Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources (Chapter Report, 03/31/97, GAO/RCED-97-48).
Pursuant to a congressional request, GAO provided information on the:
(1) profiles of three power marketing administrations, including their
similarities and differences and their interactions with the agencies
that operate federal water projects; (2) general parameters of the
process by which federally owned assets can be sold; and (3) factors
that would have to be addressed in a divestiture of federal
hydroelectric assets, such as the relationship between power generation
and the other purposes of federal water projects.
GAO noted that: (1) while the Southeastern, Southwestern, and Western
Power Administrations all market the hydropower generated at federal
water projects, they serve different geographical areas and have
different assets; (2) their customers vary in size and in their electric
energy purchases; (3) PMAs are not the main source of electricity for
most of their customers; (4) the three PMAs in GAO's report supply about
7 percent of the electricity requirements of their customers; (5) the
PMAs have a close working relationship with the Bureau of Reclamation
and the Army Corps of Engineers; (5) these interactions are based in
part on written agreements and on flexible arrangements that recognize
the operating agencies' role in managing water releases in a way that
balances a project's multiple purposes; (6) two principal objectives
have typically been cited by other nations and by the United States for
selling government assets: (a) eliminating or reducing the government's
presence in an activity that some view as best done by the private
sector; and (b) improving the government's fiscal situation; (7) as the
basis for deciding to divest government assets, these two objectives
will affect many subsequent decisions needed to implement a sale; (8)
implementation issues include decisions about such concerns as what
specific assets to sell, how to group these assets, what conditions and
liabilities to transfer to the buyer, and what sales mechanism to
employ; (9) if, based on a broad policy evaluation of the pros and cons
of privatization, a decision the divest federal hydropower assets is
reached, several key issues specifically related to hydropower would
need to be addressed; (10) these issues include balancing how water is
used among the multiple purposes of federal water projects, assigning
the numerous contractual obligations and liabilities of the Bureau, the
Corps, and the PMAs, handling Native Americans' claims to water,
property and tribal artifacts, and determining the future responsibility
for protecting the environment and endangered species--a commitment that
already constrains the operations of many projects; (11) the potential
effects of a divestiture on wholesale and retail electric rates, which
in turn would affect regional economies, are other important issues; and
(12) to a large degree, these impacts would be determined by the
prevailing wholesale electric rates of the local utilities in the regio*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-97-48
TITLE: Federal Power: Issues Related to the Divestiture of Federal
Hydropower Resources
DATE: 03/31/97
SUBJECT: Hydroelectric powerplants
Hydroelectric energy
Property disposal
Surplus federal property
Interagency relations
Electric utilities
Privatization
Native American rights
Endangered species
Utility rates
IDENTIFIER: Bureau of Reclamation Pick-Sloan Missouri Basin Program
DOE Richard B. Russell Project
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Cover
================================================================ COVER
Report to Congressional Requesters
March 1997
FEDERAL POWER - ISSUES RELATED TO
THE DIVESTITURE OF FEDERAL
HYDROPOWER RESOURCES
GAO/RCED-97-48
Federal Power
(307341)
Abbreviations
=============================================================== ABBREV
CVP - Central Valley Project
DOE - Department of Energy
EIA - Energy Information Administration
EIS - environmental impact statement
ELCON - Electricity Consumers Resource Council
FERC - Federal Energy Regulatory Commission
IBWC - International Boundary and Water Commission
kWh - kilowatt-hour
kW - kilowatt
M&I - municipal and industrial
MOU - memorandum of understanding
IOU - investor-owned utility
MW - megawatt
MWh - megawatt-hour
NERC - North American Electric Reliability Council
O&M - operations and maintenance
PG&E - Pacific Gas and Electric Company
POG - publicly owned generating utility
PRWUA - Provo River Water Users' Association
PMA - power marketing administration
SEPA - Southeastern Power Administration
SERC - Southeastern Electric Reliability Council
SPP - Southwestern Power Pool
SWPA - Southwestern Power Administration
USEC - United States Enrichment Corporation
WAPA - Western Area Power Administration
WSCC - Western States Coordinating Council
Letter
=============================================================== LETTER
B-275838
March 31, 1997
Congressional Requesters
As you requested, this report provides information on (1) the
profiles of three power marketing administrations, including their
similarities and differences and their interactions with the agencies
that operate federal water projects; (2) the general parameters of
the process by which federally owned assets can be sold; and (3) the
factors that would have to be addressed in a divestiture of federal
hydroelectric assets, such as the relationship between power
generation and the other purposes of federal water projects. We
agreed to include in our study only the Southeastern, Southwestern,
and Western Area Power Administrations.
As agreed with your offices, we are sending copies of this report to
the appropriate House and Senate Committees; interested Members of
Congress; the Administrators of the Southeastern, Southwestern, and
Western Area Power Administrations; the Commissioner, Bureau of
Reclamation; the Director for Civil Works, U.S. Army Corps of
Engineers; and other interested parties.
If you or your staff have any questions, please call me at (202)
512-3841. Major contributors to this report are listed in appendix
IX.
Victor S. Rezendes
Director, Energy, Resources,
and Science Issues
List of Requesters
Representative Charlie Norwood
Representative John M. Spratt, Jr.
Representative Bill Barrett
Representative Doug Bereuter
Representative George E. Brown, Jr.
Representative Ed Bryant
Representative Richard Burr
Representative Sonny Callahan
Representative Eva M. Clayton
Representative Bob Clement
Representative James E. Clyburn
Representative Jerry F. Costello
Representative Bud Cramer
Representative Nathan Deal
Representative Peter A. DeFazio
Representative Terry Everett
Representative Bart Gordon
Representative Lindsey Graham
Representative W. G. (Bill) Hefner
Representative Van Hilleary
Representative Robert T. Matsui
Representative Cynthia McKinney
Representative George Miller
Representative David Minge
Representative Mike Parker
Representative Collin C. Peterson
Representative Earl Pomeroy
Representative Glenn Poshard
Representative Bob Stump
Representative Zach Wamp
Representative Ed Whitfield
Representative Roger F. Wicker
Senator (formerly Representative) Tim Johnson
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The nation's five power marketing administrations (PMA)--Alaska,
Bonneville, Southeastern, Southwestern, and Western Area--are
agencies within the Department of Energy (DOE) that sell the
electricity generated by hydropower plants operated by the Department
of the Interior's Bureau of Reclamation (Bureau) and the U.S. Army's
Corps of Engineers (Corps). These powerplants are located at federal
water projects. In the 1986 budget, the President proposed divesting
the Alaska Power Administration from federal ownership. Ten years
later, this sale--delayed by numerous technical details, such as the
need to more clearly define postdivestiture rights-of-way and
easements--still has not been completed. The long time to arrange
the successful transfer of the smallest of the PMAs emphasizes the
complexity and the number of issues to be addressed before divesting
any of the larger PMAs.
In recent years, various bills to divest the federal assets used for
generating, transmitting, and marketing hydroelectricity (called
"hydropower assets") have been introduced. In response to these
proposals, on January 18, 1996, various Members of Congress requested
that GAO examine the issues related to the sale of these assets. GAO
agreed to develop a "primer" discussing the issues to be considered
in any discussions of the divestiture of the federal hydropower
assets, including the PMAs. GAO agreed to provide information on (1)
Southeastern, Southwestern, and Western, including their similarities
and differences, and their interactions with the agencies that
operate federal water projects (mostly, the Bureau and the Corps);
(2) the main objectives and general decisions involved in divesting
federal assets, along with how these objectives and decisions apply
to divesting the federal hydropower assets; and (3) the specific
issues related to hydropower to be addressed before a divestiture of
the PMAs.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
Federal water projects consist of several resources, such as dams,
reservoirs, and in cases where hydropower is generated, hydropower
plants. The PMAs market the power generated at these projects and,
with the exception of Southeastern, own and operate the facilities
that transmit the power. The hydropower plants are owned and
operated by other agencies--primarily the Bureau and the Corps.
These agencies (called "operating agencies") balance how water is
used at federal water projects among various purposes, including the
enhancement of fish and wildlife habitat, flood control, irrigation,
municipal and industrial uses, navigation, power generation, and
recreation. The amount of hydropower generated and marketed is
affected by the availability and use of water for these other
purposes.
The federal power marketing program has developed incrementally since
it began in the early 1900s. Hydropower plants were authorized to
provide power for the project's needs. Legislation also sought to
use hydropower generated in excess of those needs to be used to aid
in the financial undertaking of the project and to promote social and
economic development by directing the PMAs to market power at the
lowest possible rates consistent with sound business principles. In
their sales, the PMAs are also directed to give priority to
"preference customers," or public bodies and cooperatives, such as
municipal utilities, rural electric cooperatives, and irrigation
districts.
The three PMAs covered by GAO's review (Southeastern, Southwestern,
and Western) receive annual appropriations to cover their operating
and maintenance (O&M) expenses and, if applicable, the capital
investment in transmission assets. Federal law calls for the PMAs to
set their power rates at levels that will repay these appropriations;
it also calls for the PMAs to set their rates to recover the annual
power-related O&M expenses and annualized capital costs expended by
the operating agencies to generate the power. DOE's implementing
order specifies that unless otherwise prescribed by law, the
appropriations used for O&M expenses must be recovered in the same
year that the expenses were incurred but that appropriations used for
capital investments must be recovered, with interest, over periods
not to exceed 50 years.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
While Southeastern, Southwestern, and Western all market the
hydropower generated at federal water projects, they serve different
geographical areas and have different assets. Their customers vary
in size and in their electric energy purchases. On average, 52
percent of the customers of these three PMAs are considered "small"
(delivering 100,000 megawatt hours (MWh) or less to end-users), while
19 percent are considered "large" (delivering more than 500,000 MWh
to their end-users).\1 PMAs are not the main source of electricity
for most of their customers; the three PMAs in our report supply
about 7 percent of the electricity requirements of their customers.
However, because the PMAs' power is purchased primarily during times
of peak demand at rates that are, on average, half of the rates
charged by other utilities, great demand exists for the PMAs' power,
and there are waiting lists to become customers. The PMAs have a
close working relationship with the Bureau and the Corps. These
interactions are based in part on written agreements and on flexible
arrangements that recognize the operating agencies' role in managing
water releases in a way that balances a project's multiple purposes.
Two principal objectives have typically been cited by other nations
and by the United States for selling government assets: (1)
eliminating or reducing the government's presence in an activity that
some view as best done by the private sector and (2) improving the
government's fiscal situation. As the basis for deciding to divest
government assets, these two objectives will affect many subsequent
decisions needed to implement a sale. Implementation issues include
decisions about such concerns as what specific assets to sell, how to
group these assets, what conditions and liabilities to transfer to
the buyer, and what sales mechanism to employ. The two broad
objectives, which apply to any divestiture of government assets, have
also been advanced by proponents of divesting the federal hydropower
assets.
