Power Marketing Administrations: Repayment of Power Costs Needs Closer
Monitoring (Letter Report, 06/30/98, GAO/AIMD-98-164).

Pursuant to a congressional request, GAO reviewed the monitoring of the
repayment of the power-related costs and debt of four of the Department
of Energy's (DOE) power marketing administrations (PMA), focusing on
determining whether: (1) DOE or the Department of the Treasury actively
monitors the amount of debt to be repaid and the appropriateness of the
annual payments; and (2) there is a potential for financial loss to the
federal government as a result of any lack of such monitoring of the
repayment.

GAO noted that: (1) current monitoring activities do not ensure that the
federal government recovers the full cost of its power-related
activities from the beneficiaries of federal power; (2) the full cost of
the power-related activities includes all direct and indirect costs
incurred by the federal government in producing, transmitting, and
marketing federal power; (3) audits by external auditors and GAO's own
work have identified various unrecovered power-related costs that
resulted in financial loss; (4) progress toward resolving cost recovery
issues has been slow or nonexistent; (5) unrecovered power-related costs
relate to: (a) Civil Service Retirement System (CSRS) pensions and
post-retirement health benefits; (b) life insurance benefits; (c)
workers' compensation benefits; and (d) interest on some of the federal
appropriations used to construct certain projects; (6) GAO estimated
that the federal government's unrecovered costs for CSRS pensions and
post-retirement health benefits were about $37 million for fiscal year
(FY) 1996 and about $192 million for FY 1992 through FY 1996; (7) the
full magnitude of the under-recovery of power-related costs is unknown;
(8) until an effective monitoring system is implemented, the federal
government will continue to be exposed to financial loss to the
under-recovery of power-related costs; (9) the current activities for
monitoring the repayment of power-related costs and debt are less
extensive than those undertaken in prior years; (10) previously, DOE's
Office of Power Marketing Coordination (OPMC) monitored repayment and
reviewed rate proposals before they were sent to the Federal Energy
Regulatory Commission (FERC) for review; however, DOE disbanded OPMC in
1984 and its monitoring duties generally were not assigned to another
entity; (11) OPMC assessed whether appropriate costs were included in
rates, but did not review the PMAs' power repayment studies in detail;
(12) the scope of FERC's review of the three PMAs' rates was limited by
the Secretary of Energy's 1983 revision to the delegation order under
which FERC carries out that function; (13) the scope of FERC's review of
Bonneville's rates was limited by the passage of the Pacific Northwest
Electric Power Planning and Conservation Act; and (14) the review
procedures previously performed by DOE's OPMC and FERC provided greater
assurance that repayment amounts were accurate, complete, and timely.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-164
     TITLE:  Power Marketing Administrations: Repayment of Power Costs 
             Needs Closer Monitoring
      DATE:  06/30/98
   SUBJECT:  Electric utilities
             Energy marketing
             Utility rates
             Electric power generation
             Retirement benefits
             Financial analysis
             Losses
IDENTIFIER:  Civil Service Retirement System
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

June 1998

POWER MARKETING ADMINISTRATIONS -
REPAYMENT OF POWER COSTS NEEDS
CLOSER MONITORING

GAO/AIMD-98-164

Power Marketing Administrations

(913818)


Abbreviations
=============================================================== ABBREV

  CSRS - Civil Service Retirement System
  DOD - Department of Defense
  DOE - Department of Energy
  DOI - Department of the Interior
  FASAB - Federal Accounting Standards Advisory Board
  FCRPS - Federal Columbia River Power System
  FERC - Federal Energy Regulatory Commission
  FPC - Federal Power Commission
  O&M - operations and maintenance
  OMB - Office of Management and Budget
  OPM - Office of Personnel Management
  OPMC - Office of Power Marketing Coordination
  PMA - power marketing administration

Letter
=============================================================== LETTER


B-279016

June 30, 1998

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

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

This report responds to your request that we examine the monitoring
of the repayment of the power-related costs and debt\1 of four of the
Department of Energy's (DOE) power marketing administrations (PMA). 
The PMAs' costs and the power-related costs of the agencies that
produce the power marketed by the PMAs are required by law to be
repaid.\2 Repayment is to be made through revenues from federal power
sales.  You expressed concern about issues we previously reported
related to the under-recovery of certain power-related costs\3

and the large amount of debt outstanding--more than $14 billion as of
September 30, 1997.  Specifically, you asked us to determine (1)
whether DOE or the Department of the Treasury (Treasury) actively
monitors the amount of debt to be repaid and the appropriateness of
the annual payments and (2) whether there is a potential for
financial loss to the federal government as a result of any lack of
such monitoring of the repayment. 

We evaluated the effectiveness of the existing monitoring activities
to determine whether they ensure that repayment amounts are complete,
accurate, and timely.  As agreed with your offices, we did not
attempt to quantify the potential financial loss to the federal
government resulting from any ineffectiveness in monitoring
repayment.  This report covers the four PMAs\4 and the power-related
activities of the Department of the Interior's (DOI) Bureau of
Reclamation (Bureau) and the Department of Defense's (DOD) Army Corps
of Engineers (Corps).  It also includes the portion of capital
expenditures for irrigation facilities that becomes repayable through
the PMAs' power rates.  We conducted our review from December 1997
through June 1998 in accordance with generally accepted government
auditing standards.  Additional information on our objectives, scope,
and methodology in conducting this review is contained in appendix I. 


--------------------
\1 PMA debt consists of reimbursable appropriations used to construct
power facilities and certain capital costs associated with irrigation
facilities (i.e., "irrigation assistance").  The irrigation
assistance costs arise when the Secretary of the Interior determines
that some of the capital costs allocated to completed irrigation
facilities are beyond the ability of irrigators to repay.  In this
report we refer to the amounts to be repaid related to both power and
irrigation facilities as debt.  However, Department of the Treasury
officials do not consider these amounts to be receivables and record
them as appropriations paid. 

\2 Some power-related costs, such as those for environmental
mitigation activities at certain projects, are legislatively exempted
from the repayment requirement; these legislatively exempt costs are
not the subject of this report. 

\3 Federal Electricity Activities:  The Federal Government's Net Cost
and Potential for Future Losses, volumes 1 and 2 (GAO/AIMD-97-110 and
110A, September 19, 1997) and Power Marketing Administrations:  Cost
Recovery, Financing, and Comparison to Nonfederal Utilities
(GAO/AIMD-96-145, September 19, 1996). 

\4 The four PMAs covered in this report are:  Bonneville Power
Administration (Bonneville), Southeastern Power Administration
(Southeastern), Southwestern Power Administration (Southwestern), and
Western Area Power Administration (Western).  We sometimes discuss
Bonneville separately because it is different in size and
characteristics than the others, which we refer to as the three PMAs. 
We excluded the fifth PMA--Alaska Power Administration--from our
analysis because legislation has been enacted to sell it to
nonfederal entities. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Current monitoring activities do not ensure that the federal
government recovers the full cost of its power-related activities
from the beneficiaries of federal power.  The full cost of the
power-related activities--which are to be recovered under current
legislation and DOE policy--include all direct and indirect costs
incurred by the federal government in producing, transmitting, and
marketing federal power.  Key participants responsible for monitoring
repayment include the Secretary of Energy, who is responsible for
ensuring that the PMAs' power-related costs are recovered, and the
Federal Energy Regulatory Commission (FERC), which reviews the PMAs'
rate proposals.  However, neither of these entities is effectively
monitoring the rate-making process and the amounts due and repayments
made to ensure their accuracy, completeness, and timeliness.  While
the Department of the Treasury receives and records the repayments,
it is not responsible for monitoring repayment. 

