Federal Power: The Evolution of Preference in Marketing Federal Power
(Letter Report, 02/08/2001, GAO/GAO-01-373).

Congress has enacted numerous statutes that designate types of customers
or geographic areas for preference and priority in purchasing
electricity from federal agencies. In general, the purpose of providing
preference has been to (1) direct the benefits of public
resources--relatively inexpensive hydropower--to portions of the public
through nonprofit entities, (2) spread the benefits of federally
generated hydropower widely and encourage the development of rural
areas, (3) prevent private interests from exerting control over the full
development of electric power on public lands, and (4) provide a
yardstick against which the rates of investor-owned utilities can be
measured. The applications of various preference provisions have been
challenged on a number of occasions in the courts, which have directed a
power marketing administration (PMA) to provide power to preference
customers, and in other instances, they have supported the denial of
power to such customers. The characteristics of the electricity industry
have changed. Over the last 20 years, competition has been replacing
regulation in major sectors of the U.S. economy. Congress has seen a
number of proposals to restructure the electricity industry, including
some that would encourage the states to allow retail customers a choice
in selecting their electricity supplier. As these proposals are
discussed, Congress has continued to consider the role of preference in
the PMAs' sale of electricity.

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

 REPORTNUM:  GAO-01-373
     TITLE:  Federal Power: The Evolution of Preference in Marketing
	     Federal Power
      DATE:  02/08/2001
   SUBJECT:  Energy marketing
	     Hydroelectric energy
	     Energy legislation
	     Electric power generation
	     Electric utilities

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GAO-01-373

A

Report to the Chairman, Committee on Resources, House of Representatives

February 2001 FEDERAL POWER The Evolution of Preference in Marketing Federal
Power

GAO- 01- 373

Lett er

February 8, 2001 The Honorable James V. Hansen Chairman, Committee on
Resources House of Representatives

Dear Mr. Chairman: For decades, the power marketing administrations (PMA) 1
of the Department of Energy (DOE) have provided electricity, generated
largely at federal multipurpose water projects, to customers in over 30
states. To

guide the PMAs' efforts in marketing electricity, the Congress and the
courts have directed the PMAs to give certain customers preference.
Generally, preference is the opportunity to obtain priority access to
federal power that has traditionally been sold at rates generally below
those of other sources. Preference provisions come into play only when a
potential

customer that does not have preference (such as an industrial user or a
commercial power company) and a preference customer (such as a municipally
owned utility or a rural electric cooperative) want to buy federal power and
not enough is available for both. As we enter the 21st century, the
electricity industry is restructuring from one dominated by

regulated monopolistic electric utilities to one that increasingly allows
customers to choose their source of electricity. The Congress continues to
consider legislation dealing with this industry's restructuring, including
the role of preference in the PMAs' sale of electricity. To help in
congressional deliberations on the future role of the PMAs and their
preference customers, the Subcommittee on Water and Power asked us to (1)
identify how federal legislation and major relevant court cases have, over
time, directed the PMAs to give preference to particular customers in
purchasing electricity and (2) discuss the status of preference in the PMAs'
electricity sales in light of the restructuring of the electricity industry.

To do this, we reviewed power- marketing and land reclamation statutes that
contain provisions providing such preferences, which are referred to as
preference clauses or provisions. We also reviewed numerous legislative 1
The PMAs are the Bonneville Power Administration (Bonneville), which serves
the Pacific

Northwest; Southeastern Power Administration; Southwestern Power
Administration; and Western Area Power Administration (Western).

proposals, as well as numerous judicial and administrative cases, that have
interpreted and applied the portions of various statutes that confer
preference. A list of the statutes, court cases, and administrative rulings
we reviewed appears in appendix I. A table showing the extent to which the
PMAs are selectively affected by various preference- related statutes is
contained in appendix II.

Results in Brief The federal government began distributing its own
electricity and regulating the industry in the early 1900s. The federal
power system as

initially established reflected the policies of the times, the status of the
fledgling electricity industry, and the multiple purposes of federal water
projects. For nearly a century, the Congress has enacted numerous statutes

that designate types of customers (such as public bodies and cooperatives)
and/ or geographic areas for preference and priority in purchasing
electricity from federal agencies. In general, the purpose of providing
preference has been to (1) direct the benefits of public resources-
relatively inexpensive hydropower- to portions of the public through
nonprofit entities, (2) spread the benefits of federally generated

hydropower widely and encourage the development of rural areas, (3) prevent
private interests from exerting control over the full development of
electric power on public lands, and (4) provide a yardstick against which
the rates of investor- owned utilities can be measured. The PMAs' specific
applications of various preference provisions have been challenged on a
number of occasions in the courts. In some instances, the courts have
directed a PMA to provide power to preference customers, and in other
instances, they have supported the denial of power to such customers. The
characteristics of the electricity industry have changed and continue to

change, both regionally and nationally. Over the last 20 years, competition
has been replacing regulation in major sectors of the U. S. economy, and new
legislation and technological changes have created a climate for change in
traditional electricity markets. In this context, the Congress has seen a
number of proposals to restructure the electricity industry, including some
that would encourage the states to allow retail customers a choice in
selecting their electricity supplier. As these proposals are discussed, the
Congress has continued to consider the role of preference in the PMAs' sale

of electricity.

