U.S. Forest Service: Fee System for Rights-of-Way Program Needs Revision
(Letter Report, 04/22/96, GAO/RCED-96-84).

Pursuant to a congressional request, GAO reviewed the Forest Service's
issuance of rights-of-way on national forest lands, focusing on: (1)
whether the fees collected for rights-of-way reflect fair market value;
(2) how Forest Service fees compare with fees charged by private
landowners; and (3) the changes needed to ensure that Forest Service
fees reflect fair market value.

GAO found that: (1) Forest Service fees for rights-of-way for oil and
gas pipelines, power lines, and communications lines are typically below
fair market value; (2) Forest Service fees for rights-of-way are
generally less than those charged by nonfederal landowners; (3) options
available to the Forest Service for revising its fee determination
system include using a new fee schedule based on recent appraisals and
local market data, using a new fee schedule with the flexibility to
disregard it when its fees are below fair market value, and using
site-specific appraisals only; and (4) many rights-of-way users would be
willing to pay fair market value for Forest Service rights-of-ways if
the Forest Service would improve the administration of its rights-of-way
program.

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

 REPORTNUM:  RCED-96-84
     TITLE:  U.S. Forest Service: Fee System for Rights-of-Way Program 
             Needs Revision
      DATE:  04/22/96
   SUBJECT:  Forest management
             National forests
             Forestry legislation
             National parks
             Public utilities
             User fees
             Federal property management
             Land use agreements
             Fair market value
             Property rights procurement

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


Report to the Chairman, Subcommittee on Oversight of Government
Management and the District of Columbia, Committee on Governmental
Affairs, U.S.  Senate

April 1996

U.S.  FOREST SERVICE - FEE SYSTEM
FOR RIGHTS-OF-WAY PROGRAM NEEDS
REVISION

GAO/RCED-96-84

Forest Service's Fees for Rights-of-Way

(140332)


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

  BLM - Bureau of Land Management
  BPA - Bonneville Power Administration
  FLPMA - Federal Land Policy and Management Act
  GAO - General Accounting Office
  MLA - Mineral Leasing Act
  OMB - Office of Management and Budget

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


B-271198

April 22, 1996

The Honorable William S.  Cohen
Chairman, Subcommittee on
 Oversight of Government Management
 and the District of Columbia
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

The U.S.  Department of Agriculture's Forest Service authorizes,
through special use permits, a variety of rights-of-way on national
forest lands.  These rights-of-way include such commercial uses as
oil and gas pipelines, power lines, and telephone and fiber-optic
lines as well as such public and private uses as state roads and
private driveways. 

Concerned about whether the Forest Service is receiving fair market
value for the lands being used for rights-of-way, as required by the
Federal Land Policy and Management Act of 1976, the Mineral Leasing
Act, and the Office of Management and Budget's Circular A-25, you
asked us to review several issues in connection with how the Forest
Service is administering these lands.  Specifically, you asked (1)
whether the fees currently charged to users of Forest
Service-authorized rights-of-way for oil and gas pipelines, power
lines, and communications lines (such as telephone and fiber-optic
lines) reflect fair market value; (2) how the Forest Service's fees
compare with the fees charged by nonfederal landowners; and (3) what,
if any, changes are needed to the Forest Service's fee system to
ensure that the fees reflect fair market value. 


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

The Forest Service's current fees for rights-of-way for oil and gas
pipelines, power lines, and communications lines frequently do not
reflect fair market value.  In 1986, the Forest Service prepared to
implement a fee schedule based on market data.  However, because of
concerns by the industry and the agency's management that the fees
were too high, the fee schedule's rates were reduced.  The fee
schedule that was eventually implemented, according to agency
officials, did not consider the factors critical to determining fair
market value.  As a result, the fees in the schedule represented the
low end of the market.  Agency officials acknowledge that current
rates are too low.  They estimate that in many cases--particularly in
high-value areas near major cities--the Forest Service may be
charging as little as 10 percent of the fair market value. 

Nonfederal landowners frequently charge higher fees than the Forest
Service for rights-of-way.  While some states and localities use a
fee schedule, most nonfederal entities we spoke with use market-based
techniques--appraisals and negotiations--to determine the fees to be
charged for rights-of-way.  As a result, their fees are frequently
higher than those of the Forest Service.  For example, in 1995 a
company running a fiber-optic cable in Colorado paid a one-time fee
of $791 per acre for a right-of-way on state land.  If this
right-of-way had been on Forest Service land, the annual fee would
have been $11.48 per acre--an amount equivalent to a one-time
lump-sum payment of $202 per acre.  Thus, the Forest Service's fee is
less than 30 percent of the state of Colorado's fee for the
right-of-way in this example.  We found many similar examples on
state and private lands in the vicinity of the national forests we
visited. 

To meet the requirements of the Federal Land Policy and Management
Act, Mineral Leasing Act, and Office of Management and Budget's
Circular A-25, the Forest Service needs to revise its fee system to
reflect fair market value by basing the system on market-based
valuations of the land being used.  These valuations would be made
using appraisals and market surveys.  Industry officials we spoke
with indicated that the Forest Service's current fees are generally
lower than what the industry pays nonfederal landowners.  The
officials stated that they are not opposed to paying higher rates to
the Forest Service.  However, they indicated that in order to charge
market rates, the Forest Service needs to administer rights-of-way by
using practices commonly found in the marketplace, such as granting
authorizations for rights-of-way with an easement instead of a
permit.  Forest Service officials acknowledge that they could do
several things to update or improve their rights-of-way program and
make it more market-like as well as more efficient to administer. 


