oversight

Federal Power: Implications of Reduced Maintenance and Repairs of Federal Hydropower Plants

Published by the Government Accountability Office on 1999-03-30.

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

                 United States General Accounting Office

GAO              Report to the Chairman, Subcommittee
                 on Water and Power, Committee on
                 Resources, House of Representatives


March 1999
                 FEDERAL POWER
                 Implications of
                 Reduced Maintenance
                 and Repairs of Federal
                 Hydropower Plants




GAO/RCED-99-63
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-282016

      March 30, 1999

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

      Dear Mr. Chairman:

      This report discusses the reliability of the Bureau of Reclamation’s and the
      Corps of Engineers’ hydropower plants in generating electricity compared
      with the reliability of nonfederal hydropower plants, reasons why the
      Bureau’s and the Corps’ plants may be less reliable than nonfederal plants
      and the potential implications of reduced reliability, and the actions taken
      to obtain funding to better maintain and repair the Bureau’s and the Corps’
      plants.

      As agreed with your office, unless you publicly announce the contents of
      this report 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 of the
      report to Representative Don Young, Chairman, House Committee on
      Resources; Representative George Miller, Senior Democratic Member,
      House Committee on Resources; Representative Calvin Dooley, Ranking
      Minority Member, House Committee on Resources, Subcommittee on
      Water and Power; Senator Frank Murkowski, Chairman, Senate
      Committee on Energy and Natural Resources; Senator Jeff Bingaman,
      Ranking Minority Member, Senate Committee on Energy and Natural
      Resources; Senator John Chafee, Chairman, Senate Committee on
      Environment and Public Works; and Senator Max Baucus, Ranking
      Minority Member, Senate Committee on Environment and Public Works.
      We are also sending the report to Charles Borchardt, Administrator,
      Southeastern Power Administration; Michael Deihl, Administrator,
      Southwestern Power Administration; Major General Russell Fuhrman,
      Director, Civil Works, U.S. Army Corps of Engineers; Michael Hacskaylo,
      Administrator, Western Area Power Administration; Judi Johanson,
      Administrator, Bonneville Power Administration; and Eluid Martinez,
      Commissioner, Bureau of Reclamation. We will make copies available to
      others upon request.




      Page 1                                            GAO/RCED-99-63 Federal Power
B-282016




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

Sincerely yours,




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




Page 2                                            GAO/RCED-99-63 Federal Power
B-282016




Page 3     GAO/RCED-99-63 Federal Power
Executive Summary


             Because of new, more efficient technologies for generating electricity and
Purpose      emerging competition in restructured electricity markets, electricity rates
             have decreased by about 25 percent since 1982 and are expected to
             continue to decrease.1 Electricity provided by the federal government from
             hydropower plants is generally priced less than other electricity and is
             very marketable;2 however, to retain this competitiveness as markets
             continue to restructure, the federal hydropower plants3 need to be
             operated as reliably as nonfederal hydropower plants. Reliable operation
             will help to ensure that the government can continue to market the
             electricity it generates and recover its outstanding appropriated and other
             debt of about $22 billion.4 In addition, the Congress, GAO, and the Office of
             Management and Budget have been working to help ensure that the
             purchase and maintenance of all assets and infrastructure have the highest
             and most efficient returns to the taxpayer and the government. The
             agencies that generate most of this electricity—the Army Corps of
             Engineers (the Corps), the Department of the Interior’s Bureau of
             Reclamation (the Bureau)—and the federal agencies that sell it—the
             Department of Energy’s four power marketing administrations (PMA)5
             —need to be able to adequately maintain the federal hydropower plants
             and transmission systems, in order to provide a reliable supply of
             electricity.

             As requested by the Chairman, Subcommittee on Water and Power, House
             Committee on Resources, GAO examined (1) the reliability of the Bureau’s
             and Corps’ hydropower plants in generating electricity compared with the
             reliability of nonfederal hydropower plants,6 (2) reasons why the Bureau’s
             and the Corps’ plants may be less reliable than nonfederal plants and the
             potential implications of reduced reliability, and (3) the actions taken to


             1
              The 25-percent reduction is calculated in terms of constant dollars.
             2
             See Federal Power: Options for Selected Power Marketing Administrations’ Role in a Changing
             Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998).
             3
              A power plant includes one or more generating units that produce electricity.
             4
              We use the term “appropriated debt” because the PMAs are required to set their electricity rates to
             generate revenue at levels that will recover appropriations used for capital investments by the Bureau
             and the Corps. However, these reimbursable appropriations are not considered to be lending by the
             Department of the Treasury. Other debt includes primarily debt for irrigation facilities and other debt
             for certain nonfederal nuclear power plants.
             5
              The four power marketing administrations are the Bonneville Power Administration (Bonneville),
             Southeastern Power Administration (Southeastern), Southwestern Power Administration
             (Southwestern), and Western Area Power Administrations (Western).
             6
              Nonfederal plants would include those owned by commercial utilities, municipal utilities, electric
             cooperatives, public utility districts, or other nonfederal entities.



             Page 4                                                              GAO/RCED-99-63 Federal Power
                   Executive Summary




                   obtain funding to better maintain and repair the Bureau’s and the Corps’
                   plants.


                   Since about the 1930s, the Bureau and the Corps have operated about 130
Background         hydropower plants that supply about 5 percent of the nation’s total
                   electricity supply. These agencies generate electricity in conjunction with
                   other uses of water, such as fish and wildlife enhancements, flood control,
                   irrigation, navigation, recreation, and water supply. The PMAs sell this
                   electricity primarily to wholesale customers (the “power customers”),
                   such as rural electric cooperatives and municipal utilities. The power
                   customers, in turn, sell this electricity to customers at the retail level. In
                   fiscal year 1997, the PMAs had revenues of over $3 billion from the sale of
                   electricity. A portion of these revenues is used to repay the outstanding
                   appropriated and other debt of about $22 billion.7

                   The Energy Policy Act of 1992 significantly increased competition in
                   wholesale electricity markets, and 18 states have acted to introduce
                   competition at the retail level. As a result of this competition and new,
                   more efficient generating technologies, prices are expected to continue to
                   decrease by 6 to 19 percent by 2015. In more competitive markets, utility
                   management measures the “reliability” of power plants to decide where
                   to cut costs or how to allocate scarce dollars for maintaining plants.
                   Within the electric utility industry, plants are “reliable” if they can function
                   without failure over a specific period of time or amount of usage.


                   The Bureau’s and the Corps’ hydropower plants are generally less reliable
Results in Brief   in generating electricity than nonfederal hydropower plants. The reliability
                   of the Bureau’s hydropower plants has improved recently, while the Corps’
                   has remained relatively unchanged. Specifically, from 1993 through 1997,
                   the Bureau’s units were available to generate electricity an average of
                   about 83 percent of the time compared with about 91 percent for
                   nonfederal units.8 The availability of the Bureau’s units to generate
                   electricity improved from about 81 percent of the time in 1993 to about
                   87 percent in 1997. The Corps’ units were available to generate electricity
                   an average of about 89 percent of the time during the period 1993 through

                   7
                    As of the end of fiscal year 1997—the latest year for which information was available—Bonneville was
                   responsible for repaying about $14 billion, and the other PMAs were collectively responsible for
                   repaying about $8 billion dollars. See Federal Electricity Activities: The Federal Government’s Net
                   Cost and Potential for Future Losses (GAO/AIMD-97-110 and 110A, Sept. 19, 1997).
                   8
                    The availability of power plants actually pertains to the availability of individual generating units. The
                   availability of power plants to generate electricity is a widely accepted measure of their reliability.



                   Page 5                                                                GAO/RCED-99-63 Federal Power
Executive Summary




1997.9 However, the Bureau’s and the Corps’ units in the Pacific
Northwest—which account for over one-half of the agencies’ total
hydropower capacity and almost all of the electricity that Bonneville
markets—were available about 79 percent and 85 percent of the time,
respectively.

The Bureau’s and the Corps’ plants were less reliable because they could
not always obtain funding for maintenance and repairs when needed. GAO
found that because of uncertain funding, the agencies delay repairs and
maintenance until funds become available. GAO also found that these
delays caused frequent, extended outages and inconsistent plant
performance. The power marketing administrations’ electricity is generally
priced less than other electricity. However, as markets become more
competitive, the power marketing administrations’ customers will have
more suppliers from whom they can buy electricity. In some power
marketing systems—for example, Bonneville’s service area—existing
competition has lowered nonfederal electricity rates. As a result, during
the mid-1990s, some customers left Bonneville or bought some of their
electricity from less expensive sources. As nonfederal electricity rates
decline in competitive markets, a portion of the federal government’s
appropriated and other debt of about $22 billion may be at risk of
nonrecovery if the federal electricity does not continue to be marketable.
A factor affecting the marketability of this electricity is its reliability. In
addition, the Congress, the Office of Management and Budget, and GAO
have been working to help ensure that the purchase and maintenance of
all assets and infrastructure have the highest and most efficient returns to
the taxpayer and the government.

The Bureau, the Corps, and the power marketing administrations have
taken actions to obtain funding to maintain and repair their hydropower
plants. In general, these actions involve directly funding maintenance and
repairs from the power marketing administrations’ electricity revenues or
from funds contributed by the power customers. By enabling repairs to be
made in a timely manner, these actions have the potential to help to
improve the reliability of the power marketing administrations’ electricity
and to continue their existing rate-competitiveness.




9
 The Bureau’s and the Corps units were unable to generate electricity 17 percent and 11 percent of the
time, respectively, because of breakdowns, repairs, and maintenance, compared with about 9 percent
for nonfederal units.



Page 6                                                             GAO/RCED-99-63 Federal Power
                           Executive Summary




GAO’s Analysis

The Bureau’s and the       The hydropower plants of the Bureau and the Corps are less reliable in
Corps’ Hydropower Plants   providing electricity than nonfederal hydropower plants. However, the
Are Less Reliable Than     reliability of the Bureau’s plants improved while the Corps’ has remained
                           relatively unchanged. From 1993 through 1997, the Bureau’s and the
Nonfederal Plants          Corps’ hydropower units were available to generate electricity about
                           83 percent and 89 percent of the time, respectively. Nonfederal
                           hydropower units were available to generate electricity about 91 percent
                           of the time.10 The availability of the Bureau’s units to generate electricity
                           increased from about 81 percent in 1993 to about 87 percent in 1997. (See
                           fig. 1.) At the same time, from 1993 through 1997, the Bureau’s units were
                           in outage status11 an average of about 17 percent of the time for
                           breakdowns, repairs, and maintenance, compared with an average of
                           about 9 percent for nonfederal units. The Corps’ units were in outage
                           status an average of about 11 percent of the time. In addition, the Corps’
                           units were in forced outage status an average of about 5 percent of the
                           time while nonfederal and the Bureau’s units were in forced outage status
                           an average of about 2 percent of the time12




                           10
                            Availability and outage data were obtained from the North American Electric Reliability Council—an
                           organization formed by the electric utility industry to promote the reliability of the electric supply
                           system of North America.
                           11
                             “Outage status” means a generating unit was unavailable to generate electricity because of
                           anticipated repairs and maintenance (“scheduled outages”) or unanticipated breakdowns or
                           emergency repairs (“forced outages”). This differs from a utility’s deciding not to operate a unit for
                           reasons unrelated to its operating condition, for example, insufficient or restricted water for operating
                           the plant.
                           12
                             As a result of comments from the Department of Defense (including the Corps), GAO revised the
                           report in chapter 2 to recognize the Corps’ availability factor for 1998 and a decline in the Corps’
                           forced outage factor for 1998. Defense suggested that GAO include the 1998 data in its figures, but
                           GAO did not do so because comparable data were not available for the nonfederal entities at the time
                           of GAO’s review.



                           Page 7                                                               GAO/RCED-99-63 Federal Power
                                         Executive Summary




Figure 1: Average Availability Factors
of the Bureau’s, the Corps’, and
Nonfederal Hydropower Generating
Units, 1993-97




                                         Notes: The percentages are the sum of all units’ available hours divided by the sum of all units’
                                         period hours. A unit’s period hours for a year equal 8,760 hours, or 24 hours multiplied by 365
                                         days.

                                         Sources: The Bureau, the Corps, and the North American Electric Reliability Council.




                                         In addition, forced outages are strong indicators of decreased reliability
                                         because they indicate that a utility’s units generate electricity
                                         inconsistently. According to Corps officials, as a result of major initiatives
                                         to rehabilitate its generating units, the agency has reduced its forced
                                         outages from almost 6 percent in 1995 to 4.5 percent in 1997.

                                         In the Pacific Northwest, the availability to generate electricity of the
                                         Bureau’s and the Corps’ units was generally lower than it was for the
                                         agencies other locations. From 1993 through 1997, the Bureau’s units in
                                         the Pacific Northwest were only available to generate electricity about
                                         79 percent of the time and were in outage status about 21 percent of the
                                         time. The Corps’ units in this region were available about 85 percent of the
                                         time and were in outage status 15 percent of the time. In contrast,




                                         Page 8                                                             GAO/RCED-99-63 Federal Power
                             Executive Summary




                             nonfederal units in the region were available about 90 percent of the time
                             and were in outage status about 10 percent of the time. The reliability of
                             the Bureau’s and the Corps’ hydropower plants in the Pacific Northwest is
                             important to the overall reliability of the Bureau and the Corps.


Funding Processes’           The federal planning and budget processes, under which the Bureau and
Impacts on the Reliability   the Corps must operate, do not provide timely and predictable funding
of the Bureau’s and the      needed for the maintenance and repair of hydropower plants. It can take
                             as long as 2 to 3 years before a repair that is identified is funded, if it is
Corps’ Hydropower Plants     funded at all. For example, consistent with the normal budget cycle, in
                             formulating a budget for fiscal year 2000, a regional office of the Bureau
                             began its budget process in August 1997. However, the process will not
                             culminate and the funding level will not be known with certainty until the
                             fiscal year 2000 appropriations act is signed by the President.

                             Delays in funding federal repairs and the uncertainty about the levels of
                             this funding have caused some maintenance or repairs to be postponed
                             until funds become available. For example, at the Bureau’s Shasta plant in
                             California, the need to repair the generating units was identified in 1983.
                             However, funding did not become available until 1995 when the customers
                             provided advance funding. According to a Bureau official, the repairs will
                             not be completed until 2003. Moreover, over time, deterioration at the
                             power plant worsened and, in response, the Bureau reduced the plant’s
                             operations.