If, based on a broad policy evaluation of the pros and cons of
privatization, a decision to divest federal hydropower assets is
reached, several key issues specifically related to hydropower would
need to be addressed. These issues include balancing how water is
used among the multiple purposes of federal water projects; assigning
the numerous contractual obligations and liabilities of the Bureau,
the Corps, and the PMAs; handling Native Americans' claims to water,
property, and tribal artifacts; and determining the future
responsibility for protecting the environment and endangered
species--a commitment that already constrains the operations of many
projects. The potential effects of a divestiture on wholesale and
retail electric rates, which in turn would affect regional economies,
are other important issues. To a large degree, these impacts would
be determined by the prevailing wholesale electric rates of the local
utilities in the region in which power from the PMA is sold, the
region's reliance on this power, and the availability of other
sources of power. The issues affecting the divestiture of any large
government enterprise, including the federal hydropower program, are
complex. However, complex issues have arisen and been successfully
addressed in other federal and private sector transactions and asset
transfers.
--------------------
\1 A watt is the basic unit used to measure electric power. A
kilowatt (kW) is 1 thousand watts of power, and a megawatt (MW) is 1
million watts. A kilowatt-hour (kWh) is 1 thousand watts applied for
1 hour and a MWh is 1 million watts applied for 1 hour. The average
home in the United States uses about 10,000 kWh of electricity per
year.
GAO'S ANALYSIS
---------------------------------------------------------- Chapter 0:4
PMAS, WHICH DIFFER IN SIZE
AND ASSETS, SELL TO VARIED
CUSTOMERS
-------------------------------------------------------- Chapter 0:4.1
Western, Southeastern, and Southwestern--which jointly sold about 1.6
percent of the nation's electricity in fiscal year 1994--differ in
size and assets. Western is the largest of the three, marketing
power in 14 states from 56 hydropower plants and one coal-fired power
plant operated, for the most part, by the Bureau. Western, which
markets from a total generating capacity of about 9,800 MW, had
revenues from power sales of about $658 million in fiscal year 1994.
Southeastern markets power in 11 states from 23 hydropower plants
operated by the Corps with a generating capacity of about 3,100 MW.
Southeastern had revenues from power sales of about $156 million in
fiscal year 1994. Unlike the other two PMAs, Southeastern owns no
transmission lines and therefore relies on regional utilities for
transmission services. Serving six states from 24 Corps-operated
hydropower plants with a generating capacity of about 2,100 MW,
Southwestern had revenues from power sales of about $98 million in
fiscal year 1994.
In fiscal year 1994, Western, Southeastern, and Southwestern had 637,
294, and 62 customers, respectively. These customers, who are
generally preference customers, vary in terms of type, size, and the
amount of power they purchase. Some customers are public utilities
that are among the largest in the nation, while others are small
rural electric cooperatives in sparsely populated areas. Some
customers generate and transmit internally generated electricity,
while others only distribute electricity purchased from other
utilities and suppliers. About 7 percent of the power sold by these
PMAs is purchased by other federal agencies.
Because the three PMAs have a limited amount of electricity to sell,
about three-quarters of their preference customers obtain more than
half of their electric energy from other sources. However, their
customers benefit from purchasing power from the PMAs because their
rates average about half of those from other sources. The PMAs'
ability to set lower rates stems from several factors, including the
low cost of hydropower in comparison to power generated from other
sources as well as the lower embedded capital cost of their
hydropower plants.
The PMAs maintain close working relationships with the Bureau and the
Corps. The Bureau's and the Corps' operating plans and manuals
define the timing and amount of water to release from the reservoirs.
These agencies generate hydropower subject to these operating
conditions and other factors, such as environmental restrictions and
the water quality standards of state water boards. The PMAs try to
sell hydropower in a way that is consistent with these patterns of
water releases while maximizing the value of federal power.
THE GOVERNMENT'S OBJECTIVES
WILL INFLUENCE GENERAL
DECISIONS ABOUT DIVESTING
FEDERAL ASSETS
-------------------------------------------------------- Chapter 0:4.2
Similar to divestitures by foreign governments, as examined in the
surveys of international experiences, the proposals to divest federal
assets in the United States, such as hydropower assets, have
generally stemmed from two objectives: (1) eliminating or reducing
the federal role in an activity that some view as best done by the
private sector and (2) improving the federal fiscal situation. Both
of these objectives have also been advanced by those who favor
divesting federal hydropower assets. For example, the proponents of
divesting federal hydropower assets question the role of government
in producing and marketing electricity and contend that the
marketplace for electricity has become increasingly competitive
because of such various production and marketing changes as the
ability of buyers to purchase electricity from competing sources in
wholesale markets, the development of low-cost gas-fired electricity
generation, and the emergence of power brokers. Proponents also
assert that the government's ability to operate, maintain, and repair
these assets is not well served by the government's capital planning
and budgeting systems.
On the other hand, the opponents of this divestiture stress the
importance of many other policies and goals that are related to the
production of federal hydropower--for instance, providing reasonably
priced electricity to remote rural, low-income areas. They also
contend that federal hydropower is generated subject to the other
purposes of federal water projects, such as irrigation, and that a
divestiture could complicate the government's ability to protect
these purposes. Opponents also maintain that the acquisition of
federal hydropower assets and marketing services by the private
sector, combined with continuing mergers and acquisitions in the
electric utility industry, would lead to a concentration of greater
market power in the hands of fewer utilities. This, in turn, would
increase the likelihood of higher electric rates for consumers.
The proponents believe that the net effect of the sale of federal
hydropower assets on the U.S. Treasury would be positive because,
among other reasons, the new owners would be subject to taxes and the
divestiture would eliminate what the proponents perceive to be
financial subsidies to the PMAs' ratepayers. In contrast, the
opponents of this divestiture believe that the PMAs' rates are not
subsidized and, if these assets were sold, the Treasury's loss of
revenue over time would exceed the proceeds from the sale. Assessing
the full financial impact of a divestiture requires examining the
estimates of the sale price as well as the magnitude and timing of
expected revenues and expenditures (including the impact on future
tax revenues), assessing a variety of direct and indirect costs,
expressing these amounts in present value terms, and addressing
underlying uncertainties in sensitivity analyses.\2 An analysis of
the budgetary treatment of an asset divestiture, however, does not
fully capture the long-term financial implications on the federal
budget. Budgets are usually projected and analyzed in terms of
5-year windows. Such a short time frame, however, does not capture
the financial implications of divesting federal hydropower
facilities, because these assets frequently have projected useful
lives of many decades.
Establishing the underlying objectives for a sale of federal assets,
in general, and for the PMAs, specifically, is important because the
emphasis accorded each objective will determine the subsequent
decisions in the divestiture process. Because many alternative
divestiture paths exist, specific choices can enhance or compromise
the government's divestiture goals. In general, the government faces
decisions on determining the specific assets to be sold, the
conditions to be placed on their use by the prospective buyer, the
liabilities to be transferred to the buyer or otherwise retained, and
the sales mechanism and the processes to be employed. For example,
if the government decides that seeking full market value for its
assets is paramount to other goals, it could choose sales methods
that allow for competitive bidding and place few restrictions on the
number or identity of bidders. Alternatively, if the government's
primary goal is obtaining private sector operation of its assets and
receiving a full market price is only a secondary goal, it could
choose to negotiate a sale price with a selected buyer. In addition,
decisions about the sales processes to employ--for instance, trade
sales or stock offerings--need to be made. Finally, the government
will need to decide who will manage the sale.\3
--------------------
\2 A sensitivity analysis examines how the result of a calculation is
affected by changes in the variables used.
\3 A trade sale occurs when assets are sold to firms in the relevant
trade or industry.
SPECIFIC ISSUES THAT SHOULD
BE ADDRESSED IN CONNECTION
WITH DIVESTING FEDERAL
HYDROPOWER ASSETS
-------------------------------------------------------- Chapter 0:4.3
A divestiture of federal hydropower assets raises many complex issues
to be addressed. Among them is an issue that pertains to the very
nature of federal water projects--their multiple purposes, as
specified in their authorizing legislation. For instance, most
projects managed by the Corps were built with the authorized purposes
of flood control and navigation while other laws have specified
additional uses for the water in these projects. For example, the
Endangered Species Act directs the Bureau and the Corps to implement
programs to conserve endangered and threatened species and to ensure
that their actions do not jeopardize those species or their critical
habitat. Unless the legislation authorizing a divestiture exempted
the transfer from the preexisting legal provisions that had
established the project's purposes, these provisions would continue
to affect how the new owner could manage the water project, how much
power the new owner could generate, and potential sales prices.
Irrigation is a unique authorized purpose because power revenues pay
a portion of the irrigation costs. Specifically, the Secretary of
the Interior assigns to be repaid through these revenues most, but
not all, of the federal investment in irrigation facilities that the
Secretary deems the irrigators cannot afford to repay. For instance,
according to Bureau officials, power revenues are ultimately expected
to cover about 70 percent of the federal investment in completed
irrigation projects. As of September 30, 1995, Western--through its
power revenues--was responsible for recouping about $1.5 billion over
periods ranging up to 60 years for individual projects; however, only
about $32 million of the federal investment in irrigation had been
repaid because this investment is typically repaid after the federal
investments in power assets have been repaid. If Western and the
related assets are to be sold, the issues of how to repay the federal
investment in irrigation and how to accommodate the use of water for
irrigation would need to be addressed.
The ramifications of the PMAs' and the Bureau's and the Corps'
contractual obligations and liabilities, which are numerous and
complex, would also need to be recognized. For instance, the
Bureau's Great Plains Region in Billings, Montana, has over 2,200
contracts and agreements, including 580 right-of-use permits
concerning such things as buffers, crops, drainage, and weed control.
Although the transferability of these obligations would need to be
considered, according to agency officials, the PMAs' and the
operating agencies' contracts and agreements typically do not address
whether contractual obligations would be assigned to a nonfederal
buyer and what, if anything, would happen to related federal
liabilities. Importantly, the PMAs also have contractual obligations
to sell power to their preference customers.
Concerns about the impacts of water projects on the environment,
especially the habitat of endangered and threatened species, are
increasingly constraining the ability of the operating agencies to
generate hydropower, especially during hours of peak demand. Since
the late 1980s, these restrictions have decreased generating
capacity, resulting in forgone power revenues of millions of dollars
to the PMAs as well as costs of equal magnitude to replace the lost
generating capacity and to buy replacement power. For example,
according to Bureau officials, to protect the migrations of Chinook
salmon, the Bureau has restricted the use of five hydropower units at
the Shasta powerplant in the Central Valley Project in California.
According to these officials, since 1987 these restrictions have
resulted in additional costs of about $50 million to purchase power
to meet Western's contractual obligations. According to officials
from the Bureau, the Federal Energy Regulatory Commission (FERC), the
PMAs, environmental groups, and trade associations, the effects of
environmental constraints on power production will likely continue in
the future and could affect the price the government would obtain if
it sold some hydropower assets. A divestiture proposal would need to
address the postdivestiture responsibilities of the buyer and the
government in accommodating environmental concerns.
