Hydropower Relicensing: Federal Costs Are Not Being Recovered (Letter
Report, 06/30/2000, GAO/RCED-00-107).

Pursuant to a congressional request, GAO reviewed hydropower
relicensing, focusing on the status of efforts to recover the costs
incurred by federal agencies to administer the hydropower program.

GAO noted that: (1) for fiscal years 1995 through 1998, federal agencies
reported a total of about $32 million in hydropower-program-related
administrative costs; (2) GAO estimates that for the 4 fiscal years,
about $12 million in federal costs to administer the hydropower program
either were not reported or may not be recovered because of appeals by
licensees; (3) according to agency officials with whom GAO spoke and
documents that GAO obtained, costs were not reported, in part, because
some federal agencies that incurred costs to administer the hydropower
program: (a) did not report any costs for any year to the Federal Energy
Regulatory Commission; (b) reported costs in some years but not in other
years; (c) did not report certain indirect costs (overhead), including
unfunded future federal pension and postretirement health benefits and
program-related legal costs; and (d) could not determine their costs;
(4) in addition, GAO's analysis of the agencies' cost data showed that
some of the $32 million in costs that were reported have been withdrawn
or may be not recovered because they cannot be adequately supported; (5)
GAO traced these problems to: (a) the Commission's failure to provide
clear guidance to the other federal agencies about what costs are
recoverable; and (b) the agencies' failure to improve their financial
management and reporting systems to accurately account for the costs
that they report; (6) agency officials expect the federal costs of
administering the hydropower program to increase substantially as more
and larger projects approach their dates for relicensing and as federal
agencies take on additional responsibilities resulting from recent
changes in the relicensing process; and (7) as a result, GAO estimates
that tens of millions more dollars may not be recovered over the next
decade unless corrective action is taken.

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

 REPORTNUM:  RCED-00-107
     TITLE:  Hydropower Relicensing: Federal Costs Are Not Being
	     Recovered
      DATE:  06/30/2000
   SUBJECT:  Hydroelectric energy
	     Cost control
	     Licenses
	     Administrative costs
	     Reporting requirements
	     Cost analysis
	     Government collections
	     User fees
	     Internal controls
	     Financial management
IDENTIFIER:  FERC Hydropower Program

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GAO/RCED-00-107

Appendix I: FERC's Traditional Relicensing Process

24

Appendix II: Objectives, Scope, and Methodology

25

Appendix III: Comments From the Federal Energy Regulatory Commission

27

Appendix IV: Comments From the Department of the Interior

30

Appendix V: GAO Contacts and Staff Acknowledgments

36

Figure 1: Federal Agencies' Hydropower-Program-Related
Administrative Costs Reported to FERC, Fiscal
Years 1985-98 11

FERC Federal Energy Regulatory Commission

FPA Federal Power Act

NEPA National Energy Policy Act

OMB Office of Management and Budget

Resources, Community, and
Economic Development Division

B-285047

June 30, 2000

The Honorable Ralph Regula
Chairman, Subcommittee on Interior
and Related Agencies
Committee on Appropriations
House of Representatives

Dear Mr. Chairman:

About 10 percent of all electricity produced in the United States is
generated by federal and nonfederal hydroelectric power (hydropower)
projects. Approximately half of the electricity generated by hydropower is
produced by federally owned and operated projects. Nearly all of the
remaining half is produced by about 1,000 nonfederal hydropower projects
that are licensed by the federal government, of which about 400 are located
on federal lands.1 Hydropower projects include dams, reservoirs, stream
diversion structures, powerhouses containing turbines driven by falling
water, and transmission lines.

The Federal Power Act, as amended (FPA), authorizes the Federal Energy
Regulatory Commission (FERC)--an independent five-member commission
appointed by the President and confirmed by the Senate--to issue licenses to
construct and operate nonfederally owned hydropower projects, including
those located on federal lands. Licenses can be issued for a period of up to
50 years, after which the projects must be relicensed in order to continue
operating. Licenses that expire while undergoing relicensing may receive
temporary 1-year extensions, called annual licenses, until relicensing is
completed.

Although FERC continues to issue licenses to operate new, previously
unlicensed hydropower projects, most of the about 1,000 nonfederally owned
and operated projects were originally licensed several decades ago. About
270 of these projects, including over 120 located on federal lands, either
are currently undergoing relicensing or have licenses that will expire in
the next 10 years.

In addition to FERC, federal and state resource agencies have
responsibilities for ensuring that hydropower projects meet the requirements
of environmental and planning laws that have been enacted in recent decades.
These requirements also apply to the relicensing of many projects whose
original licenses are expiring.

FPA requires licensees to pay reasonable annual charges in amounts fixed by
FERC to reimburse the United States for, among other things, the costs of
FERC's and other federal agencies' administration of the act's hydropower
provisions. To identify these costs--virtually all of which are now related
to the relicensing process--FERC annually requests federal agencies to
report their hydropower-program-related costs for the prior fiscal year.
FERC then bills individual licensees for their shares of its and the other
federal agencies' administrative costs, basing these shares largely on the
generating capacity and amount of electricity generated by the licensees'
projects. FERC deposits the licensees' reimbursements of its and the other
federal agencies' administrative costs--together with other annual charges
and filing fees that it collects--into the U.S. Treasury as a direct offset
to its annual appropriation. Receipts that exceed FERC's annual
appropriation are deposited in the General Fund of the U.S. Treasury.