                             For the most part, the PMAs’ electricity is priced below market, thus
                             helping to ensure that the PMAs’ can sell their electricity and helping to
                             secure the repayment of the government’s appropriated and other debt.
                             However, in more competitive markets, the PMAs’ customers will have a
                             choice of suppliers from which to buy electricity. In such markets, if the
                             reliability of federal electricity continues to be below that of other
                             producers, some of the competitive advantages of the PMAs’ electricity
                             would erode, thus decreasing its marketability. This is particularly true in
                             specific PMA systems where the PMAs’ electricity is already priced at about
                             the market rate or where competition already exists to the sale of the PMAs’
                             electricity. For example, in Bonneville’s service area, competitive
                             challenges exist to the sale of Bonneville’s electricity. Bonneville is facing
                             competition from low-cost suppliers of electricity that, during the
                             mid-1990s, caused customers to leave Bonneville and buy electricity at
                             rates below Bonneville’s.13

                             13
                               See GAO/AIMD-97-110 and 110A.



                             Page 9                                             GAO/RCED-99-63 Federal Power
                             Executive Summary




Actions Taken to Promote     Recognizing the delays and uncertainties that can result from the federal
Faster and More Certain      planning and budget processes, the Bureau, the Corps, and the PMAs have
Funding to Better Maintain   acted to secure funding to maintain and repair the federal hydropower
                             plants and related facilities. For example, recognizing the lower reliability
and Repair Federal Plants    of the plants in the Pacific Northwest, from 1993 through 1997, the Bureau,
                             the Corps, and Bonneville concluded four agreements whereby
                             Bonneville’s electricity revenues will provide advance funding of over
                             $1 billion dollars for routine operations and maintenance and capital
                             repairs of the electricity facilities from which it markets electricity.14 The
                             agencies expect to be able to plan and pay for maintenance and repairs
                             systematically and predictably over several years and to fix unanticipated
                             breakdowns more rapidly. For example, under the Bureau’s and
                             Bonneville’s December 1996 funding agreement, the Bureau prepares an
                             annual operations and maintenance budget by identifying major line items
                             for each project for funding during the next fiscal year and also for 5 fiscal
                             years. Annual expenditures that are less than the targeted amount are
                             carried over to future years and accounted for in a “savings account,”
                             which can be tapped, as provided for in the agreement, to pay for
                             emergency repairs. Annual budgets are proposed and approved less than 1
                             year in advance, instead of 2 to 3 years, which is the general time frame
                             under the traditional appropriations process. Bonneville believes that the
                             increased demand for its electricity and the increased financial resources
                             provided by the funding agreements would improve its competitive
                             viability and ability to recover the full cost of the electricity system from
                             which it markets power.15

                             In addition, at such locations as the Central Valley Project in California
                             and the Pick-Sloan Program in Montana, North Dakota, South Dakota, and
                             nearby states, direct payments from the PMAs’ electricity customers have
                             funded the maintenance and repair of the federal power plants and related
                             facilities. As authorized by law, the PMAs’ customers can directly pay for
                             the maintenance and repair of the federal power plants and related
                             facilities, but these commitments must be made before the repairs begin.
                             For example, electricity customers have made commitments to pay for
                             future operations and maintenance and some selected repairs of the
                             federal power plants and related facilities in the Central Valley Project.

                             The direct funding of maintenance and repairs by electricity revenues and
                             customers’ financing agreements could diminish opportunities for
                             oversight by the Congress. However, at this time, the Bureau, the Corps,

                             14
                               The agreements were concluded pursuant to the Energy Policy Act and other statutes.
                             15
                               Bonneville markets electricity from the Federal Columbia River Power System.



                             Page 10                                                          GAO/RCED-99-63 Federal Power
                  Executive Summary




                  and the PMAs provide such information as the history and background of
                  their power plants, the plants’ generating capacity and electricity
                  produced, annual electricity revenues and costs, and related
                  environmental and water quality issues to the Congress, other
                  decisionmakers, and the public. The means of communicating this
                  information include the PMAs’ annual reports; the PMAs’, the Bureau’s, and
                  the Corps’ Internet Websites; and letters to the appropriate congressional
                  committees.


                  This report contains no recommendations.
Recommendations
                  GAO provided the Department of Energy (which represented the views of
Agency Comments   Southeastern, Southwestern, and Western), the Department of the Interior
                  (including the Bureau), the Department of Defense (including the Corps),
                  and Bonneville with a draft of this report. The comments of Energy,
                  Interior, Defense, and Bonneville, and GAO’s responses to those comments,
                  are included in appendixes II, III, IV, and V, respectively.

                  The Department of Energy provided technical suggestions for the draft
                  report but deferred to the comments of the Bureau and the Corps on more
                  substantive matters. For example, Energy suggested that GAO clarify the
                  differences between “reliability” and “availability.” The report already
                  discusses that plants are viewed as reliable, within the electric utility
                  industry, if they can function without failure over a specific period of time
                  or amount of usage. The report also states that there are several ways of
                  measuring reliability, including the availability factor and outage factors.
                  Accordingly, we made no substantive changes to the report.

                  The Department of the Interior, including the Bureau, commented that the
                  report did a good job in recognizing the funding needs for operating and
                  maintaining electrical-generating facilities. However, according to Interior,
                  the report should recognize that the Bureau’s availability factors are partly
                  the result of the fact that the Bureau’s facilities operate to fulfill multiple
                  purposes and that the generation of electricity is secondary to irrigation
                  and other purposes. The report clearly recognizes that water is used for
                  multiple purposes and affects how electricity is generated. For example,
                  the executive summary recognizes that the Bureau and the Corps generate
                  electricity in conjunction with the use of water for flood control,
                  navigation, irrigation, and other purposes. Accordingly, no changes are
                  needed to the report. Also, Interior stated that the reliability of its plants




                  Page 11                                            GAO/RCED-99-63 Federal Power
Executive Summary




compares favorably with nonfederal plants, and that the forced outages
factor is a better indicator of comparative reliability than the availability
factor. GAO does not agree that the Bureau’s plants are as reliable as
nonfederal plants because, as discussed in this report, the Bureau’s plants
have lower availability factors and are in outage status more of the time
than nonfederal plants. In addition, the report already recognizes that the
forced outage factor, along with the availability factor, is viewed as one of
the most meaningful ways of measuring reliability. Accordingly, for these
points, no changes to the report are needed. Finally, GAO agrees that the
availability factor should be interpreted within the context of various
factors, some of which the Bureau listed. GAO revised chapter 1 to
recognize that assessing the performance of a hydropower plant or unit by
examining its availability factor calls for understanding additional
variables. GAO added language to reflect that the availability factor needs
to be understood in terms of such factors as the role played by the plant in
terms of the kind of demand it meets (e.g., whether it meets peak
demand), the availability of water throughout the year, and the purposes
satisfied by the dam and reservoir.

The Department of Defense, including the Corps, provided verbal
comments to clarify its position on GAO’s draft report, noting, most
significantly, that the report did not reflect changes in the performance of
the Corps’ hydropower plants that occurred in fiscal year 1998. Defense
suggested that GAO include this data in various graphs in its report. GAO
revised chapter 2 to recognize the Corps’ availability factor for 1998 and a
decline in the agency’s forced outage factor for 1998. GAO did not include
these data in graphs because comparable data were not available for the
nonfederal entities at the time of GAO’s review.

Bonneville noted that GAO “sought to conduct a fair assessment” of the
Corps’ and the Bureau’s facilities during the time of the study. Bonneville
agreed, as stated in the report, that the availability factors of the Bureau’s
and the Corps’ hydropower plants in the Pacific Northwest are lower than
in the rest of the nation. However, Bonneville suggested that GAO clarify
the report by stating that Bonneville, the Bureau, and the Corps recognized
the lower reliability of the plants in the Pacific Northwest and took action
through a series of direct-funding agreements to address the problem.
Bonneville further suggested a clarification that from 1993 through 1997,
the Bureau extensively upgraded and rehabilitated its plants, partly as a
result of the increased funding flexibility provided by the direct funding
agreements. Chapter 4 already discusses in detail the provisions of the
agreements, the $1 billion of repairs that are being funded as a result of the



Page 12                                           GAO/RCED-99-63 Federal Power
Executive Summary




agreements, and the expected improvements in the Bureau’s planning and
budgeting systems that result from them. GAO agrees that the suggested
revisions would enhance the reader’s understanding of the funding
agreements and revised the report to recognize that the increased funding
flexibility that resulted from the agreements enabled the Bureau to
undertake extensive repairs.




Page 13                                         GAO/RCED-99-63 Federal Power
Contents



Letter                                                                                            1


Executive Summary                                                                                 4


Chapter 1                                                                                        16
                         Changes in Electricity Markets                                          17
Background               Measuring the Reliability of Power Plants                               20
                         Objectives, Scope, and Methodology                                      22


Chapter 2                                                                                        24
                         The Bureau’s and Corps’ Hydropower Generating Units Are Less            24
The Bureau’s and           Available to Generate Power
Corps’ Hydropower        The Bureau’s and Corps’ Hydropower Generating Units Are in              26
                           Outage Status More of the Time Than Nonfederal Units
Plants Are Less
Reliable Than
Nonfederal Plants
Chapter 3                                                                                        33
                         Funding for Repairs Can Take Years to Obtain and Is Uncertain           33
Funding Processes’       Funding Difficulties Lead to Delays of Maintenance That Result          35
Impacts on the             in Maintenance Backlogs
                         Delayed Repairs Lead to Inconsistent Plant Performance                  36
Reliability of           Inadequate Funding for the Maintenance and Repair of Federal            38
Hydropower Plants          Hydropower Plants May Impact Marketability of Federal
                           Electricity


Chapter 4                                                                                        40
                         Direct Funding by Electricity Revenues May Pay for Over $1              40
Actions Taken to            Billion for Maintenance and Repairs
Promote Faster and       Initiatives for Funding by Customers Are Being Implemented              44
More Certain Funding
to Better Maintain and
Repair the Bureau’s
and Corps’ Plants
Appendixes               Appendix I: Objectives, Scope, and Methodology                          46
                         Appendix II: Comments From the Department of Energy                     50




                         Page 14                                        GAO/RCED-99-63 Federal Power
          Contents




          Appendix III: Comments From the Department of the Interior                 52
          Appendix IV: Comments From the Department of Defense                       63
          Appendix V: Comments of the Bonneville Power Administration                65
          Appendix VI: Major Contributors to This Report                             71


Table     Table I.1: Characteristics of Bureau, Corps, and Nonfederal                47
           Hydropower Generating Units as of 1997


Figures   Figure 1: Average Availability Factors of the Bureau’s, the Corps’,         8
            and Nonfederal Hydropower Generating Units, 1993-97
          Figure 1.1: Map of the Service Areas of the Power Marketing                17
            Administrations
          Figure 2.1: Average Availability Factors of the Bureau’s, the              25
            Corps’, and Nonfederal Hydropower Generating Units, 1993-97
          Figure 2.2: Total Outages factors of the Bureau’s, the Corps’, and         27
            Nonfederal Hydropower Generating Units, 1993-97
          Figure 2.3: Forced Outages factors of the Bureau’s, the Corps’,            28
            and Nonfederal Hydropower Generating Units, 1993-97
          Figure 2.4: Scheduled Outages factors of the Bureau’s, the Corps’,         29
            and Nonfederal Hydropower Generating Units, 1993-97




          Abbreviations

          GAO        General Accounting Office
          MW         megawatt(s)
          NERC       North American Electric Reliability Council
          OMB        Office of Management and Budget
          PMA        power marketing administrations
          TVA        Tennessee Valley Authority


          Page 15                                           GAO/RCED-99-63 Federal Power
Chapter 1

Background


             The Army Corps of Engineers (the “Corps”) and the Department of the
             Interior’s Bureau of Reclamation (the “Bureau”) operate about 130
             hydropower plants at dams throughout the nation. These plants generate
             electricity from the flow of water that is also used for other purposes,
             including fish and wildlife enhancement, flood control, irrigation,
             navigation, recreation, and water supply. Since about the 1930s, electricity
             that is generated by these hydropower plants has played an important role
             in electricity markets. These plants were a key element in electrifying rural
             and sparsely populated areas of the nation. These plants account for over
             35,000 megawatts (MW)16 of generating capacity (or about 5 percent of the
             nation’s total electric supply) in 1998. The Department of Energy’s power
             marketing administrations (PMA)17 generally market the electricity
             generated at these plants to wholesale customers (the “power
             customers”), such as rural electric cooperatives and municipal utilities,
             that in turn sell the electricity to retail customers. (Fig. 1.1 shows the
             service areas of the PMAs.) Revenues earned from the sale of this electricity
             totaled over $3 billion in fiscal year 1997. These revenues pay for the
             operation and maintenance of the government’s electricity-related assets
             and repay a portion of the outstanding federal appropriated and other
             debt18 of about $22 billion for the Bureau’s and the Corps’ power plants,
             related PMA transmission lines, and well as certain related federal
             investments for irrigation, water supply, and other facilities that are to be
             repaid over time from electricity revenues.19 The revenues also pay
             interest on the outstanding appropriated debt, where applicable.




             16
              A watt is the basic unit used to measure electricity. A megawatt equals 1 million watts. A
             megawatt-hour is equal to 1 megawatt of electricity applied for 1 hour. A kilowatt-hour equals 1,000
             watt-hours.
             17
              The PMAs are the Bonneville Power Administration (Bonneville), Southeastern Power
             Administration (Southeastern), Southwestern Power Administration (Southwestern), and Western
             Area Power Administration (Western).
             18
              We use the term “appropriated debt” because the PMAs are required to set their electricity rates to
             generate revenue at levels that will recover appropriations used for capital investments by the Bureau
             and the Corps. However, these reimbursable appropriations are not considered as lending by the
             Department of the Treasury. Other debt includes primarily debt for irrigation facilities and debt for
             certain nonfederal nuclear power plants.
             19
              As of the end of fiscal year 1997—the latest year for which information was available—the Bonneville
             Power Administration was responsible for repaying about $14 billion, and the other PMAs were
             collectively responsible for repaying about $8 billion dollars.



             Page 16                                                            GAO/RCED-99-63 Federal Power
                                                Chapter 1
                                                Background




Figure 1.1: Map of the Service Areas of the Power Marketing Administrations



                     WA

                                        MT                                                                                          ME
                     BPA                                   ND
                OR                                                   MN                                                      VT
                                                                                                                                  NH
                            ID                                                    WI
                                                           SD                                                          NY         MA
                                           WY                                                MI                                  CT RI

                                                                       IA                                         PA
                                                           NE                                                               NJ
                      NV
                                  UT    WAPA                                       IL   IN
                                                                                                   OH                  MD
                                                                                                                            DE

                                             CO            KS
                                                           KS                                            WV
              CA                                                          MO                                      VA
                                                                                              KY
                                                                                                               NC
                                                                OK                       TN
                                 AZ                                          AR
                                           NM
                                                                SWPA                     SEPA                SC

                                                                                   MS    AL             GA
                                                      TX
                                                                            LA


                                                                                                              FL




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




                                 Both Western and Southwestern market power in Kansas.