Various issues related to Native Americans' rights would have to
addressed prior to a divestiture because their rights to water could
affect a divestiture. According to Bureau officials, Native
Americans' rights to water at some federal water projects are the
earliest, thus superseding the use of water for other purposes,
including hydropower generation. As an example, they cited a legal
settlement with tribal entities of the Fort Peck Reservation,
Montana, that includes the right to about 1 million acre-feet of
water from the Missouri River.\4 Also, under federal legislation,
excess federal land in Oklahoma is subject to transfer to the
Secretary of the Interior in trust for Native American tribal
entities in Oklahoma. In addition, under the Native American Graves
Protection and Repatriation Act, certain Native American artifacts
found on federal lands must be returned to the relevant Native
American tribal entity. Corps officials responsible for managing
federal projects from which Southwestern markets power explained that
they have been involved in numerous cases in the past several years
involving this law.
Before a divestiture, the future regulatory treatment of federal
hydropower assets would also need to be specified--especially,
whether or not the future regulatory treatment would require a
license from FERC, which oversees nonfederal hydropower plants.
FERC's licensing process, which requires input from many affected
parties, can take up to 15 years to complete. If the new owners of a
hydropower facility were allowed to operate the facility without a
FERC license, they would have a competitive advantage over other
hydropower operators who are subject to FERC's licensing
requirements. The type of regulatory mechanism that would apply
would largely depend on whether the federal government maintained or
transferred control of the water storage. If only a PMA's assets
were sold (including the right to market power and its transmission
lines) and not the powerplants, the dams, and the reservoirs, the
overall management of the affected project would change little,
except that the Bureau and the Corps would have to deal with a new
power marketer whose incentives would be different from the PMA's.
However, if all of the assets were sold, then FERC's licensing
process could reassess and revise the management and uses of the
water, thereby affecting the project's electricity-generating
capacity.
Assessing how the divestiture of a PMA and/or related federal
hydropower assets would affect the rates paid by its preference
customers and their retail customers is difficult because it depends
on numerous factors. Rate changes for retail customers would depend
on how much preference customers use the PMA's power, the difference
between regional wholesale market rates and the PMA's rates, the
availability of alternate sources of power, and the extent to which
the PMA's preference customers would pass any rate increases on to
their retail customers. In general, the higher the percentage of its
total power supply that a preference customer buys from a PMA and the
greater the difference between that PMA's rates and regional
wholesale rates, the greater the potential increase in wholesale
rates after a divestiture. Retail rates might not increase as much
as wholesale rates after a divestiture because the preference
customers might be able to absorb any wholesale rate increases by
improvements in operational efficiency to the extent possible. The
economic impact of a divestiture on the affected geographic region
would be influenced by how much electric rates would increase, by the
economic characteristics of the region, and by how much water
allocations would be changed. Finally, the ongoing and widespread
deregulation and restructuring of the electric utility industry
contributes to the difficulty in assessing the effects of a
divestiture on the power rates and the economy of an affected region.
Figure 1 summarizes the key issues affecting a divestiture of federal
hydropower assets--the general decisions needed in divesting federal
assets as well as the specific issues related to hydropower.
Figure 1: Key Issues to Be
Addressed in a Divestiture of
Federal Hydropower Assets
(See figure in printed
edition.)
--------------------
\4 One acre-foot is the amount of water that it would take to cover
one acre of land with water to a depth of one foot.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
This report contains no recommendations.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
GAO provided a draft of this report to DOE (including the PMAs'
liaison office), the Department of the Interior (including the
Bureau), FERC, and the Department of Defense (including the Corps).
DOE, Interior, and FERC provided GAO with their written comments.
GAO met with officials of the Department of Defense, including the
Corps' Director of Hydropower Operations and the Director of
Operations, Construction, and Readiness. The comments of DOE,
Interior, and FERC and GAO's responses to those comments are included
in appendixes VI, VII, and VIII, respectively. DOE believes that the
report achieves a fair balance in discussing some issues but added
that other issues deserved greater discussion. For example, in DOE's
view, the position of the opponents of divesting federal hydropower
assets should have been expanded in the report and the report should
have discussed the beneficiaries and those who would be harmed by a
divestiture. GAO believes that the report is balanced and reflects
the positions of both sides of the divestiture debate. GAO contacted
organizations that favored and opposed the divestiture of federal
hydropower assets and included statements from both sides. Also, a
discussion of the specific benefits and costs of a divestiture was
outside the scope of this review. Therefore, GAO did not revise the
report as suggested by DOE. Interior stated that the report
recognizes some of the issues that would have to be addressed in the
event of a divestiture, but it suggested other issues that, in its
view, need to be discussed or clarified. For instance, Interior said
the report should clarify that the Bureau and the Corps generate
hydropower while the PMAs market and transmit it. GAO agreed and
revised the report to reflect these distinctions. In its comments,
FERC stated that the report provided an "excellent overview of the
matters that would need to be addressed" in divesting the federal
hydropower assets. FERC also provided several clarifications that
were incorporated into the report. For example, FERC clarified that
its limited flexibility in licensing hydropower projects, as
described in the report, stems from the authority of other federal
and state agencies to attach mandatory conditions to the FERC
license. Defense stated that the report provided a good assessment
of the issues related to the "very complex and controversial" subject
and also provided clarifying comments that were incorporated into the
report as appropriate.
INTRODUCTION
============================================================ Chapter 1
The federal government owns and operates numerous multipurpose water
projects, many of which generate electric power. This power, which
is generated subject to the needs of the project, is sold through
five federal power marketing administrations (PMA)--the Southeastern
Power Administration (Southeastern), the Southwestern Power
Administration (Southwestern), and the Western Area Power
Administration (Western) as well as the Alaska Power Administration
and the Bonneville Power Administration. The PMAs are separate and
distinct organizational entities within the Department of Energy
(DOE). They are required to market hydropower primarily on a
wholesale basis at the lowest possible rates consistent with sound
business principles. By law, the PMAs give preference in the sale of
federal power to public bodies and cooperatives (called "preference
customers"), such as federal agencies, irrigation districts,
municipalities, public utility districts, and other public agencies.
Each PMA has its own specific geographic boundaries, federal water
projects, statutory responsibilities, operation and maintenance
responsibilities, and statutory history.\1 In 1995, the three PMAs in
our study--Southeastern, Southwestern, and Western--sold about 1.6
percent of the nation's electricity.
--------------------
\1 Federal Electric Power: Operating and Financial Status of DOE's
Power Marketing Administrations (GAO/RCED-96-9FS, Oct. 13, 1995).
PMAS MARKET POWER GENERATED AT
MULTIPURPOSE FEDERAL WATER
PROJECTS
---------------------------------------------------------- Chapter 1:1
A federal water project consists of several resources, such as the
dam, the reservoir, the land around the dam and reservoir, and, where
hydropower is generated, the powerplant. In addition to providing
hydropower, the dams at which hydropower plants are located serve a
variety of other purposes, such as promoting fish and wildlife
conservation and habitat enhancement and providing flood control,
irrigation, navigation, recreation, water supply, and improved water
quality. Each project must be operated in a way that balances its
multiple purposes. In most instances, because generating power is
not the project's sole purpose, the amount of hydropower generated
and marketed is affected by the availability and use of water for the
project's other purposes.\2
The PMAs generally do not own, operate, or control the facilities
that actually generate the electric power; almost always, they own,
operate, and control the facilities that transmit power, and they
market the power that is generated at the federal water projects.\3
The power-generating facilities are controlled by other federal
agencies--most often by the Department of the Interior's Bureau of
Reclamation (Bureau) or the Department of the Army's Corps of
Engineers (Corps)--referred to as "operating agencies." Appendix II
lists and describes various laws that guide the Bureau's and the
Corps' management of federal water projects and hydropower plants.
The federal power marketing program, which began in the early 1900s,
has developed incrementally over the years. In 1937, the Bonneville
Project Act created the Bonneville Power Administration to market
federal power in the Pacific Northwest. In 1943, a decision by the
Secretary of the Interior established Southwestern under the
President's war powers. The Congress provided the authority to
create permanent PMAs with the passage of the Flood Control Act of
1944. The Secretary of the Interior established Southeastern in 1950
and the Alaska Power Administration in 1967. The last PMA, Western,
was authorized under the DOE Organization Act of 1977 when the four
existing PMAs were transferred from the Department of the Interior to
DOE.\4
Many hydropower plants provide electric power for the multiple needs
of a federal water project, and the project's operations have first
priority for using it. The PMAs sell the hydropower that exceeds the
project's operational requirements on a wholesale basis to their
preference customers and use the revenue earned to repay the costs to
generate, transmit, and market power.\5 Revenues from the sale of
hydropower are also used to pay for a portion of the irrigation costs
assigned for repayment through these revenues where the project
serves irrigation. The sale of federal hydropower has also served
social and economic development goals. This power is required to be
sold at rates that are as low as practicable, consistent with sound
business principles, to encourage its widespread use. The PMAs
helped make electricity available for the first time to many
consumers who lived in rural areas.
Nonfederal hydropower projects also generate electricity subject to
their multiple purposes. The Federal Energy Regulatory Commission
(FERC) licenses and regulates these projects and their hydropower
plants that affect the nation's navigable waterways.\6
FERC's operating licenses for these hydropower plants are in effect
for up to 50 years, after which relicensing must occur. Under
provisions of such legislation as the Federal Power Act, as amended
by the Electric Consumers Protection Act, FERC's licensing and
regulatory activities establish the conditions under which the
project must operate, consistent with legal and policy developments.
In licensing and relicensing nonfederal hydropower projects, FERC is
required to give equal weight to both "developmental factors" (such
as power, irrigation, and flood control) and "nondevelopmental
factors" (such as protecting fish and wildlife habitat, conserving
energy, and providing recreation).
FERC's regulatory activities with respect to electricity from the
PMAs are limited to the authority delegated to it by the Secretary of
Energy. FERC's review of the PMAs' rates is limited to (1) whether
the rates are the lowest possible consistent with sound business
principles; and (2) whether the revenues generated by the rates are
enough to recover, within the period allowed, the costs of producing
and transmitting electricity, including the repayment of the capital
investment allocated to generate power and the costs assigned by acts
of the Congress for repayment. FERC's review also includes the
assumptions and the projections used in developing the rates. Other
than reviewing the PMAs' rates, FERC has no jurisdiction over the
operation of federal hydropower facilities.
--------------------
\2 Section 9(c) of the Reclamation Project Act of 1939 prohibits the
Secretary of the Interior from entering into any contract regarding
the electric power generated by a reclamation project that, in the
judgment of the Secretary, would impair the efficiency of the project
for irrigation purposes. This section has been construed to limit
sales of project electricity if they would impair the project's
ability to deliver water for irrigation. Also, section 5 of the
Flood Control Act of 1944 provides for the sale of power generated at
the Department of the Army's Corps of Engineers' (Corps) reservoir
projects that is "in the opinion of the Secretary of the Army not
required in the operation of such project."