Preference Clauses and Preference clauses have existed throughout the
history of federal power

Beneficiaries Have legislation and have been directed to a variety of
customers and regions of

the nation. The Congress has mandated preference in the sale of electricity
Evolved Over Time

by federal agencies in a number of power- marketing and land reclamation
statutes. The idea of establishing public priority or preference in the use
of public water resources dates back to the 1800s, when the Congress decided

to keep navigable inland waterways free from state taxes, duties, and the
construction of private dams. The Reclamation Act of 1906, which is also
referred to as the Town Sites and Power Development Act of 1906, is

generally considered the federal government's entry into the electric power
field. The act grants preference in the disposition of surplus 2
hydroelectric power from federal irrigation projects for “municipal
purposes,” such as street lighting.

As the availability and sources of electricity have changed over time, the
types of preference clauses the Congress has included in legislation have
evolved. For example, with the Federal Power Act of 1920, preference began
to evolve from serving “municipal purposes” to serving
particular classes of users, 3 such as public bodies 4 and cooperatives. 5
The 1920 act required the federal government, when faced with breaking a tie
between competing equal applications, to give preference to states and
municipalities in awarding licenses for hydroelectric plants owned and
operated by nonfederal entities. The act defined a municipality as a city,
county, irrigation district, drainage district, or other political
subdivision or agency of a state competent under law to develop, transmit,
utilize, or

distribute power. One primary benefit that the Congress sought in giving
priority to public utilities and cooperatives, which distribute power
directly 2 Surplus power is power in excess of a project's operational
requirements (e. g., pumping water to fields being irrigated). The
generation of electricity was seen as a means of making

the hydroelectric projects self- supporting and financially solvent and as a
useful complement to the projects' other purposes, which may include flood
control, irrigation, navigation, or recreation. 3 The Act of September 18,
1922, continued to give preference to municipal purposes for surplus power
from the Salt River Project in Arizona. 4 “Public bodies” are
defined differently in various statutes and include entities such as
municipally owned electric utilities, irrigation districts, public utility
districts, and state agencies. Bonneville and Western also consider Native
American tribes to be public bodies. 5 A cooperative is a nonprofit
enterprise or organization owned by and operated for the benefit of those
using its services.

to customers without a profit incentive, was to obtain lower electricity
rates for consumers. At that time, competitive rate setting was not used to
provide lower electricity rates for service from regulated monopolies with
dedicated service territories. The Congress has also provided preference to
specified regions of the nation.

The notion of providing public bodies and cooperatives with preference for
federal hydropower rests on the general philosophy that public resources
belong to the nation and their benefits should be distributed directly to
the public whenever possible. 6 Under the various preference clauses,
preference customers are given priority over nonpreference customers in

the purchase of power. In many cases, the preference provisions of federal
statutes give the electric cooperatives, many of which are rural, and public
bodies priority in seeking to purchase federally produced and federally
marketed power. However, the courts have held that preference customers do
not have to be treated equally and that all potential preference customers
do not have to receive an allotment of federal power. Preference

provisions come into play only when a potential customer that does not have
preference (such as an industrial user or a commercial power company) and a
preference customer (such as a municipally owned utility or a rural electric
cooperative) want to buy federal power and not enough is available for both.

The Congress initially granted preference in the sale of federal electricity
to public bodies and cooperatives for several reasons. First, it was a way
to ensure that the benefits of this power were passed on to the public at
the lowest possible cost, using cost- based rates, because the preference
customers generally were entities that would not incorporate a profit in

their rates. Second, it was also meant to extend the benefits of electricity
to remote areas of the nation using publicly and cooperatively owned power
systems. Additionally, the Congress gave preference to public bodies and
cooperatives to prevent the monopolization of federal power by private
interests. The rates charged by such nonprofit entities could then serve as
a yardstick for comparison with the rates charged by public and private
utilities. 7 For example, the Boulder Canyon Project Act of 1928 encouraged

public nonprofit distributors to begin marketing power by allowing them a 6
According to Bonneville's statutes, its marketing area is the area into
which Bonneville is to sell power for loads before offering power for sale
outside that area. 7 See GAO's comments on the Pacific Northwest Electric
Power and Planning Conservation Act (EMD- 79- 4, Oct. 26, 1978).

reasonable amount of time to secure financing in order to construct
generation and transmission facilities. According to the House Committee on
Irrigation and Reclamation, one of the committees that drafted the 1928 act,
the allocation of power rights between the preference and nonpreference
customers was expected to create competition among various entities,
ensuring reasonable rates and good service. These entities included states,
political subdivisions, municipalities, domestic watersupply

districts, and private companies. The committee viewed the preference clause
as a bulwark against the monopolization of power by private companies.
Another, more recent embodiment of the premise that public resources should
be provided to the public without an effort to profit from their sale is the
Hoover Power Plant Act of 1984. This act gives

preference primarily to municipalities and others for power generated at the
Hoover Dam. It also authorizes the renewal of a preference power contract
with an investor- owned utility, originally entered under the Boulder Canyon
Project Act of 1928.

At about the same time as the Congress was enacting the Rural
Electrification Act of 1936 to encourage cooperatives and others to extend
their electric systems into nearby rural areas, it enacted other statutes
that affect how federally generated electricity is sold, especially to
cooperatives. The Bonneville Project Act of 1937, along with the earlier
(1933) Tennessee Valley Authority (TVA) Act, extended preference to include
nonprofit cooperative organizations. 8 The acts also authorized the

construction of federal transmission lines to carry the power, thus
minimizing regional reliance on private power companies. The two laws
established a statutory framework of energy allocation policies in an era of
extensive federal hydroelectric development. The 1937 Bonneville Project

Act authorized the construction of federal power lines in order to transmit
the federal power as widely as practicable. The act states that preference
was provided to public bodies and cooperatives to ensure that the hydropower
projects were operated for the benefit of the general public, particularly
domestic (residential) and rural customers. The preference clauses in the
Bonneville and TVA 9 acts were both viewed as yardsticks for evaluating the
rates charged by private utilities.