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

Through special use permits, the Forest Service authorizes a variety
of rights-of-way across the lands it administers.  These include
commercial uses such as pipelines and power lines and noncommercial
uses such as driveways, roads, and trails.  In total, there are about
13,000 permits for all rights-of-way.  This report focuses on three
commercial uses--oil and gas pipelines, power lines, and
communications lines.  In 1995, there were about 5,600 permits for
these uses, which generated about $2.2 million in fees to the
government.  According to federal law, 25 percent of the fees
generated from these permits is returned to the states where they
were generated.\1 The remaining 75 percent goes to the U.S. 
Treasury. 

The Forest Service administers about 191.6 million acres of
land--roughly the size of California, Oregon, and Washington
combined.  The networks of oil and gas pipelines, power lines, and
communications lines that cross the nation frequently go through
national forest lands.  Where these lands are located near population
centers, the demand for land is higher, which thereby increases the
value of a right-of-way. 

In order to best serve their customers, businesses that operate oil
and gas pipelines, power lines, and communications lines frequently
need to gain access to many miles of land in strips usually 20 to 50
feet wide.  These companies negotiate with numerous landowners--both
public and private--to gain rights-of-way across their lands. 

The Federal Land Policy and Management Act (FLPMA) of 1976 and the
Mineral Leasing Act (MLA) generally require federal agencies to
obtain fair market value for the use of federal lands for
rights-of-way.  In addition, title V of the Independent Offices
Appropriation Act of 1952, as amended in 1982, requires the federal
government to levy fair fees for the use of its services or things of
value.  Under the Office of Management and Budget's (OMB) Circular
A-25, which implements the act, the agencies are normally to
establish user fees on the basis of market prices.  While there are
exceptions to this practice, they are generally reserved for federal,
state, and local government agencies and nonprofit organizations. 


--------------------
\1 Specifically, 16 U.S.C.  500 requires that 25 percent of the fees
generated from each forest be paid to the state in which the forest
is situated for the benefit of public schools and public roads. 


   FEES FOR RIGHTS-OF-WAY
   FREQUENTLY DO NOT REFLECT FAIR
   MARKET VALUE
------------------------------------------------------------ Letter :3

The Forest Service's current fees for commercial rights-of-way for
oil and gas pipelines, power lines, and communications lines
frequently do not reflect fair market value.  Before 1986, the Forest
Service used a variety of techniques to establish fees for
rights-of-way.  These fees were based on appraisals, negotiations, a
small percentage of the permittees' investment in the land, or a
small percentage of the estimated value of the land.  However, in
1986 the Forest Service implemented a fee schedule to address the
problems that the agency was having in administering the fees for
rights-of-way.  Agency officials told us that the 1986 fee schedule
reflected land values representing the low end of the market.  As a
result, when the fee schedule was implemented, the fees for
rights-of-way near some urban areas were significantly reduced from
pre-1986 levels. 

Before 1986, the Forest Service did not have a consistent system to
establish fees for oil and gas pipelines, power lines, or
communications lines.  The agency's field staff used different
methods for developing the fees for rights-of-way.  Some used a
percentage of the estimated value of the land or a percentage of the
permittees' investment in the land, while others used appraisals and
negotiations with the permittees to set the fees.  However, in
addition to being inconsistent, these practices resulted in
unpredictable fees and appraisals that were subject to an appeals
process.  At that time, agency officials thought that moving to a fee
schedule based on fair market value would resolve these problems. 

To develop a fee schedule based on fair market value, Forest Service
officials, as well as officials from the Department of the Interior's
Bureau of Land Management (BLM), collected market data on raw land
values throughout the country.  On the basis of these data, the
Forest Service and BLM produced a fee schedule in 1986 which charged
annual per acre fees that were based on the location and type of the
right-of-way.  The rates in the fee schedule were indexed to the
Implicit Price Deflator to account for future inflation.\2 However,
according to Forest Service officials, the agency's management and
the industry viewed the rates as being too high.  As a result, the
fees in the 1986 schedule were reduced by 20 percent for oil and gas
pipelines and 30 percent for power lines and communications lines. 

Before the reductions, the fees represented average raw land values
for federal lands.  These values did not consider several factors
that are critical to establishing land values that reflect fair
market value.  Specifically, they did not reflect what the land was
being used for, the "highest and best" use of the land, or the values
of any urban uses.  For example, if these factors are not considered,
land located near a large metropolitan area, which might otherwise be
used for a residential housing development, would be valued as if it
were being used for livestock grazing--a use that would result in a
considerably lesser value.  As such, according to Forest Service
officials, the data used to generate the land values used in the fee
system represented the "bottom of the market" and did not reflect
fair market value.  Nonetheless, the fee schedule established in 1986
is the basis for current fees. 

The Forest Service officials in the agency's Lands Division, which is
responsible for the rights-of-way program at a national level,
estimated that many of the current fees for rights-of-way may be only
about 10 percent of the fair market value--particularly for lands
near large urban areas.  However, agency officials acknowledged that
this estimate is based on their professional judgment and program
experience and that there are no national data to support it. 