Because of your concern about increasing costs and controversies related to
federal agencies' hydropower relicensing activities, you asked us to
identify and assess significant issues related to nonfederally owned and
operated hydropower projects. In this report, we assess one issue--the
status of efforts to recover the costs incurred by federal agencies to
administer the hydropower program. Our report does not address the
appropriateness of the agencies' expenditures for the program but considers
only the adequacy of efforts by FERC and the other agencies to recover costs
they have incurred. Future work will assess other issues, such as the
adequacy of payments made by licensees for the use of federal lands, the
environmental and fiscal effects of delays in the relicensing process, and
the potential costs to federal and state governments to remove nonfederal
hydropower projects that are not relicensed.

For fiscal years 1995 through 1998, federal agencies reported a total of
about $32 million in hydropower-program-related administrative costs.
However, on the basis of our review, we estimate that for the 4 fiscal
years, about $12 million in federal costs to administer the hydropower
program either were not reported or may not be recovered because of appeals
by licensees. According to agency officials with whom we spoke and documents
that we obtained, costs were not reported, in part, because some federal
agencies that incurred costs to administer the hydropower program (1) did
not report any costs for any year to the Federal Energy Regulatory
Commission; (2) reported costs in some years but not in other years; (3) did
not report certain indirect costs (overhead), including unfunded future
federal pension and postretirement health benefits and/or program-related
legal costs; and/or (4) could not determine their costs. In addition, our
analysis of the agencies' cost data showed that some of the $32 million in
costs that were reported have been withdrawn or may be not recovered because
they cannot be adequately supported. We traced these problems to (1) the
Commission's failure to provide clear guidance to the other federal agencies
about what costs are recoverable and (2) the agencies' failure to improve
their financial management and reporting systems to accurately account for
the costs that they report. Agency officials expect the federal costs of
administering the hydropower program to increase substantially as more and
larger projects approach their dates for relicensing and as federal agencies
take on additional responsibilities resulting from recent changes in the
relicensing process. As a result, we estimate that tens of millions more
dollars may not be recovered over the next decade unless corrective action
is taken. Therefore, this report contains recommendations that, if
implemented, would make clear what administrative costs should be reported
and ensure that the costs that are reported are accurate. It also contains a
matter for congressional consideration that would provide an incentive to
the agencies to report their costs.

We obtained written comments on a draft of our report from the Federal
Energy Regulatory Commission and the Department of the Interior. These
agencies generally agreed with the thrust of our report's findings,
conclusions, and recommendations, with certain exceptions. While agreeing to
provide the other federal agencies with general information on reporting
costs, the Commission did not indicate in its comments whether it would
clarify which of the other agencies' administrative costs are eligible for
recovery under the Federal Power Act as we have recommended. As a result, we
have doubts about whether the problems we have identified will be resolved.

Hydropower has several advantages over other methods of generating
electricity. It is comparatively inexpensive to produce, can be increased
quickly in periods of peak demand, is renewable, and produces no air
pollution or radioactive wastes. Reservoirs created by hydropower projects
also often provide opportunities for other uses, such as boating, fishing,
flood control, irrigation, and municipal water supply.

Although hydropower has several advantages over other methods of generating
electricity, it has disadvantages as well. For example, projects may prevent
fish from moving upstream or downstream or may kill them as they pass
through turbines used to generate power. Projects can also adversely affect
water quantity and quality, as well as fish and wildlife habitat, by
disturbing natural streamflows.

FPA is the basic statutory authority governing the licensing and relicensing
of hydropower projects. However, during the decades that have passed since
FERC issued original licenses for most hydropower projects, the Congress has
enacted numerous laws that can affect the projects' operations and the
relicensing process.

Section 4(e) of FPA authorizes FERC to issue licenses to construct and
operate nonfederally owned hydroelectric projects. In deciding whether to
issue an original or renewed license, FERC must give equal consideration to
developmental and nondevelopmental values, such as power and fish and
wildlife. Under section 4(e), licenses for projects on federal lands that
the Congress has reserved for other purposes, such as national forests--or
that utilize federal facilities such as dams, outlets, or canals--are
subject to terms and conditions established by the head of the land
management agency responsible for protecting the lands or facilities.

In addition, section 10(a) of FPA requires FERC to solicit recommendations
from federal and state resource agencies and Indian tribes on the terms and
conditions proposed for inclusion in a license. Under section 10(j), the
license must include conditions for the protection, mitigation, and
enhancement of fish and wildlife, which must generally be based on
recommendations by federal and state fish and wildlife agencies. Section 18
of FPA requires FERC to include conditions in the license providing for fish
passage as prescribed by federal fish and wildlife agencies.

In developing their recommendations on the terms and conditions proposed for
inclusion in a license, federal land management and resource agencies must
address the requirements of the Clean Water Act, the Endangered Species Act,
and several other environmental laws. In addition, decisions to relicense
hydropower projects must be made in accordance with the National
Environmental Policy Act (NEPA), which requires federal agencies to assess
the impacts of proposed actions that may significantly affect the
environment. Plans developed under federal land management planning laws may
also affect relicensing, principally by serving as a basis for specifying
conditions under section 4(e) of FPA.