8 The Bonneville Project Act defines a cooperative as a nonprofit
organization of citizens supplying any kind of goods, commodities, or
services, as nearly as possible at cost. 9 Although not a PMA, TVA is an
independent multipurpose federal corporation that, among other activities,
generates and markets electricity to customers in nearly all of Tennessee
and parts of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and
Virginia.

Preference for public entities and cooperatives is also found in the
Reclamation Project Act of 1939 and the Flood Control Act of 1944. The
Reclamation Project Act of 1939, which provides guidance for projects
operated by the Bureau of Reclamation, gives preference to municipalities,

other public corporations or agencies, and cooperatives and other nonprofit
organizations. The Bureau is an agency within the Department of the Interior
whose projects generate much of the electricity sold by Bonneville and
Western. The 1939 act limited preference for cooperatives to those financed
at least in part by loans made under the Rural Electrification Act of 1936,
as amended. The Flood Control Act of 1944,

which gives guidance for projects operated by the U. S. Army Corps of
Engineers, gives preference to public bodies and cooperatives. The Corps'
projects generate electricity sold by all four PMAs. The act requires that
electricity be sold to encourage the most widespread use of power at the
lowest rates to consumers consistent with sound business practices. The
federal government was authorized to construct or acquire transmission

lines and related facilities to supply electricity to federal facilities,
public bodies, cooperatives, and privately owned companies. The legislative
history indicates that priority was given to public bodies and cooperatives
to expand rural electrification and to avoid monopolistic domination by

private utilities. Subsequent statutes, while building on preference
provisions provided by other federal power marketing laws, granted regional,
geographic preference. The Pacific Northwest Power Preference Act, enacted
in 1964,

authorizes Bonneville to sell outside its marketing area, the Pacific
Northwest region, surplus federal hydropower if there is no current market
in the region for the power at the rate established for its disposition in
the Pacific Northwest. The 1980 Northwest Power Act requires Bonneville to
provide power to meet all the contracted- for needs of its customers in the
Northwest, extending the regional preference provisions of the 1964 act to
include not only hydropower but also power from Bonneville's and

customers' other resources- including coal- fired and nuclear plants. As a
result of this regional preference, Bonneville's customers in the Pacific
Northwest- including private utility and direct service customers as well as
public utilities- have priority over preference customers in the Pacific

Southwest. The act also requires Bonneville to generally charge lower rates
to preference customers than to nonpreference customers. Such rates are
based upon the cost of the federal system resources used to supply
electricity to those customers.

In September 2000, the 1980 Northwest Power Act was amended to allow
Bonneville to sell preference power to existing “joint operating
entities” (public bodies or cooperatives formed by two or more public
bodies or cooperatives that were Bonneville preference customers by Jan. 1,
1999).

As indicated in the legislative history of the amendment, the new entities
could pool their members' or participating customers' power purchases from
Bonneville, which could result in operating efficiencies and

reductions in overhead costs for them, without reducing Bonneville's
receipts from the sale of power. 10

The Congress also granted regional preference in the sale of electricity
from federal projects to other parts of the country, such as the Northeast,
that are not served by the PMAs or TVA. The 1957 Niagara Redevelopment Act
establishes (1) a division of all power from the project into preference

and nonpreference power, (2) a preference for public bodies and
cooperatives, with an emphasis on serving domestic and rural consumers, and
(3) a geographic preference for preference customers in New York and in
neighboring states.

Other statutes give geographic preference to entire states or portions of
states for purchases of electricity generated in those areas. For example,
the 1928 Boulder Canyon Project Act gives preference to customers in

Arizona, California, and Nevada for purchases of excess power from the
Boulder Canyon Project. This preference language distinguishes among
preference customers, giving the states (e. g., California) a priority over
municipalities (e. g., Los Angeles).

Application of Preference Although we found no instances in which the
statutory preference

Provisions Reviewed by the provisions themselves were challenged, specific
applications of these Courts

provisions by the PMAs have been challenged in the courts and in
administrative proceedings. The cases have included disputes among
preference customers and between preference and nonpreference customers of
the various PMAs. In some instances, the courts have directed

a PMA to provide power to preference customers, and in other instances, they
have supported a PMA's denial of power to such customers. General principles
that may be drawn from the various court interpretations and rulings are
that (1) PMAs must act in favor of customers specifically provided
preference and priority in purchasing surplus power when

10 Pub. L. 106- 273, 114 Stat. 802 (2000).

nonpreference customers are competing for this power, (2) PMAs have
discretion in deciding how and to which preference customers they will
distribute electricity when the customers are in competition with each other
for limited power, and (3) preference customers do not have to be treated
equally, nor do individual preference customers have an entitlement to all
or any of the power. The Federal Energy Regulatory Commission has affirmed
the application of preference clauses in its rulings, as has the

Attorney General in an opinion interpreting the preference provision of the
1944 Flood Control Act. A list of the court cases and administrative rulings
we reviewed, with a brief description of each, is included in appendix I.
Restructuring of

The characteristics of the electricity industry on a national and regional
Electricity Industry basis have changed over time and continue to change.
For example, the issues and problems of the 1930s, when rural America was
largely without

Provides Another electricity and private utilities were not extensively
regulated, were not

Opportunity for the those that confronted the Congress in later decades or
that confront the

Congress to Reassess Congress now. The issue of preference in power sales by
the PMAs was of

continuing interest during the 106th Congress. Not only was the Northwest
Preference in PMA Power Act amended in September 2000, but also a bill was
introduced in

Marketing the Senate in April 2000 to amend the Niagara Redevelopment Act.
This bill would have eliminated the geographic preference allocating up to
20

percent of the power from the Niagara Power Project to states neighboring
New York. The preference status of sales to selected cooperatives and public
bodies in those states, however, would not have been affected. 11 In
September 2000, a bill was introduced in the House of Representatives to
eliminate all future sales of preference power; its provisions would have
taken effect only as each existing power sale contract expired. 12 In
October 2000, another bill was introduced in the House of Representatives to
authorize investor- owned electric utilities in California to purchase power
directly from Bonneville at specified rates. 13 The 106th Congress
adjourned, however, without taking further action on these bills. As of
January 30, 2001, no bills directly relating to preference power had been
introduced in the 107th Congress, according to DOE officials.