Because the fee schedule did not reflect several critical factors for
determining fair market value, the fees for many rights-of-way,
especially in forests near urban areas, were reduced when the fee
schedule was implemented in 1986.  For example, in the San Bernardino
National Forest near Los Angeles, the annual fee for a fiber-optic
cable was $465.40 per acre before the fee schedule was implemented
and $11.16 afterwards.  In the same forest, the annual fee for a
power line was $72.51 per acre before the fee schedule and $8.97
afterwards.  While these examples are among the most notable, the
fees at forests that were not near urban areas frequently were also
reduced.  For example, in the Lolo National Forest in Montana, the
fees for a communications line right-of-way went from $19.88 per acre
to $17.23 per acre.  Overall, at four of the six national forests
where we collected detailed information, we found examples of fees
that were reduced when the agency moved to a fee schedule in 1986. 

The Forest Service and BLM use the same fee schedule for
rights-of-way.  In March 1995, the Department of the Interior's
Inspector General issued a report which found that BLM's fee system
did not collect fair market value for rights-of-way.\3 In the report,
the Inspector General estimated that BLM could be losing as much as
$49 million (net present value\4 ) during the terms of the current
rights-of-way by charging less than fair market value.  At the time
of the report, the agency had authorized 30,600 rights-of-way subject
to rental payments. 


--------------------
\2 The Implicit Price Deflator is an index of inflation produced by
the Bureau of Economic Analysis within the Department of Commerce. 

\3 Right-of-Way Grants, Bureau of Land Management, U.S.  Department
of the Interior, Office of Inspector General (95-I-747, Mar.  31,
1995). 

\4 Net present value analysis is a technique that allows meaningful
comparison between a one-time payment and a series of annual
payments.  In general, revenues to be received in the future are
worth less than equal revenues on hand today because money on hand
can be invested to yield a higher amount in the future. 


   FOREST SERVICE'S FEES ARE
   FREQUENTLY LESS THAN THOSE
   CHARGED BY NONFEDERAL
   LANDOWNERS
------------------------------------------------------------ Letter :4

To determine how the Forest Service's fees compare with those charged
by nonfederal landowners, we collected and analyzed information on
charges for rights-of-way by states and private landowners.  We found
that state and private landowners frequently charge higher fees than
the Forest Service.  However, because our analysis is based on a
judgmental sample of forests, it is important to note that our
findings may not be representative of the situation for the nation as
a whole. 

To compare the Forest Service's fees with those charged by nonfederal
landowners, we collected available data on fees charged by nonfederal
landowners in the same states as the forests that we visited.  These
forests included the San Bernardino National Forest and Angeles
National Forest in California, the Arapaho/Roosevelt National Forest
in Colorado, the Lolo National Forest in Montana, the
Washington/Jefferson National Forest in Virginia, and the Mount
Baker/Snoqualmie National Forest in Washington.  Our objective was to
include forests from different parts of the country, some of which
are near urban areas and some of which are in rural areas. 

Since most nonfederal landowners charge a one-time fee either in
perpetuity or for an extended term, such as 30 years, we used a net
present value analysis to convert the Forest Service's annual fees to
an equivalent one-time fee, which could then be compared with the
one-time fee charged by nonfederal landowners.\5 Table 1 compares the
Forest Service's fees at the six forests we sampled with those
charged by nonfederal landowners in the general vicinity of that
forest. 




                                         Table 1
                         
                         Comparison of the Forest Service's Fees
                             With Fees Charged by Nonfederal
                                        Landowners

                                                                            Difference
                                                                            between
                                                              Net present   nonfederal
                                                Forest        value of      fees and
                Type of right-  Nonfederal      Service's     Forest        Forest
State           of-way (year    landowner's     comparable    Service's     Service's
(landowner)     granted)        one-time cost   annual fee    fee           fees
--------------  --------------  --------------  ------------  ------------  -------------
California      Natural gas     $130,726        $32.80 per    $814 per      $129,912
(state)         pipeline        per acre        acre          acre          per acre
                (1995)

Virginia        Natural gas     $2,406 per      $23.55 per    $584 per      $1,822 per
(private)       pipeline        acre            acre          acre          acre
                (1991)

Virginia        Natural gas     $1,925 per      $23.55 per    $584 per      $1,341 per
(private)       pipeline        acre            acre          acre          acre
                (1991)

Virginia        Natural gas     $1,906 per      $23.55 per    $584 per      $1,322 per
(private)       pipeline        acre            acre          acre          acre
                (1991)

Virginia        Natural gas     $1,900 per      $23.55 per    $584 per      $1,316 per
(private)       pipeline        acre            acre          acre          acre
                (1991)

Colorado\a      Power line      $1,322 per      $5.50 per     $97 per acre  $1,225 per
(state)         (1993)          acre\           acre                        acre

California      Communications  $1,964 per      $34.46 per    $855 per      $1,109 per
(private)       line (1995)     acre            acre          acre          acre

Virginia        Power line      $1,400 per      $22.01 per    $546 per      $854 per acre
(private)       (1993)          acre            acre          acre

Colorado\a      Communications  $791 per acre   $11.48 per    $202 per      $589 per acre
(state)         line (1995)                     acre          acre

Colorado\a      Natural gas     $793 per acre\  $12.94 per    $228 per      $565 per acre
(state)         pipeline                        acre          acre
                (1994)

Montana         Communications  $708 per acre   $16.97 per    $421 per      $287 per acre
(private)       line (1994)                     acre          acre

Virginia        Power line      $775 per acre   $22.97 per    $570 per      $205 per acre
(private)       (1983)                          acre          acre

Colorado\a      Communications  $529 per acre\  $22.97 per    $404 per      $125 per acre
(state)         line (1995)                     acre          acre

Virginia        Power line      $650 per acre   $22.01 per    $546 per      $104 per acre
(private)       (1993)                          acre          acre

Virginia        Power line      $650 per acre   $22.01 per    $546 per      $104 per acre
(private)       (1993)                          acre          acre

Montana         Communications  $413 per acre   $16.08 per    $399 per      $14 per acre
(state)         line (1992)                     acre          acre

Montana\        Communications  $410 per acre   $16.97 per    $421 per      ($11) per
(state)         line (1994)                     acre          acre          acre
-----------------------------------------------------------------------------------------
\a The terms of these rights-of-way are 30 years.  All the other
rights-of-way in the table have been acquired in perpetuity. 