The licensing terms and conditions prescribed or recommended by FERC and
federal and state land and resource agencies may call for minimum water
flows, the construction of fish passage facilities, or the installation of
screens and other devices to prevent fish from being injured or killed. They
may also limit reservoir drawdowns and require the purchase and restoration
of lands affected by projects.

FERC's traditional relicensing process includes seven steps that we have
grouped into two phases. (See app. I.) The first--the notification
phase--begins about 5 to 5-1/2 years before a project's license expires,
when the licensee notifies FERC of its intent to seek relicensing. During
this phase, the licensee must consult with federal and state land and
resource agencies, which must identify studies that they believe should be
undertaken to determine the project's impacts on fish and wildlife,
recreation, water, and other resources. If the licensee disagrees with the
need to conduct a study, either party may ask FERC to resolve the dispute.
After completing agreed-upon studies, the licensee prepares a draft
application and obtains comments from, and attempts to resolve any
disagreements on, needed actions with the relevant federal and state
agencies.

The second phase in the traditional process--the application phase--begins
when the licensee files a formal application to seek relicensing. This
filing must occur at least 2 years before the license expires. The
application is a comprehensive, detailed document that specifies the
project's proposed operations, its anticipated impacts on resources and
other land uses, and proposed actions to mitigate adverse effects. FERC
reviews the application to ensure that it meets all requirements and then
asks relevant federal and state land and resource agencies to formally
comment on it. Depending on the comments, FERC may ask the licensee to
provide additional data and studies. When FERC is satisfied that these are
sufficient, it conducts an environmental analysis under NEPA. After
completing its environmental analysis, FERC negotiates with federal and
state fish and wildlife agencies on recommendations to mitigate the
project's impacts on these resources. In addition to using FERC's NEPA
analysis, federal land and resource agencies frequently conduct separate
environmental analyses under NEPA or assessments under other laws to
determine the license terms and conditions they will prescribe or recommend
to protect and enhance resources.

In recent years, the traditional relicensing process has often proved to be
lengthy and acrimonious. As a result, in 1997, FERC issued regulations
creating an alternative relicensing process. Termed the collaborative
process, it is intended to (1) speed relicensing by combining many of the
earlier consultations and studies with the later environmental reviews and
(2) reduce acrimony by improving communication and collaboration among the
participants in the process. The licensee may choose the alternative process
if it can demonstrate that the participants agree on its use.

Section 10(e) of FPA requires licensees to pay reasonable annual charges in
amounts fixed by FERC to reimburse the United States for, among other
things, the costs of FERC's and other federal agencies' administration of
the act's hydropower provisions. These costs include those related to
licensing and relicensing projects and to monitoring them after relicensing,
as established in agreements reached through the collaborative process. In
fixing these and other section 10(e) charges, FERC must seek to avoid
increasing the price of power to consumers. FERC has recognized that any
increase in charges may have an impact on consumers and interprets this
provision to prohibit the assessment of unreasonable charges that would be
passed along to consumers.2

The Office of Management and Budget's (OMB) Circular A-25-User Charges
(Circular A-25)--which provides guidance to federal agencies in setting
fees--calls for full cost recovery to the extent permitted by law, including
the recovery of all unfunded retirement costs. In addition, in 1995, the
Federal Accounting Standards Advisory Board--a body jointly established by
the Department of the Treasury, OMB, and GAO to consider and recommend
accounting principles for the federal government--issued a new standard
(number 4) on the concept of full cost recovery, including the recovery of
all indirect (overhead) costs.3

Hydropower Program Are Not Being Recovered

For fiscal years 1995 through 1998, federal agencies reported a total of
about $32 million in hydropower-program-related administrative costs.
However, on the basis of our review, we estimate that for the 4 fiscal
years, about $12 million in federal costs to administer the hydropower
program either were not reported or may not be recovered because of appeals
by licensees. According to agency officials with whom we spoke and documents
that we obtained, costs were not reported, in part, because some federal
agencies that incurred costs to administer the hydropower program (1) did
not report any costs for any year to FERC; (2) reported costs in some years
but not in other years; (3) did not report certain indirect costs
(overhead), including unfunded future federal pension and postretirement
health and/or program-related legal costs; and/or (4) could not determine
their costs. In addition, our analysis of the agencies' cost data showed
that some of the $32 million in costs that were reported have been withdrawn
or may be not recovered because they cannot be adequately supported. We
traced these problems to (1) FERC's failure to provide clear guidance to the
other federal agencies about what costs are recoverable and (2) the
agencies' failure to improve their financial management and reporting
systems to accurately account for the costs that they report. Agency
officials expect the federal costs of administering the hydropower program
to increase substantially as more and larger projects approach their dates
for relicensing and as federal agencies take on additional responsibilities
resulting from recent changes in the relicensing process. As a result, we
estimate that tens of millions more dollars may not be recovered over the
next decade unless corrective action is taken.

In 1985, the Department of Energy's Inspector General observed that,
although FERC had been annually billing licensees for its own administrative
costs, it had not been billing them for the administrative costs incurred by
other federal agencies.4 Accordingly, in fiscal year 1986, FERC began
annually billing licensees for the prior fiscal year's administrative costs
reported to it by other federal agencies. These agencies have, in different
years, included the Forest Service in the Department of Agriculture; the
National Marine Fisheries Service in the Department of Commerce; the Corps
of Engineers in the Department of Defense; the Environmental Protection
Agency; and the Bureau of Land Management, the Bureau of Reclamation, the
Bureau of Indian Affairs, the Fish and Wildlife Service, and the National
Park Service in the Department of the Interior. Interior's Office of the
Solicitor has also provided data on its costs.