Audits by external auditors and our own work have identified various
unrecovered power-related costs that have resulted in financial loss
to the federal government.  In several instances in which problems
with the repayment of power-related costs have been reported to PMA
management, progress toward resolving the issues has been slow or
nonexistent.  Unrecovered power-related costs relate to (1) Civil
Service Retirement System (CSRS) pensions and postretirement health
benefits, (2) life insurance benefits, (3) workers' compensation
benefits for Corps employees at projects marketed by Southeastern,
and (4) interest on some of the federal appropriations used to
construct certain projects.  We estimated that the federal
government's unrecovered costs for CSRS pensions and postretirement
health benefits for PMA employees and operating agency employees
involved in power-related activities were about $37 million for
fiscal year 1996 and about $192 million (in constant 1996 dollars)
for fiscal years 1992 through 1996.  The full magnitude of the
under-recovery of power-related costs is unknown.  Until an effective
monitoring system is implemented, the federal government will
continue to be exposed to financial loss due to the under-recovery of
power-related costs. 

The current activities for monitoring the repayment of power-related
costs and debt are less extensive than those undertaken in prior
years.  Previously, DOE's Office of Power Marketing Coordination
(OPMC) monitored repayment and reviewed rate proposals before they
were sent to FERC for review; however, DOE disbanded OPMC in 1984 and
its monitoring duties generally were not assigned to another entity. 
OPMC assessed whether appropriate costs were included in rates, but
did not review the PMAs' power repayment studies in detail.  In
addition, FERC previously had more latitude in reviewing the PMAs'
rates.  The scope of FERC's review of the three PMAs' rates was
limited by the Secretary of Energy's 1983 revision to the delegation
order under which FERC carries out that function.  The scope of
FERC's review of Bonneville's rates was limited by the passage of the
Pacific Northwest Electric Power Planning and Conservation Act
(Northwest Power Act).  The review procedures previously performed by
DOE's OPMC and FERC provided greater assurance that repayment amounts
were accurate, complete, and timely.  Better monitoring is essential
to protect the federal government's right to recover the costs of its
investments that are to be repaid through power revenues. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The PMAs were established from 1937 through 1977 to sell and transmit
electricity generated mainly from federal hydropower facilities. 
Most of these facilities were constructed and continue to be owned
and operated by the Bureau and Corps (operating agencies).  The
operating agencies constructed these facilities as part of a larger
effort to develop multipurpose water projects that have functions in
addition to power generation, such as flood control, irrigation,
navigation, and recreation.  As required by law, the PMAs give
preference in the sale of power to public power customers.  These
preference customers include public utility and irrigation districts,
customer-owned cooperatives, municipally-owned utilities, and, in
some cases, state governments and the federal government. 

With the exception of Bonneville, the Congress appropriates money
each year to the PMAs for power-related purposes and to the operating
agencies for both power and nonpower purposes.  The PMAs, other than
Bonneville, generally receive appropriations annually to cover
operations and maintenance expenses (O&M) and, if applicable, capital
investments in their transmission assets.  Since 1974, Bonneville has
operated without annual appropriations from the Congress and has
financed its activities through a revolving fund.\5 Bonneville is,
however, responsible for repaying its pre-1974 appropriations.\6 The
operating agencies receive appropriations for all aspects of their
multipurpose water projects, including O&M expenses and capital
expenditures.\7 The portion of these appropriations expended for
power-related purposes is allocated to the PMAs for repayment by
power customers. 

Section 9(c) of the Reclamation Project Act of 1939 and section 5 of
the Flood Control Act of 1944 generally require that the PMAs recover
through power rates the costs of producing, transmitting, and
marketing federal hydropower.  Bonneville is covered additionally
under the Northwest Power Act.  In addition, the PMAs that market
power from multipurpose projects also having irrigation as a
purpose--Bonneville and Western--are responsible for repaying certain
irrigation assistance costs.  Costs are recovered by the PMAs through
rates charged the customers who benefit from the federal power.  The
PMAs generally repay appropriations expended for O&M expenses in the
same year that the expenses are incurred, but generally repay
appropriations expended for capital investments and other debt, with
interest, within the repayment period prescribed by law and/or DOE
order. 

As shown in table 1, the PMAs differ substantially in annual revenues
and the amount of outstanding debt to be repaid to the federal
government.  Table 1 and the notes thereto include information on (1)
the outstanding appropriated debt and irrigation costs that are to be
repaid by the PMAs, (2) Bonneville Power Administration Treasury
bonds, and (3) certain nonfederal debt. 



                                Table 1
                
                    Annual Revenues and Outstanding
                Appropriated and Irrigation Debt of the
                 PMAs for the Fiscal Year Ending and as
                         of September 30, 1997

                         (Dollars in millions)

                                           Outstanding     Outstanding
                                          Appropriated      Irrigation
                          Revenues for    Debt\b as of      Debt as of
                           Fiscal Year   September 30,   September 30,
PMA                               1997            1997          1997\f
------------------------  ------------  --------------  --------------
Southeastern\a                    $168          $1,519             n/a
Southwestern                       112           695\c             n/a
Western                            793         3,142\d          $3,528
Bonneville                       2,272       4,452\d,e             857
======================================================================
Totals                          $3,345          $9,808          $4,385
----------------------------------------------------------------------
\a Southeastern's data on revenues and outstanding appropriated debt
is based on draft financial statements for fiscal year 1997. 

\b Our calculation of outstanding appropriated debt may differ from
the amount of unpaid investment reported by the PMAs in their annual
reports primarily because the PMAs do not include
construction-work-in-progress in their totals. 

\c Southwestern's appropriated debt data are as of September 30,
1996; fiscal year 1997 data were not available at the time of our
review. 

\d In addition to the appropriated and irrigation debt, Western and
Bonneville also have $163 million and $7,037 million of nonfederal
debt, respectively.  Bonneville also has $2,499 million of medium-
and long-term debt held by Treasury in the form of Bonneville Power
Administration bonds. 

\e As a result of legislation passed in 1996 (Omnibus Consolidated
Rescissions and Appropriations Act of 1996 - Public Law 103-134,
April 26, 1996, 110 Stat.  1321-350), Bonneville's appropriated debt
was restructured to reduce the principal owed by about $2,560 million
and increase the associated interest rate by about 3.6 percentage
points.  This figure reflects that restructuring. 

\f Since projects marketed by Southeastern and Southwestern do not
have irrigation as a purpose, irrigation debt is not applicable
(n/a). 

Source:  Audited financial statements and other information provided
by the PMAs. 

DOE's policy for implementing the cost recovery requirement is set
forth in DOE Order RA 6120.2,\8 which states that all costs of
operating and maintaining the power system, as well as transmission
and irrigation assistance costs, are generally to be included in the
rates set by the PMAs.  This order does not specifically identify and
define all costs that must be recovered.  To define the full costs
associated with producing, transmitting, and marketing the federal
hydropower, we referred to Office of Management and Budget (OMB)
Circular A-25 and federal financial accounting standards recommended
by the Federal Accounting Standards Advisory Board (FASAB) and
adopted by GAO, OMB, and Treasury.  OMB Circular A-25 defines the
full costs of providing goods or services--in this case federal power
marketed by the PMAs--as all direct and indirect costs of delivering
those goods or services.  The federal financial accounting standard\9
defines the full costs of an entity's outputs as "the sum of (1) the
costs of resources consumed by the segment that directly or
indirectly contribute to the output, and (2) the costs of
identifiable supporting services provided by other responsibility
segments within the reporting entity, and by other reporting
entities." As we reported in 1996,\10 applying these definitions of
full cost, the full cost of the power marketed by the PMAs includes
all direct and indirect costs incurred by the operating agencies to
produce the power, the PMAs to market and transmit the power, and any
other agencies to support the operating agencies and PMAs. 

DOE Order RA 6120.2 requires the PMAs to annually conduct power
repayment studies to evaluate whether power rates are sufficient to
recover all costs that must be repaid within the rate-making period. 
These power repayment studies form the basis for setting the PMAs'
rates.  Specifically, the power repayment studies must identify,
among other things, estimated revenues, expenses, repayments of debt,
and the total amount of debt to be repaid generally over the next 50
years. 