Source:  GAO's analysis of data collected from nonfederal landowners. 

As table 1 shows, the Forest Service's fees are frequently less than
fees charged by nonfederal landowners for similar rights-of-way. 
This was the case in 16 of the 17 examples we found during our
review.  In over half (10) of the examples, the Forest Service's fees
were over $500 per acre less than the fees charged by nonfederal
landowners.  For example, in 1993 a power company negotiated with a
private landowner in Virginia to obtain a right-of-way to run a power
line.  The power company agreed to pay a one-time fee of $42,280 for
30.2 acres of land, or $1,400 per acre.  The Forest Service's annual
fee in 1993 for that part of Virginia was $22.01 per acre.  Our use
of net present value techniques showed that the right-of-way
operator's annual payment to the Forest Service of $22.01 per acre
was equivalent to a one-time payment of $546 per acre.  Thus, the
Forest Service's one-time fee was $854 per acre less than the fee
charged by the private landowner.  Another example from the table
shows that in 1995, a natural gas pipeline in California paid a
one-time fee of $130,726 per acre for a right-of-way on state land. 
As the table shows, the Forest Service's comparable fee is over
$129,000 less than the state of California's fee.  While this
difference is atypical of other examples we found, it nonetheless
demonstrates how a unique parcel of land can have a considerable
value.  Furthermore, it is an example of how difficult it is to
design a fee schedule that can reflect the fair market value of all
lands managed by the Forest Service. 

In addition to collecting comparable data on fees in the same states
as the six national forests we visited, we also gathered examples of
the rates paid to state and private landowners by the Bonneville
Power Administration (BPA)--an electric utility operating in the
northwestern United States.  BPA runs power lines across hundreds of
miles of land owned by the federal government, states, and private
entities.  We included BPA in our review because during the course of
our work, we learned that this utility had extensive data on the
rates it was paying for rights-of-way.  Therefore, it was a good
source of data on fees.  The data in table 2 are based on a sample
from a database of fees that BPA paid to state and private
landowners.\6 The table compares the rates BPA paid to state and
private owners with the rates charged by the Forest Service in that
area. 



                                         Table 2
                         
                         Comparison of the Forest Service's Fees
                           With Fees Charged to the Bonneville
                            Power Administration by State and
                                    Private Landowners

                                              Forest
                                              Service's
                                              comparable                    Difference
                                              annual fee in   Net present   between BPA's
                Year power                    year right-     value of      fees and
                line right-   BPA's lump sum  of-way was      Forest        Forest
State           of-way was    payment per     granted or      Service's     Service's
(landowner)     granted       acre            1987            fee           fees
--------------  ------------  --------------  --------------  ------------  -------------
Washington      1988          $8,141 per      $13.84 per      $343 per      $7,798 per
(private)                     acre            acre (1988)     acre          acre

Washington      1988          $3,400 per      $13.84 per      $343 per      $3,057 per
(private)                     acre            acre (1988)     acre          acre

Washington      1988          $3,209 per      $13.84 per      $343 per      $2,866 per
(private)                     acre            acre (1988)     acre          acre

Washington      1988          $2,400 per      $13.84 per      $343 per      $2,057 per
(private)                     acre            acre (1988)     acre          acre

Montana         1990          $2,208 per      $14.88 per      $369 per      $1,839 per
(private)                     acre            acre (1990)     acre          acre

Montana         1984          $1,712 per      $13.46 per      $334 per      $1,378 per
(state)                       acre\a          acre (1987)     acre          acre

Montana         1984          $1,114 per      $13.46 per      $334 per      $780 per acre
(private)                     acre\a          acre (1987)     acre

Washington      1988          $1,000 per      $13.84 per      $343 per      $657 per acre
(private)                     acre            acre (1988)     acre

Washington      1988          $750 per acre   $13.84 per      $343 per      $407 per acre
(private)                                     acre (1988)     acre

Montana         1983          $681 per        $13.46 per      $334 per      $347 per acre
(private)                     acre\a          acre (1987)     acre

Washington      1989          $675 per acre   $14.24 per      $353 per      $322 per acre
(private)                                     acre (1989)     acre

Montana         1982\         $397 per        $13.46 per      $334 per      $63 per acre
(private)                     acre\a          acre (1987)     acre

Montana         1984\         $229 per        $13.46 per      $334 per      ($105) per
(state)                       acre\a          acre (1987)     acre          acre

Montana         1982\         $229 per        $13.46 per      $334 per      ($105) per
(private)                     acre\a          acre (1987)     acre          acre
-----------------------------------------------------------------------------------------
\a For comparison purposes, these payments were converted to 1987
dollars using the gross domestic product Implicit Price Deflator. 

Source:  GAO's analysis of BPA's data. 