For fiscal years 1995 through 1998, federal agencies reported about $32
million in hydropower-program-related administrative costs. (See fig. 1.)
However, other administrative costs were not reported.

Reported to FERC, Fiscal Years 1985-98

Source: GAO's presentation of data from FERC.

Some federal agencies did not report any of their administrative costs to
FERC. For example, Interior officials estimate that the National Park
Service incurs costs of about $200,000 a year to administer the hydropower
program but never reports these costs to FERC. Similarly, an Environmental
Protection Agency official estimates that the agency incurs annual costs of
tens of thousands of dollars a year for the same purpose but never reports
the costs to FERC. Officials from both agencies said they considered the
amounts to be too small for them to account for and report to FERC. By
contrast, both the Bureau of Land Management and the Bureau of Reclamation
have annually reported comparable or smaller costs.

Other federal agencies reported their hydropower-program-related costs in
some years but not in others. For instance, the Forest Service--which
reported an average of about $2.7 million a year for fiscal years 1996 and
1998--did not report any costs for fiscal year 1997. According to the
agency's national hydropower program coordinator, fiscal year 1997 "slipped
through the cracks" because her position was vacant. Similarly, the Bureau
of Indian Affairs did not report $2.4 million in fiscal year 1995 costs
until fiscal year 1997, or a year after it should have reported the costs to
FERC. According to Bureau officials, the need to report its costs to FERC
got lost as a result of personnel changes.

When agencies reported their costs, they often did so inconsistently. For
example, the Bureau of Indian Affairs included indirect costs (overhead) for
fiscal years 1995 and 1996, but not for fiscal year 1997. Similarly, the
Fish and Wildlife Service reported indirect costs for some, but not all, of
its regional offices in both fiscal years 1996 and 1997. Both agencies
attributed the inconsistencies to the low priority given to accounting for
and reporting these costs.

Moreover, while FERC included unfunded future federal pension and
postretirement health benefit costs as recoverable indirect costs, the other
agencies did not, even though those benefits will have to be paid by the
federal government in future years. According to officials from these
agencies, they had never been advised to include these costs. In 1996, we
reported that the cost of future pension benefits was about 11 percent of
the salaries of employees in the federal government's Civil Service
Retirement System and that postretirement health benefits were estimated to
be $2,000 per year per employee.5

Agencies also reported their legal costs inconsistently. On the one hand,
FERC included its legal costs, and the Department of the Interior reported
the costs its Office of the Solicitor incurred in providing legal advice on
hydropower-program-related activities to the five Interior agencies that are
involved in administering the program. On the other hand, the Department of
Agriculture did not report the costs incurred by its Office of General
Counsel in providing legal advice to the Forest Service on such activities.

Other administrative costs that should have been reported were not because
they could not be determined. For instance, according to its fiscal year
1998 budget justification, the Forest Service planned to spend about $10
million on hydropower-program-related activities. However, the agency
reported less than $4.5 million to FERC. According to Forest Service
officials, a large but indeterminate portion of the remaining more than $5.5
million was spent on hydropower-program-related activities but charged to
other programs and activities. Similarly, the Bureau of Reclamation said it
could not determine the hydropower-program-related costs incurred in its
Pacific Northwest region for fiscal years 1996 and 1997 because these costs
were intermingled with a variety of other expenditures in a single account.
In addition, the Bureau of Land Management estimated that it did not report
as much as $250,000 in administrative costs to FERC for fiscal year 1999--a
year that was outside the period covered by our review.

Recovered

Of the $32 million in hydropower-program-related administrative costs
reported by federal agencies for fiscal years 1995 through 1998, some may
not be recovered. In 1997, hydropower licensees began to challenge certain
federal agencies' costs for which they had been billed. In a series of
appeals filed with FERC, the licensees asserted that FPA prohibits them from
being billed for certain costs, including costs not reported in the
appropriate fiscal year, agencies' legal costs, some overhead costs, and
costs whose accuracy or sufficiency of documentation they believe FERC did
not adequately review.

At the order of an administrative law judge, the Bureau of Indian Affairs
submitted additional information on its fiscal year 1995 costs (because its
costs were the only ones appealed for that fiscal year) and it and other
federal agencies, except FERC, submitted additional information on their
costs for fiscal years 1996 and 1997. Some of the agencies revised their
earlier submissions to FERC to either add or reduce the amounts reported.
For example, the Bureau of Indian Affairs withdrew about $3.9 million of its
initially reported $6.2 million in costs for fiscal years 1995 through 1997
because it could not adequately support the costs.

In March 2000, counsels for FERC and the appellant licensees negotiated a
settlement agreement on the basis of the data and documentation submitted by
the federal agencies and jointly proposed that the administrative law judge
forward it to FERC's five Commissioners for their consideration. The
proposed negotiated settlement would refund to the appellants 77 percent of
the final costs submitted by the Bureau of Indian Affairs for fiscal year
1995 and 77 percent of the final costs submitted by the Bureau and other
federal agencies for fiscal years 1996 and 1997 without identifying which
costs are being disallowed or why.