                                                Source: Developed by GAO from data provided by the Department of Energy and the PMAs.



                                                In traditional markets, electric utilities enjoyed relative certainty about the
Changes in Electricity                          amount of demand they would have to satisfy in the future. A compact
Markets                                         existed between utilities and state public utility commissions. Utilities
                                                were obligated to serve all existing and future customers in their
                                                pre-established service areas. In return, utilities were granted monopolies
                                                within their service areas and approved rate schedules that guaranteed




                                                Page 17                                                                     GAO/RCED-99-63 Federal Power
                            Chapter 1
                            Background




                            stated earnings on their operating costs and investments. They forecasted
                            the load they would serve by using econometric and end-use analyses
                            models over future periods of time that were as long as 20 years. They
                            collected sufficient funds in their electric rates to pay for needed
                            generating capacity and to operate, maintain, and repair existing power
                            plants and other electricity assets. The funds collected through rates also
                            include profits.

                            However, the nation’s electricity markets are undergoing significant
                            changes. The Energy Policy Act of 1992 significantly increased
                            competition in wholesale electricity markets. In addition, competition at
                            the retail level is now arriving. According to the Department of Energy’s
                            Energy Information Administration, as of March 1999, 18 states had
                            acted—by legislation that had been enacted (14 states) or by regulatory
                            order (4 states)20 —to restructure electricity markets. Regulators in these
                            states expected that industrial, commercial, and, ultimately, residential
                            consumers would be able to choose their electricity supplier from among
                            several competitors, rather than being tied to one utility.

                            As competition increases, the rates paid by consumers for electricity have
                            dropped and should continue to do so. For example, according to the
                            Energy Information Administration, as a result of such factors as emerging
                            competition and new, more efficient generating technologies, retail
                            electricity rates decreased by about 25 percent from 1982 through 1996,
                            after factoring in the impact of inflation. The administration expects
                            electricity rates to continue to decrease in real terms by 6 percent to
                            19 percent by 2015.


Utilities Respond to More   In recent years, uncertainty about the pace and extent of competitiveness
Competitive Markets         in electric markets has caused utilities to be more flexible. Utilities have
                            relied more on purchasing electricity from other sources or acquiring new
                            power plants, such as smaller natural-gas-fired plants, that are less
                            expensive and more flexible for meeting shifting demand. They have also
                            cut costs by reorganizing and reducing staff, and they have consolidated or
                            merged with other utilities where they believed it was appropriate. For
                            example, after years of virtually no mergers, from October 1992 to
                            January 1998, investor-owned utilities had proposed over 40 mergers and
                            completed 17 of them, according to the Edison Electric Institute. In

                            20
                              The states that enacted legislation were Arizona, California, Connecticut, Illinois, Maine,
                            Massachusetts, Montana, Nevada, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Rhode
                            Island, and Virginia. Other states with regulatory orders were Maryland, Michigan, New York, and
                            Vermont.



                            Page 18                                                           GAO/RCED-99-63 Federal Power
Chapter 1
Background




addition, according to utility officials, some utilities are retiring or
divesting some high-cost power plants, while others are buying those same
plants to serve a niche in their resource portfolios.

According to utility officials, in more stable electricity markets, utilities
and federal agencies maintained and repaired their hydroelectric and other
power plants according to a schedule that was predetermined by the
manufacturer’s specifications and the operating history of the plant.
Maintenance and repairs were frequently made at this predetermined time
whether or not they were needed. Because maintenance or repairs could
have been performed later or less frequently, perhaps with lower costs,
some Bureau and utility officials that we contacted characterized these
practices as over-maintenance of the hydropower plants. These practices,
according to an industry consultant, were seldom questioned partly
because of the low costs and resiliency of hydropower plants—especially
of those placed into service during the 1950s.

However, as markets become more competitive, federal agency, utility,
and electric industry officials have increasingly viewed hydropower plants
as particularly useful to utilities’ overall operations. One of hydropower’s
important traits is its flexibility in meeting different levels of demand. This
characteristic, according to utility officials, means that hydropower plants
will likely continue to play a significant role in meeting demand during
peak periods and providing ancillary services,21 without which electricity
systems cannot operate. Currently, utilities provide these services
routinely. However, according to Bureau, PMA, and utility officials,
depending upon actions taken by federal and state regulators in the near
future, a separate market may develop for ancillary services. These
services may be priced separately and may allow utilities with hydropower
to capture a market niche and earn additional revenues.

In response to new markets and perceptions about the role of hydropower
in those markets, federal agencies and some utilities have reconsidered
how they operate, maintain, and repair their hydropower plants. For
example, some utilities have implemented less-expensive, more-flexible
maintenance practices, which consider such factors as the generating size
of a utility’s hydropower plants, those plants’ roles in the utility’s
generation portfolio, and marketing and economic considerations. One
such approach, called “Reliability Centered Maintenance,” is defined as a
maintenance philosophy that attempts to make use of the most logical,

21
 Ancillary services are services or tariff provisions related to the generation and delivery of electricity
other than the simple generation, transmission, or distribution of electricity.



Page 19                                                               GAO/RCED-99-63 Federal Power
                       Chapter 1
                       Background




                       cost-effective mix of breakdown maintenance, preventive maintenance,
                       and predictive testing and proactive maintenance to attain the full life of
                       the equipment, reduce maintenance costs, and encourage reliable
                       operations. For example, according to some utilities we contacted, in
                       determining when to maintain or repair equipment, they are relying
                       increasingly on the use of monitoring equipment to detect changes in the
                       operating conditions of the equipment, instead of performing those actions
                       in a prescheduled manner, as in the past. On the basis of these
                       examinations, the utility may decide to repair or replace the component.
                       Alternatively, the utility may decide to stretch out the operation of the
                       component to the point of near-failure. Some components may actually be
                       run until they fail. However, according to Corps and utility officials, in the
                       cases of some smaller hydropower units, installing monitoring equipment
                       at a cost of $200 to $500 per unit may not make economic sense. Other
                       measures may also be used to monitor the operating condition of
                       equipment. For example, the Corps tests the lubricating oil to indicate the
                       condition of its generating equipment.

                       Also, in some cases, when deciding how and when to maintain and repair
                       generating units, management now considers the plant or the unit as an
                       individual cost center that must make a positive contribution to the
                       utility’s bottom line. In such an environment, plant managers will become
                       more aware of the production costs and will exert increased pressures to
                       cut costs at the plant and at the corporate levels. Plant managers may
                       become aware that a utility may actually shut down and sell a generating
                       unit if operating or repairing it does not return a required, positive
                       financial return.


                       As market competition intensifies, utilities will face increasing pressures
Measuring the          to operate as efficiently and cost-effectively as possible. Utilities’
Reliability of Power   management will need to know how well their plants are producing
Plants                 electricity in order to make informed decisions about how to allocate
                       scarce dollars for maintaining and repairing power plants, where to cut
                       costs, or, in more extreme cases, which generating units22 to sell or shut
                       down.23 An important concept for defining power plants’ performance is
                       the “reliability” with which plants generate electricity. Within the electric


                       22
                         A power plant is made up of one or more generating units that produce electricity.
                       23
                        The Bureau, for example, has “benchmarked” the performance of its hydropower plants against
                       other plants in the industry, using such indicators as the availability, scheduled outage, and forced
                       outages factors. See Future Generations: A New Era of Power, Performance, and Progress, Bureau of
                       Reclamation (1996).



                       Page 20                                                            GAO/RCED-99-63 Federal Power
Chapter 1
Background




utility industry, power plants are viewed as “reliable” if they are capable
of functioning without failure over a specific period of time or amount of
usage. The availability factor and the related outages factors are widely
accepted measures of the reliability of power plants. The time a generating
unit is “available” to generate electricity is the time it is mechanically able
to generate electricity because it is not malfunctioning unexpectedly or
because it is not being maintained or repaired. For instance, if a unit were
available to generate electricity 8,000 hours out of the 8,760 hours in a
year, then its availability factor would be 8,000 hours divided by 8,760
hours, or about 91.3 percent.

When a unit is unable to generate electricity because it is broken, being
repaired, or being maintained, it is in outage status. Outages are further
classified as “scheduled” outages if the unit is unable to generate
electricity because it is undergoing previously scheduled repairs or
maintenance. If a unit is unable to generate electricity because of an
unexpected breakdown and/or if unanticipated repairs need to be
performed, then it is in “forced outage” status. If a plant were in
scheduled outage status for 100 hours over the course of one year, then its
scheduled outage factor would be 100 hours divided by the 8,760 hours in
a year, or 1.1 percent. If a plant were in a forced outage status for 600
hours, then its forced outage factor would be 600 hours divided by the
8,760 hours in the year, or 6.8 percent of the time. For any generating unit,
the availability factor, the scheduled outage factor, and the forced outage
factor, added together, should equal 100 percent because, taken together,
they account for a plant’s entire operating status over a period of time.

Assessing the performance of a hydropower plant or unit by examining its
availability factor calls for understanding additional variables that would
affect its performance. Many officials we contacted said that the
availability factor needs to be understood in terms of such factors as the
role played by the plant in terms of the kind of demand that it meets (for
instance, whether it meets peak demand), the availability of water
throughout the year, and the purposes satisfied by the dam and reservoir.
For example, according to a utility consultant, because water is abundant
at the New York Power Authority’s Niagara Power Project, the generating
units are used primarily to satisfy nonpeak loads. Therefore, the utility
attempts to operate and maintain those units to be on line as much as
possible. To do otherwise entails a loss of generating revenues that could
be earned almost 24 hours per day. Nevertheless, officials at every utility
we contacted said that they achieved an availability of at least 90 percent,




Page 21                                            GAO/RCED-99-63 Federal Power
                     Chapter 1
                     Background




                     and the Bureau and the Corps have formal goals of attaining that
                     availability level.


                     As requested by the Chairman, Subcommittee on Water and Power, House
Objectives, Scope,   Committee on Resources, we examined the (1) reliability of the Bureau’s
and Methodology      and Corps’ hydropower plants in generating electricity compared with the
                     reliability of nonfederal hydropower plants;24 (2) reasons why the
                     Bureau’s and the Corps’ plants may be less reliable than nonfederal plants
                     and the potential implications of reduced reliability; and (3) actions taken
                     to obtain funding to better maintain and repair the Bureau’s and the Corps’
                     plants.

                     To compare the generating reliability of the Bureau’s and the Corps’
                     hydropower plants with nonfederal ones, we obtained, analyzed, and
                     contrasted power plants’ performance data, including availability and
                     outages factors, from the Bureau, the Corps, and the North American
                     Electric Reliability Council.25 We discussed the limitations of these
                     performance indicators with officials from the Bureau, the Corps, the
                     PMAs, the Tennessee Valley Authority, investor-owned utilities, publicly
                     owned utilities, and other experts in the electric utility industry.

                     To explore why federal hydropower plants sometimes performed at lower
                     levels, we obtained and analyzed various reports on the subject and
                     discussed the topic with representatives of the Bureau, the Corps, the
                     PMAs, various PMA electricity customers or their associations,
                     investor-owned utilities, and nonfederal, publicly owned utilities.
                     Moreover, in addressing the implications of any reduced performance by
                     federal plants, we interviewed industry experts, representatives of
                     investor-owned and publicly owned utilities, officials of the PMAs, and the
                     PMAs’ electricity customers. We also examined studies about the changes
                     in electricity markets.

                     In examining steps to secure funding to better maintain and repair the
                     Bureau’s and the Corps’ plants, we studied the efforts of the Corps, the
                     Bureau, and the PMAs to pay for the maintenance and repair of federal
                     hydropower assets more quickly and with greater certainty. In this regard,
                     we contacted the Bureau, the Corps, the PMAs, and the PMAs’ power

                     24
                      Nonfederal plants would include those owned by commercial utilities, municipal utilities, electric
                     cooperatives, public utility districts, or other nonfederal entities.
                     25
                      The Council was established by the electric utility industry to promote the reliability of the electricity
                     supply system of North America.



                     Page 22                                                               GAO/RCED-99-63 Federal Power
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Background




customers at several different locations, including Denver, Colorado;
Boise, Idaho; Portland, Oregon; and Sacramento, California. At these
locations, we also examined any funding agreements concluded by these
parties and asked detailed questions about the benefits and other
implications of these agreements. Our analysis was based on the
assumption that the Bureau’s and the Corps’ hydropower plants, the
related facilities, and the PMAs would continue to exist under some form of
federal ownership. In examining other steps to secure enhanced funding,
we relied to the greatest extent possible upon previous work that we had
performed on federal electricity, especially work performed during two
prior reviews—Federal Power: Options for Selected Power Marketing
Administrations: Role in a Changing Electricity Industry (GAO/RCED-98-43,
Mar. 6, 1998) and Federal Power: Outages Reduce the Reliability of
Hydroelectric Power Plants in the Southeast (GAO/T-RCED-96-180, July 25,
1996).

Our work was performed at many different locations that included various
power plants and offices of the Bureau, the Corps, Bonneville,
Southeastern, Southwestern, and Western; investor-owned utilities; and
publicly owned utilities. We also contacted national and regional industry
trade associations.

Our work was performed from July 1998 through February 1999 in
accordance with generally accepted government auditing standards.
Appendix I contains a more complete description of our objectives, scope,
and methodology.




Page 23                                          GAO/RCED-99-63 Federal Power
Chapter 2

The Bureau’s and Corps’ Hydropower Plants
Are Less Reliable Than Nonfederal Plants

                       Within the electric utility industry, power plants are viewed as “reliable”
                       if they are capable of functioning without failure during a specific period
                       of time or amount of usage. From 1993 through 1997, the reliability of the
                       Bureau’s hydropower plants improved, while the Corps’ remained about
                       the same. However, the Bureau’s and the Corps’ hydropower plants are
                       generally less reliable in generating electricity than nonfederal plants.26
                       The Bureau’s and the Corps’ hydropower generating units have been in
                       outage status more of the time for forced and scheduled outages.
                       Importantly, the reliability of the Bureau’s and the Corps’ plants in the
                       Pacific Northwest is generally below that of Bureau and Corps plants
                       elsewhere and also below that of nonfederal plants in the region and
                       elsewhere. The Bureau’s and the Corps’ plants in the region account for
                       over half of these agencies’ total generating capacity and almost all of the
                       power marketed by the Bonneville Power Administration
                       (Bonneville)—the largest of the PMAs in terms of power sales.