Under the Department of Energy Organization Act of 1977 (DOE Act),
the Secretary of Energy is responsible for monitoring the PMAs to
ensure that all applicable costs are recovered.  The Secretary has
delegated to the Deputy Secretary the primary responsibility for
PMA-related issues.  The Deputy Secretary's office is to review the
rate proposals of the three PMAs before they are sent to FERC for
review.  For Bonneville, in accordance with provisions of the
Northwest Power Act, the administrator develops the rate proposals
and submits them directly to FERC without review by the Deputy
Secretary. 

FERC, an independent agency within DOE, reviews the three PMAs' rates
under authority delegated to it by the Secretary of Energy under DOE
Delegation Order 0204-108.\11 For Bonneville, FERC reviews rates
under the requirements of the Northwest Power Act.  The Secretary's
delegation order and legislation limit FERC's review authority. 

The public also plays a role in the rate review process.  Whenever a
PMA proposes a new rate, a public hearing process takes place to
obtain input on the proposed rate.  This process ensures that members
of the public, such as PMA customers, have an opportunity to provide
input for the PMAs' consideration before the rate becomes effective. 
According to DOE and FERC officials, most comments received during
this public process are received from customers, who have an
incentive to keep rates as low as possible. 

See appendix II for more information on the legal responsibilities
and delegated authorities regarding PMA rate-making. 


--------------------
\5 Western also has three projects with revolving funds. 

\6 In addition to the outstanding pre-1974 appropriated debt and
irrigation debt, Bonneville's debt includes Treasury bonds and
obligations related to certain nonfederal power projects.  Bonneville
is to repay all these debts, except those pertaining to irrigation
facilities, with interest. 

\7 Following agreements reached with the operating agencies,
Bonneville currently directly funds the power-related O&M costs of
Bureau projects in the Federal Columbia River Power System (FCRPS). 
Beginning in 1999, Bonneville will directly fund Corps power-related
O&M costs.  In addition, Bonneville also directly funds selected
capital investments in FCRPS for both the Bureau and Corps. 

\8 Power Marketing Administration Financial Reporting, October 1,
1983. 

\9 FASAB Statement of Federal Financial Accounting Standards (SFFAS)
No.  4, Managerial Cost Accounting Concepts and Standards for the
Federal Government, June 1995. 

\10 Power Marketing Administrations:  Cost Recovery, Financing, and
Comparison to Nonfederal Utilities (GAO/AIMD-96-145, September 19,
1996). 

\11 Delegation Order for Approval of Power Marketing Administration
Power and Transmission Rates, December 14, 1983, and subsequent
amendments. 


   CURRENT MONITORING OF REPAYMENT
   IS INEFFECTIVE
------------------------------------------------------------ Letter :3

Current monitoring activities do not ensure that all power-related
costs are recovered and that cost recovery issues identified in audit
reports are resolved in a timely manner.  There is little monitoring
performed at DOE's departmental level and FERC's monitoring efforts
are limited in scope.  Neither DOE nor FERC performs independent,
detailed reviews of the power repayment studies that form the basis
for the PMAs' rates.  Thus, there is little assurance that the power
repayment studies provide for complete, accurate, and timely
repayment of the PMAs' power-related costs and debt.  Treasury's
involvement in the repayment process includes receiving and recording
the repayment transactions, but does not include monitoring the
repayment for appropriateness. 


      DEPARTMENT OF ENERGY
---------------------------------------------------------- Letter :3.1

The Secretary of Energy has delegated to the Deputy Secretary the
responsibility for monitoring the PMAs' activities to ensure that
power-related costs and debt are repaid.  The Deputy Secretary does
so through interaction with the PMA administrators in the field and
with the two Washington, D.C., PMA liaison offices at DOE
headquarters. 

The Deputy Secretary receives the rate proposal packages from the
three PMAs, approves the rates established by the three PMAs on an
interim basis, and sends the rate proposal packages to FERC for
review.  The sole staff person in the Office of the Secretary
involved in doing this told us that he spends most of his time on
national energy policy issues, such as the administration's recent
proposal for restructuring the electricity industry.  He estimated
that only about 30 percent of his time is spent on PMA activities,
little of which is devoted to detailed review of rate-making and cost
recovery issues.  As a result, the Deputy Secretary's office does not
perform the monitoring activities necessary to ensure that all of the
appropriate costs are included in the PMAs' power repayment studies,
on which rates are based.  In addition, not all information that
would be relevant to FERC's consideration of rate proposals, such as
audit reports, is routinely gathered and submitted to FERC. 

Bonneville's rates are established by the administrator and sent
directly to FERC for review without review by the Deputy Secretary's
office.  Therefore, as with the current situation for the three PMAs,
there is no assurance that FERC will routinely receive all
information, such as audit reports, that would be relevant to FERC's
consideration of Bonneville's rate proposals. 


      FEDERAL ENERGY REGULATORY
      COMMISSION
---------------------------------------------------------- Letter :3.2

The Secretary of Energy has delegated to FERC the responsibility for
reviewing and approving the final rates of the three PMAs.  According
to FERC officials, their review of the PMAs' rate proposals focuses
on reviewing financial and other information provided to FERC by the
PMAs.  Although FERC has the authority to do so, FERC officials told
us that when reviewing a rate proposal they generally do not obtain
and review documentation related to the three PMAs' costs, such as
audit reports that have raised cost recovery issues, beyond that
provided by the three PMAs.  Under Department of Energy Delegation
Order 0204-108, FERC's review of the three PMAs' rates includes
assessing (1) whether the rates are the lowest possible to customers
consistent with sound business principles, (2) whether the revenue
levels generated by the rates are sufficient to recover the costs of
producing and transmitting electric energy, and (3) the assumptions
and projections used in developing the rate components.  However,
according to FERC officials, the delegation order allows FERC to
reject a rate proposal only if it finds the proposal to be
"arbitrary, capricious or in violation of law." According to FERC
officials, since this standard for rejection imposes a significant
practical limitation on FERC's review of the three PMAs' rates, FERC
rarely disapproves a rate request.  FERC officials told us that they
have rejected a rate proposal on only one occasion.  This proposal
was by Western for the Parker-Davis Project and FERC rejected it
because it did not provide for the recovery of significant expected
costs of future power facility additions and replacements. 

FERC's review and final approval of Bonneville's rates is authorized
under the Northwest Power Act.  This act requires FERC to assess
whether Bonneville's rates (1) are sufficient to ensure repayment of
the federal investment in the Federal Columbia River Power System
(FCRPS),\12 (2) are based on total system costs, and (3) reflect
equitable allocation of transmission system costs between federal and
nonfederal users.  However, FERC's review of Bonneville's rate
proposals is limited by its interpretation of two court opinions
issued by the Ninth Circuit Court of Appeals, which is statutorily
charged with reviewing actions arising under the Northwest Power Act. 
FERC has interpreted the opinions to mean that it may not obtain and
review documentation other than that provided by Bonneville and
therefore FERC generally does not request additional documentation
from Bonneville in its consideration of Bonneville's rate proposals. 
In one case,\13 the court held that under the Northwest Power Act,
FERC's review of rates is limited to the three previously mentioned
standards specified in the act and that FERC's limited review
properly reflects congressional desire to limit its role to financial
oversight rather than rate-making.  In a second case,\14 the court
held that FERC should not seek new evidence in reviewing Bonneville's
rate proposals.  Instead, the court held that FERC should evaluate
the evidence developed by Bonneville, which is required to develop a
"full and complete record" under section 7.(i) of the Northwest Power
Act.  As a result of its interpretation of these court opinions, FERC
generally does not request additional documentation and limits its
review to the documentation submitted with Bonneville's rate
proposals. 

For all four PMAs, FERC analyzes the PMA-provided information to
determine whether the proposed rates appear to be sufficient to
recover the costs the PMAs have included in the power repayment
studies.  FERC relies on the amounts and due dates for repayment
reported by the PMAs in the power repayment studies as being
complete, accurate, and timely.  According to FERC officials, they
rely on the financial and other data provided by the PMAs, and not on
other evidence, such as audit reports.  Based on its restricted
analysis, FERC either approves or disapproves the PMAs' rate
proposals; it cannot modify a proposed rate.  However, FERC officials
told us if FERC disapproves a PMA's rate proposal, the existing (and
typically lower) rate remains in effect until the PMA submits a new
one that is reviewed and approved by FERC. 