Recovered

One of the two reasons for the cost recovery problems that federal agencies
have experienced is that FERC has not provided clear guidance to the other
federal agencies on what costs should be reported.

In a 1986 report, we identified reporting deficiencies similar to those
discussed above and encouraged FERC to ensure the recovery of as many
hydropower-program-related administrative costs as possible.6 However, in
1987, despite the urging of hydropower industry groups and the Department of
the Interior, FERC declined to issue regulations or enter into a memorandum
of understanding with other federal agencies on cost recovery because it had
not determined that there was a need for formal guidance. Instead, FERC
issued one page of guidance to the agencies requesting them to (1) identify
their direct and indirect costs and (2) indicate whether these costs were
related to projects owned by nonmunicipal utilities or by municipal
utilities, which are charged differently.

According to FERC officials, FERC uses OMB Circular A-25 as guidance for
reporting its hydropower-program-related administrative costs, and the
officials believe that other federal agencies should do so as well. However,
FERC's one-page guidance does not mention the circular, and officials from
the other federal agencies told us that FERC has never advised them to use
it.

FERC officials told us that they have not advised the other federal agencies
to use Circular A-25 because they believe that FPA does not provide FERC
with the authority to require other federal agencies to use the circular or
any other particular standard for identifying and reporting recoverable
federal administrative costs under the act. Therefore, they believe it would
be inappropriate for them to provide the other federal agencies with
guidance on what costs they should report. Rather, FERC has accepted
whatever costs are reported by the other federal agencies as the basis for
annually billing licensees.

In response to the series of appeals by hydropower licensees, in 1998, FERC
asked OMB to provide the other federal agencies with direction on reporting
administrative costs and to require them to "certify" the accuracy of their
costs. However, in a 1999 meeting with officials from FERC and the other
agencies, OMB declined, noting that Circular A-25 and Federal Financial
Accounting Standard Number 4 call for full cost recovery to the extent
permitted by law.

According to Interior, Forest Service, and National Marine Fisheries Service
officials, following the 1999 meeting with FERC and OMB, they had intended
to propose guidance to FERC and OMB on recoverable administrative costs and
on reporting these costs under FPA but had not done so. However, on the
basis of our review, they drafted proposed guidance and, in March 2000,
forwarded it to FERC for comment. Licensees have also recommended guidance
for FERC to adopt. Whereas the guidance proposed by the agencies calls for
reporting all their costs to administer the hydropower program, the guidance
recommended by the licensees does not. FERC had not commented on either the
agencies' or the licensees' suggestions as of June 1, 2000.

Not Being Reported or Recovered

The other reason that the federal agencies have not fully recovered their
costs to administer the hydropower program is that they cannot accurately
account for these costs.

The responsibility for producing accurate and reliable financial information
on their costs to administer the hydropower program rests primarily with
each of the federal agencies individually, rather than with FERC or OMB. For
example, the Chief Financial Officers Act of 1990, as expanded by the
Government Management Reform Act of 1994, calls for strengthening financial
accountability and producing more reliable cost and performance information
on federal operations.7 However, weaknesses in many of the federal agencies'
financial management and reporting systems prevent them from accurately
accounting for their hydropower program costs. These weaknesses include the
inability to accurately report some costs and to adequately document some
costs that are reported.

For instance, the National Marine Fisheries Service told FERC that its costs
for fiscal year 1996 were "comparable" to its costs for fiscal year 1995 and
that FERC should bill licensees for this amount. However, the Service had no
system to identify the time its staff spent on hydropower-program-related
activities. Instead, in fiscal year 1997, it asked its staff to review their
personal daily appointment books for fiscal year 1996 to identify the
activities and estimate the time spent on each hydropower project.
Similarly, to identify the time its staff spent on
hydropower-program-related activities, Interior's Office of the Solicitor
(1) sampled a week's timesheets for each month in the fiscal year and
extrapolated the time to arrive at a monthly estimate for all FERC-related
activities and then (2) asked its staff to rely on their memories to
separate the time that they spent on hydropower-program-related activities
from the time that they spent on other FERC-related activities, such as
those related to oil or natural gas pipelines.

Hydropower Program Are Projected to Increase Substantially

The effects of the cost recovery problems experienced to date are likely to
be exacerbated by projected increases in federal costs to administer the
hydropower program. In total, tens of millions more dollars may not be
recovered over the next decade unless the problems are corrected.

One reason for these projected increases in federal administrative costs is
that the number of hydropower projects to be relicensed in the next
decade--including some whose original licenses have already expired--will
continue to grow. In addition, per-project federal administrative costs are
expected to rise because the proportion of very large projects to be
relicensed is growing. On average, the generating capacity of these very
large projects is five times greater than that of the projects whose
licenses expired in the last 8 fiscal years. Relicensing such large projects
will require more complex studies of their likely effects and more extensive
reviews by federal agencies of the licensees' applications.

Recent changes in the relicensing process that have increased federal
agencies' responsibilities are also expected to drive up their costs to
administer the hydropower program, according to agency officials. These
changes include (1) the new collaborative relicensing process--which
licensees are choosing with greater frequency--that combines many of the
earlier consultations and studies with the later environmental reviews and
thus requires earlier, more intensive, and more expensive involvement by
federal agencies and (2) more intensive monitoring requirements for
relicensed projects, as established in agreements reached through the
collaborative process. In addition, agency officials stated that a recent
court decision will require more substantial analyses to support the terms
and conditions that federal land and resource agencies wish to impose on
projects in order to protect or enhance resources.