                       Nationwide, both the Bureau’s and the Corps’ generating units are less
The Bureau’s and       available to generate electricity than those of nonfederal utilities and
Corps’ Hydropower      providers; however, the Bureau’s availability factor has been improving,
Generating Units Are   while the Corps’ remained about the same.27 (See fig. 2.1.) Generating
                       units that have malfunctioned unexpectedly or are undergoing
Less Available to      maintenance and repairs are not considered to be available. Generating
Generate Power         units that are more available to generate electricity are considered to be
                       more reliable. The availability factor is considered to be a key indicator of
                       reliability, according to the Bureau.

                       From 1993 through 1997, nonfederal hydropower generating units were
                       available to generate electricity an average of 91.3 percent of the time.
                       During that same period, the Bureau’s hydropower units were available an
                       average of 83.3 percent of the time (or 8 percent less than the average for
                       nonfederal units) and the Corps’ hydropower units were available an
                       average of 88.8 percent of the time (or 2.5 percent less than nonfederal
                       units). The availability factor for nonfederal units from 1993 through 1997
                       was relatively unchanged. The Bureau’s availability factor improved from
                       80.9 percent of the time in 1993 to 86.6 percent in 1997. The Bureau
                       believes that one reason for its lesser availability factors is that more of its


                       26
                        Nonfederal plants include those of commercial utilities, municipal utilities, electric cooperatives,
                       public utility districts, and other nonfederal entities.
                       27
                         A generating unit is available to generate power when it is mechanically able to do so. The availability
                       factor is not a measure of whether a plant can or cannot generate power because water cannot be
                       released through the turbines or is otherwise not present for purposes of generating power.



                       Page 24                                                              GAO/RCED-99-63 Federal Power
                                       Chapter 2
                                       The Bureau’s and Corps’ Hydropower Plants
                                       Are Less Reliable Than Nonfederal Plants




                                       plants are located on pipelines, canals, and water diversion facilities in
                                       comparison with most nonfederal plants. The Corps’ availability factor
                                       was relatively unchanged—declining slightly from 89.6 percent in 1993 to
                                       89.2 percent in 1997. Corps officials later provided us with data showing
                                       an availability factor of 89.5 percent in 1998. Also, the Bureau provided us
                                       with data showing an availability factor of 88.5 percent in 1998.


Figure 2.1: Average Availability
Factors of the Bureau’s, the Corps’,
and Nonfederal Hydropower
Generating Units, 1993-97




                                       Notes: The percentages are the sum of all units’ available hours divided by the sum of all units’
                                       period hours. A unit’s period hours for a year equal 24 hours multiplied by 365 days, or 8,760
                                       hours.

                                       Source: The Bureau, the Corps of Engineers, and the North American Electric Reliability Council.




                                       Page 25                                                            GAO/RCED-99-63 Federal Power
                        Chapter 2
                        The Bureau’s and Corps’ Hydropower Plants
                        Are Less Reliable Than Nonfederal Plants




                        If generating units are not available to generate electricity, they are said to
The Bureau’s and        be in “outage” status.28 Because the Bureau’s and the Corps’ generating
Corps’ Hydropower       units were less available to generate electricity than the rest of the
Generating Units Are    industry, they also had higher outages factors. The longer or more frequent
                        its outages, the less available a unit is to generate electricity. (See fig. 2.2.)
in Outage Status More   From 1993 through 1997, the hydropower units of the Bureau were in
of the Time Than        outage status an average of 16.7 percent of the time, and the Corps’ units
                        were in outage status an average of 11.2 percent of the time. In contrast,
Nonfederal Units        nonfederal units were in outage status an average of 8.7 percent of the
                        time.29

                        From 1993 through 1997, the Corps’ total outage factor was relatively
                        unchanged, whereas the Bureau’s decreased from 19.1 percent in 1993 to
                        13.4 percent in 1997. Nonfederal units’ total outages factors were relatively
                        unchanged.




                        28
                         “Outage status” means that a generating unit was unavailable to generate electricity because of
                        anticipated repairs and maintenance (“scheduled outages”) or unanticipated breakdowns or
                        emergency repairs (“forced outages”). Outage status means a unit cannot operate because it is
                        broken, is being maintained, or is being repaired. This differs from a utility’s deciding not to operate a
                        unit for reasons unrelated to its operating condition—for example, insufficient or restricted water for
                        operating the plant.
                        29
                         Except for the Corps in 1993, the total outage factor is the sum of scheduled and forced outages. To
                        compute a total outage factor for the Corps in 1993, we subtracted the Corps’ availability factor of
                        89.6 percent from 100 percent.



                        Page 26                                                               GAO/RCED-99-63 Federal Power
                                       Chapter 2
                                       The Bureau’s and Corps’ Hydropower Plants
                                       Are Less Reliable Than Nonfederal Plants




Figure 2.2: Total Outages Factors of
the Bureau’s, the Corps’, and
Nonfederal Hydropower Generating
Units, 1993-97




                                       Note: The percentages are the sum of scheduled and forced outages factors in figures 5 and 6.

                                       Source: The Bureau, the Corps of Engineers, and the North American Electric Reliability Council.




The Corps’ Hydropower                  Examining the types of outages that occur indicates why generating units
Generating Units Have                  were not in service. Along with the availability factor, the forced outage
Higher Forced Outages,                 factor is a key indicator of decreasing reliability because it depicts that
                                       unexpected outages occurred, thus indicating inconsistent operations.
and the Bureau’s Have                  According to the Bureau’s 1996 benchmarking study,30 the lower the
Higher Scheduled Outages               forced outage factor, the more reliable the electricity is considered. From
                                       1993 through 1997, the average forced outage factor for the Bureau was 2.3
                                       percent and the Corps’ was 5.1 percent. The average forced outage factor
                                       for nonfederal hydropower units was 2.3 percent—the same as the
                                       Bureau’s but less than the Corps’. (See fig. 2.3.) However, it should be
                                       noted that the Corps’ forced outage factor declined—from almost 6
                                       percent in 1995 to 4.5 percent in 1997. According to the latest data


                                       30
                                         A New Era of Power, Performance, and Progress: Future Generations U.S. Bureau of Reclamation
                                       (1996).



                                       Page 27                                                          GAO/RCED-99-63 Federal Power
                                        Chapter 2
                                        The Bureau’s and Corps’ Hydropower Plants
                                        Are Less Reliable Than Nonfederal Plants




                                        provided by the Corps, the agency’s forced outage factor declined even
                                        further to under 3.2 percent in 1998. According to a Corps official, this
                                        improvement is the result of the agency’s $500 million effort, implemented
                                        or identified for implementation from fiscal year 1993 through 2009, to
                                        rehabilitate its hydropower plants.


Figure 2.3: Forced Outages Factors of
the Bureau’s, the Corps’, and
Nonfederal Hydropower Generating
Units, 1993-97




                                        Note: The percentages are the sum of all units’ forced outage hours divided by the sum of all
                                        units’ period hours. A unit’s period hours for a year, 8,760 hours, equals 24 hours multiplied by
                                        365 days. The Corps did not have 1993 forced outage data.

                                        Source: The Bureau, the Corps of Engineers, and the North American Electric Reliability Council.




                                        Scheduled outages are, by definition, anticipated. Nevertheless, scheduled
                                        outages factors also reflect the amount of time that a generating unit was
                                        off-line and unable to provide a utility’s customers with electricity.
                                        According to the Bureau’s 1996 benchmarking study, the longer a
                                        scheduled outage, the less efficient the maintenance program. In our view,



                                        Page 28                                                            GAO/RCED-99-63 Federal Power
                                        Chapter 2
                                        The Bureau’s and Corps’ Hydropower Plants
                                        Are Less Reliable Than Nonfederal Plants




                                        a more efficient maintenance program would have placed the generating
                                        unit into service faster, thereby enabling the utility to provide its
                                        customers with more service and hence possibly earn more revenues.

                                        In the case of scheduled outages, from 1993 through 1997, the Corps’
                                        average scheduled outage factor was 6.3 percent and the Bureau’s was
                                        14.4 percent. The average scheduled outage factor for nonfederal utilities
                                        was 6.4 percent. However, from 1993 through 1997 the Bureau’s scheduled
                                        outage rate showed an improvement—decreasing from 17.1 percent in
                                        1993 to 11.3 percent in 1997—while the Corps’ and the industry’s trends in
                                        scheduled outages factors were relatively unchanged. (See fig. 2.4.)


Figure 2.4: Scheduled Outages Factors
of the Bureau’s, the Corps’, and
Nonfederal Hydropower Generating
Units, 1993-97




                                        Notes: The percentages are the sum of all units’ scheduled outage hours divided by the sum of all
                                        units’ period hours. A unit’s period hours for a year, 8,760 hours, equals 24 hours multiplied by
                                        365 days. The Corps did not have 1993 scheduled outage data.

                                        Source: The Bureau, the Corps of Engineers, and the North American Electric Reliability Council.




                                        Page 29                                                          GAO/RCED-99-63 Federal Power
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                              The Bureau’s and Corps’ Hydropower Plants
                              Are Less Reliable Than Nonfederal Plants




                              Taking longer scheduled outages at opportune times is a management
                              decision that may be considered good business practice, even though such
                              decisions decrease a generating unit’s availability to generate electricity.
                              For example, the Bureau and some electric utilities extend scheduled
                              outages to perform additional repairs during periods when the water is not
                              available for generating electricity or the unit is not needed to meet
                              demand. Also, labor costs are minimized by avoiding the payment of
                              overtime wages.

                              However, according to some Bureau, PMA, and utility officials, these
                              practices may change as markets evolve. Hydropower units may need to
                              be available to generate electricity more of the time in order for the utility
                              to take advantage of new market opportunities. For example, supplying an
                              ancillary service, such as providing reserve capacity, may allow a utility to
                              earn added revenues while not actually generating electricity; however,
                              the unit must be in operating condition (“available”) to generate
                              electricity.


Reliability of the Bureau’s   The reliability of the Bureau’s and the Corps’ hydropower plants in Pacific
and the Corps’                Northwest is important to the overall reliability of the Bureau and the
Hydropower Plants in the      Corps. The generating units of those plants account for over half of the
                              Bureau’s and the Corps’ total hydropower capacity. In addition, those
Pacific Northwest             plants provide almost all of the generating capacity from which
                              Bonneville, the largest PMA, markets electricity. However, the reliability of
                              the Bureau’s and the Corps’ plants in the Pacific Northwest was below that
                              of nonfederal plants in the region.31 In addition, the reliability of the
                              Bureau’s and Corps’ plants in the region was also generally below that of
                              the Bureau’s and Corps’ plants elsewhere and below that of nonfederal
                              plants in other regions.32 As shown in chapter 4, Bonneville, the Bureau,
                              and the Corps are undertaking extensive upgrades and rehabilitations of
                              the federal plants. These actions occurred, in part, as a result of the
                              increased funding flexibility provided by the agreements under which
                              Bonneville would directly pay for the operation, maintenance, and repair
                              of these assets.




                              31
                               The region includes the hydropower generating units of the regional reliability council, called the
                              Western Systems Coordinating Council.
                              32
                                As shown in this chapter, from 1993 through 1997, nationwide, the average availability of the
                              Bureau’s generating units was 83.3 percent of the time, and the Corps’ was about 88.8 percent, whereas
                              the nonfederal units’ was 91.3 percent.



                              Page 30                                                             GAO/RCED-99-63 Federal Power
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The Bureau’s and Corps’ Hydropower Plants
Are Less Reliable Than Nonfederal Plants




The availability factor of the Bureau’s units improved over time. The
availability of the Corps’ units was slightly below that of nonfederal plants,
but it declined slightly from 1993 to 1997. However, the Corps’ units had a
forced outage status over twice as high as that of nonfederal units in the
region, indicating inconsistent plant performance, while the Bureau’s units
had a scheduled outage factor that was almost three times that of
nonfederal units.

From 1993 through 1997, the Bureau’s units in the Pacific Northwest were
available to generate power an average of about 78.7 percent of the time,
and the Corps’ units were available an average of 85.4 percent of the time.
In contrast, nonfederal hydropower units in the region were available an
average of 89.7 percent of the time. The Bureau’s availability factor
improved from a level of 74 percent in 1993 to 85 percent in 1997, and the
Corps’ availability factor decreased from 87.9 percent in 1993 to
85.7 percent in 1997. In contrast, the availability factors of nonfederal units
decreased slightly from 91.8 percent in 1993 to 90.3 percent in 1997.

In the Pacific Northwest, from 1993 through 1997, the Bureau’s units were
in outage status an average of 21.3 percent of the time, and the Corps’
units were in outage status an average of 15.3 percent of the time,
compared with an average of 10.3 percent of the time for nonfederal units
in the region. The Bureau’s outage factor decreased from about 26 percent
in 1993 to 15 percent in 1997, while the Corps’ increased slightly from
12.1 percent in 1993 to 14.3 percent in 1997. The outage factor for regional
nonfederal units increased from 8.2 percent in 1993 to 9.7 percent in 1997.

The Corps’ units performed more inconsistently than nonfederal units
because from 1993 through 1997, the Corps’ units had higher forced
outages factors (an average of 6.4 percent) than the Bureau’s units (an
average of 1.9 percent) and nonfederal units (an average of 3.1 percent).
The Corps’ forced outage factor in 199433 was about 5 percent and
increased to over 7 percent in 1995 and 1996, before declining to about 5.6
in 1997. In contrast, the Bureau’s forced outage factor was lower than the
nonfederal producers’ but increased from 1.3 percent in 1993 to
1.9 percent in 1997. Nonfederal producers had a forced outage that
increased from 1.5 percent in 1993 to 3.2 percent in 1997. According to the
Corps’ Hydropower Coordinator, the higher forced outage factor for the
Corps’ units in the region pertained to the operation of fish screens and
other equipment designed to facilitate salmon migrations around the
Corps’ units. This equipment breaks or needs to be maintained, causing

33
  The Corps did not report a forced outage factor in 1993.



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The Bureau’s and Corps’ Hydropower Plants
Are Less Reliable Than Nonfederal Plants




decreases in availability. During fiscal year 1998, at the Corps’ McNary and
Ice Harbor plants, forced outages related to fish passage equipment were
30 and 15 percent, respectively, of the total hours in which the plants
experienced forced outages.

However, from 1993 through 1997, the Bureau’s units had higher
scheduled outages factors (an average of 19.4 percent) than both the
Corps’ units (an average of 8.9 percent) and nonfederal units (an average
of 7.2 percent). The Bureau’s scheduled outages factors were far higher
than those of nonfederal parties but decreased from 24.7 percent in 1993
to 13.2 percent in 1997. The Corps’ scheduled outage factor decreased
from 9.6 percent in 1994 to 8.8 percent in 1997.34 Nonfederal parties had a
scheduled outage factor that increased from 6.7 percent in 1993 to
8.4 percent in 1994 before falling to 6.5 percent in 1997.