--------------------
\12 Bonneville is part of FCRPS, which also includes the
power-related operations of the Corps and the Bureau.  Bonneville is
responsible for marketing power from the FCRPS. 

\13 Central Lincoln Peoples' Utility District v.  Johnson, 735 F.  2d
1101, 1115 (9th Cir.  1984). 

\14 Aluminum Company of America et al.  v.  Bonneville Power
Administration, 903 F.  2d 585 594 (1990).  Although this case deals
with nonregional rather than regional rates, FERC has applied the
holding of this case to regional rate proposals. 


      DEPARTMENT OF THE TREASURY
---------------------------------------------------------- Letter :3.3

The Department of the Treasury's role in the repayment process is
minimal.  Currently, Treasury is responsible for receiving and
recording the repayments, but is not responsible for monitoring or
assessing the appropriateness of the repayment amounts and
timeliness.  In fact, Treasury does not have available to it the
information on amounts due, due dates, and interest rates that would
be necessary for it to do so.  In addition, since it has no role in
rate-making, Treasury does not have staff with the knowledge and
expertise necessary to assess the PMAs' power repayment studies and
rate proposals. 


   INEFFECTIVE MONITORING SYSTEM
   HAS RESULTED IN FINANCIAL LOSS
   TO THE FEDERAL GOVERNMENT
------------------------------------------------------------ Letter :4

Audits by external auditors and GAO have identified various
unrecovered power-related costs that have resulted in financial loss
to the federal government.  Until an effective monitoring system is
implemented, the federal government will continue to be exposed to
financial loss due to the under-recovery of costs.  Better monitoring
is essential to protect the federal government's right to recover the
costs of its investments that are to be repaid through power
revenues. 

The PMAs' financial statements are audited by external auditors.  The
results of the financial statement audits are contained in auditor's
reports, reports on compliance with laws and regulations, reports on
internal controls, and management letters.  All of these documents
can contain valuable information pertaining to cost recovery by the
PMAs.  For the three PMAs, the external auditors have repeatedly
identified certain power-related costs that are not being
recovered,\15 even though they do not specifically evaluate the PMAs'
power repayment studies as part of the financial statement audits. 
Unrecovered costs that have been identified relate to federal
employee CSRS pension, postretirement health benefits, life insurance
benefits, workers' compensation benefits, and certain interest
expenses related to federal appropriations.  Some of the same cost
recovery issues also exist at Bonneville, but they have generally not
been raised by Bonneville's external auditors in their audit reports. 
These types of costs are recoverable under the definitions of full
cost contained in OMB Circular A-25 and Statement of Federal
Financial Accounting Standard
No.  4. 

Examples of unrecovered costs identified by external and GAO auditors
that are symptomatic of the lack of effective monitoring of
repayment\16 include the following. 


--------------------
\15 The objective of a financial statement audit is to express an
opinion on whether the statements are fairly stated.  A financial
statement audit would not be expected to detect all issues related to
repayment or resolve all cost recovery issues identified. 

\16 Our objective was not to quantify the amounts of unrecovered
costs and financial loss to the federal government, but to show that
financial loss occurred, which demonstrates that monitoring is
ineffective.  However, in some cases we had estimated amounts while
conducting previous work or obtained estimates from the PMAs'
external auditors. 


      UNRECOVERED PENSION AND
      POSTRETIREMENT HEALTH
      BENEFITS COSTS
---------------------------------------------------------- Letter :4.1

PMAs historically have not recovered the full costs of providing
pensions and postretirement health benefits for PMA employees and
operating agency employees involved in power production and
marketing.  As part of their fiscal year 1994\17 financial statement
audits, the three PMAs' external auditors raised the lack of recovery
of these costs as a compliance issue in reports to the PMA
administrators.  We determined that Bonneville also is not recovering
the full costs of pensions and postretirement health benefits.\18 In
1996, and again in 1997, we reported that the PMAs still were not
recovering the full costs to the federal government of providing
these benefits.  We reported that the full costs of providing CSRS
pensions were not being recovered because the combined contributions
of federal employees and the PMAs do not cover the federal
government's full cost of providing these benefits, including
payments by other federal agencies.  The PMAs' rates include only the
costs actually paid by the PMAs, not the additional payments by the
Office of Personnel Management (OPM) related to PMA and operating
agency personnel involved in power-related activities.  We also
reported that the full costs of providing the federal government's
portion of postretirement health benefits were not being recovered
and would eventually have to be paid by the general fund of the
Treasury. 

For fiscal year 1996, we estimated that the net cost to the federal
government of providing these benefits was about $37 million ($21
million for Bonneville and $16 million for the other three PMAs). 
Cumulatively, for fiscal years 1992 through 1996, we estimated that
the net cost, in constant 1996 dollars, was about $192 million ($110
for Bonneville and $82 million for the other three PMAs).  These
estimates covered only current PMA and operating agency employees
involved in power-related activities. 

All four PMAs have said that they plan to begin recovering the full
costs of providing these benefits.  Bonneville began recovering some
of these costs in 1998 and plans to phase in full cost recovery over
time, with full cost recovery beginning in 2002.\19 Bonneville
estimated the amounts related to operating agency personnel, since
the operating agencies did not determine the appropriate amounts and
allocate the costs to Bonneville.  The three PMAs began recovering
the full costs of CSRS pension and postretirement health benefits for
their own employees in 1998; however, they have not begun to recover
the costs for operating agency personnel.  According to PMA
officials, the three PMAs will begin recovering the costs for
operating agency personnel if the operating agencies determine the
amounts to be recovered and allocate the costs to the PMAs.  However,
PMA and operating agency officials told us that the operating
agencies are still deciding how this will be done.  None of the four
PMAs plans to recover these costs retroactively by placing them in
current power rates, according to PMA officials. 


--------------------
\17 Western's external auditor first raised this issue in its review
of Western's fiscal year 1993 financial statements. 

\18 Bonneville's external auditor told us that it considers this an
area open to differing legal interpretation and has not reported
these as unrecovered costs.  However, the auditor said that it had
discussed the ramifications of possible future liability for these
costs with Bonneville's management. 

\19 Although Bonneville will not begin recovering the full amount of
these costs through its rates until 2002, it plans to ensure that
Treasury will be compensated for the period of time in which rates do
not fully reflect these costs.  Accordingly, Bonneville plans to pay
interest on such costs that are not included in rates.  Once these
costs are included in rates, they will be repaid, with interest, over
a period of years, including the unpaid costs of any such benefits
for the period 1998 to 2001.  In this manner, Bonneville plans to
repay Treasury the full cost of these benefits, including interest. 


      UNRECOVERED LIFE INSURANCE
      COSTS
---------------------------------------------------------- Letter :4.2

Similarly, the PMAs have not recovered the full costs of providing
life insurance benefits for PMA employees and operating agency
employees involved in power production and marketing.  As part of
their fiscal year 1994 financial statement audits,\20 the three PMAs'
external auditors reported to the respective administrators that the
PMAs were not recovering these costs.  Recovery of the costs is still
under consideration by the three PMAs.  We determined that Bonneville
also had not been fully recovering the costs of life insurance. 
However, Bonneville and operating agency officials told us that
Bonneville began recovering some of these costs in fiscal year 1998
by including an estimate of the amounts related to life insurance
benefits in the estimates discussed above.  As with CSRS pensions and
postretirement health benefits, Bonneville plans to phase in full
cost recovery in rates over time, with full cost recovery beginning
in 2002.\21


--------------------
\20 Western's external auditor first raised this issue in its review
of Western's fiscal year 1993 financial statements. 