Forest Service officials estimated that, with the projected increases in the
number and size of projects approaching their dates for relicensing and the
recent changes in the relicensing process, their annual costs to administer
the hydropower program could double or triple over the next decade, from
about $10 million to as much as $30 million a year. Interior and National
Marine Fisheries Service officials estimated that their average annual
hydropower-program-related costs over the next decade could increase by the
same or an even greater multiple for many of the same reasons.

For and Report Their Costs

Currently, FERC deposits licensees' reimbursements of other federal
agencies' administrative costs into the U.S. Treasury as a direct offset to
its annual appropriation. According to officials from several federal
agencies, allowing the agencies to retain licensees' reimbursements of their
hydropower program administrative costs would provide a strong incentive for
the agencies to accurately account for and report their full costs. The
officials noted that the agencies accurately account for similar
reimbursements in other programs that they administer when they are
authorized to retain reimbursements to cover the costs of providing
services. For example, according to the National Marine Fisheries Service,

"…the procedures [the National Marine Fisheries Service] follows for
FERC cost reporting are not the same as the procedures it follows for
`reimbursable' tasks. Reimbursable tasks are those for which we are
reimbursed in full for our costs for either services or products. These
reimbursable tasks are tracked through accounting which is kept separate by
task number, with daily and often hourly entries…."

However, agency officials also expressed concern that, if the Congress
authorized them to retain licensees' reimbursements of their administrative
costs, it might also offset their appropriations by the amounts that they
retained. They noted that the reimbursements might not keep pace with the
rising costs of relicensing activities. They also expressed concern that
this approach would reduce their current flexibility to shift funds between
hydropower relicensing activities and other activities funded out of the
same budget accounts. Moreover, as we have observed, such an approach to
financing agencies' activities raises issues of (1) congressional control
over accountability and priority-setting and (2) agencies' management of and
competition for limited federal resources.8 For instance, allowing federal
agencies to retain administrative costs reimbursements reduces the
Congress's ability to use these funds for other priorities.9

The federal government may forgo tens of millions of dollars over the next
10 years unless FERC provides clear guidance on the costs that are
recoverable and other federal agencies improve their financial management
and reporting systems to identify and accurately report these costs.

FERC has declined to provide clear guidance on cost recovery because it
believes that the need for such guidance has not been determined.
Conversely, we believe that the failure to recover about $12 million in
federal costs in just 4 fiscal years clearly establishes such a need. In
addition, FERC claims that FPA does not provide it with the authority to
require other federal agencies to use OMB Circular A-25 or any other
particular standard for identifying and reporting recoverable federal
administrative costs under the act. However, FPA does not prohibit FERC from
providing other federal agencies with guidance on what costs they should
report. Furthermore, other federal agencies have urged FERC to provide such
guidance and have even proposed guidance to FERC and OMB.

In addition, all federal agencies that incur costs to administer the
hydropower program must ensure that their financial management and reporting
systems accurately account for the costs that they report. However, the
Congress has options for addressing other federal agencies' administrative
cost recovery that it can also consider.

Because the federal government will likely be at risk of continuing to lose
millions of dollars a year until guidance is issued on which other federal
agencies' costs are eligible for recovery under the Federal Power Act, we
recommend that the Chairman and Members of the Federal Energy Regulatory
Commission take the following actions:

ï¿½ Issue guidance, developed in consultation with the Office of Management
and Budget and all affected federal agencies, that specifies what federal
administrative costs are eligible for recovery under the Federal Power Act
and how these costs are to be reported. This guidance should take into
account the Office of Management and Budget's Circular A-25-User Charges and
Federal Financial Accounting Standard Number 4.

ï¿½ Report the Commission's progress in developing this guidance in the
Commission's fiscal year 2002 budget submission to the Congress in February
2001.

ï¿½ Report annually to the Appropriations Committees of the Congress any
failures by federal agencies to report costs in accordance with the
Commission's guidance.

Defense and to the Chief of the Forest Service and the Administrator of the
Environmental Protection Agency

Because the federal government will likely also continue to be at risk of
losing millions of dollars a year until the agencies produce accurate,
timely, and reliable information on their hydropower-program-related
administrative costs, we recommend that the Secretaries of the Interior,
Commerce, and Defense and the Chief of the Forest Service and the
Administrator of the Environmental Protection Agency take the following
actions:

ï¿½ Ensure that their agencies' financial management and reporting systems are
capable of producing accurate, timely, and reliable information on
hydropower-program-related administrative costs eligible for recovery in
accordance with the Federal Energy Regulatory Commission's prospective new
guidance.

ï¿½ Report their agencies' progress in improving their systems in their fiscal
year 2002 budget submissions to the Congress in February 2001.

Should the Commission not report adequate progress in developing the
recommended guidance and/or federal agencies not report adequate progress in
improving their financial management and reporting systems in their fiscal
year 2002 budget submissions, the Congress may wish to consider directing
the Commission and/or the other agencies to accomplish the action(s) by a
certain date.

Additionally, the Congress may wish to consider whether to continue to fund
the costs incurred by federal agencies (other than the Commission) to
administer the hydropower program solely through the annual appropriations
process or to allow them to retain licensees' reimbursements to offset some
or all of these costs. In doing so, the Congress would need to weigh any
benefits that such a provision would provide against the loss of flexibility
over the use of the funds.