As table 2 shows, in 12 out of 14 examples, the fees charged by
nonfederal landowners were higher than those charged by the Forest
Service and in most cases were significantly higher--$100 or more per
acre.  In 6 of the 14 examples, the fees charged by nonfederal
landowners were over $1,000 per acre higher than the fees charged by
the Forest Service in the area.  For example, in 1990 BPA negotiated
with a private landowner in Montana to gain a right-of-way for a
power line.  BPA and the landowner agreed to a one-time payment of
$11,106 for 5.03 acres of land, or about $2,208 per acre.  In
comparison, in 1990 the Forest Service's fee schedule produced an
annual fee of $14.88 per acre for land located in the same county as
the private land.  Our use of net present value techniques showed
that the annual payment received by the Forest Service of $14.88 per
acre was equivalent to a one-time payment of $369 per acre.  Thus,
the Forest Service's one-time fee was $1,839 per acre less than the
fee charged by the private landowner. 


--------------------
\5 In order to compute the net present value of future payments to
the Forest Service, we deflated future payments by 4.2 percent per
year.  We obtained this number by subtracting the expected inflation
from the 30-year government bond rate.  As of March 21, 1996, the
30-year government bond rate was 6.65 percent, and the WEFA Group's
forecast for inflation was 2.45 percent.  (The WEFA Group is a
commonly cited private economic forecasting organization that
produces estimates of the long-term economic outlook, including the
expected inflation.)

\6 We reviewed 23 rights-of-ways from BPA's database.  The data from
Montana were based on a random sample of over 190 rights-of-way in
that state.  The data from Washington included rights-of-way from one
of BPA's most recent lines.  For presentation purposes, we used only
14 of the examples in table 2.  The remaining nine examples are
similar to those that are included in the table. 


   FOREST SERVICE'S FEE SYSTEM
   NEEDS REVISION
------------------------------------------------------------ Letter :5

In order to meet the requirements of FLPMA, MLA, and OMB Circular
A-25, the Forest Service needs to revise and update its current fee
system to establish fees that more closely reflect fair market value. 
The way to accomplish this task is to develop a system that is based
on data that reflect current land values.  However, each of the
several available options for developing such a system has costs and
benefits that need to be considered.  Many of the industry
representatives we spoke with acknowledged that nonfederal landowners
generally charge higher fees than the Forest Service.  Furthermore,
these representatives indicated that they would be willing to pay
higher market-based fees if the Forest Service improves its
administration of the program by using more market-like business
practices. 

Both the industry representatives and Forest Service officials
suggested several changes that, if implemented, could improve the
efficiency of the program for both the Forest Service and the
industry. 


      OPTIONS AVAILABLE TO REVISE
      THE FEE SYSTEM
---------------------------------------------------------- Letter :5.1

The Forest Service has several options available to revise its fee
system for rights-of-way to reflect fair market value.  Among them
are three basic options:  (1) develop a new fee schedule based on
recent appraisals and local market data; (2) develop a new fee
schedule, as noted above, but allow agency staff the alternative of
obtaining site-specific appraisals when the fee schedule results in
fees that do not adequately reflect the fair market value of a
right-of-way; or (3) eliminate the fee schedule and establish fees
for each individual right-of-way based on a site-specific appraisal
or local market data. 

The first option involves developing a new fee schedule based on
recent appraisals and local market data.  This option would include
performing some site-specific appraisals of Forest Service
rights-of-way and developing an inventory of the rates charged by
nonfederal landowners for various types of rights-of-way in the area. 
These data would be used to formulate a new, more up-to-date fee
schedule that would set annual fees for identified areas within a
forest.  The fee schedule would be used in the same way that the
current schedule is used.  In this way, the Forest Service could, for
the most part, charge annual fees that broadly reflect the fair
market value of a right-of-way for an area. 

The advantage of having a fee schedule, and one of the reasons the
agency originally decided to use a fee schedule, is that it is both
easy to use and generates fees that are consistent and predictable
for the industry.  The disadvantage of a fee schedule is that it does
not take into account the unique characteristics that may affect the
value of a particular parcel of land.  Therefore, instances may arise
when a fee schedule will charge fees that are significantly different
from fair market value--as our analysis has shown.  Furthermore,
performing appraisals and collecting market data to develop a new fee
schedule will cost the agency time and money.  However, these
additional costs may be offset by the additional revenue that would
be generated from the increased fees.  Another disadvantage of using
a fee schedule is that it carries the administrative burden and cost
of having to bill and collect fees every year. 

A second option available to the Forest Service is a variation of the
first option.  It too would involve developing a new fee schedule
based on recent appraisals and market data.  However, under this
approach, the fees in the schedule would be used as minimum fees. 
When it appears that the fees from this schedule do not properly
value a right-of-way, the agency would be permitted to obtain an
individual site appraisal to determine the fair market value of the
site.  The fee would then be based on the appraisal instead of the
fee in the schedule. 

This option would offer the ease of use provided by a fee schedule
combined with an accounting of the unique characteristics of
individual parcels of land as provided for in appraisals.  If the
agency decided to use this option in developing a new fee system, it
would have to develop meaningful criteria for when field staff should
seek an appraisal.  Otherwise, agency field staff may not seek to
obtain appraisals when they are justified.  For example, the Forest
Service's current fee schedule contains a provision that permits
Forest Service field staff to obtain appraisals.  However, basing a
fee on an appraisal can only occur when fair market value is 10 times
greater than the fee from the fee schedule.  This "10-times" rule is
viewed by Forest Service officials in headquarters and in the field
as being too high and, as a result, serves as a disincentive to
obtaining appraisals.  In fact, Forest Service headquarters and field
staff could recall only one occasion in the past 10 years when this
10-times rule was used. 