34
  The Corps did not report a scheduled outage factor in 1993.



Page 32                                                         GAO/RCED-99-63 Federal Power
Chapter 3

Funding Processes’ Impacts on the
Reliability of Hydropower Plants

                      The Bureau’s and the Corps’ plants were less reliable than nonfederal
                      plants partly because, under the federal planning and budget cycle, they
                      could not always obtain funding for maintenance and repairs when
                      needed. We found that funding for repairs can take years to obtain and is
                      uncertain. As a result, the agencies delay repairs and maintenance until
                      funds become available. In addition, the Anti-Deficiency Act and other
                      statutes require that federal agencies not enter into any contracts before
                      appropriations become available, unless authorized by law. Such delays
                      can lead to maintenance backlogs and to inconsistent, unreliable
                      performance. The PMAs’ electricity generally is priced less than other
                      electricity. However, because markets are becoming more competitive, the
                      PMAs’ customers will have more suppliers from which they can buy
                      electricity. In some power marketing systems—for example, Bonneville’s
                      service area—competition during the mid-1990s allowed some customers
                      to leave or buy some of their electricity from other sources, rather than
                      continuing to buy from Bonneville. Reliability is a key aspect of providing
                      marketable power. For example, according to Bonneville, in large
                      hydropower systems, the PMAs’ ability to earn electricity revenues
                      depends, in part, on the availability of hydropower generating units to
                      generate power. In more competitive markets, the reliability of the federal
                      electricity will have to be maintained or improved to maintain the
                      competitiveness of federal electricity and thus help ensure that the federal
                      government’s $22 billion appropriated and other debt will be repaid. In
                      addition, the Congress, the Office of Management and Budget (OMB), and
                      we have been working to help ensure that the purchase and maintenance
                      of all assets and infrastructure have the highest and most efficient returns
                      to the taxpayer and the government.


                      The federal planning and budgeting process takes at least 2 full years and
Funding for Repairs   does not guarantee that funds will be available for a specific project. This
Can Take Years to     affects the ways in which the Bureau and the Corps plan and pay for the
Obtain and Is         maintenance and repair of their hydropower plants. The federal budgeting
                      process is not very responsive in accommodating the maintenance and
Uncertain             repair of those facilities—it can take as long as 2 to 3 years before a repair
                      is funded, if it is funded at all. Specifically, the project and field locations
                      of the Bureau and the Corps identify, estimate the costs of, and develop
                      their budget requests, not only for hydropower, but also for their other
                      facilities, including dams, navigation systems, irrigation systems, and
                      recreational facilities. The funding needs of these various assets compete
                      for the funding and repair of hydropower plants may be assigned lower
                      priorities than other items.



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Funding Processes’ Impacts on the
Reliability of Hydropower Plants




For example, officials of the Bureau’s office in Billings, Montana,
described the budget process they expected to undergo to develop a
budget for fiscal year 2000. The process began in August 1997, when the
regional office received initial budget proposals from its area offices.
During the ensuing months, the area offices; the region; the Bureau’s
Denver office; the Bureau’s Washington State office; the Office of the
Secretary of the Interior; and OMB reviewed, discussed, and revised the
proposed area offices’ and regional office’s budgets, resulting in a
consolidated budget for the Bureau and the Department of the Interior.
Certainty about expected funding levels will not be obtained until
sometime between February 1999, when OMB conveys the President’s
budget to the Congress, and the enactment and approval of the Energy and
Water Appropriations Act. The time that will elapse from August 1997,
when the area offices began their budget processes, and October 1999 (the
start of fiscal year 2000) totals 26 months.

In addition, funding for the maintenance and repair of the Bureau’s and the
Corps’ hydropower plants is uncertain. Agency officials and other policy
makers, faced with limited and scarce resources, especially in times of
limited budgets, make decisions about where and where not to spend
funds. As shown in examples below, funding is not always delivered to
maintain and repair hydropower plants, even if the need is demonstrated.

According to documentation that the Bureau provided us with, in 1983,
detailed inspections of the generating units at the Shasta, California,
hydropower plant found that generating components were deteriorating.
The Bureau advised one of its federal power customers that it would seek
funds in fiscal year 1984 for the repairs. However, OMB did not approve the
requests because the units were not “approaching a failure mode.” Later,
in 1990, the Bureau issued invitations to bid for the repairs, which, upon
receipt ranged from $9 million to $12 million. However, the project was
dropped because the Bureau had budgeted only $6 million. In 1992, after
an inspection to determine how far the deterioration had advanced, one
generating unit’s operations were reduced. The inspectors also
recommended repairing the other two units because the gains in
generating capacity that would be achieved as a result of the repairs would
enable Western to sell more electricity. To fund the repairs, the Bureau
requested funds in its fiscal year 1993 budget request; however, according
to the Bureau’s records, OMB eliminated the request. The Bureau’s Budget
Review Committee recommended that the project not be included in the




Page 34                                         GAO/RCED-99-63 Federal Power
                        Chapter 3
                        Funding Processes’ Impacts on the
                        Reliability of Hydropower Plants




                        agency’s fiscal year 1994 budget request and that the Bureau’s regional
                        office “make a concerted effort to find non-federal financing.”35

                        The Corps’ Northwestern Division in Portland, Oregon, has also
                        experienced difficulties in funding needed repairs. For example, at the
                        Corps’ hydropower plant at The Dalles, Oregon, direct funding by
                        Bonneville allowed the Corps to accomplish maintenance that, according
                        to Corps officials, in all likelihood would not have been funded because of
                        the funding constraints in the federal budget process. Beginning in late
                        1993, the Corps began preparing an evaluation report that was submitted
                        to headquarters to replace major plant components on 14 units36 that had
                        exhibited many problems over the years but were kept in service through
                        intensive maintenance. The Congress approved funding for the major
                        rehabilitation as part of the Corps’ fiscal year 1997 appropriations.
                        However, after 2 of the units were out of service for an extended time,
                        Bonneville and the Corps entered into an agreement in January 1995 for
                        Bonneville to pay for the rewinding of the generator at unit 9. In
                        February 1996, the rewinding of unit 7 was added to the agreement. In
                        addition, Bonneville, in March 1996, agreed to fund the replacement of the
                        excitation systems for The Dalles’ units 15 through 22, which were not
                        included in the major rehabilitation funded by appropriations.


                        Delayed or uncertain funding leads to delays or postponements of needed
Funding Difficulties    maintenance and repairs. These delays or postponements can result in
Lead to Delays of       maintenance backlogs that can worsen over time. After funding requests
Maintenance That        are identified and screened, funding may not be made available until up to
                        3 years in the future. The Corps has estimated a total maintenance backlog
Result in Maintenance   of about $190 million for its power plants in Bonneville’s service territory.
Backlogs                However, according to Bonneville and Corps officials, the extent to which
                        critical repair items are part of the backlog is a matter yet to be
                        determined. In addition, according to Bonneville and Corps officials, the
                        role of the approximately $190 million estimate for purposes of planning
                        and budgeting under Bonneville’s and the Corps’ funding agreements is
                        subject to debate. The Corps’ Hydropower Coordinator noted that carrying



                        35
                          On August 10, 1995, Western’s power customers agreed to pay about $21.5 million to repair the units.
                        According to a Bureau official, this cost included not only rewinding the generators but replacing the
                        turbine runners. Replacing the turbine runners was not previously planned. Officials of the Sacramento
                        Municipal Utility District (a funding contributor) and the Bureau noted that replacing the turbine
                        runners allows the government to better realize the gains in capacity that result from rewinding the
                        generators.
                        36
                          The Dalles was originally constructed with 14 units. Units 15 through 22 were added later.



                        Page 35                                                            GAO/RCED-99-63 Federal Power
                        Chapter 3
                        Funding Processes’ Impacts on the
                        Reliability of Hydropower Plants




                        a maintenance backlog is not a bad management practice in and of itself,
                        as long as it can be managed through planning and budgeting techniques.

                        In contrast with the Corps, Bureau officials maintain that they have a
                        policy of not deferring maintenance and repairs they consider to be
                        critical, although noncritical items may be deferred. They added that the
                        Bureau is free to reprogram funds when needed to fund repairs and
                        maintenance. However, we noted that unfunded maintenance
                        requirements for the Bureau exist. In the Pacific Northwest, the Bureau
                        has been able to address these needs by securing new funding sources.
                        Specifically, Bonneville and the Bureau in the Pacific Northwest have
                        signed an agreement under which Bonneville’s power revenues will
                        directly pay for about $200 million of capital repairs at the Bureau’s power
                        plants. According to Bureau officials, some of these repairs would likely
                        not have been made under the existing federal planning and budgeting
                        processes because of limited and declining federal budgetary resources.
                        Therefore, it is doubtful that these maintenance needs could have been
                        addressed in a timely manner without a new funding mechanism.


                        Failure to fund and perform maintenance and repairs in a timely fashion
Delayed Repairs Lead    can lead to frequent and/or extended outages. These outages force the
to Inconsistent Plant   PMAs or their customers to purchase more expensive power than the

Performance             federal agencies provided in order to satisfy their contractual
                        requirements. For example, from 1990 through 1992, two or more units of
                        the Corps’ Carters hydropower plant, in Georgia, were out of service at the
                        same time for periods ranging from about 3 months to almost 1 year. A
                        Southeastern official estimated that its wholesale customers had
                        purchased replacement electricity for about $15 million more than they
                        would have paid for power marketed by Southeastern. In another
                        example, Southeastern officials estimated that customers of its
                        Georgia-Alabama-South Carolina system had paid 22 percent more in 1990
                        than in the previous year partly as a result of extended, unplanned
                        outages. Other factors that led to the rate increase included a drought and
                        increases in operation and maintenance costs at the Corps’ plants. In
                        addition, as previously noted in our Shasta example, the Bureau restricted
                        the operation of one of the plant’s generators in response to deteriorating
                        operating conditions.




                        Page 36                                          GAO/RCED-99-63 Federal Power
                             Chapter 3
                             Funding Processes’ Impacts on the
                             Reliability of Hydropower Plants




Utilities Attempt to Avoid   Although the average nonfederal hydropower generating unit is older (48
Extended Outages by          years) than the Bureau’s (41 years) and the Corps’ (33 years), the
Ensuring Sufficient          nonfederal units’ availability to generate power is greater than the
                             Bureau’s and the Corps’. This is true because, according to utility officials,
Funding to Maintain and      utilities ensure that sufficient funds exist to repair and maintain their
Repair Their Power Plants    generating units and thus promote a high level of generating availability.
                             According to officials from three investor-owned utilities or holding
                             companies37 and four publicly owned utilities with an average of about
                             2,458 MW of hydropower generating capacity,38 their hydropower units
                             were available at least 90 percent of the time—sometimes in ranges
                             approximating or exceeding 95 percent. Some officials said they would not
                             tolerate significant reductions in their generating availability because their
                             hydropower units play key roles in meeting demand during peak times.

                             Under the traditional regulatory compact between states’ public utility
                             commissions and utilities, the utilities have an obligation to provide all
                             existing and future loads in their service territories with power. According
                             to utility officials, to comply with these obligations, utilities implement
                             planning and budgeting systems that ensure that they can pay for all
                             necessary maintenance costs as well as critical repairs and replacements
                             in a timely fashion.

                             According to some utility officials, unlike under the federal budgeting
                             system, utilities typically have the financial capability to quickly obtain
                             funding to pay for unexpected repairs to their power plants. According to
                             these officials, utilities are also able to accumulate funds in reserves to
                             meet future contingencies, such as unexpected breakdowns and repairs of
                             generating units. In addition, issuing bonds but allowing work to begin
                             prior to the bond’s issuance is another tool that utilities use to pay for and
                             make repairs very quickly. For example, according to officials of the
                             Douglas County Public Utility District, the utility district can respond
                             quickly to an unexpected breakdown because (1) it has access to some
                             reserve funds, (2) its commissioners can approve funding via the issuance
                             of bonds up to 18 months after work was begun on a repair, and (3) its
                             budgeting process is fast and accurate. For example, the utility district in
                             January 1999 was completing work on the budget for the next fiscal year
                             that would begin in only 8 months—namely, August 1999. The budget for
                             the utility district’s hydropower project reflects funding requirements for

                             37
                               Idaho Power, Pacific Gas and Electric, and the Southern Company.
                             38
                              Chelan County Public Utility District, Washington State; Douglas County Public Utility District,
                             Washington State; Grant County Public Utility District, Washington State; and the New York Power
                             Authority.



                             Page 37                                                          GAO/RCED-99-63 Federal Power
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                        Funding Processes’ Impacts on the
                        Reliability of Hydropower Plants




                        operations, maintenance, anticipated repairs, and debt service, on the
                        basis of the long-term operational and financial history for the project.
                        According to Bonneville, the agency is achieving a similar effect by being
                        able to quickly provide access to funds and establish reserve funds
                        through agreements whereby its funds directly pay for the operation,
                        maintenance, and repair of the Bureau’s and the Corps’ hydropower
                        plants.


                        In competitive markets, the price being charged for the electricity and the
Inadequate Funding      reliability of that electricity will continue to be important factors that
for the Maintenance     consumers will consider when making purchasing decisions. On average,
and Repair of Federal   the electricity sold by the PMAs has been priced less than electricity from
                        other sources. However, failing to adequately maintain and repair the
Hydropower Plants       federal hydropower plants causes costs to increase and decreases the
May Impact              reliability of the electricity. The PMAs’ rates will have to be maintained at
                        competitive levels, and the reliability of this power will have to be
Marketability of        maintained or enhanced to ensure that federal electricity remains
Federal Electricity     marketable. In addition, the Congress, OMB, and we have been working to
                        help ensure that the purchase and maintenance of all assets and
                        infrastructure have the highest and most efficient returns to the taxpayer
                        and the government.

                        Delayed and unpredictable federal funding for maintenance and repairs
                        have contributed to the decreased availability (and reliability) of the
                        federal hydropower generating units as well as to higher costs that can
                        cause rates to increase if those costs are included in the rates. However, in
                        competitive markets, increased rates decrease the marketability of federal
                        electricity, as nonfederal electricity rates are expected to decline.
                        Customers are expected to have opportunities to buy electricity from any
                        number of reasonably priced sources. If the PMAs’ rates are higher than
                        prevailing market rates, customers will be less inclined to buy power from
                        the PMAs. According to the Department of Energy’s Energy Information
                        Administration, retail rates nationwide by 2015 may be about 6 to 19
                        percent (after inflation) below the levels that they would have been if
                        competition had not begun. In certain PMA systems—for example, the
                        Central Valley Project, which, as of fiscal year 1997, had an appropriated
                        and other debt of about $267 million—the PMAs’ electricity (in this case,
                        supplied by Western) is already facing competition from nonfederal
                        generation. If the price of the PMAs’ electricity exceeds the market price,
                        then its marketability would be hampered.