\3 The Alaska Power Administration owns two federal water projects
that provide power and serve no other purpose.
\4 The DOE Organization Act transferred power marketing
responsibilities and transmission assets that had been previously
managed by the Bureau of Reclamation to Western.
\5 In some cases, PMAs are not required to recover some costs (for
instance, certain environmental costs and the full costs of pensions
and postretirement health benefits of PMA employees) because of
specific legal provisions or because the DOE implementing order
excludes the costs or is not specific about them. See Power
Marketing Administrations: Cost Recovery, Financing, and Comparison
to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996).
\6 See Electricity Regulation: Issues Concerning the Hydroelectric
Project Licensing Process (GAO/RCED-91-120, May 10, 1991) and
Electricity Regulation: Electric Consumers Protection Act's Effects
on Licensing Hydroelectric Dams (GAO/RCED-92-246, Sept. 18, 1992).
APPROPRIATIONS FINANCE FEDERAL
WATER PROJECTS AND PMAS
---------------------------------------------------------- Chapter 1:2
Each year the Congress appropriates money to the PMAs, the Bureau,
and the Corps. The PMAs' appropriations are generally to cover
operations and maintenance (O&M) expenses associated with their power
marketing activities and capital investments in their transmission
assets. The Bureau's and the Corps' appropriations are for all
aspects of the federal water projects, including capital investments
as well as operation and maintenance (O&M) expenses related to
generating power and to providing other functions, such as irrigation
and navigation.
Federal law calls for the PMAs to set power rates at levels that will
repay their appropriations and the power-related O&M as well as the
capital appropriations expended by the operating agencies generating
the power. DOE's implementing order specifies that appropriations
used for O&M expenses must be recovered in the same year the expenses
were incurred; however, it allows the appropriations used for capital
investments to be recovered, with interest, over periods that can
last up to 50 years. The order also allows the PMAs to defer
payments on O&M expenses if the PMAs do not generate sufficient
revenue in a particular year because of the variability of
hydropower. Because O&M expenses that are deferred are amortized
with interest, the amount of deferred expenses accrues interest until
it is fully repaid and may require the PMA to increase its rates.
The federal investment in water projects has nonreimbursable and
reimbursable components. The nonreimbursable component refers to
costs that are not reimbursable by revenues collected from the
projects' beneficiaries. The reimbursable component refers to costs
that are recovered from the project's ratepayers and other
beneficiaries, such as power and irrigation users. This component
includes the construction costs as well as the O&M expenses for power
generation, transmission, and marketing; the construction costs
allocated to irrigation and O&M expenses for irrigation, if
applicable; and the construction costs allocated to municipal and
industrial water supply as well as the related O&M expenses. The
reimbursable component is further divided into investments repaid
with interest (for example, for power and municipal and industrial
water supply) and investments repaid without interest (for irrigation
only).
PROPOSALS HAVE BEEN MADE TO
DIVEST THE FEDERAL GOVERNMENT
OF ITS HYDROPOWER ASSETS
---------------------------------------------------------- Chapter 1:3
In 1986, the executive branch first attempted to sell a PMA when the
President's budget proposed selling the Alaska Power Administration
to its preference customers. Despite the enactment of laws in 1995
and 1996 to authorize this transaction, the sale of the hydropower
assets from which the Alaska Power Administration markets its power
has not been completed, in part because of the need to resolve issues
related to rights-of-way and easements. The length of time taken to
complete the sale of the smallest of the five PMAs raises questions
about the complexity and number of issues that will need to be
addressed before the government can divest itself of the larger PMAs
and their related hydropower assets.
Numerous bills have been introduced to the Congress to sell the
remaining PMAs, and some bills have included the sale of the related
hydropower assets of the Bureau and the Corps. These bills have
proposed selling only the PMA and its assets; the PMA and the related
hydropower assets of the Bureau and the Corps; or all of these assets
plus the related dams and reservoirs. For example, in 1996
legislation introduced in the House of Representatives proposed to
divest, among other things, the PMAs and the associated
power-generating assets through a competitive bidding process. The
bill proposed that FERC be directed to grant a 10-year operating
license to the buyers of the federal hydropower plants. It also
exempted the divestiture from certain federal laws pertaining to the
disposal of surplus federal property and to environmental protection,
such as the Federal Land Policy and Management Act of 1976, the
National Environmental Policy Act of 1969, the Endangered Species Act
of 1973, and the Wild and Scenic Rivers Act of 1968.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:4
In response to divestiture proposals, on January 18, 1996, 39 Members
of Congress requested that we examine the issues related to the
divestiture of the PMAs and related federal hydropower assets. On
March 1, 1996, we received a separate request letter from another
Member of Congress. We agreed to report on the issues related to
divesting the federal hydropower assets, including the PMAs; however,
we did not evaluate whether or not the PMAs and federal hydropower
assets should be divested. We agreed to provide information on (1)
Southeastern, Southwestern, and Western, including their similarities
and differences, and their interactions with the agencies that
operate federal water projects (mostly, the Bureau and the Corps);
(2) the main objectives and general decisions involved in divesting
federal assets, along with how these objectives and decisions apply
to the PMAs; and (3) the specific issues related to hydropower that
should be addressed before a divestiture of the PMAs. As requested,
we limited our study to Southeastern, Southwestern, and Western. We
did not include the Bonneville Power Administration because it has a
unique financial situation or Alaska because it is being divested.\7
A detailed description of our objectives, scope, and methodology is
contained in appendix I. We conducted our review from May 1996
through February 1997 in accordance with generally accepted
government auditing standards.
--------------------
\7 Bonneville Power Administration: Borrowing Practices and
Financial Condition (GAO/AIMD-94-67BR, Apr. 19, 1994).
-------------------------------------------------------- Chapter 1:4.1
We provided a draft of this report to DOE (including the PMAs'
liaison office), the Department of the Interior (including the
Bureau), FERC, and the Department of Defense (including the Corps).
DOE, Interior, and FERC provided us with their written comments.
These comments and our responses are included in appendixes VI, VII,
and VIII, respectively. We met with officials of the Department of
Defense, including the Corps' Director of Hydropower Operations and
the Director of Operations, Construction, and Readiness. Defense
stated that our report provided a good assessment of the issues
related to the "very complex and controversial" subject. Defense
also provided clarifying comments that we incorporated into our
report as appropriate. For example, Defense stated that the report
needed to be revised to acknowledge that the Corps has improved the
generating availability of its hydropower plants in its South
Atlantic Division (Atlanta, Georgia) to over 90 percent for fiscal
year 1996.
PROFILE OF THE PMAS
============================================================ Chapter 2
While differing in size, scope, and assets, Southeastern,
Southwestern, and Western all are responsible for selling hydropower
primarily to preference customers--publicly owned utilities and state
and federal agencies. These customers vary in size and in the
quantity of electricity they purchase. The PMAs have a close working
relationship with the Corps and the Bureau because, with a few
exceptions, the Bureau and the Corps are responsible for operating
the hydropower plants and for ensuring that electricity is generated
subject to the other multiple purposes of each federal water project.
This relationship is based in part on written documents and also on
flexible arrangements that recognize the variability associated with
water.
PMAS DIFFER IN SERVICE AREAS,
CUSTOMERS, AND ASSETS
---------------------------------------------------------- Chapter 2:1
The PMAs generally market power to publicly owned utilities and to
state and federal agencies located within their service areas. The
three PMAs in our study market power in 30 states from 103 hydropower
plants and a coal-fired power plant.\1 Figure 2.1 shows the service
areas for each PMA and appendix III lists the hydropower projects
from which the PMAs market power. As described below, the PMAs
differ in several ways, including the sizes of their service areas,
the number of customers served, and the types of assets owned.\2
Figure 2.1: Map of the Service
Areas of Southeastern,
Southwestern, and Western
(See figure in printed
edition.)
Source: Developed by GAO from data provided by the PMAs.
In fiscal year 1994, Western marketed power to 637 customers in
Arizona, California, Colorado, Nebraska, New Mexico, North Dakota,
South Dakota, Utah, and parts of Iowa, Kansas, Minnesota, Montana,
Nevada, Texas, and Wyoming.\3 Western's power is largely generated
from 56 hydropower plants.\4 They have an existing capacity of 9,808
megawatts (MW) operated mostly by the Bureau.\5 Western owns 16,727
miles of transmission line. In fiscal year 1994, its revenues from
power sales were about $658 million, based on about 36.1 billion
kilowatt-hours (kWh) of energy sold. Although about 60 percent of
Western's sales are to municipalities, cooperatives, and public
utility districts, about 6 percent of its sales are to irrigation
districts (see table 2.1). Most of the remaining power sales are to
state and federal agencies and investor-owned utilities (IOU).
Southwestern, serving Arkansas, Kansas, Louisiana, Missouri,
Oklahoma, and part of Texas, marketed power to 62 customers in fiscal
year 1994.\6 Southwestern's power is generated from 24 hydropower
plants operated by the Corps with an existing capacity of 2,051 MW.
Southwestern's revenues from power sales in fiscal year 1994 were
about $98 million, based on sales of about 6.6 billion kWh. Over 95
percent of Southwestern's sales are to municipal utilities and
cooperatives (see table 2.1). Southwestern also owns 1,380 miles of
transmission lines.
Southeastern, serving Alabama, Georgia, Kentucky, Mississippi, South
Carolina, Tennessee, Virginia, and West Virginia, as well as parts of
Florida, Illinois, and North Carolina, sold power to 294 customers in
fiscal year 1994. Southeastern's power is generated from 23
hydropower plants operated by the Corps with an existing capacity of
3,092 MW. Southeastern's revenues from power sales in fiscal year
1994 were about $156 million, based on sales of about 7.9 billion
kWh. Southeastern sold 57 percent of its power to municipalities and
cooperatives. The remainder went to federal agencies and public
utility districts (see table 2.1). Because Southeastern owns no
transmission lines, it relies upon other utilities for transmission
services.
Table 2.1
Electricity Purchased From Each PMA by
Customer Type, Fiscal Year 1994
Southeaste Southweste
Customer Types rn\a rn Western Average
---------------------- ---------- ---------- ---------- ----------
Municipal utilities 17.2% 26.5% 26.6% 25.2%
Cooperatives 39.7% 70.7% 21.7% 30.8%
Public utility 0.4% 0.0% 11.5% 8.3%
districts
Investor-owned 0.0% 0.0% 7.3% 5.2%
utilities
Federal agencies 42.8%\b 2.8% 5.9% 11.1%
State agencies 0.0% 0.0%\c 17.4% 12.5%
Irrigation districts 0.0% 0.0% 6.1% 4.4%
Other 0.0% 0.0% 3.6% 2.6%
Total\d 100.0% 100.0% 100.0% 100.0%
MWh (thousands) 7,541.6 6,579.6 36,067.2 50,188.4
----------------------------------------------------------------------
\a Because Southeastern's fiscal year 1994 annual report does not
identify customers by class, our sales total includes only those
customers that we could classify using EIA's Form 861 database. As a
result, our total is about 5 percent smaller than the sales total for
all customers that Southeastern presents in its annual report.