A third option available to the Forest Service is to eliminate the
fee schedule and establish fees for each individual right-of-way
based on a site-specific appraisal or local market data.  Appraisals
are a technique commonly used in the marketplace for determining fair
market value.  By performing site-specific appraisals, the Forest
Service could charge fees reflective of the fair market value for
each individual permit.  The fees could also be based on local market
data.  This method would be the most appropriate when agency staff
are familiar with the fees being charged for nonfederal lands or when
recent appraisal data are available from nearby lands. 

The obvious advantage of obtaining site-specific appraisals is that
the practice would result in fees that would accurately reflect the
fair market value for each individual permit throughout the Forest
Service.  As such, it would meet the requirements of FLPMA, MLA, and
OMB Circular A-25.  Like the other options, the downside of using
appraisals is that they could be costly and/or time-consuming and
could likely be subject to appeals because of their inherent
subjectivity.  In addition, this approach could be more difficult to
administer than a fee schedule because of the need to perform
appraisals on thousands of right-of-way permits across the nation. 
However, to mitigate this burden, the agency could require the users
of rights-of-way to pay for any needed appraisals--something the
industry representatives we spoke to agreed with.\7


--------------------
\7 In addition to dozens of individual users of rights-of-way, the
primary industry group we talked to during the course of our work was
the Western Utility Group.  This organization represents over 25
major companies that operate oil and gas pipelines, power lines, and
telephone and fiber-optic lines.  These companies represent about 75
percent of the energy and communications business in 11 western
states.  About 74 percent of all the land managed by the Forest
Service is within these 11 western states.  For a list of member
organizations of the Western Utility Group, see app.  I. 


      INDUSTRY NOT OPPOSED TO
      HIGHER FEES IF THE PROGRAM'S
      ADMINISTRATION IS IMPROVED
---------------------------------------------------------- Letter :5.2

Industry officials we talked to representing a large segment of the
users of rights-of-way indicated that, from their perspective, the
value of rights-of-way on Forest Service lands is generally less than
the value of similar nonfederal lands because of the administrative
problems the prospective permittees may encounter in obtaining Forest
Service permits.  However, most of the industry representatives we
spoke with told us that if the Forest Service improves its
administration of the rights-of-way program by using more market-like
administrative practices, they would be willing to pay fair market
value for rights-of-way on Forest Service lands. 

While revising its fee system, the Forest Service can do several
things to improve the administration of permits for rights-of-way. 
These include (1) using a more market-like instrument, such as an
easement instead of a permit, to authorize rights-of-way; (2) billing
less frequently or one time over the term of an authorization instead
of annually; (3) providing consolidated billing for operators that
have more than one right-of-way permit in a forest or region; and (4)
making more timely decisions when processing new authorizations. 
These improvements would both reduce the agency's cost of
administering rights-of-way and bring about the use of industry
practices commonly found in the market.  The Forest Service has the
authority to make most of these changes.  However, MLA requires
annual payments for rights-of-way for oil and gas pipelines.  Thus,
changing fee collection from an annual payment to a one-time payment
would require legislative action from the Congress. 

Instead of employing special use permits to grant right-of-way
authorizations, one improvement the Forest Service could make is to
grant authorizations using an instrument, such as an easement, that
is more commonly found in the market.  Special use permits convey
rights that are similar to those of easements but not equal to them. 
Special use permits are revocable.  In other words, during the term
of a permit, if the agency decides that a right-of-way is no longer
consistent with management's goals for an area of a forest, the
agency can revoke the permit and require the operator to remove his
investment in the land and leave.  Because of this situation, banks
do not recognize a permit as granting a value in the land equivalent
to that granted by an easement, which is not revocable but can be
terminated if the operator breaches the terms and conditions of the
easement.  The constraint on special use permits affects the users of
rights-of-way when they are trying to obtain financing for a project. 
With a permit, the permittee is also at risk if the Forest Service
decides to trade or exchange the land that the right-of-way crosses. 
In such instances, the permittee must renegotiate a right-of-way with
the new landowner.  If the Forest Service is going to revise its fee
system to reflect fair market value, then the agency also needs a
comparable instrument that conveys rights similar to those commonly
found in the marketplace.  This comparability could best be achieved
by issuing easements instead of permits.  Permits have been viewed by
agency officials as giving the Forest Service more flexibility
because it can terminate them if the use is no longer consistent with
management's objectives in a forest.  In practice, agency officials
indicated that rarely has this flexibility been used to revoke a
permit. 

Another improvement available to the agency in administering
rights-of-way is to revise its billing system to eliminate the annual
billing of permit fees.  Instead, the agency could bill only once for
the 20- or 30-year term of an authorization, or perhaps reduce
billing to every 5 or 10 years.  The agency has the authority to make
this change for power lines and communications lines, but it would
need to seek authority to do so for oil and gas pipelines.  In
addition, the agency can consolidate billing for operators that have
multiple permits within the same forest or region.  One-time billing
and consolidated billing would reduce costs to both the agency and
the permittee.  For example, the Forest Service estimates that it
costs the agency an average of about $40 to mail a bill and collect
payment for a permit.  Over the life of a 30-year permit, the
agency's costs would be $1,200.  With 5,600 rights-of-way permits for
oil and gas pipelines, power lines, and communications lines, the
potential savings for the program could be substantial--roughly $6.7
million ($1,200 x 5,600 permits) over a 30-year term.  (The potential
savings of $6.7 million has a net present value of about $3.9
million.) If the agency moved to a one-time payment, it would
substantially reduce the costs of processing bills in the future. 
These costs can be further reduced by consolidating billing for
multiple permits issued to the same operator within a forest or
region.  While the agency has made progress in consolidating some
bills into "master permits," industry officials indicated that there
remain more opportunities for consolidation.  Both one-time billing
and consolidated billing are commonly found in the marketplace, and
both are supported by industry representatives. 