\21 Bonneville plans to recover these costs in a manner similar to
its recovery of the CSRS pension costs mentioned above.  By 2002,
Bonneville plans to include in its rates the full cost of employee
life insurance and plans to repay, with interest, any unpaid life
insurance costs for the period 1998-2001. 


      UNRECOVERED WORKERS'
      COMPENSATION COSTS
---------------------------------------------------------- Letter :4.3

Southeastern's external auditor reported as part of its fiscal year
1995 financial statement audit that Southeastern was not recovering
the full costs to the federal government of providing workers'
compensation benefits.  Specifically, the auditor reported that the
Corps was not allocating any of its workers' compensation costs to
Southeastern and that Southeastern was therefore not recovering these
costs through rates. 


      UNRECOVERED INTEREST COSTS
---------------------------------------------------------- Letter :4.4

Auditors have also identified instances of incorrect interest
calculations and/or payments by the three PMAs.  The errors related
to interest on moveable equipment at Western, interest on deferred
assets\22 at the Harry S.  Truman Dam and Reservoir (Truman Project)
marketed by Southwestern, and calculations using incorrect interest
rates at certain projects marketed by Southeastern and Southwestern. 

As part of its fiscal year 1993 financial statement audit, Western's
external auditor reported that Western was not recovering about $3
million annually in interest on moveable equipment.  In fiscal years
1994 and 1995, Western developed a common approach for all projects
designed to ensure that it recovered this interest in the future. 
However, Western's external auditor reported that the problem had not
yet been resolved as of the end of fiscal year 1995.  Specifically,
the auditor reported that certain area offices had not calculated
interest on an allocated amount of movable equipment located at
headquarters.  Western did not address this issue until 1996, when it
began charging interest on the balance of all moveable equipment. 
However, according to Western's external auditor, Western did not
retroactively charge interest on moveable equipment for years prior
to 1993. 

We also found an error related to the calculation of interest on
deferred assets at the Truman Project, marketed by Southwestern. 
Because of fish kills, the project has never operated at its 160,000
kilowatt capacity; instead, only 53,300 kilowatts have been declared
to be in commercial operation.  As a result, Southwestern has
deferred from recovery the estimated costs--$31 million--of the
nonoperational portion of the Truman Project.  However,
Southwestern's stated policy is to recover the interest expense of
the Truman deferred investment annually. 

Until 1994, the Corps calculated the interest expense for Truman and
other projects marketed by Southwestern.  Interest costs were to be
based on the entire power-related construction costs of these
projects, including the $31 million Truman deferral.  In 1995,
Southwestern began calculating the interest expense on the projects
it markets.  However, Southwestern's fiscal year 1995 calculation of
interest expense for the Truman project mistakenly excluded interest
associated with the $31 million Truman deferral.  As a result, about
$930,000 in interest on the Truman deferral was not recovered. 
Southwestern officials acknowledged the mistake and said that the
underpayment of interest would be corrected in fiscal year 1996. 
Southwestern did subsequently recover the $930,000 associated with
the Truman deferral, along with approximately $71,000 in additional
accrued interest. 

As a result of its fiscal year 1994 financial statement audit,
Southeastern's external auditor informed Southeastern's management
that, in several instances, the Corps had improperly calculated
interest expense on the federal government's outstanding
power-related appropriations.  According to the auditor, these errors
resulted from the misinterpretation of the interest calculation
guidance.  For example, the external auditor reported that since
1983, three Corps district offices had not applied the current
interest rate on plant additions, even though the policy has been to
use current interest rates since 1983.  Instead, the Corps had been
using the original project interest rates, which for 1984 through
1994 ranged from a low of 2.5 percent to a high of 6.1 percent. 
These interest rates were considerably lower than the 7.1 to 12.4
percent interest rates that should have been applied to hydropower
investments during this period. 

Under a methodology proposed by its auditor, Southeastern estimated
that as of September 30, 1994, using the incorrect interest rates had
understated interest expense by about $1.7 million at two of its four
rate-making systems.\23

Southeastern officials did not agree with the methodology proposed by
its auditor and told us that the $1.7 million represents the maximum
amount of the interest understatement.  Southeastern subsequently
took over the calculation of interest on federal investment that had
previously been done by the Corps; however, it did not determine the
total magnitude of the error.  Southeastern officials told us that
they do not plan to recover these costs because they considered them
immaterial to Southeastern's financial statements.  We do not agree
that materiality in relation to financial statements is the
appropriate criteria for deciding whether to recover a known
power-related cost. 

Similarly, as a result of its fiscal year 1994 financial statement
audit, Southwestern's external auditor informed Southwestern's
management that, for the years 1984 through 1988, the Corps had used
interest rates lower than those that should have been used to
calculate interest on additions to the federal power facilities
marketed by Southwestern.  The auditor also noted that, as of fiscal
year 1994, three Corps districts had continued to use the lower
interest rates to calculate interest.  Southwestern adjusted its
books to properly record interest expense for fiscal years 1989
through 1995 when it took over responsibility for calculating
interest on investment from the Corps in fiscal year 1995.  However,
as of fiscal year 1996, Southwestern had not applied the appropriate
interest rates to additions to the federal investment for fiscal
years 1984 through 1988, and Southwestern officials told us that they
do not plan to do so. 

A long delay in recovering the costs of a transmission line on which
construction began in 1965, and which was later abandoned, is another
example of the ineffectiveness of the current monitoring system. 
According to the Bureau,\24 a transmission line, which was planned to
be part of the Pacific Northwest-Pacific Southwest Intertie Project,
was abandoned in fiscal year 1969 due to sporadic funding.  Western
and its external auditor agreed in 1996 that the total unrecovered
amount for the abandoned transmission line was about $20 million. 
However, even though these costs were power-related, Western was able
to delay making any principal or interest payments to the federal
government until 1997, about 28 years after the project had been
abandoned. 

The current monitoring efforts do not ensure that costs such as those
described above are fully recovered, and therefore that the federal
government does not incur unnecessary losses on power-related
activities.  It is important to note that although the aforementioned
unrecovered costs have been documented, there is no assurance that
all unrecovered costs have been identified.  Other instances of
under-recovery could exist which we did not identify as a result of
the limited scope of our work.  Thus, the full magnitude of the
unrecovered costs is unknown.  If the PMAs were to begin recovering
all of these costs, in many cases they would first need to develop
estimates of the amounts to be recovered in cooperation with the
appropriate operating agency.  These estimated costs would then need
to be included in the PMAs' power repayment studies and rates for
recovery, as is commonly done now for other costs.  If the PMAs were
to begin including these unrecovered costs in power rates, the result
could be upward pressure on rates. 


--------------------
\22 At the Truman Project, deferred assets represent the costs for
the nonoperational portion of the project that are not yet being
recovered through rates. 

\23 The two systems were the Georgia-Alabama-South Carolina system
and the Cumberland Basin system, which collectively encompass 19 of
Southeastern's 23 projects. 

\24 Western was established on December 21, 1977, pursuant to Section
302 of the DOE Act.  Power marketing responsibilities and the
transmission system assets--including those of the abandoned
project--previously managed by the Bureau of Reclamation were
transferred to Western. 


   CURRENT MONITORING ACTIVITIES
   ARE LESS EXTENSIVE THAN THOSE
   PERFORMED IN PRIOR YEARS
------------------------------------------------------------ Letter :5

The current activities for monitoring the repayment of power-related
costs and debt are less extensive than those performed in prior
years.  For several years prior to 1984, DOE's Office of Power
Marketing Coordination (OPMC) monitored the PMAs' activities and
reviewed their rate proposals.  This provided some additional
assurance that information provided to FERC on costs to be recovered
by the PMAs was complete and accurate.  In addition, before the
Secretary of Energy's order delegating to FERC the authority to
review the PMAs' rates was revised in 1983, FERC had more latitude in
reviewing the PMAs' rates.  According to FERC officials, this
latitude enabled FERC to more actively review rate proposals and
challenge rates that they thought did not recover all relevant costs. 
FERC's review of Bonneville's rate proposals was similarly broader
before the passage of the Northwest Power Act.  The act limited
FERC's scope of review to the standards specified in the act. 