\b Most of the power that Southeastern sold to federal agencies was
sold to the Tennessee Valley Authority which, in turn, sold the power
to its distributors--110 municipal utilities and 50 cooperatives.
\c In actuality, 0.02 percent of Southwestern's power was sold to
state agencies. The amount was omitted from the table because of
rounding.
\d Because of rounding, the amounts may not total to 100 percent.
Source: Developed by GAO from data provided by the PMAs.
--------------------
\1 Southwestern and Western both sell power in Kansas and Texas.
\2 Unless otherwise noted, we used fiscal year 1994 data as reported
by the PMAs in their annual reports. We also used calendar year 1994
data on total sales and revenues for PMA customers from the Energy
Information Administration (EIA). The EIA's data were the most
recent at the time of our review.
\3 The number of customers does not include sales to the Bureau of
Reclamation or interdepartmental sales.
\4 Western currently markets power from 47 hydropower projects
operated by the Bureau, 6 operated by the Corps, 2 operated by the
International Boundary and Water Commission, and 1 operated by the
Provo River Water User's Association but co-owned by Western.
Western lists the Bureau's Lewiston hydropower plant as part of the
Trinity plant. Western also markets power from a coal-fired plant
operated by the Salt River Project.
\5 A watt is the basic unit used to measure electric power. A
kilowatt (kW) is 1 thousand watts. A kilowatt hour (kWh) is equal to
1 kilowatt of power applied for 1 hour. One thousand kW are one
megawatt (MW), and 1,000 kWh are one megawatt-hour (MWh).
\6 The 62 customers do not include the utilities that buy power from
the Kansas Municipal Energy Agency and the Louisiana Electric Power
Authority.
PREFERENCE CUSTOMERS OF PMAS
VARY GREATLY
---------------------------------------------------------- Chapter 2:2
While the preference customers of PMAs are publicly owned utilities
and state and federal agencies that generally purchase small amounts
of electricity, they vary greatly.
THE TYPES AND SIZE OF
CUSTOMERS VARY
-------------------------------------------------------- Chapter 2:2.1
The types of customers served by Southeastern, Southwestern, and
Western vary both in terms of type and size. They include
municipalities and cooperatives; public utility districts; irrigation
districts; federal agencies, including military and laboratory
installations; and state agencies. Some customers are utilities that
are among the largest in the nation, while others are among the
smallest. Some customers generate much of the electricity they
transmit to their customers, while others only transmit electricity
they buy from other sources.
For all three PMAs, municipalities and cooperatives are by far the
most prevalent customers, accounting together for about two-thirds of
all customers. Public utility districts and irrigation districts
together account for about 8 percent of customers, while federal
agencies, including military and laboratory facilities, account for
about 7 percent. State agencies account for about 5 percent of all
customers and IOUs account for about 3 percent. Figure 2.2 depicts
the composition of customers for each PMA.
Figure 2.2: Composition of the
PMAs' Customers
(See figure in printed
edition.)
Source: GAO's analysis of data provided by EIA and the PMAs' 1994
annual reports.
THE SIZE OF PREFERENCE
CUSTOMERS ALSO VARIES
-------------------------------------------------------- Chapter 2:2.2
The PMAs' preference customers also vary in size.\7 As shown in fig.
2.3, about two-thirds (67 percent) of Western's preference customers
are small utilities. About 6 percent of Western's preference
customers are in the medium category and another 6 percent are large.
About half (47 percent) of Southwestern's preference customers are
small utilities. However, almost one-third (30 percent) of
Southwestern's preference customers are large. In contrast, almost
half (47 percent) of Southeastern's preference customers are
medium-sized utilities.
Figure 2.3: Sizes of the PMAs'
Preference Customers, Fiscal
Year 1994
(See figure in printed
edition.)
Note: Totals may not add to 100 percent due to rounding.
Source: Developed by GAO from data provided by EIA and the PMAs'
1994 annual reports.
--------------------
\7 We measured size by the number of MWh each preference customer
delivered to its end-users from all sources in fiscal year 1994. We
categorized size as follows: "small" = 0 to 100,000 MWh; "medium" =
more than 100,000 to 500,000 MWh; "large" = more than 500,000 MWh.
We discussed these categories with the National Rural Electric
Cooperative Association and American Public Power Association.
MOST CUSTOMERS PURCHASE
SMALL AMOUNTS OF ELECTRICITY
ANNUALLY
-------------------------------------------------------- Chapter 2:2.3
The preference customers of the three PMAs also vary in terms of the
quantity of electricity purchased. As shown in figure 2.4, although
a few customers purchase large quantities of electricity from PMAs,
most purchase smaller quantities. For example, in fiscal year 1994,
about 83 percent of the preference customers purchased 50,000 MWh or
less from the PMAs and over 90 percent purchased less than 100,000
MWh. The PMAs also sell to a few larger customers (about 1 percent
of their customers each buy over 1,000,000 MWh).
Figure 2.4: Sizes of
Customers' Purchases From Each
PMA, Fiscal Year 1994
(See figure in printed
edition.)
Source: Developed by GAO from data provided by EIA and the PMAs'
1994 annual reports.
MOST PREFERENCE CUSTOMERS
OBTAIN THE MAJORITY OF THEIR
ELECTRICITY FROM SOURCES
OTHER THAN PMAS
-------------------------------------------------------- Chapter 2:2.4
Most preference customers obtain the majority of their electricity
from sources other than the PMAs. As shown in figure 2.5, about 75
percent of the PMAs' preference customers purchase less than half of
their total electricity from the PMAs.\8 In addition, over 60 percent
of the preference customers receive no more than 25 percent of their
electricity from the PMAs. Because the PMAs have a limited quantity
of power for sale that must be allocated among many preference
customers, these customers must obtain most of their electricity from
other sources.
However, the PMAs differ in how much they provide as a percentage of
their customers' total needs for electricity. About 99 percent of
Southeastern's preference customers purchase no more than 25 percent
of their electricity from the PMA. In contrast, Western supplies
more than half of the electricity to over 40 percent of its
preference customers. Southwestern, on the other hand, supplies no
more than 25 percent of the electricity used by most of its
preference customers. Yet, it also supplies over 20 percent of its
preference customers with at least 75 percent of their electricity.
PMA officials and representatives of preference customers maintain
that the total portion of electricity the PMAs supply to them does
not accurately portray the PMAs' importance because the PMAs
primarily provide power to them during periods of peak demand when
electricity from other sources is in relatively short supply.
Therefore, measuring the customers' reliance on the PMAs in terms of
their purchases of electric energy (measured in kWh) does not
accurately capture the situation of some preference customers,
particularly those of Southeastern and Southwestern, that rely more
on the PMAs to meet their peak demands for electricity. These
customers may use electricity from the PMAs more for meeting peak
demands than for providing normal baseload electricity. In response,
representatives of IOUs contend that most preference customers could
purchase this electricity from other sources.
Figure 2.5: Power Purchases
From PMAs by Public Power
Customers as a Percentage of
Their Total Power Obtained From
All Sources, Fiscal Year 1994
(See figure in printed
edition.)
Note: Totals may not add to 100 percent due to rounding.
Source: GAO's analysis of data provided by EIA and the PMAs.
--------------------
\8 These figures do not include preference customers who do not
report to EIA their purchases of electricity from other sources.
PMAS SELL POWER AT A LOWER
WHOLESALE COST THAN OTHER
UTILITIES
---------------------------------------------------------- Chapter 2:3
In fiscal year 1994, the PMAs sold power at a wholesale rate that was
about one-half of the wholesale rates offered by other utilities.
For example, the combined average revenue earned per kWh sold by the
three PMAs in our study was about 1.8 cents compared with a national
rate of about 3.5 cents for IOUs and about 3.9 cents for publicly
owned generating utilities (POG).\9 In fiscal year 1994,
Southeastern's average revenue of about 2.0 cents per kWh compared
with wholesale rates of about 4.2 cents per kWh for IOUs and about
5.3 cents for POGs in the region in which Southeastern serves
power.\10
In fiscal year 1994, Southwestern received average revenues of about
1.5 cents per kWh. In comparison, IOUs' average revenues per kWh
ranged from about 2.6 to 4.5 cents per kWh, while POGs' average
revenues per kWh ranged from 3.5 to 4.1 cents per kWh in the region
in which Southwestern sells power. In fiscal year 1994, Western
received average revenues of about 1.8 cents per kWh for its
electricity. In contrast, IOUs received average revenues ranging
from about 2.7 to 3.5 cents per kWh and POGs' average revenue ranged
from about 3.3 to 4.1 cents per kWh in the region in which Western
sells power.
According to a PMA official, because of the low rates PMAs offer, the
PMAs have informal waiting lists of prospective preference customers
that want to buy their power. Although Western is implementing a
program to set aside some existing capacity to serve new customers,
becoming a new PMA customer is difficult because few customers are
willing to give up their power allocations from a PMA and almost no
new federal hydropower plants will be coming on line in the
foreseeable future.
Figure 2.6: Average Revenue
Earned Per KWh Sold by PMAs,
Regional Investor-Owned
Utilities, and Publicly Owned
Generating Utilities, 1994
(See figure in printed
edition.)
\a SEPA/SERC - Southeastern/Southeastern Electric Reliability
Council; SWPA/SPP - Southwestern/Southwest Power Pool; WAPA/WSCC -
Western/Western Systems Coordinating Council; NERC - North American
Electric Reliability Council.
\b Average revenues per kWh sold can fluctuate throughout the year,
depending on the availability of water--for instance from 1.2 to 2.8
cents per kWh for Southwestern.
Source: GAO's analysis of data provided by EIA, the PMAs' 1994
annual reports, and the American Public Power Association.
Many factors contribute to the PMAs' ability to sell electricity at
generally lower rates than other neighboring utilities. Importantly,
their electricity is primarily generated from hydropower plants,
making their power generally less expensive than other sources of
power because it has no fuel cost. In addition, because most of
these hydropower plants were built when construction costs were lower
than more recent construction, the PMAs have lower imbedded costs to
recover through their rates. Also, as we discussed in our 1996
report, their rates do not fully recover all of the costs associated
with production of power. In some cases, the PMAs are not required
to recover some costs (for example, certain environmental costs and
the full costs of federal pensions and postretirement health
benefits) because of specific legal provisions or because the DOE
implementing order excludes the costs or is not specific about
them.\11 Also, unlike IOUs, the PMAs do not pay federal income taxes
nor do they set their rates to earn a profit. In addition, while the
PMAs in our study do not have to build new capacity to meet future
demand, IOUs have an obligation to serve all existing and future
customers in their service areas. Therefore, they must build new
generating capacity and recover the associated capital costs through
their rates. This requirement could result in higher rates for IOUs,
depending on the cost to increase this capacity.