Furthermore, moving to a one-time billing process has significant
cost-savings implications if and when the Forest Service attempts to
increase its fees to reflect fair market value.  Specifically, if the
Forest Service decides to move to site-specific appraisals to
establish fees, as described in the third option, the agency would
have to do thousands of appraisals to determine the fees for the
current permits.  As we noted, under current conditions, this
additional workload could be both costly and time-consuming. 
However, if the agency moved to a one-time billing process and based
its fees on site-specific appraisals, then the agency would need to
perform an appraisal on each permit only once over a 20- to 30-year
authorization period.  While the agency would spend more of its
resources on appraisals, agency officials indicated that the cost
savings of moving to one-time billing would more than cover the
additional appraisal costs.  Furthermore, the agency can largely
negate these costs by requiring the users to pay for any needed
appraisals.  The industry representatives that we spoke to had no
problem with paying for the necessary appraisals as long as the
agency also moved to easements and one-time billing. 

Another improvement to the agency's administration of rights-of-way
is to reduce the time the agency takes to reach a decision on whether
to approve a new right-of-way.  Industry representatives indicated
that it frequently takes months and occasionally years for the Forest
Service to reach a decision on whether to approve an application for
a new right-of-way permit.  Generally, delays in approving
applications are the result of a lack of agency staff to perform
environmental studies and inconsistent requirements among Forest
Service units.  Forest Service headquarters officials acknowledged
that applications for permits are not processed in a timely manner,
and they are now trying to identify opportunities for streamlining
the agency's practices to help address this issue.  It is their view
that the industry should assume a greater share of the costs of both
processing applications for new rights-of-way and administering
existing rights-of-way.  Industry representatives we spoke with
indicated a willingness to pay for application and administration
costs.  Both agency and industry representatives have been working
together to implement and resolve this issue. 


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

The Forest Service needs to update its current fees to fair market
value for rights-of-way used by operators of oil and gas pipelines,
power lines, and communications lines.  In most cases, nonfederal
landowners charge higher fees for similar rights-of-way.  In
attempting to arrive at fees based on fair market value, the agency
has several options.  Each of these options has a number of
advantages and disadvantages.  The initial costs of developing a new
fee system could be substantial because of the need to perform
appraisals and collect the market data needed to establish fair
market value.  These costs could be mitigated, and in some cases
negated, with some administrative improvements to the program.  Given
the tight budgets and resource constraints that all federal land
management agencies are experiencing, one option appears to be the
most advantageous--obtaining site-specific appraisals that are paid
for by the users of rights-of-way.  However, to implement this
option, a number of other changes would have to be made to the
program to make it more market-like and more efficient to administer. 


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

To meet the requirements of FLPMA, MLA, and OMB Circular A-25, we
recommend that the Secretary of Agriculture direct the Chief of the
Forest Service to develop a fee system that ensures that fair market
value is obtained from companies that have rights-of-way to operate
oil and gas pipelines, power lines, and communications lines across
Forest Service lands.  While there are a number of options available
to accomplish this goal, the option of establishing fees based on
local market data or site-specific appraisals paid for by the users
of rights-of-way appears to be the most attractive because it
collects fair market value for each right-of-way and also reduces the
agency's administrative costs. 

We also recommend that the Secretary improve the administration of
the program by (1) authorizing rights-of-way with a more market-like
instrument--specifically, easements; (2) billing once during the term
of an authorization or, at a minimum, reducing the frequency of the
billing cycle; and (3) consolidating the billing of multiple permits
issued to the same operator in a forest or region.  To the extent
that the agency needs additional authority to charge one-time fees,
we recommend that the Secretary seek that authority from the
Congress.  In addition, we also recommend that the Forest Service
continue its efforts to streamline its practices for processing
applications for right-of-way authorizations. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided a draft of this report to the Forest Service and the
Western Utility Group--an industry group representing a large number
of users of rights-of-way--for their review and comment.  We met with
officials from the Forest Service--including the Acting Director of
the Division of Lands--and with officials from the Western Utility
Group, including its Chairman.  Both the agency and the Western
Utility Group agreed with the factual content, conclusions, and
recommendations in the report.  While the Forest Service officials
agreed with the report's recommendations, they noted that the
recommendations should also include having the Forest Service (1)
look for ways to operate more efficiently and (2) manage the
rights-of-way program in a more business-like manner.  We are not
including these points because we believe they are already inherent
in our recommendations.  The Forest Service officials also stated
that the industry should assume a greater share of the costs of both
processing applications for new rights-of-way and administering
existing rights-of-way.  We have revised the report to reflect this
comment.  Officials from the Western Utility Group provided us with
some clarifications on technical issues, which have been included in
the report as appropriate.  They also noted that while they currently
pay nonfederal landowners higher fees for rights-of-way, it is their
view that they get more from these landowners than they do from the
Forest Service because nonfederal landowners (1) generally use
easements, instead of permits, to authorize rights-of-way and (2) are
more timely than the Forest Service in responding to requests for
rights-of-way. 