11 S. 2361, 106th Cong., 2nd Sess. (2000). 12 H. R. 5113, 106th Cong., 2nd
Sess. (2000). 13 H. R. 5458, 106th Cong., 2nd Sess. (2000).

Over the last 20 years, competition has been replacing regulation in major
sectors of the U. S. economy. New legislation at the federal and state
levels and technological changes have created a climate for change in
traditional electricity markets. The extent to which the federal government
should participate in fostering retail competition has yet to be decided.
Over the last several years, the Congress has deliberated on the
restructuring of the electricity industry. As the Congress continues these
deliberations, it is considering redefining existing federal roles, as well
as how to more efficiently and equitably produce and distribute electricity
to all customers. The way that the federal government generates, transmits,
and markets federal preference power has not changed in the same manner as
the industry surrounding it. In a March 1998 report, 14 we noted that the

Congress has options that, if adopted, would affect preference customers.
Considering changes to the preference provisions would be consistent with
the spirit of several of our testimonies 15 before various Senate and House

committees. Examining the legacy of existing federal programs in light of
changing conditions can yield important benefits. At these hearings, we
discussed the need to reexamine many federal programs in light of changing
conditions and to redefine the beneficiaries of these programs, if
necessary. In our testimony, we noted that as the restructuring of the
electricity industry proceeds, the Congress has an opportunity to consider
how the existing federal system of generating, transmitting, and marketing
electricity is managed, including the role of preference in federal power
sales.

Agency Comments We provided DOE with copies of a draft of this report. We
met with officials of DOE's Bonneville Power Administration and DOE's Power
Marketing Liaison Office, which is responsible for the other three PMAs. The
PMAs generally agreed with the information in our draft report. They also
observed that the previous administration did not support the repeal of the

14 Federal Power: Options for Selected Power Marketing Administrations' Role
in a Changing Electricity Industry (GAO/ RCED- 98- 43, Mar. 6, 1998). 15
Budget Issues: Effective Oversight and Budget Discipline Are Essential- Even
in a Time of Surplus (GAO/ T- AIMD- 00- 73, Feb. 1, 2000); Congressional
Oversight: Opportunities to Address Risks, Reduce Costs, and Improve
Performance (GAO/ T- AIMD- 00- 96, Feb. 17, 2000); Managing in the New
Millenium: Shaping a More Efficient and Effective Government for the 21st
Century (GAO/ T- OGC- 00- 9, Mar. 29, 2000); and Congressional Oversight:
Challenges for the 21st Century (GAO/ T- OCG- 00- 11, July 20, 2000).

“preference clause” as part of the restructuring of the
electricity industry. That administration did not incorporate such
provisions in its bill to restructure the industry because it believed that
federal restructuring legislation should be designed to ensure that
consumers in all states benefit and that those in certain parts of the
nation not be adversely affected. They

also stated that, consistent with applicable statutes and current contracts,
they have continually evaluated their roles and policies in light of changes
occurring in the electric utility industry. They agreed with us that the
Congress has the latitude to reconsider all laws containing both customer
and geographic preference in federal electricity sales.

To examine the evolution of preference in the PMAs' marketing, we reviewed
statutes, federal court cases, rulings by the Federal Energy Regulatory
Commission, and an Attorney General's opinion on federally

mandated preference in electricity licensing or sales by federal facilities.
As requested, we performed detailed reviews of legislative histories for
nine of these statutes. We also reviewed past GAO reports, testimonies, and
other products that relate to preference in the PMAs' electricity sales. We

interviewed the staffs of the PMA liaison offices in Washington, D. C., as
well as the General Counsels of each of the four PMAs. We reviewed various
other preference- related documents, including relevant law review articles,
issue briefs from trade associations, and the PMAs' marketing plans. We
performed our review from October 1999 through January 2001 in accordance
with generally accepted government auditing standards.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 5 days after
the date of this letter. At that time, we will send copies to appropriate
House and Senate Committees and Subcommittees; interested Members of the
Congress; Steve Wright, Acting Administrator and Chief Executive Officer,
Bonneville Power Administration; Charles A. Borchardt, Administrator,
Southeastern Power Administration; Michael A. Deihl, Administrator,
Southwestern Power Administration; and Michael S. Hacskaylo,

Administrator, Western Area Power Administration. We will also make copies
available to others on request.

If you or your staff have any questions or need additional information,
please contact me or Peg Reese at (202) 512- 3841. Key contributors to this

report were Charles Hessler, Martha Vawter, Doreen Feldman, and Susan Irwin.

Sincerely yours, Jim Wells Director, Natural Resources

and Environment

Appendi xes Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to

Appendi x I

Preference Statute Relevant provisions

Act of March 3, 1877 (Desert Land Act) Grants preference to certain classes
of public users to surplus reclamation water [19 Stat. 377, 43 U. S. C. 321]
from public lands.