--------------------
\9 EIA cautions that the average revenue per kWh sold should not be
used as a substitute for the price of power. The price that any one
utility charges another for wholesale energy reflects numerous
transaction-specific factors, including the fee charged for reserving
a portion of capacity, the fee for the energy actually delivered, and
the fee for the use of the hydropower-generating facilities. These
fees are influenced by such factors as time of delivery, quantity of
energy, and the reliability of supply. Also, all three PMAs use
power repayment studies to set their rates. Southeastern sets a rate
for each of its four different systems, Southwestern generally sets a
rate for its entire service area but also sets a separate rate for
two separate generating facilities, and Western sets a rate for each
of its "projects."
\10 We used the reliability council regions defined by the North
American Electric Reliability Council as the basis for revenue
comparisons.
\11 Power Marketing Administrations: Cost Recovery, Financing, and
Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19,
1996).
PMAS WORK CLOSELY WITH THE
BUREAU AND THE CORPS
---------------------------------------------------------- Chapter 2:4
The PMAs have a close working relationship with the Bureau and the
Corps, which operate and control the hydropower plants and ensure
that hydropower is generated subject to the other multiple purposes
of federal water projects. These relationships are based on written
documents and on flexible arrangements. The PMAs market power
subject to the parameters of these written agreements and flexible
arrangements. The flexible arrangements allow the operating agencies
to balance a project's multiple purposes, even if this reduces power
production. For example, releasing water in the late summer to
improve oxygen levels downstream to benefit fisheries reduces the
capacity to generate electricity.
THE BUREAU AND THE CORPS
MANAGE THE OPERATION OF
FEDERAL WATER PROJECTS
-------------------------------------------------------- Chapter 2:4.1
In allocating water among a project's multiple purposes, the Bureau
and the Corps arbitrate among the competing purposes for water. The
Bureau operates primarily in the West and manages water in federal
water projects mostly for irrigation. The Corps manages water mostly
for flood control and navigation. The Bureau and the Corps also
provide water for fish and wildlife habitat enhancement, municipal
and industrial supplies, recreation, and water quality improvement.
How much electricity the PMAs can sell is subject to the Bureau's and
the Corps' control of the water. How the Bureau and the Corps
control the water, in turn, is affected not only by the multiple
purposes of a project but by the interests of outside stakeholders.
For instance, under provisions of the Clean Water Act, state agencies
issue water quality certificates that affect how federal dams are
operated and the amount and timing of water that can be released from
a reservoir. Moreover, compacts to apportion water among states
affect the availability of water for various purposes. The Bureau
and the Corps must also frequently consider state environmental laws
when managing water resources. For instance, in operating the
Central Valley Project (CVP) in California, the Bureau follows a
decision by the California State Water Resources Board that directs
the CVP and the state water project to meet the state's standards for
fish habitat and water quality, such as the salinity standards for
the San Francisco Bay area. To accomplish these standards, the
Bureau and the management of the state water project operate under an
agreement that describes how water supplies should be shared and who
would be responsible for environmental issues. For example, under
one aspect of this agreement, the Bureau would be responsible for
about 75 percent of the fish and wildlife habitat and water quality
responsibilities in some cases.
OPERATING AGENCIES AND THE
PMAS INTERACT WHEN PLANNING
MANAGEMENT OF A RIVER SYSTEM
-------------------------------------------------------- Chapter 2:4.2
The Bureau or the Corps and the PMAs interact when planning the
management of a river system, so that releases of water, which are
frequently accomplished through the generating turbines of a
hydropower plant, can be timed to maximize the use of water for the
sale of hydropower. Western and Bureau officials in Salt Lake City,
Utah; Sacramento, California; and Billings, Montana; for example,
explained that the Bureau prepares annual operating plans that are
updated monthly. In January of each year, the Bureau completes the
first surveys of mountain snow. By entering the resulting data into
its model, the Bureau makes preliminary predictions about run-offs
and annual hydrological conditions. Western, water users,
environmentalists, and other stakeholders then meet to review the
12-month operating plan. The Bureau updates the plan monthly as new
hydrologic information becomes available. For each month in a
rolling 12-month period, the annual operating plan contains the
following information by reservoir, dam, and hydropower plant: water
inflows, water levels, projected water releases, projected water
deliveries, and estimated power generation by each hydropower plant
according to the maintenance schedule and planned outages. Based on
information about hydrology, reservoir levels, and the demand for
water, the Bureau issues daily water orders that fine tune water
releases and water movements to accommodate the project's multiple
purposes. The staff of the Bureau's control center and Western's
power dispatchers coordinate water releases so water is released
through the turbines to maximize the value of the power generated
within the parameters defined by the other multiple purposes of the
project.
THE OBJECTIVES OF A FEDERAL
DIVESTITURE WILL SHAPE GENERAL
DECISIONS ABOUT A SALE
============================================================ Chapter 3
The general process governments use to divest their assets is
composed of many decisions. In reviewing domestic and international
divestiture experiences, we found a successful divestiture begins
with a definition of the sale's objectives, which typically include
(1) reducing or eliminating the government's presence in an activity
that some view as best left to the private sector and (2) improving
the government's fiscal situation.\1 Both of these objectives have
been advanced by those who favor the federal government's divestiture
of its hydropower assets. However, those who oppose divesting these
assets argue that there are advantages stemming from the government's
current hydropower activities and question whether divesting the
federal hydropower assets, including the PMAs, would actually improve
the government's fiscal position.
Once a decision has been made to divest certain federal assets, the
underlying objectives will shape the sales process. In particular,
they will shape the general decisions about which specific assets are
sold, what conditions and liabilities will transfer with those
assets, and how to implement the sale.
--------------------
\1 We reviewed experiences with divestiture in five
countries--Canada, France, Mexico, New Zealand, and the United
Kingdom. Each of these governments reported that it viewed
increasing economic efficiency as a major objective of their
divestiture programs. Budget Issues: Privatization/Divestiture
Practices in Other Nations (GAO/AIMD-96-23, Dec. 15, 1995).
REDUCING OR ELIMINATING THE
GOVERNMENT'S PRESENCE IN THE
PRIVATE SECTOR AND LOWERING THE
DEFICIT ARE COMMON OBJECTIVES
FOR SELLING GOVERNMENT ASSETS
---------------------------------------------------------- Chapter 3:1
A successful divestiture of government assets generally starts with
defining the objectives of a sale. Divestiture proposals have been
motivated by two broad objectives, typically in conjunction with one
another: (1) to reduce or eliminate the government's presence in an
industry that is viewed as best left to the private sector and (2) to
improve the government's fiscal position.
ONE TYPICAL OBJECTIVE IS
REDUCING OR ELIMINATING THE
FEDERAL PRESENCE IN A
LARGELY PRIVATE SECTOR
ACTIVITY
-------------------------------------------------------- Chapter 3:1.1
International experience with divestitures suggests that one common
objective for divesting government assets was a belief that certain
functions being provided by the government would be more efficiently
undertaken by the private sector. Some proponents believe this
premise is true in the context of federal hydropower assets, because
they believe the federal government should not be involved in
generating, transmitting, and marketing electricity in wholesale
markets. They maintain the following:
-- The historical justification for the federal presence in the
electricity industry--to provide electricity at the lowest
practicable cost to regions that were too remote or sparsely
populated to be served by investor-owned utilities (IOUs)--is
outmoded. The entire nation has become electrified; new
technologies, such as the gas-fired turbine, generate
electricity at relatively low capital costs; and nonutility
generators, such as independent power producers, now generate
and sell power in wholesale electricity markets that have become
increasingly competitive. In addition, the 1992 Energy Policy
Act required that a utility make its transmission lines
accessible to other utilities (called "open transmission
access"), thus enabling customers to obtain electricity from a
variety of competing utilities.\2 As the market has become
increasingly open, spot and futures markets in bulk power have
grown and power marketers and brokers now offer services so
wholesale customers can buy the cheapest power available.\3
-- The tax advantages and other subsidies the PMAs receive give
them unfair advantages over their competitors. As we recently
reported, federal hydropower is cheaper than wholesale power
sold by IOUs and publicly owned generating utilities, in part
because hydropower has no fuel cost, but also because the PMAs
have received low-interest financing and have flexible repayment
terms.\4
-- If federal hydropower assets are sold, the private sector would
operate these assets more efficiently. Proponents believe that
the federal agencies do not adequately operate, maintain, and
repair these assets. As we recently testified, the government's
capital planning and budgeting systems do not enable federal
agencies to fulfill these responsibilities adequately.\5
Furthermore, according to proponents, the private sector would
make better decisions about maintenance and investment because
the decisions would be based on market signals rather than the
federal government's appropriations and budget cycles.\6 In
responding to a draft of our report, Corps officials pointed out
that, in some instances, the Corps' efforts to better operate,
maintain, and repair its hydropower plants have paid off, and
they cited that the Corps' South Atlantic Division (Atlanta,
Georgia) has improved the generating availability of its
hydropower plants to over 90 percent for fiscal year 1996.\7 PMA
officials added that not all federal hydropower assets in all
regions of the nation exhibit these problems.
--------------------
\2 This act authorized FERC to order utilities (including PMAs) to
provide wholesale transmission services, upon application, to any
electric utility, federal power marketing agency, or any person
generating electric energy. In 1996, FERC issued Order 888,
requiring all public utilities to file open access transmission
tariffs so that eligible customers are not required to seek
transmission services on a case-by-case basis. Since the PMAs are
not public utilities as defined under section 201(e) of the Federal
Power Act, they are not required to file open access transmission
tariffs. However, as transmitting utilities, they still may be
required to provide transmission services to any applicant on a
case-by-case basis.
\3 Spot markets involve transactions for the immediate delivery of a
commodity. Futures markets determine current prices for the delivery
of a product at some specified future date.
\4 Power Marketing Administrations: Cost Recovery, Financing, and
Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19,
1996).
\5 Federal Power: Outages Reduce the Reliability of Hydroelectric
Power Plants in the Southeast (GAO/T-RCED-96-180, July 25, 1996).
\6 It is important to note that many opponents of divestiture,
including some preference customers, concur that the Bureau and the
Corps do not adequately operate, maintain, and repair the federal
hydropower assets. Some of these customers now support up-front
financing of capital repairs for these assets, greater involvement by
customers in planning and financing capital repairs, and contracting
out these responsibilities to the private sector or to the preference
customers themselves while the federal government retains ownership
of the assets.
\7 In fiscal year 1995, the availability of these hydropower plants
was 87 percent.