      OFFICE OF POWER MARKETING
      COORDINATION PRACTICES
---------------------------------------------------------- Letter :5.1

Prior monitoring practices used by OPMC, which was disbanded in 1984,
were more extensive than those performed by DOE today.  According to
former OPMC officials, including the former director of that office,
OPMC's monitoring practices included reviewing the PMAs' rate
proposals and power repayment studies before they were sent to FERC. 
They told us that one of OPMC's key responsibilities was to assess
whether appropriate costs were included in rates, and the office
employed a staff with expertise in PMA rate-making to help it carry
out this responsibility.  However, OPMC did not perform detailed
reviews of the power repayment studies which form the basis for the
PMAs' rate proposals. 

According to DOE officials, when OPMC was disbanded, its monitoring
activities were not assigned to another entity and have not been
subsequently assumed by another entity.  Although the two Washington
PMA liaison offices began to perform some of the functions of the
disbanded OPMC, they generally have not reviewed the PMAs' rate
proposals and power repayment studies.  As a result, the assurance
that the PMAs' rate proposals provide for accurate, complete, and
timely repayment was decreased when OPMC was disbanded. 


      FERC DELEGATION ORDER
      REVISION
---------------------------------------------------------- Letter :5.2

Because the Secretary of Energy's 1978 delegation order did not
specify the standard of review, FERC interpreted the order as
allowing the same type of review that it had previously carried out
as the Federal Power Commission (FPC) when it applied its independent
expertise in evaluating the PMAs' rate proposals.\25 Subsequently,
the December 14, 1983, revision to the delegation order,\26 which is
currently in effect, limited FERC's review to the previously
discussed three standards set forth in the order.  In FERC's view,
under this order, rate proposals can only be rejected if found to be
arbitrary, capricious, or in violation of law.  In addition, the
revision indicated that the operating agencies' policy judgments and
interpretations of laws and regulations were not reviewable by FERC. 
These limitations significantly reduced FERC's ability to ensure that
all power-related costs are included in the three PMAs' rates. 

Prior to the passage of the Northwest Power Act in 1980, the DOE
delegation order to FERC applied to all PMAs, including Bonneville. 
The current delegation order does not cover Bonneville due to
provisions of the act.  As previously discussed, the act limits the
scope of FERC's review of Bonneville's rates. 


--------------------
\25 See, e.g., U.S.  Secretary of Energy, Bonneville Power
Administration, 20 FERC par.  61,291 (Sept.  1, 1982), U.S. 
Department of Interior, Bonneville Power Administration, 34 F.P.C. 
1462; 1965 (Dec.  14, 1965).  The DOE Act transferred most of FPC's
functions to the Secretary of Energy and FERC. 

\26 DOE Delegation Order No.  0204-108. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

While Treasury is responsible for receiving and recording the
repayment of the PMAs' power-related costs and debt, it is not
responsible for monitoring repayment and is not in a position to
effectively do so.  DOE is responsible under the law for monitoring
the repayment of the PMAs' power-related costs and debt and is in the
best position to perform this function.  However, until an effective
monitoring system is established by DOE, including at FERC, the
federal government will continue to be exposed to financial loss. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Energy move quickly to enhance the
department's oversight of the repayment of the PMAs' power-related
costs and debt and thereby increase the likelihood that the federal
government will receive all money due it in a timely manner.  To
provide this additional assurance, the Secretary of Energy should do
the following. 

  -- Require independent, outside reviews by qualified parties of the
     power repayment studies prepared by the PMAs to increase
     assurance that all power-related costs are included in rates. 
     These reviews should assess (1) the appropriateness of the
     assumptions and methodologies used in the power repayment
     studies, (2) whether all power-related costs are included, and
     (3) whether appropriate interest rates are used by the PMAs and
     operating agencies to calculate interest to be charged on
     completed projects or capitalized for projects being
     constructed.  The results of the reviews should be summarized in
     written reports.  These independent reviews should initially be
     done for each power repayment study the next time it is updated. 
     Thereafter, the frequency of the reviews should be based on the
     results of prior review(s) and assessments of the risk of
     financial loss to the federal government.  The independent
     review costs, as valid power-related costs, should be included
     in power rates. 

  -- Include the full costs of CSRS pension and postretirement health
     benefits, life insurance, and workers' compensation benefits in
     the PMAs' rates.  The costs should include not only those for
     PMA employees, but also those for operating agency employees
     involved in power-related activities either full-time or
     part-time, directly or indirectly.  Amounts pertaining to
     operating agency personnel should be obtained from the operating
     agencies or, if necessary, estimated by the Department of Energy
     in cooperation with the appropriate operating agency. 

  -- Incorporate and maintain updated cost recovery guidance in DOE
     Order RA 6120.2 that ensures full recovery of power-related
     costs, including the full costs of CSRS pension and
     postretirement health benefits, life insurance, and workers'
     compensation benefits for all PMA employees as well as operating
     agency employees involved in power-related activities either
     full-time or part-time, directly or indirectly. 

  -- Establish a process within DOE for tracking and resolving issues
     that affect the repayment of power-related costs and debt. 
     Specifically, DOE should: 

Review the three PMAs' (Southeastern, Southwestern, and Western) rate
proposals before they are sent to FERC.  For all four PMAs
(Bonneville, Southeastern, Southwestern, and Western), review the
reports summarizing the results of the independent, outside
evaluations of the power repayment studies, for purposes of
identifying any issues that require follow-up and resolution with the
PMAs. 

Review audit reports (Auditor's Reports, Reports on Compliance with
Laws and Regulations, Reports on Internal Controls, and Management
Letters) for all four PMAs and ensure the timely resolution of all
identified management, cost recovery, and repayment issues. 

Ensure that all four PMAs pass onto FERC the reports referred to
above for its use in reviewing PMA rate proposals. 

  -- Revise Delegation Order 0204-108 to give FERC more authority to
     review and challenge the rate proposals of the three PMAs. 
     Specifically, the Secretary of Energy should (1) clarify that
     the "arbitrary and capricious" standard does not preclude FERC
     from rejecting a rate proposal that it finds to be inconsistent
     with cost recovery guidance contained in DOE Order RA 6120.2,
     (2) allow FERC to go beyond the three specific standards of
     review specified in the order, as necessary, and (3) allow FERC
     to modify a rate proposal rather than merely accept or reject
     it. 

In addition, we recommend that the Federal Energy Regulatory
Commission utilize this additional authority in its reviews of PMA
rate proposals, including analysis and consideration of audit reports
and the results of independent evaluations of the PMAs' power
repayment studies. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We provided a draft of this report to FERC, DOI, Treasury, DOD, DOE,
and the PMAs for comment.  FERC, DOI, Treasury, and DOD generally
agreed with the report.  FERC and DOD provided informal technical
comments which we incorporated into the report, as appropriate. 

DOE's Office of the Secretary did not provide written comments, but
told us that they concurred with the PMAs comments.  The PMAs agreed
with many of the facts contained in our report, but disagreed with
our conclusions and recommendations for improving the monitoring. 
The PMAs' comments are reprinted in appendix III.  Their major
comments are evaluated below; other comments are evaluated in
appendix III.  The PMAs also provided us with informal technical
comments which we evaluated and incorporated, as appropriate. 


      THE PMAS ARE ALREADY SUBJECT
      TO EXTENSIVE OVERSIGHT
---------------------------------------------------------- Letter :8.1

The PMAs stated that current monitoring activities are extensive and
additional monitoring is not necessary.  They cited 10 types of
oversight, monitoring, and appeals that are currently available over
PMA repayment practices, and stated that our recommendation for an
independent, outside review of the PMAs' power repayment studies
would seem to be an unnecessary, expensive, and time-consuming
duplication of existing reviews.  We do not agree.  Based on our
review, the current monitoring activities are not designed to ensure
that repayment is complete, accurate, and timely.  For example, none
of the activities delineated by the PMAs include detailed reviews of
the PMAs' power repayment studies, upon which rates are based. 
Therefore, there is little assurance that these repayment studies
provide for complete, accurate, and timely repayment of the costs
that the federal government is entitled to recover under current law. 