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Reliability of Hydropower Plants




Any factors that can cause the PMAs’ electricity rates to increase or that
decrease reliability decrease the marketability of federal electricity. The
marketability of the federal electricity will need to be maintained, as
markets become more competitive, in order to ensure the repayment of
the federal appropriated and other debt. For example, in 1994, in
evaluating the financial status of Bonneville, we noted that:

“. . .[Bonneville’s] financial viability would also be jeopardized if the gap between
[Bonneville’s] rates and the cost of alternative energy sources continues to narrow. Such a
scenario could cause some [Bonneville] customers to meet their energy needs elsewhere,
leaving a dwindling pool of ratepayers to pay off the substantial debt accumulated from
previous years.”39


In Bonneville’s service area, during the mid-1990s, competition decreased
nonfederal electric rates, resulting in some customers leaving or buying
power from less expensive sources, rather than continuing to buy from
Bonneville.

Similarly, in the case of the Tennessee Valley Authority (TVA)—a federally
owned corporation that supplies electricity in Tennessee and six other
Southeastern states), TVA’s sales to industrial customers declined from
about 25 billion kWh in 1979 to 16 billion in 1993 after double-digit annual
rate increases.40




39
 Bonneville Power Administration: Borrowing Practices and Financial Condition
(GAO/AIMD-94-67BR, Apr. 19, 1994).
40
 Tennessee Valley Authority: Financial Problems Raise Questions About Long-term Viability
(GAO/AIMD/RCED-95-134, Aug. 17, 1995).



Page 39                                                         GAO/RCED-99-63 Federal Power
Chapter 4

Actions Taken to Promote Faster and More
Certain Funding to Better Maintain and
Repair the Bureau’s and Corps’ Plants
                       Various actions have been used to fund the maintenance and repair of
                       federal hydropower facilities. If these actions work as intended, they have
                       the potential to deliver dollars for maintenance and repairs faster and with
                       more certainty than before these actions were implemented. By enabling
                       repairs to be made on time, they have the potential to help improve the
                       reliability of the PMAs’ electricity and to continue its existing
                       rate-competitiveness. Hence, these actions can help to secure the
                       continued marketability of the PMAs’ electricity and promote the
                       repayment of the appropriated and other debt. However, these various
                       actions may reduce opportunities for congressional oversight of the
                       operation, maintenance, and repair of federal plants and related facilities
                       and reduce flexibility to make trade-offs among competing and changing
                       needs.


                       Aware of the problems involved in securing funding through federal
Direct Funding by      appropriations, the Bureau, the Corps, the PMAs, and PMA customers have
Electricity Revenues   begun to take actions to secure the funding that is required to maintain
May Pay for Over $1    and repair the federal hydropower plants and related facilities. An
                       example is the Bureau’s, the Corps’, and Bonneville’s agreements in the
Billion for            Pacific Northwest, concluded from 1993 to 1997 and made pursuant to the
Maintenance and        Energy Policy Act and other statutes. According to Bureau officials, these
                       funding arrangements were caused by budget cuts during the 1980s. They
Repairs                added that the need to perform about $200 million in electricity-related
                       maintenance in the near future would strain the agency’s ability for
                       maintenance and repairs in a steady, predictable fashion. These officials
                       said that, as a result of these funding shortfalls, maintenance backlogs
                       accumulated and the generating availability of the federal power plants in
                       Bonneville’s service area declined from 92 to 82 percent. In response, in
                       1988, the Secretary of the Interior requested that the Congress authorize
                       Bonneville to directly fund certain maintenance costs. Such authority was
                       granted in provisions of the Energy Policy Act, which authorized the
                       funding agreements between Bonneville, the Bureau, and the Corps.

                       Under these agreements, Bonneville’s electricity revenues will directly pay
                       for over $1 billion of routine operations and maintenance as well as capital
                       repairs of the Bureau’s and the Corps’ electricity assets in Bonneville’s
                       service territory. The agencies expect to be able to plan and pay for
                       maintenance and repairs in a systematic, predictable manner over several
                       years. The agencies expect that the resulting funding will allow them to
                       respond with greater flexibility and speed to the need to repair
                       hydropower plant equipment. According to Bonneville, the funding



                       Page 40                                          GAO/RCED-99-63 Federal Power
Chapter 4
Actions Taken to Promote Faster and More
Certain Funding to Better Maintain and
Repair the Bureau’s and Corps’ Plants




agreements will create opportunities for the increased availability of
hydropower, financial savings, and the increased revenues. In addition,
Bonneville believes that increased demand for its electricity and the
increased financial resources provided by the funding agreements will
improve its competitive viability and ability to recover the full cost of the
electricity system from which it markets power.41

The Bureau and Bonneville signed two agreements for Bonneville’s
electricity revenues to pay up front for capital repairs and improvements
as well as ordinary operations and maintenance of the Bureau’s electricity
assets in Bonneville’s service area. In January 1993, the Bureau and
Bonneville executed an agreement that provided for funding by Bonneville
of specific capital items, as provided by subsequent “subagreements.” To
date, several subagreements have been signed under which Bonneville will
pay, up front, up to about $200 million for major repairs of the Bureau’s
hydropower plants in Bonneville’s service territory. For example,
Bonneville will spend about $125 million from 1994 through 2007 for
upgrades of the turbines of 18 generating units at the Bureau’s Grand
Coulee power plant, in Washington State.

In addition, in December 1996, the Bureau and Bonneville executed an
agreement whereby Bonneville agreed to directly pay for the Bureau’s
annual operations and maintenance costs as well as selected
“extraordinary maintenance,” replacements, and additions. The parties
anticipated that funding under terms of the agreement would total about
$243 million—ranging from about $47 million to about $50 million per year
from fiscal year 1997 to fiscal 2001.

The Corps and Bonneville have also signed two agreements that allow
Bonneville’s electricity funds to directly pay for the operation,
maintenance, and repair of the Corps’ electricity assets. The first
agreement, signed in 1994, was implemented by a series of subagreements,
under which about $43 million in capital improvements and emergency
repairs are being funded by Bonneville’s electricity revenues. For example,
under one subagreement, about $29 million will be spent for reliability
improvements at 21 of the Corps’ power plants throughout Bonneville’s
service area. Bonneville is also paying for over $5 million in repairs at The
Dalles, Oregon, power plant that were requested but not approved under
the appropriations process. Other work at The Dalles is currently funded
by appropriations. In December 1997, Bonneville and the Corps signed a
second agreement under which Bonneville will directly pay for annual

41
  Bonneville markets power from the Federal Columbia Rivers Power System.



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                                 Chapter 4
                                 Actions Taken to Promote Faster and More
                                 Certain Funding to Better Maintain and
                                 Repair the Bureau’s and Corps’ Plants




                                 operations and maintenance expenses, for Bonneville’s share of joint
                                 project costs allocated to electricity revenues for repayment, and for some
                                 small replacements at the Corps’ projects from which Bonneville markets
                                 electricity. The implementation of this agreement will begin in fiscal year
                                 1999 with an established budget of $553 million from fiscal 1999 through
                                 fiscal 2003—about $110 million per year.

Pacific Northwest’s Funding      Because the implementation of the Pacific Northwest funding agreements
Initiatives Include Systematic   is still relatively new, it is too early to determine if they will result in
Planning and Budgeting           improvements to the availability factors of the Bureau’s and the Corps’
Processes                        hydropower plants. At the same time, these efforts include a
                                 comprehensive attempt, that in our view, establishes systematic methods
                                 for identifying and budgeting for routine operations and maintenance, as
                                 well as for capital repairs, rehabilitations, and replacements of the federal
                                 hydropower plants in the region.42 For example, pursuant to the
                                 December 1996 funding agreement, the Bureau prepares an annual
                                 operations and maintenance budget by identifying major line items for
                                 each project during the next fiscal year. The Bureau also prepares 5-year
                                 budgets, on the basis of estimated budgets for each of the years that are
                                 included. The funding totals for the 5-year period cannot be exceeded,
                                 although any expenditures in a year that are less than the targeted amount
                                 are carried over to future years as accounted for in a “savings account.”
                                 The Bureau and Bonneville formed a “Joint Operating Committee” to vote
                                 on and approve the annual and 5-year budgets as well as any modifications
                                 to the budgets. Similarly, the December 1997 operations and maintenance
                                 funding agreement between the Corps and Bonneville features annual and
                                 5-year budgets that are voted upon and approved by the Joint Operating
                                 Committee. Five-year budget totals cannot be exceeded without the
                                 Committee’s approval, but the reallocation of funds is possible. In
                                 addition, if “savings” occur in any year, they are shared between
                                 Bonneville and the Corps and/or carried over to future years.

                                 In addition, annual budgets are proposed and approved less than 1 year in
                                 advance instead of 2 to 3 years in advance—as under the traditional
                                 federal appropriations process. These budget practices reflect more
                                 immediate considerations and, in the views of agency officials, are more
                                 realistic than budgets that have to be compiled 2 to 3 years ahead of time.



                                 42
                                    See Executive Guide: Leading Practices in Capital Decision-Making (GAO/AIMD-99-32, Dec. 1998).
                                 That report identifies practices used by leading organizations to make capital investment decisions.
                                 These include evaluating and ranking capital assets on the basis of established criteria and balancing
                                 control and flexibility when funding capital projects.



                                 Page 42                                                             GAO/RCED-99-63 Federal Power
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                                  Actions Taken to Promote Faster and More
                                  Certain Funding to Better Maintain and
                                  Repair the Bureau’s and Corps’ Plants




Enhanced Set-Aside Funds          The potential advantages of the funding agreements in the Pacific
Made Available                    Northwest include enhancing the agencies’ ability to accumulate funds in
                                  the “savings accounts” to pay for emergency repairs, as provided by the
                                  agreement. According to Bureau officials, the savings can be reallocated
                                  between projects on the basis of a telephone call between the Bureau and
                                  Bonneville. The ability of nonfederal utilities to quickly access reserve
                                  funds to meet emergency needs was mentioned by some nonfederal
                                  utilities when they discussed their planning and budgeting processes with
                                  us.

                                  In addition to the funds in savings, a variety of funding sources can be
                                  used to pay for maintenance and repairs, including emergency actions. For
                                  instance, according to Bureau officials, if unexpected repairs need to be
                                  performed, moneys to pay for them may be obtained via a subagreement
                                  between the Bureau and Bonneville. Work on the repairs could begin prior
                                  to Bonneville’s and the Bureau’s signing of the subagreement. According
                                  to Corps officials, some ongoing rehabilitations of the Corps’ Bonneville
                                  and The Dalles projects will continue to be funded with appropriations;
                                  however, maintenance or repairs to be supported under the funding
                                  agreements will no longer be included in the Corps’ budget requests for
                                  appropriations. To pay for the maintenance and repair of the Bureau’s and
                                  the Corps’ hydropower plants, Bonneville can use its cash reserves or its
                                  bonding authority.

Pacific Northwest’s Initiatives   Because the agreements provide more secure and predictable funding, the
May Allow Agencies to Adapt       Bureau and the Corps have begun to exercise greater flexibility in how
New, More Flexible                they maintain and repair their hydropower plants. Consistent with
Maintenance Practices             evolving market competition and with the actions of nonfederal utilities,
                                  Bureau and the Corps officials said their personnel will rely less on
                                  traditional, prescheduled maintenance and rely more on newer, more
                                  flexible maintenance philosophies, such as reliability-centered
                                  maintenance. For example, according to Bureau officials at the agency’s
                                  Pacific Northwest region, staff at the region’s electricity projects schedule
                                  maintenance and repairs, in part, by using a database that shows when
                                  maintenance and repairs were last performed and when a part may need
                                  maintenance or repairs in the future. Repairs or upgrades will be
                                  increasingly made “just-in-time” on the basis of test results. Bureau
                                  officials characterized their maintenance philosophy as evolving to be
                                  more responsive to Bonneville’s marketing requirements as well as to
                                  reduce costs.




                                  Page 43                                           GAO/RCED-99-63 Federal Power
                          Chapter 4
                          Actions Taken to Promote Faster and More
                          Certain Funding to Better Maintain and
                          Repair the Bureau’s and Corps’ Plants




                          According to these officials, because they now have funds that can be used
                          to pay for emergency repairs, they can take prudent risks in managing
                          their maintenance requirements by deferring some repairs that perhaps
                          can be made just in time or repairing other items that may have higher
                          priority. For example, according to the managers of the Grand Coulee
                          power plant, the new funding flexibility allowed the Bureau to reschedule
                          the spending of up to about $3 million on repairs at the plant.


                          Direct contributions from customers have been suggested and
Initiatives for Funding   implemented as one way to improve how the Bureau, the Corps, and the
by Customers Are          PMAs pay for repairs. Although the use of nonfederal funds to finance

Being Implemented         federal agencies’ operations is generally prohibited unless specifically
                          authorized by law, several forms of alternative financing have been
                          statutorily authorized by the Congress. Supporters of alternative financing,
                          among them officials from the Bureau, the Corps, the PMAs, and the PMAs’
                          electricity customers, note that alternative financing allows repairs and
                          improvements to be made more expeditiously and predictably than
                          through the federal appropriations process. They believe that alternative
                          financing could provide more certainty in funding repairs and help address
                          problems such as deferred maintenance at federal plants.

                          Through one type of authorized arrangement, referred to, among other
                          names, as “advance of funds,” nonfederal entities, such as preference
                          customers, pay up front for repairs and upgrades of the federal
                          hydropower facilities.43

                          Under federal statutes, such funding must be ensured before work on a
                          project can be started. Such funding arrangements have been proposed
                          and/or implemented in a variety of PMA systems, most prominently
                          Western’s Pick-Sloan Program in Montana, North Dakota, South Dakota,
                          and several neighboring states; Loveland Area Projects in Colorado and
                          nearby states; Hoover and Parker-Davis projects in Arizona and Nevada;
                          and Central Valley Project in California. For example, under an agreement
                          executed on November 12, 1997, by the Bureau, Western, and Western’s
                          power customers within the Central Valley Project, the customers agreed
                          to pay up front for electricity-related operations and maintenance and
                          certain capital improvements. These activities are specified in a funding

                          43
                            According to a Corps official, the Corps’ authority to accept outside funding is much narrower than
                          the Bureau’s. The Corps’ authority, pursuant to 33 U.S.C. 701h, allows contributions only for flood
                          control work and only from states and political subdivisions. The Corps’ authority to upgrade
                          hydropower facilities was further limited by section 216 of the Water Resources Development Act of
                          1996.



                          Page 44                                                            GAO/RCED-99-63 Federal Power
Chapter 4
Actions Taken to Promote Faster and More
Certain Funding to Better Maintain and
Repair the Bureau’s and Corps’ Plants




plan developed by a Governance Board that represents the Bureau,
Western, and the electricity customers. In approving spending proposals,
the Bureau and Western have veto power and two-thirds of the customers
represented on the Board must approve a proposal for it to pass. The
customers will be reimbursed for their contributions by credits on their
monthly electricity bills.