ANOTHER OBJECTIVE IN
DIVESTING FEDERAL ASSETS IS
IMPROVING THE GOVERNMENT'S
FISCAL SITUATION
-------------------------------------------------------- Chapter 3:1.2
International experience also suggests that asset divestitures have
been typically motivated by a desire to reduce the government's debt
or deficit. This can include reducing the size or activities of the
government. Some policymakers propose selling the federal hydropower
assets to improve the federal government's fiscal position: They
believe the cost of the federal hydropower program exceeds its value
to the government because, among other reasons, the rates the PMAs
charge do not recover all of the costs associated with generating,
transmitting, and marketing electricity. If the government would
sell these assets, the lump-sum payments would reduce the federal
government's current borrowing requirements. The government would
also save money on the annual appropriations that would no longer be
needed for the three PMAs and the operating agencies for operating,
maintaining, and repairing those assets. While the U.S. Treasury
would no longer receive annual revenues from the sale of federal
hydropower, proponents of divestiture believe that the sales proceeds
the federal government would receive from the divestiture and the
reduced government expenditures would more than offset the forgone
revenues from electricity sales.\8 Some proponents also contend that
a divestiture would eliminate any subsidies to PMA ratepayers.
However, assessing the full financial impact on the government from a
sale of hydropower assets requires that other indirect costs to the
government also be considered. Furthermore, assessing the full
financial impact requires examining a variety of revenue and
expenditure components, expressing these in present value terms that
reflect their timing as well as magnitude, and addressing underlying
uncertainties through sensitivity analyses.\9 For instance, the
government would incur transactions costs--associated with preparing
for and carrying out a divestiture--if it sells the assets. These
costs could be significant, particularly in the case of a large-scale
public stock offering.\10
Additionally, a variety of labor costs, such as providing severance
packages to terminated employees of the PMAs and/or operating
agencies, and other costs associated with the disposition of their
pension and postretirement benefits would need to be accounted
for.\11
Furthermore, a divestiture could create more regulatory
responsibilities, and the costs of meeting those increased
responsibilities would have to be considered a cost of the
divestiture if those costs would not have been incurred otherwise and
would be borne by the government.\12
Proponents contend that some of these additional costs may be offset
by the additional tax revenues the federal government would receive
from sales of electricity if the PMAs and related hydropower assets
were sold to IOUs or independent power producers. The Edison
Electric Institute (the trade association of IOUs and a strong
advocate of divesting federal hydropower assets) maintains that, if
the three PMAs in our study were sold to private utilities, the
present value of potential federal income taxes on purchasers and
bond buyers could equal about $1 billion.\13 However, these taxes may
reduce how much a potential purchaser would offer for the PMAs by an
amount approximately equal to the tax liabilities. Thus, counting
the expected additional tax revenues without considering the
offsetting effect on the expected sales price would overstate the
financial benefits of the sale.
Finally, it is important to note that the budgetary treatment of a
sale of federal assets does not reflect the full, long-term financial
impact of the sale on the Treasury. For example, current budget
rules use a 5-year budget window for scoring government revenues and
expenditures.\14 Many observers believe that this period is not long
enough to evaluate an asset sale in which lump-sum sales proceeds are
compared to changes in expenditure and revenue streams that may
continue for up to 50 years. In addition, without legislative
change, the sales proceeds from a divestiture could not be used to
finance new spending or offset revenue losses. Furthermore, the
congressional committees that have jurisdiction over the entities
being sold could not count the sales proceeds toward the deficit
reduction goals specified under the Budget Enforcement Act of 1990,
as amended. This means the committees could not use the proceeds to
offset additional expenditures within their budget allocation.
However, because the sales proceeds would flow directly to the
Treasury, the proceeds would reduce the government's overall
borrowing requirements.
--------------------
\8 Bureau officials note that certain hydropower revenues accrue to
and are expended from revolving funds, such as the one associated
with the Colorado River Storage Project.
\9 Examines how the result of a calculation is affected by changes in
the variables used.
\10 For example, as reported in the press, selling the United States
Enrichment Corporation could yield sales proceeds estimated between
$1.5 billion and $2 billion, but it could have transactions costs of
$60 million to $100 million.
\11 Federal agencies do not pay the full cost of these benefits
currently and, depending on the terms of a divestiture, the
government could continue to bear the residual costs. We reported
that the cumulative unrecovered Civil Service Retirement System
pension and costs for postretirement health benefit for the three
PMAs totaled an estimated $436 million as of September 30, 1995.
Power Marketing Administrations: Cost Recovery, Financing, and
Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19,
1996).
\12 If FERC is the selected regulatory authority, then the additional
costs of licensing and regulating divested hydropower assets would be
recovered through FERC's fees, subject to congressional action.
\13 Although PMAs make some payments in lieu of taxes, officials from
the Edison Electric Institute stated that IOUs pay an average of 8
cents on every dollar earned in federal taxes, while the PMAs, being
federal entities, are tax-exempt.
\14 Scoring is the process of estimating the budgetary effects of
legislation and comparing them to limits set in the budget resolution
or legislation.
MANY QUESTION THE NEED TO
DIVEST FEDERAL HYDROPOWER
ASSETS
-------------------------------------------------------- Chapter 3:1.3
Those who favor the government's current role in providing hydropower
maintain that the debate about divesting hydropower assets should
also consider many other effects. They point to long-standing
federal policies to use federal water projects to help develop local
and regional economies and the importance of the revenue the
government receives from the sale of hydropower. For example, as an
"aid to irrigation," power revenue is counted on to repay about 70
percent of the federal government's (nominal) capital investment in
irrigation facilities at federal water projects in the West. Parties
that favor continued government ownership argue that the sale of
federal hydropower promotes competition. They also assert that
private-sector generation and marketing of hydropower formerly
provided by the PMAs would lead to greater monopoly power in the
electricity industry and higher rates to consumers, especially those
in remote rural, low-income areas. In addition, the opponents of the
sale believe that the PMAs' electric rates are not subsidized and
that, if the federal government sold its hydropower assets, the
taxpayer would lose a steady stream of revenues that over time would
exceed their selling price.
THE DIVESTITURE OF FEDERAL
ASSETS REQUIRES SEVERAL GENERAL
DECISIONS
---------------------------------------------------------- Chapter 3:2
Once a decision has been made to divest, then additional decisions
would be needed to answer several broad questions. For instance,
what specific assets would be divested? What associated conditions
and liabilities would be transferred? And, what methods would be
used to value and sell the assets? The final sales proceeds would
depend on just what decisions would be made.
THE SPECIFIC ASSETS TO BE
SOLD WOULD NEED TO BE
IDENTIFIED
-------------------------------------------------------- Chapter 3:2.1
As we found in our review of divestitures in other nations, an
important, initial decision in a divestiture involves determining
which assets to sell. In this regard, federal hydropower assets
could be grouped in several different ways. First, a PMA itself
could be sold, including any transmission assets and/or the right to
sell the hydropower generated at the Bureau's or the Corps'
hydropower plants. In a second alternative, a PMA, including its
transmission assets and its right to sell power, as well as the
Bureau's or the Corps' powerplants could be divested. In a third,
more complicated alternative, a PMA and all of the aforementioned
items as well as the remaining assets related to the water projects
(e.g., the dams and the reservoirs) could be divested.
An alternative to selling an entire PMA and any related hydropower
assets could be to package the assets of a specific project for sale.
For instance, Bureau officials in Sacramento, California, opined that
the Central Valley Project could be sold to the state of California
because the project is contained fully in that state and complements
the existing water project that is managed by the state. Another
option could be to sell all the federal hydropower plants on a river
system together to preserve operating efficiencies because the
releases of water from upstream facilities to downstream ones could
be more easily coordinated under one-party ownership--an important
consideration for flood control and other water management purposes.
TRADE-OFFS BETWEEN
LIABILITIES TO BE
TRANSFERRED OR RESTRICTIONS
ON DIVESTITURE AND THE BIDS
RECEIVED WOULD NEED TO BE
CONSIDERED
-------------------------------------------------------- Chapter 3:2.2
Along with defining the specific assets to be divested, policymakers
would have to consider the explicit and implicit liabilities borne by
the government and which of those liabilities to transfer to a buyer.
As a policy matter, the government may want to retain certain
liabilities associated with the assets being divested or place
specific restrictions on their postdivestiture use of these assets.
However, policymakers would need to consider that assets that are
sold with many or relatively onerous restrictions (from the viewpoint
of a prospective purchaser) or assets that are in poor condition are
correspondingly less attractive and would likely result in lower
sales proceeds than otherwise. While the government may still choose
to place restrictions or to assign or retain certain liabilities, the
financial consequences in terms of the sale price should be assessed.
Many combinations of assets and liabilities could be grouped for
sale. Both defining and valuing the specific liabilities that the
federal government could retain are important because the government
may be in a better position to bear certain risks. In general, the
government could receive larger sales proceeds by retaining certain
liabilities because a purchaser could substantially discount its bid
if the purchaser would assume the financial risks associated with
those liabilities. For instance, in the proposed divestiture of the
United States Enrichment Corporation (USEC), the government would
retain liability for the environmental cleanup associated with the
prior production of enriched uranium. According to a contractor's
report, decontamination and decommissioning activities at uranium
enrichment plants could cost as much as $17.4 billion in 1994
constant dollars. The PMAs are liable for environmental cleanup
associated with use of polychlorinated biphenyls and other hazardous
waste. While no precise estimates have been made, these liabilities
could total many millions of dollars.
Assets that are in better operating condition are more likely to
receive larger bids than assets in poor condition. We testified
recently that federal hydropower plants in the Southeast have
experienced significant outages and that these outages occur because
of the age of the plants and the way they have been operated. If
these hydropower assets were to be sold without reducing the current
backlog of necessary maintenance, bids would be lowered. However, a
1995 World Bank review of international experience with divestitures
found that in preparing a government enterprise for divestiture, a
government should generally refrain from making new investments to
expand or improve that enterprise because any increase in sales
proceeds is not likely to exceed the value of those investments.
Imposing restrictions on operating the assets could also reduce the
value to potential buyers. For instance, significant restrictions on
using water to generate hydropower at the Glen Canyon Dam have been
implemented to protect a variety of natural and cultural resources
that are located downstream. According to the Bureau, these
restrictions reduced the dam's generating capacity by an amount
exceeding 400 MW, even though total energy production over the course
of a day or a season will be largely unchanged.\15 It is almost
certain that a new owner of the Glen Canyon Dam would continue to
bear the responsibility to operate the dam's hydropower plants
according to these restrictions. As a practical matter, bids by
prospective purchasers of the rights to market hydropower produced at
Glen Canyon Dam would presumably reflect the diminished revenue
potential. Thus, the government would incur much of the financial
cost associated with the current restrictions in the form of reduced
proceeds from the sales, just as the government would continue to
bear this cost if its continued ownership and operation of the dam
were maintained. Moreover, uncertainty about the extent of such
restrictions likewise increases the uncertainty of expected future
revenues and would likely reduce proceeds from the sale.