Act of April 16, 1906 (Reclamation Act of 1906 or Establishes the first
precedent for a municipality's preference to surplus hydropower Town Sites
and Power Development Act of 1906)

generated at federal irrigation projects. Provides for the disposition of
hydroelectric [34 Stat. 116, 117, 43 U. S. C. 522]

power from irrigation projects and requires the Secretary of the Interior to
give a preference to power sales for municipal purposes.

Act of December 19, 1913 (Raker Act) Provides the city and county of San
Francisco with a right- of- way over public lands [38 Stat. 242, 245] for
the construction of aqueducts, tunnels, and canals for a waterway, power
plants,

and power lines for the use of San Francisco and other municipalities and
water districts. Prohibits grantees of the right to develop and sell water
and electric power from selling or leasing those rights to any corporation
or individual other than another municipality, municipal water district, or
irrigation district.

Federal Water Power Act (1920) (Federal Power Requires FERC (formerly the
Federal Power Commission) to give preference to Act)

states and municipalities in issuing licenses for hydropower projects
operated by [41 Stat. 1063, 1067, 16 U. S. C. 791a, 800] nonfederal
entities, if the competing applications are equally well adapted for water
development. (Preference criteria in this act may be used in disposing of
power to preference customers under the Boulder Canyon Act of 1928.)

Act of September 18, 1922 Gives preference to municipal purposes for surplus
power from the Salt River Project [42 Stat. 847, 43 U. S. C. 598] in
Arizona. Act of December 21, 1928 (Boulder Canyon Requires the Secretary of
the Interior to give preference within the policy of the Project Act)

Federal Water Power Act, i. e., to states and municipalities, when selling
power from [45 Stat. 1057, 1060, 43 U. S. C. 617, 617d]

the project. Gives the states of Arizona, California, and Nevada initial
priority over other preference customers.

Tennessee Valley Authority Act of 1933, as Requires TVA to give preference
in power sales to states, counties, municipalities, amended and cooperative
organizations of citizens or farmers that are organized or doing [48 Stat.
58, 64; 49 Stat. 1075, 1076, 16 U. S. C. business not for profit but
primarily for the purpose of supplying electricity to their 831, 831i]

own citizens or members. Authorizes TVA to construct its own transmission
lines to serve farms and small villages not otherwise supplied with
reasonably priced electricity and to acquire existing electric facilities
used to provide power directly to these customers.

Rural Electrification Act of 1936 Authorizes loans for rural electrification
and grants preferences to states; [49 Stat. 1363, 1365, 7 U. S. C. 901, 904]
municipalities; utility districts; and cooperative, nonprofit, or limited-
dividend

associations. Bonneville Project Act of 1937

Requires BPA to give preference and priority to public bodies (nonfederal
[50 Stat. 731, 733, 16 U. S. C. 832, 832b] government agencies) and
cooperatives. Allows the people within economic transmission distance of the
Bonneville project (Washington, Oregon, Idaho, and Montana) a reasonable
amount of time to create public or cooperative agencies so as to qualify for
the public power preference and secure financing. Act of May 18, 1938 (Fort
Peck Project Act) Requires the Bureau of Reclamation to give preference and
priority to public bodies [52 Stat. 403, 405, 16 U. S. C. 833, 833c] and
cooperatives.

Reclamation Project Act of 1939 Requires the government, when selling
surplus power from its reclamation projects, [53 Stat. 1187, 1194, 43 U. S.
C. 485, 485h (c) to give preference to municipalities and other government
agencies, and to

cooperatives and other nonprofit organizations financed in whole or in part
by loans from the Rural Electrification Administration.

(Continued From Previous Page)

Statute Relevant provisions

Act of October 14, 1940 (Water Conservation and Authorizes water projects in
the Great Plains and arid and semiarid areas of the

Utilization Act) nation. Gives preference in sales or leases of surplus
power to municipalities and [54 Stat. 1119, 1120 and 1124, 16 U. S. C. 590y,

other public corporations or agencies; and to cooperatives and other
nonprofit 590z- 7]

organizations financed in whole or in part by loans under the Rural
Electrification Act of 1936.

Act of June 5, 1944 (Hungry Horse Dam Act) Authorizes the construction of
the Hungry Horse Dam in western Montana for uses [58 Stat. 270, 43 U. S. C.
593a] primarily in the state of Montana. This “Montana
Reservation” has been interpreted as a geographic preference requiring
a calculated quantity of power (221 average megawatts) from Hungry Horse Dam
to be offered first for sale in Montana to preference and nonpreference
customers before the calculated amount of power is offered to other BPA
customers, including preference customers in other states.

Act of December 22, 1944 (Flood Control Act of Gives preference to public
bodies and cooperatives for power generated at Corps of 1944)

Engineers projects and authorizes transmission to federal facilities and
those owned [58 Stat. 887, 890, 16 U. S. C. 825s]

by public entities, cooperatives, and private companies. Act of March 2,
1945 (Rivers and Harbors Act of Provides for the distribution of power from
the Snake River Dams and the Umatilla 1945)

Dam in accordance with the preference provisions of the Bonneville Project
Act. [59 Stat. 1021, 1022]

Act of July 31, 1950 (Eklutna Act) Gave preference to public bodies and
cooperatives and to federal agencies in sales [64 Stat. 382, 383 (repealed,
Pub. L. 104- 58)] of power from the Eklutna project near Anchorage, Alaska.