Our report includes several examples of (1) significant power-related
costs that historically have not been recovered and (2) the lack of
timeliness in resolving cost recovery issues once they were raised. 
It is important to note that our review was not designed to detect
and quantify all losses, but rather to evaluate the effectiveness of
the system for monitoring repayment and determine if there was the
potential for financial loss to the federal government.  Based on our
assessment of the monitoring system, we concluded that there is the
potential for loss to the federal government, beyond the identified
examples in the report, and therefore that the system is ineffective
and needs enhancing through closer monitoring of the PMAs' repayment. 
However, in response to the PMAs' comments, we have revised our
report to clarify that we are not proposing multiple detailed reviews
of the power repayment studies.  Instead, the detailed, independent
power repayment study reviews should be performed and summaries of
the results of those reviews used by DOE to identify issues that
require follow-up and resolution with the PMAs and by FERC in
assessing the PMAs' rate proposals. 

The PMAs also stated that the three PMAs' respective financial
statement auditors perform compliance testing which already
accomplishes our recommendation that the power repayment studies be
independently reviewed to determine whether they provide for
complete, accurate, and timely repayment.  We do not agree.  As we
state in the report, the objective of a financial statement audit is
to express an opinion as to whether the statements are fairly stated
and the audit would not be expected to detect all issues related to
repayment or cost recovery.  The financial statement audits--and
other audits--have not included detailed reviews of the power
repayment studies that assessed their completeness, assumptions,
methodologies, and the reasonableness of estimates used.  Since the
existing reviews of the power repayment studies have not included
such assessments to ensure that repayment is complete, accurate, and
timely, it is not possible to determine whether all cost recovery
issues have been identified.  Moreover, the PMAs' assertion relates
to the compliance testing at the three PMAs rather than at
Bonneville, which receives a different type of audit and less
compliance testing, according to a Bonneville official.  As we state
in our report, some of the same cost recovery issues exist at
Bonneville but generally have not been raised by its financial
statement auditor in audit reports. 

Additionally, even when cost recovery issues have been identified as
part of the audits, they have often not been addressed in a timely
manner by the PMAs.  For example, the unrecovered CSRS pensions and
postretirement health benefits cost issue was first reported by
Western's financial statement auditor as part of its fiscal year 1993
audit and by Southeastern's and Southwestern's auditors in 1994, but
still has not been fully resolved by PMA management. 


      MOST COST RECOVERY
      DISAGREEMENTS INVOLVE POLICY
      MATTERS
---------------------------------------------------------- Letter :8.2

The PMAs stated that the failure to recover costs that we identified
in this and previous reports largely involved differing
interpretations of law or policy, rather than a failure to follow
clear guidance.  While differing interpretations of law or policy can
lead to a failure to recover power-related costs, this is one reason
closer monitoring is needed so that issues can be resolved in a more
timely manner.  For example, as discussed above, Western's financial
statement auditor first recommended that Western begin recovering
CSRS pension and postretirement health benefits costs in 1993.  This
issue has only recently begun to be resolved.  Some of the delay in
resolving the issue could be attributable to differing
interpretations of law or policy.  However, a monitoring system at
the DOE level would likely have identified this as an issue that
might also exist elsewhere and would have facilitated quick
resolution at all four PMAs to ensure that the federal government did
not continue to suffer financial loss.  As we state in our report,
the amount of the four PMAs' unrecovered CSRS pension and
postretirement health benefits costs over a 5-year period (fiscal
years 1992-1996) was an estimated $192 million (in constant 1996
dollars).  This financial loss could have been mitigated by timely
identification of the scope of the problem at the DOE level and
resolution at each of the PMAs. 

The PMAs also maintain that OMB Circular A-25 and federal accounting
standards do not apply when "the amount to be priced is provided for
by statute or regulation." This statement does not appear to be
relevant to the unrecovered costs identified in our report, which the
PMAs have now agreed should be recovered.  Recovering these
power-related costs is in accordance with laws and regulations. 
Moreover, statutes, regulations, and DOE Order RA 6120.2 require that
the PMAs' power-related costs be included in rates, but do not
specifically identify and define all costs that must be recovered. 
Therefore, using guidance set forth by OMB Circular A-25 and federal
accounting standards to help define the full costs of federal power
is appropriate. 


      DESCRIPTION OF UNRECOVERED
      COSTS IS MISLEADING
---------------------------------------------------------- Letter :8.3

The PMAs state that the description of unrecovered power-related
costs included in our report is misleading in that it claims that
four types of power-related costs are not being recovered.  The PMAs
further state that they generally agree that these costs should be
recovered and have been taking steps to ensure that this occurs,
beginning in fiscal year 1998.  They also object to our
characterization of progress towards resolving problems as slow or
nonexistent.  However, as our report demonstrates, progress toward
resolving some of the cost recovery issues has been slow.  For
example, Western delayed making principal or interest payments on a
transmission line for about 28 years after the project was abandoned. 
The total amount of the unrecovered costs during that time period was
approximately $20 million. 

No progress has been made toward resolving certain other cost
recovery issues.  For example, our report discusses unrecovered
workers compensation costs at Southeastern that were reported as a
result of Southeastern's fiscal year 1995 financial statement audit. 
The PMAs' comments acknowledge that these costs should be included in
rates; however, no progress has been made to do so.  In addition,
Western's financial statement auditor reported as part of its fiscal
year 1993 financial statement audit that Western was not recovering
about $3 million annually in interest on moveable equipment.  Western
subsequently recovered interest for 1993 and later years; however, it
has not taken any steps to recover interest for prior years, even
though DOE policy has always been to recover interest on the federal
government's outstanding investment in power-related activities. 
Similarly, our report describes unrecovered interest costs at
Southeastern and Southwestern related to the application of incorrect
interest rates to the federal investment that remain unrecovered. 

The PMAs state that many of the findings reported by the external
auditors and GAO were initially raised by PMA personnel.  They also
state that because the errors related to unrecovered interest on
federal investments at certain projects were raised by the three
PMAs' external auditors, that "it is apparent that the present
oversight and monitoring practices are working." We do not agree. 
Many of the issues we discuss had been problems for a number of years
before they were identified.  Further, while financial audits are an
important element of monitoring, they do not relieve management of
its responsibility to establish an effective monitoring system within
its own organization. 


      FERC'S AUTHORITY IS BROAD
      ENOUGH TO ENSURE REPAYMENT
---------------------------------------------------------- Letter :8.4

The PMAs believe that FERC's current authority is sufficient to allow
FERC to provide effective monitoring and oversight of the three PMAs'
repayment.  This is at odds with FERC's position.  FERC officials
told us that, in their opinion, the "arbitrary and capricious"
standard specified in the current delegation order is very difficult
to meet and thus imposes a significant practical limitation on FERC's
review authority.  As a result, FERC rarely disapproves a rate
request.  Our recommendation involves returning to a more general
delegation of authority to FERC that does not impose unnecessary
limits on its review authority, including the "arbitrary and
capricious" standard that was not a part of the Secretary of Energy's
previous delegation order. 

We agree with the PMAs' position that revising the delegation order
to allow FERC to modify the three PMAs' rate proposals, rather than
merely accepting or rejecting them, is worthy of consideration.  This
change, along with the removal of the restrictions on FERC's review,
would better enable FERC to help ensure that costs are recovered.  As
a result, we have revised our recommendation pertaining to revising
the delegation order. 