However, advance of funds agreements generally are limited in their
ability to free the funding for the maintenance and repair of federal
electricity assets from the uncertainties of the federal budget process.
They supplement rather than completely replace federal appropriations
and, therefore, may enhance the certainty of funding for repairs and
maintenance but not necessarily provide more speed in obtaining that
funding. For example, in Bonneville’s service territory, Bonneville, the
Bureau, and the Corps can budget 1 year in advance; however, under the
Central Valley Project agreement, the Governance Board approves
electricity-related operations and maintenance budgets 3 years in advance
to coincide with the federal budget and appropriation cycles for the
Bureau and Western. The dovetailing is necessary because federal
appropriations are counted upon to fund the balance of the maintenance
and repairs of the federal electricity assets.

Depending on how they are implemented, the direct funding of
maintenance and repairs by electricity revenues and agreements for
funding by customers pose the risk that opportunities for oversight by
external decisionmakers, such as the Congress, will be diminished. Also,
the lack of oversight limits Congress’s flexibility to make trade-offs among
competing needs. As the Congress and other decisionmakers examine the
need for new arrangements to fund the maintenance and repair of federal
hydropower plants, they may need to consider any reduced opportunities
for oversight, along with the potential benefits of these funding
arrangements. At this time, the Bureau, the Corps, and the PMAs provide
such information as the history and background of their power plants; the
power plants’ generating capacity and electricity produced; annual
electricity revenues, costs, and the repayment status; and related
environmental and water quality issues, to the Congress, other
decisionmakers, and to the public in general. The means of
communicating this information include the PMAs’ annual reports; the
PMAs’; the Bureau’s, and the Corps’ Internet Websites; and letters to the
appropriate congressional committees.




Page 45                                          GAO/RCED-99-63 Federal Power
Appendix I

Objectives, Scope, and Methodology


              As requested by the Chairman, Subcommittee on Water and Power, House
              Committee on Resources, we examined (1) the reliability of the Bureau’s
              and Corps’ hydropower plants in generating electricity compared with the
              reliability of nonfederal hydropower plants;44 (2) reasons why the Bureau’s
              and the Corps’ plants may be less reliable than nonfederal plants and the
              potential implications of reduced reliability; and (3) actions taken to
              obtain funding to better maintain and repair the Bureau’s and the Corps’
              plants.

              To compare the generating reliability of the Bureau’s and the Corps’
              hydropower plants with that of nonfederal ones, we obtained, analyzed,
              and contrasted power plant performance data, including availability and
              outage factors, from the Bureau, the Corps, and the North American
              Electric Reliability Council (NERC). NERC is a membership of
              investor-owned, federal, rural electric cooperatives,
              state/municipal/provincial utilities, independent power producers, and
              power marketers, whose mission is to promote the reliability of the
              electricity supply for North America. NERC compiles statistics on the
              performance of classes of generating units, such as fossil, nuclear, and
              hydro. The statistics are calculated from data that electric utilities report
              voluntarily to NERC’s Generating Availability Data System. The data
              reported to NERC exclude many hydropower units, which, on average, are
              smaller in generating capacity than those that report to NERC. According to
              the Department of Energy’s Energy Information Administration, as of
              January 1998, hydropower in the United States was generated by a total of
              3,493 generating units with a capacity of 91,871 megawatts (MW). As shown
              in table I.1, the federal and nonfederal hydropower generating units
              included in our report totaled 1,107 generating units and had a total
              generating capacity of 70,005 MW, or an average generating capacity of 63.2
              MW per unit. Therefore, the nonreporting units totaled 2,386, and had a
              total generating capacity of 21,866 MW, or an average generating capacity
              of 9.2 MW per unit. To compare the performance of federal hydropower
              generating units with that of nonfederal units, we used data on
              hydropower generating units from NERC’s database that excluded federal
              hydropower generating units. We did not evaluate NERC’s validation of the
              industry’s data, nor the specific input data used to develop the database.
              We collected 1998 availability and outage data for the Bureau and the
              Corps, but we did not present it in our graphs because comparative data
              for the nonfederal units were not available from NERC at the time we
              completed our study. We also did not evaluate the specific input data used

              44
               Nonfederal plants include those owned by commercial utilities, municipal utilities, electric
              cooperatives, public utility districts, and other entities.



              Page 46                                                            GAO/RCED-99-63 Federal Power
                                        Appendix I
                                        Objectives, Scope, and Methodology




                                        by the Corps and the Bureau to develop their databases on the
                                        performance of federal generating units. Table I.1 depicts some of the
                                        characteristics of the hydropower generating units included in our analysis
                                        of the performance of the Bureau’s, the Corps, and industry’s generating
                                        units. Data for nonfederal units is from 32 nonfederal utilities.

Table I.1: Characteristics of Bureau,
Corps, and Nonfederal Hydropower                                                                                                 Average
Generating Units as of 1997                                                                               Nameplate            nameplate
                                                              Average age of           Number of          capacity of         capacity of
                                                                  generating           generating         generating          generating
                                        Agency                  units (years)               units         units (MW)          units (MW)
                                        Bureau                               41                188              14,515                   77
                                        Corps                                33                349              20,720                   59
                                        Nonfederal                           48                570              34,770                   61
                                        Note: We excluded units at two of the Bureau’s power plants from our analysis–The Boise River
                                        Diversion because it has not operated in several years, and the Lewiston plant because it is a
                                        small (less than 1 MW) station service power plant for the Trinity power plant.

                                        Source: U.S. Bureau of Reclamation, U.S. Army Corps of Engineers, and NERC.



                                        We discussed the limitations of these performance indicators with officials
                                        from the Bureau, the Corps, the Tennessee Valley Authority,
                                        investor-owned utilities, publicly owned utilities, and other experts in the
                                        electric utility industry.

                                        To explore why federal hydropower plants sometimes performed at lower
                                        levels, we obtained and analyzed various reports on the subject, and
                                        discussed the topic with representatives of Bonneville, the Bureau, the
                                        Corps, various pwer maketing administration (PMA) power customers or
                                        their associations, investor-owned utilities, and nonfederal, publicly
                                        owned utilities. In our analysis, we included information obtained from the
                                        Tennessee Valley Authority, a federally owned utility with high
                                        performance indicators and significant hydropower resources.

                                        In addressing the implications of any reduced performance by federal
                                        plants, we interviewed industry experts, representatives of investor-owned
                                        and publicly owned utilities, and officials of PMA power customers. We also
                                        examined studies about the changes in electricity markets and contacted
                                        national and regional trade associations. Moreover, we addressed
                                        alternative ways of ensuring the enhanced funding of maintenance and
                                        repairs of the federal hydropower plants and related facilities. In this
                                        regard, to the extent possible, we relied upon previous work that we had




                                        Page 47                                                          GAO/RCED-99-63 Federal Power
Appendix I
Objectives, Scope, and Methodology




performed on federal power, especially work performed during two prior
reviews: Federal Power: Options for Selected Power Marketing
Administrations: Role in a Changing Electricity Industry (GAO/RCED-98-43,
Mar. 6, 1998) and Federal Power: Outages Reduce the Reliability of
Hydroelectric Power Plants in the Southeast (GAO/T-RCED-96-180, July 25,
1996). Moreover, we examined the Corps’, the Bureau’s, and the PMAs’
efforts to make power revenues directly finance the maintenance and
repair of federal hydropower assets. In this regard, we contacted the
Bureau, the Corps, Bonneville, Western, and the PMAs’ power customers
and examined various agreements of arrangements to pay for the
maintenance and repair of the federal hydropower plants and related
facilities.

Our work was performed at various locations, including the offices of
federal and nonfederal parties. Regarding the Corps, these locations
include the agency’s headquarters, Washington, D.C.; the Northwestern
Division, Portland, Oregon; the Portland, Oregon, District; and the
Nashville, Tennessee, District. Because the Corps’ power operations have
been affected by the need to accommodate the migrations of salmon, we
also contacted the Walla Walla and Seattle, Washington, Districts, and the
Corps’ Bonneville (Oregon) power plant. We visited the Bureau’s offices at
the Department of the Interior in Washington, D.C.; Denver, Colorado; the
Central Valley Operations Office, Sacramento, California; the Pacific
Northwest Region, Boise, Idaho; and the Grand Coulee, Washington,
power plant. To gain a perspective on how another federal
electricity-generating entity operated its hydropower program, we
interviewed TVA officials in Chattanooga, Tennessee. Moreover, we
contacted the PMAs at locations including their Power Marketing Liaison
Office, U.S. Department of Energy, Washington, D.C.; Bonneville in
Portland, Oregon; Southeastern in Elberton, Georgia; Southwestern in
Tulsa, Oklahoma; and Western in Golden and Loveland, Colorado, and
Folsom, California.

Our scope included contacting several PMA customers or associations that
represent PMA customers, including the City of Roseville, California;
Colorado River Energy Distributors Association, Tuscon, Arizona; the
Midwest Electric Consumers Association, Denver, Colorado; the Northern
California Power Agency, Roseville, California; and the Sacramento
(California) Municipal Utility District. In addition, we contacted several
investor-owned utilities, utility holding companies, and nonfederal publicly
owned utilities (other than those previously listed) that operate significant
amounts (collectively, over 17,000 MW) of hydropower -generating



Page 48                                           GAO/RCED-99-63 Federal Power
Appendix I
Objectives, Scope, and Methodology




capacity; they included the Chelan County (Washington) Public Utility
District; Idaho Power Company; Grant County (Washington) Public Utility
District; Douglas County (Washington) Public Utility District; New York
Power Authority in Niagara, New York; Pacific Gas and Electric Company,
Sacramento, California; South Carolina Electric and Gas; and the Southern
Company in Atlanta, Georgia.

Our work was performed from July 1998 through February 1999 in
accordance with generally accepted government auditing standards.




Page 49                                        GAO/RCED-99-63 Federal Power
Appendix II

Comments From the Department of Energy




              Page 50          GAO/RCED-99-63 Federal Power
Appendix II
Comments From the Department of Energy




On March 6, 1999, the Department of Energy provided technical
suggestions for the draft report but deferred to the comments of the
Bureau and the Corps on more substantive matters. For example, Energy
suggested that we clarify the differences between “reliability” and
“availability.” The report already discussed that plants are viewed as
reliable, within the electric utility industry, if they can function without
failure over a specific period of time or amount of usage. The report also
demonstrates that there are several ways of measuring reliability,
including the availability factor and outage factors. Accordingly, we made
no substantive changes to the report.




Page 51                                           GAO/RCED-99-63 Federal Power
Appendix III

Comments From the Department of the
Interior

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




See comment 1.




See comment 2.




See comment 3.




                             Page 52   GAO/RCED-99-63 Federal Power
Appendix III
Comments From the Department of the
Interior




Page 53                               GAO/RCED-99-63 Federal Power
                    Appendix III
                    Comments From the Department of the
                    Interior




See cover letter.




See cover letter.




See cover letter.




                    Page 54                               GAO/RCED-99-63 Federal Power
                 Appendix III
                 Comments From the Department of the
                 Interior




Now the report
cover



Now on p. 4.



Now on p. 7.




Now on p. 8.



Now on p. 9.




                 Page 55                               GAO/RCED-99-63 Federal Power
                        Appendix III
                        Comments From the Department of the
                        Interior




Now on pp. 10 and 11.




Now on pp. 28 and 29.




Now on p. 30.


Now on p. 34.

Now on p. 36.



Now on p. 36.



Now on p. 35.




Now on p. 40.




Now on p. 42.


Now on p. 42.



Now on p. 44.




                        Page 56                               GAO/RCED-99-63 Federal Power
                 Appendix III
                 Comments From the Department of the
                 Interior




                 The following are GAO’s comments on the Department of the Interior’s
                 (including the Bureau of Reclamation’s) letter dated March 12, 1999.


                 Interior provided us with comments that were intended to clarify its
GAO’s Comments   position regarding reliability measures, operation and maintenance, and
                 funding mechanisms.

                 1. In its cover letter and general comments, Interior stated that the report
                 does a good job in recognizing the funding needs for operating and
                 maintaining electrical-generating facilities. However, Interior stated the
                 report does not articulate in the executive summary, as it does in the body,
                 the initiatives undertaken by the Bureau and the Corps to identify
                 alternative funding sources. We believe that the executive summary
                 adequately addresses the issue of the initiatives undertaken by the Bureau,
                 the Corps, and the PMAs, particularly as they relate to efforts in the Pacific
                 Northwest. Therefore, we did not revise our report.

                 2. In its cover letter and in general comments, Interior stated that the
                 report does not articulate the fact that the Bureau’s facilities are operated
                 to fulfill multiple purposes, such as providing water for irrigation,
                 municipal and industrial uses, fish and wildlife enhancement, and
                 electricity generation. According to the Bureau, if water is frequently not
                 available for generating electricity, the availability factor is not a good
                 indicator for comparing the reliability of the Bureau’s
                 hydropower-generating units with other units that are not operated under
                 multipurpose requirements. Interior also suggested that the nonfederal
                 projects are freer to maximize power and revenues because they are less
                 affected by multiple purposes.

                 We disagree with the Bureau’s position that the report does not recognize
                 that water is used for multiple purposes and affects how electricity is
                 generated. For example, the executive summary recognizes that the
                 Bureau and the Corps generate electricity subject to the use of water for
                 flood control, navigation, irrigation, and other purposes. In addition, the
                 report recognizes, in chapter 2, that the Bureau and other utilities utilize
                 periods of low water and low demand to perform scheduled maintenance
                 and repairs. This would tend to decrease the availability factors of these
                 entities. The report also states that this practice may be regarded as good
                 business practices. We further disagree that the availability factor is not a
                 good basis for comparing the reliability of different projects. The
                 availability factor is a widely accepted measure of reliability that has



                 Page 57                                            GAO/RCED-99-63 Federal Power
Appendix III
Comments From the Department of the
Interior




validity, as long as it is understood in terms of other factors that affect
how plants are operated. Moreover, we disagree that other utilities
necessarily operate hydropower plants that are affected less by multiple
purposes. In fact, as we have noted previously, for other utilities, the
multiple uses of the water are regulated through conditions in the utilities’
hydropower-plant-operating licenses, which are issued by the Federal
Energy Regulatory Commission.

The Bureau contends that the availability of its plants is affected by the
fact that more of the Bureau’s plants are located on pipelines, canals, and
water diversion facilities than most nonfederal plants. We recognized this
point in chapter 2.