---------------------------------------------------------- Letter :8.1

We conducted our review from April 1995 through March 1996 in
accordance with generally accepted government auditing standards.  We
performed our work at Forest Service headquarters and field offices. 
We also contacted nonfederal landowners and representatives of
companies that operate oil and gas pipelines, power lines, and
communications lines on federal lands.  Appendix II contains further
details on our objectives, scope, and methodology. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the Secretary of Agriculture, the Chief of the U.S. 
Forest Service, and the Director of the Office of Management and
Budget.  We will also make copies available to others on request. 

Should you have questions about this report or need more information,
please call me at (202) 512-3841.  Major contributors to this report
are listed in appendix III. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy, Resources
 and Science Issues


MEMBERS OF THE WESTERN UTILITY
GROUP
=========================================================== Appendix I

Arizona Public Service Company
AT&T
Bonneville Power Administration
Idaho Power Company
Kern River Gas Transmission Company
Los Angeles Department of Water & Power
MCI Telecommunications Corporation
Montana Power Company
Nevada Power Company
Northwest Pipeline Company
Pacific Bell
Pacific Gas and Electric Company
Pacific Gas Transmission Company
PacifiCorp (Pacific Power/Utah Power)
Plains Electric Generation and Transmission Cooperative
Public Service Company of Colorado
Public Service Company of New Mexico
Puget Sound Power and Light Company
Salt River Project
San Diego Gas and Electric Company
Sierra Pacific Power Company
Southern California Edison Company
Sprint Communications Company, Inc.
The Gas Company
Tri-State G&T Association, Inc
US West
Washington Water Power Company
Western Area Power Administration


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II

We were asked by the Chairman, Subcommittee on Oversight of
Government Management and the District of Columbia, Senate Committee
on Governmental Affairs, to determine (1) whether the fees currently
charged to users of Forest Service rights-of-way that operate oil and
gas pipelines, power lines, and communications lines reflect fair
market value, (2) how the Forest Service's fees compare with fees
charged by nonfederal landowners, and (3) what, if any, changes are
needed to the Forest Service's fee system to ensure that fees reflect
fair market value. 

Our review included rights-of-way managed by the U.S.  Department of
Agriculture's Forest Service.  Our work addressed the major
commercial users of rights-of-way:  oil and gas pipelines, power
lines, and communications lines. 

To determine how the Forest Service establishes fees for
rights-of-way, we reviewed the laws and implementing regulations
governing rights-of-way.  Because the Forest Service and the Bureau
of Land Management (BLM) worked together to develop the joint 1986
fee schedule for rights-of-way, we reviewed the methods these
agencies used to develop the schedule.  However, we did not verify
the accuracy of the data or the computations used by the agencies in
developing this fee schedule. 

To determine whether the current federal fees reflect fair market
value, we reviewed applicable laws and regulations, along with the
Department of Agriculture's requirements for obtaining fair market
value on lands it administers.  We interviewed representatives of
nonfederal entities (states, counties, private companies, and private
landowners) to obtain information on commonly accepted techniques for
determining fair market value.  We also interviewed officials at
Forest Service headquarters and field locations.  We reviewed
rights-of-way in six national forests:  the Angeles National Forest
and the San Bernardino National Forest in California, the
Arapaho/Roosevelt National Forest in Colorado, the Lolo National
Forest in Montana, the Washington/Jefferson National Forest in
Virginia, and the Mount Baker/Snoqualmie National Forest in
Washington.  We selected these sites to obtain broad geographical
representation and to encompass a high volume of commercial
rights-of-way. 

To determine how federal fees compare with fees charged on nonfederal
land, we compared the fee determination methods used by the Forest
Service and BLM to those used by states, counties, private companies,
and private landowners.  For example, we interviewed state and county
officials responsible for rights-of-way agreements in California,
Colorado, Montana, Virginia, and Washington.  We also interviewed
commercial land managers who manage private lands in Montana and
Virginia.  Furthermore, we reviewed the Bonneville Power
Administration's (BPA) settlement records for rights-of-way in
Montana and Washington states.  In addition, state and county
officials, private land managers, and BPA administrators told us what
they charged and/or were charged for various types of rights-of-way
agreements.  Using net present value techniques, we compared these
fees with those charged by the federal government. 

In order to compute the net present value of future payments to the
Forest Service, we deflated future payments by 4.2 percent per year. 
We obtained this number by subtracting expected inflation from the
30-year government bond rate.  As of March 21, 1996, the 30-year
government bond rate was 6.65 percent, and the WEFA Group's forecast
for inflation was 2.45 percent.  (The WEFA Group is a commonly cited,
private economic forecasting organization that produces estimates of
the long-term economic outlook, including expected inflation.)

To obtain views on potential changes to the Forest Service's fee
schedule, we met with officials of the Western Utility Group.  This
organization represents over 25 major companies that operate oil and
gas pipelines, power lines, and communications lines.  These
companies represent about 75 percent of the energy and communications
business in 11 western states.  About 74 percent of all the land in
the Forest Service is within these 11 western states.  (For a list of
member organizations of the Western Utility Group, see app.  I.) In
addition, we interviewed private landowners and Forest Service
personnel in each of the states we visited.  Finally, we interviewed
several BLM field staff to obtain their viewpoints on the fee
schedule. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION WASHINGTON,
D.C. 

Cliff W.  Fowler
Ned H.  Woodward

DENVER REGIONAL OFFICE

Diane S.  Lund

SEATTLE REGIONAL OFFICE

Rodney R.  Conti

OFFICE OF THE CHIEF ECONOMIST

Joseph D.  Kile


*** End of document. ***