We provided a draft of this report to Chairman of FERC; the Secretaries of
the Interior, Commerce, and Defense; the Chief of the Forest Service; and
the Administrator of the Environmental Protection Agency for their review
and comment. FERC and the Department of the Interior generally agreed with
our findings, conclusions, and recommendations. However, FERC did not
indicate in its comments whether it would issue specific guidance
identifying which other federal agencies' costs are eligible for recovery
under FPA. Instead, it said it would (1) work with the other agencies to
clarify the technical requirements of OMB's Circular A-25 and Federal
Financial Accounting Standard Number 4 and explain how FERC uses them for
determining its own costs and (2) recommend to OMB that OMB convene an
interagency group or provide supplemental direction if this is necessary.
Federal agencies already have Circular A-25 and Federal Financial Standard
Number 4 available to them and, presumably, can currently call FERC staff
with questions. Moreover, OMB has already declined to provide additional
specific guidance beyond that contained in Circular A-25 and Federal
Financial Standard Number 4. Accordingly, the steps FERC proposes do not
appear to improve on the present situation, which has resulted in millions
of dollars in unrecovered costs. Both OMB Circular A-25 and Federal
Financial Standard Number 4 call for full cost recovery, but only to the
extent permitted by law. As long as FERC continues to decline to clarify
what costs are recoverable under FPA and how they are to be reported, we do
not believe the problems we have identified will be resolved. Because FPA
assigns the responsibility of fixing annual charges to FERC, not OMB or any
other entity, FERC is the agency in the best position to clarify the
ambiguities that have plagued federal hydropower program cost recovery
efforts. FERC's comments and our responses appear in appendix III.

Interior agreed with our report's conclusions and recommendations on FERC's
providing additional guidance but raised concerns about some matters
discussed in our draft report and made a number of technical suggestions,
which we incorporated where appropriate. These concerns and suggestions,
together with our responses to them, appear in appendix IV.

The Environmental Protection Agency and the Department of Defense's Corps of
Engineers told us they had no comments. We did not receive comments from the
Department of Agriculture's Forest Service or the Department of Commerce's
National Marine Fisheries Service in time for inclusion in our report.

We conducted our work from August 1999 through June 2000 in accordance with
generally accepted government auditing standards. Appendix II contains the
details of our scope and methodology.

We are sending copies of this report to Representative Norm Dicks, Ranking
Minority Member of the Subcommittee on Interior and Related Agencies, House
Committee on Appropriations; the Honorable James Hoecker, Chairman, Federal
Energy Regulatory Commission; the Honorable Bruce Babbitt, Secretary of the
Interior; the Honorable Mike Dombeck, Chief of the Forest Service; the
Honorable William M. Daley, Secretary of Commerce; the Honorable William S.
Cohen, Secretary of Defense; and the Honorable Carol Browner, Administrator,
EPA. We will also make copies available to others on request.

If you have any questions about this report, please call me or
Charles S. Cotton at (202) 512-3841. Key contributors to this report are
listed in appendix V.

Sincerely yours,

Jim Wells
Director, Energy, Resources
and Science Issues

FERC's Traditional Relicensing Process

Source: GAO's adaptation of data from FERC.

Objectives, Scope, and Methodology

Concerned about increasing costs and controversies related to federal
agencies' hydropower relicensing activities, the Chairman, Subcommittee on
Interior and Related Agencies, House Committee on Appropriations, asked us
to identify and assess significant issues related to nonfederally owned and
operated hydropower projects. In this report, we assess the status of
efforts to recover the costs incurred by federal agencies to administer the
hydropower program.

In conducting our work, we reviewed relevant provisions of the Federal Power
Act, as amended (FPA); the Federal Energy Regulatory Commission's (FERC)
implementing regulations, the Office of Management and Budget's (OMB)
Circular A-25, and Federal Financial Accounting Standard Number 4. We also
met and discussed this issue with OMB and Federal Accounting Standards
Advisory Board officials. In addition, we interviewed and obtained documents
from FERC headquarters officials, as well as from headquarters and field
officials in nine other federal agencies that incur hydropower program
costs. We also reviewed the cost data that these agencies filed with the
administrative law judge assigned to hear the licensees' challenges of the
administrative costs reported to FERC by certain agencies in fiscal years
1995, 1996, and 1997 and total costs reported in fiscal year 1998. In
addition, we discussed the appeals and the data filed with the judge with
counsels for FERC and the licensees. We did not, however, independently
verify the accuracy and completeness of these data or the weaknesses of the
accounting systems that may have led to inadequacies in them. We also did
not independently verify the reasonableness of the agencies' projections of
likely future increases in such costs. Our report does not address the
appropriateness of the federal agencies' expenditures but considers only the
adequacy of efforts by FERC and the other agencies to recover costs they
have incurred.

We attended a 3-day interagency training course on hydropower relicensing,
which included presentations by representatives of industry and
environmental groups, and a 4-day annual conference of the National
Hydropower Association, which was devoted in large part to relicensing
issues. In addition, we met with and obtained documents from participants in
various federal government, industry, and environmental groups, including
the Interagency Task Force on Hydropower, the Electrical Power Research
Institute, and the Hydropower Reform Coalition. We also visited six
hydropower projects in four western states (California, Idaho, Montana, and
Oregon) and discussed their operations and relicensing with project staff.
In addition, we spoke with representatives from FERC, other federal
agencies, states, environmental groups, and hydropower licensees about
relicensing issues related to several other projects that we did not visit
in these and other states.