Act of September 30, 1950 Provides for the sale or lease of power from the
Palisades Dam in southeastern [64 Stat. 1083] Idaho to bodies entitled to
preference under federal reclamation laws. Act of June 18, 1954

Requires the Secretary of the Interior to give preference in the sale of
power [68 Stat. 255, 256] generated at the Falcon Dam on the Texas/ Mexico
border to public bodies and

cooperatives. Act of July 27, 1954

Authorizes BPA to purchase power generated at the Priest Rapids Dam in [68
Stat. 573] Washington. Requires BPA to sell the power according to the
preference provisions applicable to other sales of BPA power. Atomic Energy
Act of 1954

Provides for preference to public bodies and cooperatives in the sale of
power from [68 Stat. 919, 929, 42 U. S. C. 2064] the Department of Energy's
nuclear production facilities; also provides preference to private utilities
serving high- cost areas not serviced by public bodies and cooperatives. Act
of August 12, 1955 (Trinity River Division Act)

Reserves 25 percent of the power from theTrinity power plants for preference
[69 Stat. 719, 720] customers in Trinity County, California.

Act of April 11, 1956 (Colorado River Storage Provides for the sale of power
from the Colorado River Storage Project and Project Act)

participating projects to bodies entitled to preference under reclamation
laws. [70 Stat. 105, 107]

Niagara Redevelopment Act (1957) Sets out preference and allocation
provisions required to be included in FERC's [Pub. L. 85- 159, 71 Stat. 401,
16 U. S. C. 836] license to the state of New York for the sale of power
generated from the Niagara River. Contains several allocation mechanisms:
(1) a division of all project power into preference and nonpreference power,
(2) a preference clause for public bodies and cooperatives, particularly for
the benefit of domestic and rural customers, (3) a provision that preference
power sold initially to private utilities is subject to withdrawal to meet
the needs of preference customers, (4) a geographic preference (80 percent
of the preference power is reserved for New York preference customers and up
to 20 percent for neighboring states), and (5) an allocation of a specific
amount of power to an individual nonpreference customer for resale to
specific industries.

(Continued From Previous Page)

Statute Relevant provisions

Flood Control Act of 1958 Provides that a reasonable amount of power, up to
50 percent, from dams [Pub. L. 85- 500, tit. II, 72 Stat. 305, 311]
subsequently constructed by the Corps of Engineers on the Missouri River,
shall be reserved for preference customers within the state in which each
dam is located.

Atomic Energy Commission Authorization Act Authorizes the sale of by-
product energy from the Hanford New Production Reactor (1962)

to purchasers agreeing to offer 50 percent of the electricity generated to
private [Pub. L. 87- 701, 76 Stat. 599, 604]

organizations and 50 percent to public organizations. (DOE has terminated
the operation of this reactor.)

Flood Control Act of 1962 Requires “first preference” for
customers in Tuolomne and Calaveras Counties in [Pub. L. 87- 874, tit. II,
76 Stat. 1180, 1191- 1192

California for 25 percent of the additional power generated by the New
Melones and 1193- 1194 (section 204, relating to the

project. Required preference for federal agencies, public bodies, and
cooperatives in Snettisham project, repealed, Pub. L. 104- 58)] power sales
from the Snettisham project near Juneau, Alaska.

Act of December 23, 1963 Requires the Secretary of the Interior to give
preference in the sale of power [Pub. L. 88- 237, 77 Stat. 475] generated at
Amistad Dam on the Texas/ Mexico border to federal facilities, public
bodies, cooperatives, and privately owned companies.

Act of August 31, 1964 (Pacific Northwest Power Authorizes the sale outside
the Pacific Northwest of federal hydroelectric power for Preference Act)

which there is no current market in the region or that cannot be conserved
for use in [Pub. L. 88- 552, 78 Stat. 756, 758, 16 U. S. C. 837, the region.
Provides that sales outside the Pacific Northwest are subject to 837a, 837b,
837d, and 837h]

termination of power deliveries if a BPA customer in the Pacific Northwest
needs the power. Grants reciprocal protection with respect to energy
generated at, and the peaking capacity of, federal hydroelectric plants in
the Pacific Southwest, or any other marketing area, for use in the Pacific
Northwest. Explicitly provides that the Hungry Horse Dam Act's geographical
preference for power users in Montana is not modified by this act.

Colorado River Basin Project Act (1968) Authorizes the purchase of
nonfederal thermal power for the Central Arizona [Pub. L. 90- 537, 82 Stat.
885, 889 and 901, 43 irrigation project. Authorizes, subject to the
preference provisions of the Reclamation U. S. C. 1501, 1523 and 1554]

Project Act, the disposal of power purchased, but not yet needed, for the
project. Pacific Northwest Electric Power Planning and Explicitly retains
the preference provisions of the Bonneville Project Act of 1937 and
Conservation Act (Northwest Power Act) (1980)

other federal power marketing laws. Requires BPA to provide power to meet
all the [Pub. L. 96- 501, 94 Stat. 2697, 2712 , 2723, and contracted- for
needs of its customers in the Northwest. As a result of this regional 2734,
16 U. S. C. 839c, 839e, and 839g]

preference, BPA's public as well as private utility and direct service
industry customers in the Pacific Northwest have priority over preference
customers in the Pacific Southwest. Requires BPA to charge lower rates to
preference customers than to nonpreference customers. Also requires BPA to
offer initial 20- year power sale contracts to specific nonpreference as
well as preference customers throughout the

Pacific Northwest: (1) publicly owned utilities, (2) federal agencies, (3)
privately owned utilities, and (4) directly served industrial customers.
Hoover Power Plant Act of 1984 Gives preference power to municipalities, an
investor- owned utility, and others for [Pub. L. 98- 381, 98 Stat. 1333,
1335, 43 U. S. C. power generated at the Hoover Power Plant. 619a]

Electric Consumers Protection Act of 1986 Amends the Federal Power Act to
provide that preference does not apply to [Pub. L. 99- 495, 100 Stat. 1243]
relicensing. (Retains preference for original licenses.) National Defense
Authorization Act for Fiscal Year For a 10- year period, reserves power that
becomes available because of military 1994

base closures for sale to preference entities in California that are served
by the [Pub. L. 103- 160, 107 Stat. 1537, 1935]

Central Valley Project and that agree to use such power for economic
development on bases closed or selected for closure under the act.