3. In the cover letter and in its general comments, Interior stated that the
forced outages factor is a better indicator of reliability than the availability
factor for multiple purpose facilities. In addition, in its cover letter,
Interior indicated that the Bureau’s benchmarking studies indicate that its
plants compare favorably with other plants in the area of reliability.
Regarding forced outages factors, our report recognizes that there are
several indicators of reliability and the forced outages factor is one of
most meaningful. More generally, we disagree with Interior’s conclusion
that the Bureau’s plants are as reliable as those of other power providers.
As shown in chapter 2 of this report, although the Bureau’s forced outages
factors are on par with those of nonfederal utilities, the Bureau’s
availability factor is lower, and it has been improving. Moreover, the
Bureau’s scheduled outages factors are higher than nonfederal utilities.

In its general comments, Interior adds that reliability is a measure of
whether a plant can operate when it is needed, while availability is a
measure of a unit’s ability to operate within a given time period. These
factors, stated the Bureau, can be equated only when a plant is required to
operate for the full time of the period. The Bureau added that optimum
availability is unique to each plant, depending on such factors as design,
time, water supply, location, and cost. As stated in our report, reliability is
a measure of a plant’s ability to operate over a specific period or amount
of usage. We further agree that the significance of an availability factor
should be understood within the context of various factors, some of which
are mentioned by the Bureau. We revised chapter 1 to recognize that
assessing the performance of a hydropower plant or unit by examining its
availability factor calls for understanding additional variables. We added
language to reflect that the availability factor needs to be understood in
terms of such factors as the kind of demand the plant meets (e.g., whether



Page 58                                             GAO/RCED-99-63 Federal Power
                    Appendix III
                    Comments From the Department of the
                    Interior




                    it meets peak demand), the availability of water throughout the year, and
                    the purposes satisfied by the dam and reservoir.

                    4. According to Interior, the report implies that the Bureau delays repairs
                    and maintenance, pending the availability of funds. The Bureau stated that
                    it performs repairs and maintenance when needed by reprioritizing funds.
                    We revised the report in chapter 3 to recognize the Bureau’s statement that
                    it reprioritizes funding. However, the example of the delayed repairs
                    because of delayed funding at the Bureau’s Shasta, California, project,
                    illustrates our point that repairs and maintenance are delayed when funds
                    are not forthcoming.

                    5. Interior stated that the Bureau has undertaken a program to improve its
                    performance by benchmarking its electricity operations against the rest of
                    the industry and is continually striving to improve, given the legal and
                    financial constraints encountered. Our report does not imply that these
                    agencies are operating in an unbusinesslike manner but shows that the
                    Bureau’s availability has improved in the face of financial and budgeting
                    constraints. We revised chapter 1 to recognize the Bureau’s benchmarking
                    effort.


Specific Comments   1. Interior commented that the title of the report implies that the Bureau
                    has reduced its operation and maintenance program. Interior stated the
                    Bureau has always implemented preventive and reliability-centered
                    maintenance and that adequate funding for these activities has been
                    available. Chapter 4 of the report recognizes that the Bureau, in particular
                    in the Pacific Northwest, will increasingly practice reliability-centered
                    maintenance and practiced preventive maintenance in the past. However,
                    the efforts of the Bureau’s field locations to engage in direct or advance
                    funding arrangements serves as evidence that faster and more predictable
                    funding is needed.

                    2. We added “transmission system” to the report, as requested by Interior.

                    3. We revised the report to indicate that the Bureau’s forced outages rate
                    from 1993 through 1997 was the same as the nonfederal sector’s.

                    4. According to Interior, our comparing plants of different size and type
                    may distort our conclusions about the performance of the federal and
                    nonfederal plants. We disagree. As shown in appendix I, the federal and
                    nonfederal electrical-generating units in our analysis were about same size



                    Page 59                                           GAO/RCED-99-63 Federal Power
Appendix III
Comments From the Department of the
Interior




because our analysis of nonfederal units excluded about 2,400 smaller
ones that averaged about 9 MW of generating capacity. In addition, our
decision to include both conventional generators and pump generators in
our analysis was based on the fact that the Corps’ performance data did
not separate its conventional and pump units. The Bureau itself, in its 1996
benchmarking study, included seven pump units (about 323 MW) at its
Grand Coulee and Flatiron plants as conventional generating units.
Moreover, although the Bureau has generating units from 1 MW to 700 MW,
it used only two MW-size categories (1 to 29 MW, and 30 MW and larger) in
comparing the availability and outages factors of its plants to the industry
in its 1996 benchmarking study. In addition, our analysis of the availability
factors of the Bureau’s hydropower-generating units from 1993 through
1997 showed that among pump generators as well as the size categories
zero to 10 MW, 11 to 50 MW, 51 to 100 MW, and 101 to 200 MW, the Bureau’s
hydropower units had lower availability factors than the industry as a
whole.

5. According to Interior, although the customers funded up to $22 million
in repairs for Shasta, the rewind contract was awarded for $8.8 million,
including total costs to replace the turbines estimated at $12.2 million.
This point is expanded upon under comment 12.

6. Interior disagrees with the statement in the draft report that advance or
direct funding arrangements decrease opportunities for congressional
oversight. We revised the report to state that, although these arrangements
could diminish opportunities for oversight, the Bureau, the Corps, and the
PMAs provide such information as the history and background of their
power plants; the plants’ generating capacity and electricity produced;
annual electricity revenues and costs; and related environmental and
water availability issues to the Congress, other decisionmakers, and to the
public. The means of communicating this information include the PMAs’
annual reports; the PMAs’, the Bureau’s, and the Corps’ Internet Websites;
and letters to the Congress.

7. According to Interior, our statement that “the longer the scheduled
outage, the less efficient the maintenance program,” is out of place as it
pertains to federal plants. The statement would apply primarily to
run-of-the-river plants, according to Interior. The Department noted that
federal plants are not allowed to earn more revenues and outages do not
have an impact on revenues if water is not available for generating
electricity.




Page 60                                           GAO/RCED-99-63 Federal Power
Appendix III
Comments From the Department of the
Interior




We believe our report sufficiently addresses these points. We have already
noted that performing scheduled outages during times of low water or low
demand may constitute good business practice. In addition, we have noted
the need to understand such factors as the kind of demand a plant meets
(for instance, whether it meets peak demand) and the availability of water
for generating power. Our report also states that, as markets evolve to
become more competitive, operating plants at higher availability factors
may allow the PMAs and utilities to take advantage of new opportunities to
earn revenue by selling ancillary services. In addition, we continue to
believe that, all things being equal, having plants on-line for longer periods
of time is also good business practice, as stated in the Bureau’s 1996
benchmarking report.45

8. As suggested by Interior, we revised the report to read “Western
Systems Coordinating Council.”

9. As suggested by Interior, we revised the report to reflect that three of
five units at Shasta were repaired. The other two were not.

10. In response to Interior’s comment, we revised the report to reflect that
while the Bureau defers noncritical items, it does not defer items it deems
to be critical. Interior also notes that unfunded maintenance requirements
do not necessarily indicate a deferred maintenance situation. In our view,
any maintenance requirements that are put off until the future are
deferred. However, we revised the report to state that deferred
maintenance is not problematic as long as it can be managed.

11. As requested by Interior, we added “due to limited and declining
federal budgetary sources.”

12. Interior clarified that the costs of rewinding the Shasta units decreased
from $10.5 million (low bid) in 1994 to $8.8 million in 1996. The rewind
contract was executed in 1996 to increase the rating to 142 MW per unit
versus the higher-priced rewind in 1994 to 125 MW per unit. Most
importantly, the $21.5 million commitment includes the replacement of
turbines in three units that were not included in earlier cost estimates.
Because of the new information provided regarding the nature of the
additional work at Shasta, we revised our report in chapter 3 to state that
the Bureau expanded the scope of work to be performed at the plant.



45
 See U.S. Bureau of Reclamation, A New Era of Power, Performance, and Progress: Future
Generations (1996).



Page 61                                                        GAO/RCED-99-63 Federal Power
Appendix III
Comments From the Department of the
Interior




13. As suggested by Interior, we revised the text to state that the funding
arrangements in the Pacific Northwest were necessitated by budget cuts
during the 1980s. Also, the need to fund about $200 million in maintenance
in the near term would limit the Bureau’s ability to pay for maintenance
and repairs in a steady, predictable fashion.

14. As suggested by Interior, we deleted the word “electricity” from the
reference to the Bureau’s operation and maintenance budget.

15. As suggested by Interior, we revised the text to eliminate references to
“separate” Joint Operating Committees.

16. As suggested by Interior, we changed “defer spending” to
“reschedule.”




Page 62                                           GAO/RCED-99-63 Federal Power
Appendix IV

Comments From the Department of Defense


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




                             Page 63   GAO/RCED-99-63 Federal Power
Appendix IV
Comments From the Department of Defense




On March 16, 1999, the Department of Defense (including the Army Corps
of Engineers) provided us with a letter acknowledging that the Corps’
verbal comments, discussed with us at a March 10, 1999, meeting, had
been resolved. The primary verbal comment was that we did not reflect
changes in the performance of the Corps’ hydropower plants that occurred
in fiscal year 1998. The Corps suggested that we include these data in
various graphs in our report. As discussed with Corps officials, we
addressed the changes in the Corps’ performance in the text of our report,
primarily in chapter 2. However, we declined to show changes in the
graphs because the 1998 data were not available for the nonfederal
hydropower generating units at the time we completed our review.




Page 64                                         GAO/RCED-99-63 Federal Power
Appendix V

Comments of the Bonneville Power
Administration

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




See comment 1.




See comment 2.




                             Page 65   GAO/RCED-99-63 Federal Power
                 Appendix V
                 Comments of the Bonneville Power
                 Administration




Now on pp. 10,
11, and 45.
See comment 3.




See comment 4.

Now on p. 10.




                 Page 66                            GAO/RCED-99-63 Federal Power
                 Appendix V
                 Comments of the Bonneville Power
                 Administration




Now on p. 8.
See comment 5.



Now on p. 9.
See comment 6.




Now on p. 33.
See comment 7.




Now on p. 38.
See comment 8.




                 Page 67                            GAO/RCED-99-63 Federal Power
                 Appendix V
                 Comments of the Bonneville Power
                 Administration




                 The following are GAO’s comments on the Department of Energy’s
                 (including the Bonneville Power Administration’s) letter dated March 11,
                 1999.


                 On March 11, 1999, Bonneville provided us with general and specific
GAO’s Comments   comments regarding our draft report. Bonneville noted that in its view, we
                 “sought to conduct a fair assessment of the U.S. Army Corps of Engineers
                 (Corps) and the Bureau of Reclamation (Reclamation) facilities during the
                 time of the study.”

                 1. Bonneville understood that we were not requested to evaluate the
                 direct-funding agreements in the Pacific Northwest. However, Bonneville
                 suggested that we add language to the report to reflect that the funding
                 agreements between itself, the Bureau, and the Corps contain a systematic
                 approach to maintenance planning and investment that creates
                 opportunities for increased hydropower availability, financial savings, and
                 increased revenues. We believe that our report addresses these points.
                 However, we added language that Bonneville believes these enhancements
                 will be attained as a result of the funding agreements.

                 2. As noted by Bonneville, our report stated that the availability factors of
                 the Bureau’s and the Corps’ hydropower plants in the Pacific Northwest
                 are lower than in the rest of the nation. Bonneville suggested that we
                 clarify the report, in the executive summary, by stating that Bonneville, the
                 Bureau, and the Corps recognized the lower reliability of the plants in the
                 Pacific Northwest and took action through a series of direct-funding
                 agreements to address the problem. Bonneville further suggested a
                 clarification that during the period 1993 through 1997, the federal agencies
                 undertook extensive upgrades and rehabilitations of the Bureau’s plants
                 partly as a result of the increased funding flexibility provided by the
                 direct-funding agreements. We agreed that these statements would clarify
                 the report and incorporated them.

                 3. Bonneville noted that the draft report stated that funding maintenance
                 and repair actions through direct customer contributions or through direct
                 payments from the PMAs’ revenues reduced opportunities for congressional
                 oversight. According to Bonneville, the funding arrangement in the Pacific
                 Northwest was specifically supported by the Senate Appropriations
                 Committee in 1997. Bonneville also stated that its annual congressional
                 budget submission includes programmatic information on the operations
                 and maintenance funding that Bonneville plans to provide for the Bureau



                 Page 68                                           GAO/RCED-99-63 Federal Power
Appendix V
Comments of the Bonneville Power
Administration




and the Corps. In response to this and other comments, we revised the
executive summary and chapter 4 to show that information is now being
made available to the Congress and others about the operation of the
federal power program. For instance, the Bureau, the Corps, and the PMAs
provide such information as the history and background of their power
plants; the plants’ generating capacity and electricity produced; annual
electricity revenues and costs; and related environmental and water
quality issues to the Congress, other decisionmakers, and to the public.
The means of communicating this information include the PMAs’ annual
reports; the PMAs’, the Bureau’s, and the Corps’ Internet Websites; and
letters to the appropriate congressional committtees.

4. We revised the executive summary as recommended by Bonneville by
adding “under the traditional appropriations process.”

5. Bonneville believed that the location of figure 1 in the executive
summary was confusing, since it discussed national availability factors but
was positioned over the discussion of availability in the Pacific Northwest.
We agree and have relocated the figure.

6. The draft’s executive summary stated that some of Bonneville’s power
customers are leaving the agency for less-expensive sources. Bonneville
stated that some customers left the power administration in an earlier
period but the situation today is significantly different, with demand for
electricity and other products exceeding the supply. Bonneville stated that
increasing demand for its electricity as well as the increased financial
resources provided by its funding agreements with the Bureau and the
Corps will improve its competitive viability and ability to recover the full
cost of the Federal Columbia River Power System. We agreed and revised
the report in the executive summary and chapter 4.

7. Bonneville suggested that the final report recognize that, for large
hydropower systems, the ability to earn electricity revenues depends on
the availability of water and of operable hydropower-generating units.
These conditions and other factors must be considered to optimize the
maintenance program for the plants from which Bonneville markets
electricity. We agreed and revised chapter 3 accordingly.

8. As suggested by Bonneville, we added language to chapter 3 to the
effect that like the Douglas County Public Utility District, Bonneville will
be able to quickly provide access to funds and establish reserved funds
through agreements whereby its funds directly pay for the operation,



Page 69                                            GAO/RCED-99-63 Federal Power
Appendix V
Comments of the Bonneville Power
Administration




maintenance, and repair of the Bureau’s and the Corps’ hydropower
plants.




Page 70                                       GAO/RCED-99-63 Federal Power
Appendix VI

Major Contributors to This Report


              Peg Reese
              Philip Amon
              Ernie Hazera
              Martha Vawter




(141194)      Page 71         GAO/RCED-99-63 Federal Power
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