We conducted our work between August 1999 and June 2000 in accordance with
generally accepted government auditing standards.

Comments From the Federal Energy Regulatory Commission

The following is GAO's comment on the Federal Energy Regulatory Commission's
letter dated June 14, 2000.

1. Federal agencies already have the OMB and Federal Financial Standard
Number 4 guidance documents available to them and, presumably, can currently
call FERC staff with questions. Moreover, OMB has already declined to
provide additional specific guidance beyond that contained in Circular A-25
and Federal Financial Standard Number 4. Accordingly, the steps FERC
proposes do not appear to improve on the present situation, which has
resulted in millions of dollars in unrecovered costs. Both OMB Circular A-25
and Federal Financial Standard Number 4 call for full cost recovery, but
only to the extent permitted by law. As long as FERC continues to decline to
clarify what costs are permitted to be recovered under FPA and how they are
to be reported, we do not believe the problems we have identified will be
resolved. Because FPA assigns the responsibility of fixing annual charges to
FERC, not OMB or any other entity, FERC is the agency in the best position
to clarify the ambiguities that have plagued federal hydropower program cost
recovery efforts.

Comments From the Department of the Interior

The following are GAO's comments on the Department of the Interior's letter
dated June 15, 2000.

1. We added clarifying language in our report to this effect.

2. We agree that such information, among other factors, may be useful to
consider for the purpose of making a determination on how best to fund the
hydropower program.

3. We revised our report to state explicitly that it does not address the
appropriateness of federal agencies' hydropower program expenditures but
considers only the adequacy of efforts by FERC and the other agencies to
recover the costs they have incurred.

4. About 600 of the 1,600 projects referred to by the Fish and Wildlife
Service are exempt from licensing under FPA largely because of their small
size, leaving about 1,000 licensed projects. We have clarified the language
in our report to make clear that our report is generally focused on the
licensed projects whose consideration results in the bulk of federal
expenditures.

5. Our reference to hydropower as a renewable source of energy is intended
as a narrow, descriptive one, based solely on its reliance on naturally
occurring rainfall for energy production, and is used without consideration
of any effects that projects might have on other resources or potential
alternative uses of those resources.

6. We incorporated this change.

7. We believe the statement adequately serves the limited purpose for which
it is included--providing background information on significant steps in the
relicensing process as described in the FERC Hydroelectric Project
Relicensing Handbook.

8. We added the information that agencies use FERC's environmental analyses
to determine conditions they should impose for protecting federal lands and
facilities.

9. We deleted this statement and made appropriate changes to other sections
of the report.

10. We did not intend to suggest that retained payments covering prior
years' administrative costs should be the only source of funding for the
agencies' subsequent hydropower program activities. Our report notes likely
increases in the agencies' hydropower program costs over the next decade,
and nothing would prevent the Congress from supplementing those retained
funds as it sees fit. Nonetheless, we modified our draft report to clarify
that the Congress may wish to consider the payments covering prior years'
administrative costs as the source of either some or all of the funding for
the agencies' hydropower activities. The Congress could then consider the
agencies' need and diligence in cost recovery as criteria for annual
appropriations.

11. The source of our data is FERC. Differences between the numbers may
relate to the inclusion or exclusion of exempted projects that may also be
scheduled for consideration (see comment 1). However, were unable to
determine the cause for the difference because the Bureau of Land Management
did not indicate the source of its data.

12. We added language to clarify the description of section 4(e).

GAO Contacts and Staff Acknowledgments

Jim Wells, (202) 512-3841

Charles S. Cotton, (202) 512-3841

In addition to those named above, Alan Dominicci, Leanne Flama, Richard P.
Johnson, Chester Joy, Jon Ludwigson, and George Senn made key contributions
to this report.

(141371)

Figure 1: Federal Agencies' Hydropower-Program-Related
Administrative Costs Reported to FERC, Fiscal
Years 1985-98 11
  

1. About 600 additional hydropower projects nationally are granted
exemptions from the federal licensing requirement, generally because of
their small generating capacity. Unless otherwise noted, the term "projects"
in this report refers to larger, licensed projects.

2. 52 Fed. Reg. 18265.

3. Managerial Cost Accounting Concepts and Standards for the Federal
Government: Statement of Federal Financial Accounting Standard Number 4,
Federal Accounting Standards Advisory Board (Washington D.C.: July 1995).

4. Assessment of Charges Under the Hydropower Licensing Program
(DOE/IG-0219, Sept. 18, 1985).

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

6. Energy Regulation: More Effort Needed to Recover Costs and Increase
Hydropower User Charges (GAO/RCED-87-12 , Nov. 25, 1986).

7. See High Risk Series: An Update (GAO/HR-99-1 , Jan. 1999).

8. Federal User Fees: Budgetary Treatment, Status, and Emerging Management
Issues (GAO/AIMD-98-11 , Dec. 19, 1997).

9. Forest Service: Barriers to and Opportunities for Generating Revenue
(GAO/RCED-99-81 , Feb. 10, 1999).
*** End of document. ***