(Continued From Previous Page)

Statute Relevant provisions

Energy and Water Development Appropriations Authorizes BPA to sell excess
power outside the Pacific Northwest on a firm basis for Act, 1996 a contract
term not to exceed 7 years, if the power is first offered to public bodies,
[Pub. L. 104- 46, 109 Stat. 402, 420]

cooperatives, investor- owned utilities, and direct service industrial
customers identified in the Northwest Power Act. Public Law 106- 273, 114
Stat. 802, 2000 Amends the Northwest Power Act of 1980 to allow BPA to sell
preference power to joint operating entities' members who were customers of
BPA on or before January 1, 1999.

Court case Relevant decision

Arizona Power Pooling Association v. Morton, 527 The court applied the
Reclamation Project Act of 1939's preference clause to F. 2d 721, (9th Cir.
1975), cert. denied, 425 U. S. governmental sales of thermally generated
electric power from the Central Arizona 911 (1976)

Project. The court held that under the act's preference clause, the
Secretary of the Interior must give preference customers an opportunity to
purchase excess power before offering it to a private customer. The court
also held that preference customers do not have entitlement to federal
power. Arizona Power Authority v. Morton, 549 F. 2d 1231

The court held that the implementation of geographic preferences in the
allocation of (9th Cir. 1977), cert. denied, 434 U. S. 835 (1977) federal
hydroelectric power under the Colorado River Storage Project Act in a

manner that discriminated among preference customers was within the
discretion of the Secretary of the Interior and not reviewable by the court.
City of Santa Clara v. Andrus, 572 F. 2d 660 (9th The court held that the
Secretary of the Interior could not sell federally marketed Cir.), cert.
denied, 439 U. S. 859 (1978) power to a private utility, even on a
provisional basis, while denying power to a

preference customer. Only if the available supply of power exceeds the
demands of interested preference customers may power be sold to private
entities. Preference means that preference customers are given priority over
nonpreference customers in the purchase of power. However, preference
customers do not have to be treated equally, nor do all potential preference
customers have to receive an allotment.

City of Anaheim v. Kleppe, 590 F. 2d 285 (9th Cir. The court held that the
preference clause of the Reclamation Project Act of 1939 1978); City of
Anaheim v. Duncan, 658 F. 2d 1326

was not violated by the sale of federal power to private utilities on an
interim basis (9th Cir. 1981)

when preference customers lacked transmission capacity to accept such power
within a reasonable time and did not offer to buy power when it was
originally sold. As a result, there was no competing offer between a
preference and a nonpreference customer.

Aluminum Company of America v. Central Lincoln The Supreme Court held that
terms of contracts, which the Pacific Northwest Peoples' Utility District,
467 U. S. 380 (1984), rev'g Electric Power Planning and Conservation Act
required BPA to offer to certain Central Lincoln Peoples' Utility District
v. Johnson, nonpreference customers, did not conflict with the applicable
preference provisions. 686 F. 2d 708 (9th Cir. 1982) The preference
provisions determine the priority of different customers when there are
competing applications for power that can be allocated administratively.
Here, however, the contracts in question were not part of an administrative
allocation of preference power, and the power covered by the initial
contracts was allocated directly by the statute. Since BPA was not
authorized to administratively allocate this power, there could be no
competing applications for the power, and the preference provisions did not
apply to the transactions.

ElectriCities of North Carolina, Inc. v. A challenge to SEPA's 1981
allocation policy for the Georgia- Alabama power Southeastern Power
Administration, 774 F. 2d system, changing the location and list of
preference customers, was denied. The 1262 (4th Cir. 1985)

court held that the allocation of preference power is discretionary and that
the preference provision of the Flood Control Act is too vague to provide a
standard for the court to apply to SEPA's actions.

(Continued From Previous Page)

Court case Relevant decision

Greenwood Utilities Commission v. Hodel, 764 F. A challenge to sales of
capacity without energy to investor- owned utilities was 2d 1459 (11th Cir.
1985), aff'g Greenwood Utilities denied. The court held that the Flood
Control Act's preference provision did not Commission v. Schlesinger, 515 F.
Supp. 653

establish an entitlement to power or standards for eligibility for power.
The statute is (M. D. Ga. 1981) too vague to permit judicial review of sales
and allocations decisions.

Arvin- Edison Water Storage District v. Hodel, 610 Irrigation districts'
claim to an allocation of power ahead of other preference F. Supp. 1206 (D.
D. C. 1985) customers (super preference) for WAPA power was denied. The
preference clause of the Reclamation Project Act does not provide a
superpreference for irrigators; it only provides that public entities be
given preference over private entities. The clause does not require that all
preference customers be treated equally or that they even receive an
allocation. The allocation decision is within an agency's discretion and
cannot be reviewed by the court.