---------------------------------------------------------- Letter :8.5

As agreed with your offices, unless you publicly announce its
contents earlier, we will not distribute this report until 30 days
from its date.  At that time, we will send copies to appropriate
House and Senate Committees; the Ranking Minority Members of the
House Committee on the Budget and the House Committee on Resources'
Subcommittee on Water and Power Resources; interested Members of the
Congress; the Secretary of Energy; the Secretary of the Interior; the
Secretary of Defense; the Secretary of the Treasury; the Chairman of
the Federal Energy Regulatory Commission; the Director of the Office
of Management and Budget; and other interested parties.  We will make
copies available to others upon request. 

Please call me at (202) 512-8341 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
IV. 

Linda M.  Calbom
Director, Resources, Community, and Economic Development
Accounting and Financial Management Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

We were asked by the Chairmen of the House Budget Committee and the
Subcommittee on Water and Power Resources, House Resources Committee,
to examine the monitoring of the repayment of the power-related costs
and debt of the Department of Energy's (DOE) Power Marketing
Administrations (PMA).  Specifically, the Chairmen asked us to
determine (1) if DOE or the Department of the Treasury actively
monitors the amounts of debt to be repaid and the appropriateness of
the annual payments and (2) if there is a potential for financial
loss to the federal government due to lack of such monitoring.  We
determined whether the current activities for monitoring repayment
effectively ensure that repayment amounts are complete, accurate, and
timely, but did not attempt to quantify the financial loss to the
federal government resulting from any monitoring ineffectiveness. 

This report provides information on the Bonneville, Southeastern,
Southwestern, and Western Area Power Administrations.  It also
includes the power-related activities of the Department of the
Interior's Bureau of Reclamation (Bureau) and U.S.  Army Corps of
Engineers (Corps), which own and operate virtually all of the
multipurpose federal water projects that provide power to the PMAs'
customers. 

ASSESSING MONITORING EFFECTIVENESS
AND THE POTENTIAL FOR FINANCIAL
LOSS TO THE FEDERAL GOVERNMENT

To determine if current monitoring activities ensure that all
repayments were accurate, complete, and timely, we first determined
who has the legal responsibility for ensuring that the PMAs recover
all power-related costs and repay debt and then obtained an
understanding of the current system for monitoring the repayment.  We
did this by researching relevant laws, regulations, and court cases
and interviewing senior officials from DOE headquarters; the two PMA
liaison offices in Washington, D.C.; the four PMAs; the Department of
the Treasury; the Federal Energy Regulatory Commission (FERC); and
the operating agencies (the Department of the Interior's Bureau of
Reclamation and U.S.  Army Corps of Engineers). 

We then assessed the potential for financial loss to the federal
government.  In doing so, we relied extensively on audited financial
information for each of the four PMAs.  Specifically, we obtained and
analyzed the external auditors' reports of the results of their
financial statement audits, reports on the PMAs' compliance with laws
and regulations, reports on the effectiveness of the PMAs' systems of
internal controls, and letters to management highlighting cost
recovery and other issues.  Many of these reports contained
information on cost recovery issues.  For each PMA, we reviewed the
most recently available reports as well as those for several previous
years.  In addition, we reviewed and synthesized recent GAO reports
that assessed cost recovery by the PMAs.  In performing the reviews
that resulted in these previous reports, we had developed a good
understanding of the PMAs' requirement for recovering power-related
costs and for several of the costs that were not being fully
recovered.  We also reviewed reports by the DOE, DOI, and DOD
Inspector General offices. 

After developing an understanding of cost recovery and repayment
issues at each of the four PMAs, we corroborated our understanding of
those issues by interviewing appropriate officials.  Specifically, we
corroborated the results of our analyses by interviewing DOE
officials and the PMAs' external auditors. 


      DETERMINING WHETHER CURRENT
      MONITORING ACTIVITIES ARE AS
      EXTENSIVE AS THE PRIOR ONES
------------------------------------------------------- Appendix I:0.1

We identified how current activities for monitoring the repayment of
the PMAs' power-related costs and debt differ from prior ones by
obtaining and reviewing documentation on organizational changes
within DOE pertaining to the monitoring of the PMAs.  Specifically,
we obtained and reviewed organization charts and delegation orders
spanning more than a decade.  In addition, we interviewed officials
from DOE, the PMA liaison offices, the PMAs, the Department of the
Treasury, and FERC.  To follow up on these discussions, we also
interviewed former officials of DOE's disbanded Office of Power
Marketing Coordination (OPMC), which previously monitored the PMAs'
activities in the late 1970s and early 1980s.  Among the officials we
interviewed was the former director of OPMC.  We then assessed
whether these changes could affect the potential for financial losses
to the federal government. 

We conducted our review from December 1997 through June 1998 in
accordance with generally accepted government auditing standards. 


LEGAL RESPONSIBILITIES AND
DELEGATED AUTHORITIES FOR
BONNEVILLE, SOUTHEASTERN,
SOUTHWESTERN, AND WESTERN AREA
POWER ADMINISTRATIONS
========================================================== Appendix II



   (See figure in printed
   edition.)

   Note:  The three PMAs are
   Southeastern, Southwestern, and
   Western Area Power
   Administrations.

   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix III
COMMENTS FROM THE FOUR POWER
MARKETING ADMINISTRATIONS
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Energy's letter
dated June 5, 1998. 

GAO COMMENTS

1.  Discussed in the "Agency Comments and Our Evaluation" section of
the report. 

2.  Our involvement in raising cost recovery issues to the Congress
should not be considered a part of the monitoring process designed by
the Secretary of Energy to ensure that he or she fulfills his or her
responsibility to recover these costs.  Our audit work is generally
performed at the specific request of the Congress and cannot be
considered to be routine, ongoing monitoring of PMA activity. 

3.  We believe that the return of the federal government's investment
in the PMAs' power-related activities to the Treasury through
scheduled payments is an expectation of the federal government and
the taxpayers, and should not necessarily be thought of as a record
of achievement.  While we agree that the PMAs have made substantial
repayments to Treasury on a timely basis, this report and our
previous reports\1 clearly point out that the PMAs have not recovered
all of the costs that the federal government has incurred to produce,
market, and transmit federal power. 

4.  We disagree.  There should not be diversity among the PMAs in
recovering the costs discussed, or in recovering other costs that are
power-related.  Clarifying the requirement that these costs be
recovered in DOE Order RA 6120.2 would help ensure the necessary
consistency among the PMAs and, as discussed previously, would avoid
any confusion which might arise from differing interpretations
regarding these costs in the future.  Moreover, significant
unrecovered cost categories identified in future monitoring efforts,
such as detailed reviews of the PMAs' power repayment studies, should
be specified as recovery requirements in the DOE Order.  In addition,
since Bonneville is not subject to the delegation order under which
DOE reviews the other three PMAs' rate proposals before they are sent
to FERC, monitoring of cost recovery issues at Bonneville at the DOE
level is curtailed; clarifying cost recovery guidance in DOE Order RA
6120.2 is especially important to ensure power-related costs are
treated alike among all the PMAs. 

5.  The PMAs' willingness to provide audit reports, including
management letters, to FERC will enhance FERC's ability to
effectively evaluate the PMAs' rate proposals.  However, as noted in
our response to comment 4, it is important to include this
requirement in RA 6120.2 because Bonneville is not subject to the
delegation order under which DOE transmits case materials to FERC. 


--------------------
\1 Power Marketing Administrations:  Cost Recovery, Financing, and
Comparison to Nonfederal Utilities (GAO/AIMD-96-145, September 19,
1996) and Federal Electricity Activities:  The Federal Government's
Net Cost and Potential for Future Losses, volumes 1 and 2
(GAO/AIMD-97-110 and 110A, September 19, 1997). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Robert E.  Martin, Assistant Director
Donald R.  Neff, Senior Audit Manager
Patricia B.  Petersen, Senior Auditor
Margaret A.  Mills, Communications Analyst

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Thomas H.  Armstrong, Assistant General Counsel
Amy M.  Shimamura, Senior Attorney

SEATTLE FIELD OFFICE

David W.  Bogdon, Senior Evaluator
Larry L.  Feltz, Senior Evaluator
Robert J.  Bresky, Jr., Evaluator


*** End of document. ***