Brazos Electric Power Cooperative, Inc. v. The court upheld the dismissal of
a challenge by an electric cooperative to an Southwestern Power
Administration, 828 F. 2d exchange arrangement between a SWPA customer and
an investor- owned utility. 1083 (5th Cir. 1987)

The investor- owned utility's arrangement with preference customers does not
violate the preference provision of the Flood Control Act. Even though the
investor- owned utility receives some economic benefits, this is not a sham
sale of preference power. ElectriCities of North Carolina, Inc. v. SEPA's
decision to create two divisions and sell some power to nonpreference
Southeastern Power Administration, 621 F. Supp.

customers in its Western Division while excluding preference customers in
its 358 (W. D. N. C. 1985) Eastern Division is not subject to challenge by
those excluded, who have no right or entitlement to allocations of SEPA
power.

Salt Lake City v. Western Area Power The court held that WAPA reasonably
interpreted the preference provisions of the Administration, 926 F. 2d 974
(10th Cir. 1991) Reclamation Project Act of 1939 in determining that
preference applied only to municipalities that operated their own utility
systems, and not to every city or town that fit the act's definition of
“municipality.”

Administrative ruling Relevant decision

Municipal Electric Utilities Association of the State FERC held that in the
Niagara Redevelopment Act, the Congress defined the term of New York v.
Power Authority of the State of New “public bodies” as those
governmental bodies that resell and distribute power to the Yo r k (PASNY),
21 FERC para. 61, 021 (Oct. 13, 1982); people as consumers. The appellate court
affirmed that preference rights under the PASNY v. FERC, 743 F. 2d 93 (2d
Cir. 1984)

act accrue to public bodies and nonprofit cooperatives that are engaged in
the actual distribution of power. In determining the ultimate retail
distribution of the power sold to them, public entities could resell the
power to industrial and commercial users, not just to domestic and rural
customers. The court also described “yardstick

competition,” a theory that underlies preference. The court stated
that the Congress, while concerned with meeting the needs of rural and
domestic consumers, believed that all interests could best be served by
giving municipal entities the right to decide on the ultimate retail
distribution of the preference power sold to them. This belief was founded
on the so- called “yardstick competition” principle, which
assumes that if the municipal entities are supplied with cheap hydropower,
their lower competitive rates will force the private utilities in turn to
reduce their rates, with resulting benefits to all, including rural and
domestic consumers.

Massachusetts Municipal Wholesale Electric FERC reaffirmed parts of an
earlier decision interpreting the Niagara Company v. PASNY, 30 FERC para. 61,
323 ( Mar. 27,

Redevelopment Act as providing allocations of preference power for states
1985) neighboring New York and clarified which states were included. FERC
held that any public body or nonprofit cooperative in a state neighboring
NewYork within economic transmission distance of the Niagara Power Project
is entitled to an allocation of preference power. FERC also held that only
publicly owned entities that

are capable of selling and distributing power directly to retail consumers
are public bodies entitled to preference under the act.

(Continued From Previous Page)

Administrative ruling Relevant decision

Disposition of Surplus Power Generated At Clark The Attorney General
construed section 5 of the Flood Control Act of 1944, Hill Reservoir
Project, 41 Op. Atty Gen. 236 (1955) providing preference to public bodies
and cooperatives, to mean that if there are two

competing offers to purchase federal power, one by a preference customer and
the other by a nonpreference customer, and the former does not have at the
time the physical means to take and distribute the power, the Secretary of
the Interior must contract with the preference customer on condition that
within a reasonable time fixed by the Secretary, the customer will obtain
the means for taking and distributing the power. If within that period the
preference customer does not do so, the

Secretary is authorized to contract with the nonpreference customer, subject
to the condition that should the preference customer subsequently obtain the
means to take and distribute the power, the Secretary will be enabled to
deal with the

preference customer. The Secretary's duty to provide preference power is not
satisfied by the disposition of the power to a nonpreference customer under
an arrangement whereby the nonpreference customer obligates itself to sell
an equivalent amount of power to preference customers. Legend

BPA = Bonneville Power Administration FERC = Federal Energy Regulatory
Commission SEPA = Southeastern Power Administration SWPA = Southwestern
Power Administration TVA = Tennessee Valley Authority WAPA = Western Area
Power Administration

PMAs Affected by Selected Statutes Relating

Appendi Appendi x x II I II to Preference in the Sale of Electricity
Affected PMA( s) Statute BPA SEPA SWPA WAPA

Reclamation Act of 1906 X X Act of September 18, 1922 X Boulder Canyon
Project Act (1928) X Bonneville Project Act of 1937 X Fort Peck Project Act
(1938) X Reclamation Project Act of 1939 X X Water Conservation and
Utilization Act (1940) X X Hungry Horse Dam Act (1944) X Flood Control Act
of 1944 X X X X Rivers and Harbors Act of 1945 X Act of September 30, 1950 X
Act of June 18, 1954 X Act of July 27, 1954 X Trinity River Division Act
(1955) X Colorado River Storage Project Act (1956) X Flood Control Act of
1958 X Flood Control Act of 1962 X Act of December 23, 1963 X Pacific
Northwest Power Preference Act (1964) X X Colorado River Basin Project Act
(1968) X Pacific Northwest Electric Power Planning and Conservation Act
(1980) X Hoover Power Plant Act of 1984 X National Defense Authorization Act
for Fiscal Year 1994 X Energy and Water Development Appropriations Act, 1996
X Public Law 106- 273, 2000 X

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

(141459) Lett er

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Appendix I

Appendix I Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to Preference

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Appendix I Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to Preference

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Appendix I Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to Preference

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Appendix I Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to Preference

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Appendix I Compendium of Selected Statutes, Court Cases, and Administrative
Rulings Relating to Preference

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Appendix II

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