In previous deliberations over divesting federal hydropower assets,
including the PMAs, policymakers debated the desirability of ensuring
regional control of divested federal hydropower assets. While a
decision to limit bidders on particular assets to certain geographic
areas would foster a goal of local or regional control of those
assets, it could reduce the proceeds from the sale if other
potentially interested buyers were precluded from making offers. For
example, in the divestiture of the Alaska Power Administration--the
only PMA to be offered for sale--an overriding concern was to protect
the PMA's ratepayers from possible increases in electricity rates.
This concern led decisionmakers to restrict the eligibility of
bidders to only ones from within the state. It also led
decisionmakers to accept a sales price approximating the present
value of future principal and interest payments that the Treasury
would have received instead of establishing the price by selling the
assets in an open, more competitive fashion to the highest bidder.
--------------------
\15 Essentially, the restrictions reduce the amount of electricity
that can be produced during peak periods, when it is more valuable,
and increase the amount of electricity produced during off-peak
periods.
THE SPECIFIC SALES MECHANISM
AND PROCESS NEED TO BE
DETERMINED
-------------------------------------------------------- Chapter 3:2.3
The objectives underlying a divestiture help determine the most
appropriate sales method. For example, if a divestiture were largely
motivated by fiscal considerations--with an emphasis on sales
proceeds--an appropriate sales mechanism would involve some form of
competitive bidding and tend to place few restrictions on the number
or identity of bidders.\16 Alternatively, if the major motivation
were a desire to transfer operations to the private sector--with an
emphasis on a smooth transfer--the government could choose to
negotiate a sales price with a selected buyer.
In general, we have supported the principle that the federal
government should seek the full market value in selling its assets.
Sales methods that allow for competitive bidding are more likely to
generate this result and lead to the transfer of assets to those
buyers who value them most highly. A World Bank survey of
international experiences with divestiture indicates that open
bidding among competitors is preferable to sales that rely on
negotiations with selected bidders because the former method offers
less opportunity for favored buyers to receive special treatment at
the taxpayers' expense.
In practice, the size of the assets to be sold, in terms of value and
scale of enterprise, has influenced the type of sales process used.
Trade sales and public stock offerings are general processes, with
trade sales used more often to sell smaller enterprises or assets,
and public offerings used to sell larger ones. Also, within each
type, sales can be organized using competitive bidding methods or
negotiations. A brief description of these processes follows:
-- "Trade sales" draw on the idea that an existing set of
businesses competing in the relevant line of business (or trade)
are likely to offer more and higher bids for the assets.\17
Three key attributes of the PMAs and the electricity industry
may lend themselves to a trade sale: (1) The PMAs and related
hydropower assets are part of an established industry with
capital market connections experienced in the valuation,
grouping, and sale of electricity-generating assets. (2) Sales
of significant electricity-generating assets are not unusual.
(3) There would likely be several bidders for at least large
portions of the PMAs and their related assets, depending on how
those assets are grouped for sale. A trade sale can be a
negotiated sales process between the government and a buyer or
can be accomplished using an auction to determine both the sales
price of the asset or assets as well as the buyer or buyers.
-- Stock offerings have been used domestically, most recently in
the sale of Conrail in 1987, as well as internationally to
divest large public enterprises. This method of sale would most
likely require creating a government corporation or corporations
out of the PMAs and their associated assets. Some of these
assets could be grouped for sale, and some could be excluded
from the sale, depending on the policy trade-offs discussed. In
the case of some federal water projects, for example, the
government could decide to retain control of the dam and
reservoir to satisfy increasingly significant restrictions on
the use of water because of concerns about the environment or
endangered species. The stock of the government corporation
would be subsequently sold through standard financial market
methods, such as a private placement through negotiations
between particular investors and the government or through a
sale to the general public by using competitive bidding.
In cases where auction methods might be selected to sell government
assets, recent government experience indicates the importance of
carefully choosing the specific format for an auction. That is, a
policy decision to choose a competitive auction format requires
making many subsequent decisions to define the specific rules leading
to an appropriate operational auction. For example, the Federal
Communications Commission has chosen to auction the leases of
electromagnetic spectrum licenses for use in mobile communications.
While generating a large amount of revenue was a less important goal
than achieving an efficient geographic allocation of spectrum
licenses to communications firms, the auctions generated more revenue
than had been predicted by some potential bidders, according to
auction analysts. In large part, the success of these auctions was
due to careful consideration of the auction format and the
identification of particular problematic features of auctions of
similar assets in other countries.\18
Most domestic and international divestitures have relied on private
capital market firms as consultants and managers because of their
frequent experience with complicated and high-valued transactions
governing the transfer of assets in the private sector. Particularly
in the case of public offerings but also for trade sales, the
government would likely incur substantial costs to prepare its assets
for sale or to pay for services performed by its financial advisers.
For example, in the sale of Conrail, the government employed a
variety of financial advisers and, in a key role, a prominent law
firm with expertise in a variety of fields, including tax and
employment law.
Within the government, a variety of possible divestiture management
options exist to guide the divestiture process and implement the
decisions that must be made. In the Conrail divestiture, the
Department of Transportation was primarily responsible for managing
the sale. In the ongoing Alaska Power Administration sale, DOE is
the lead agency. In our review of the USEC divestiture, we
recommended that the Secretary of the Treasury lead the privatization
process because that official will not be affected by the
privatization and the Secretary's mission is clearly defined in terms
of protecting taxpayers' general interests.
--------------------
\16 In general, because bids would likely increase with more bidders,
restrictions on the number of bidders would likely lead to smaller
sales proceeds. In many divestitures, governments have considered
whether to exclude foreign bidders, the trade-off being between sales
proceeds and the development of domestic institutions. Some
restrictions would likely be warranted, such as those that would
preclude frivolous bids.
\17 As a practical matter, no reason exists to restrict bidders to
the relevant trade, even though the term suggests that many potential
purchasers would be drawn from the "trade" or related industries.
\18 For instance, although New Zealand in 1990 and Australia in 1993
sold portions of the electromagnetic spectrum using auction formats
that were fairly well understood in many contexts, these formats
presented problems in the more complicated framework characterizing
the allocation of spectrum licenses. For a discussion of spectrum
auction issues, see R. Preston McAfee and John McMillan, "Analyzing
the Airwaves Auction," Journal of Economic Perspectives, Winter 1996,
pp. 159-175.
MANY SPECIFIC ISSUES RELATED TO
FEDERAL HYDROPOWER WOULD NEED TO
BE ADDRESSED BEFORE A SALE
============================================================ Chapter 4
Besides the general decisions that arise from any complex
divestiture, many specific issues related to federal hydropower would
need to be addressed before a divestiture of federal hydropower
assets could be completed. These issues include the multiple
purposes of federal water projects; the existing contractual
obligations and liabilities of the PMAs, the Bureau, and the Corps;
the future responsibility for environmental liabilities and
protecting endangered species, which already constrain the operations
of many projects; the rights and concerns of Native Americans; and
the future regulatory treatment of the hydropower assets. The
potential effects on wholesale and retail electric rates, including
potential regional economic effects, would also need to be
considered. Although determining how wholesale rates would be
affected by a divestiture is difficult, the impacts would be
influenced by the extent to which customers buy a large portion of
their power from the PMAs and the prevailing wholesale rates in the
regional market. The impact on retail rates and any regional
economic impacts would depend on the extent to which a PMA's
customers would absorb any cost increases or pass them on to their
retail customers.
A divestiture of hydropower assets would require time and resources.
However, complex issues have arisen and been successfully addressed
in transfers of assets in the private sector. For example, for
nonfederal facilities, balancing the multiple purposes of the water
projects has been historically managed through FERC's licensing
process. In addition, when FERC decreased its regulation of the
natural gas industry and the industry restructured itself, thousands
of new contracts were negotiated and rewritten.
THE IMPACT OF A DIVESTITURE ON
BALANCING WATER PROJECTS'
MULTIPLE PURPOSES WOULD NEED TO
BE ADDRESSED
---------------------------------------------------------- Chapter 4:1
The purposes and the management of federal water projects are guided
by many statutes, including federal water management and reclamation
statutes generally applicable to all projects, specific authorizing
and appropriations statutes for individual projects, and
environmental protection statutes. Many federal projects serve
multiple purposes, such as fish and wildlife habitat protection,
flood control, hydropower generation, irrigation, municipal and
industrial water uses, navigation, recreation, and water quality
improvements. Unless the legislation that authorized a divestiture
exempted the water projects from these laws, the statutory provisions
would continue to affect how the new owners would manage the projects
and how much electricity the new owners could generate. See appendix
II for a description of relevant federal statutes.
As described in chapter 2, under current arrangements the Bureau and
the Corps manage the allocation of water in federal water projects to
balance their multiple purposes. The uses of the water are sometimes
complementary and sometimes competitive with one other. For example,
water is stored in and is released from the reservoir to provide for
recreation, but its release through the turbines could be scheduled
to generate electricity in a way that is intended to maximize
revenues. In contrast, Western's office in Billings, Montana,\1
forecasts decreases in power revenues in the long-term because water,
which would otherwise be used to generate electricity, will
increasingly be used for irrigation and other purposes.\2 In its
fiscal year 1995 repayment study, Western predicted that revenues
from the sale of hydropower could decrease from about $253 million in
2001 to about $213 million (in constant 1995 dollars) in fiscal year
2080 for the Pick-Sloan Program.
Under authorizing legislation, such as the Flood Control Act of 1944
and the various reclamation acts, the Bureau and the Corps enjoy some
latitude in managing water for various purposes. These agencies'
role in arbitrating between multiple uses becomes especially visible
during times of drought.\3 For example, according to Western
officials, during the drought of the late 1980s and early 1990s,
water was increasingly assigned to irrigation. As a result, power
generation suffered significantly in Western's service area. The
role of the Bureau and the Corps has also become increasingly
important as population and economic growth have intensified the
competition over how water is used. For example, competition for
water is now emerging even in areas with abundant rainfall, such as
the Southeast. For several years, Alabama, Florida, and Georgia have
been contesting the uses of water on two river basins in the
Southeast (the Alabama-Coosa-Tallapoosa and the
Apalachicola-Chattahoochee-Flint) that are managed by the Corps.
Georgia, which contains the headwaters of the waterways in question,
needs increased water supplies to provide for the growing population
of the Atlanta area, as well as for farming and industry. Florida is
concerned about the effects of water levels on its barging
industries. It is also concerned about upstream pollution because
water from the Chattahoochee and other rivers flows into Apalachicola
Bay--a rich source of shellfish and shrimp. Alabama is also
concerned about the cumulative impacts of potential water resource
actions. In the 1980s, the Corps, responding to requests from
several Georgia communities for additional water withdrawals from
reservoirs, planned to reallocate water away from generating
hydropower to increase the water supply. In June 1990, Alabama sued
the Corps, challenging the adequacy of documentation about the
environmental impacts of those reallocations and the Corps'
procedures for operating its reservoirs. However, in January 1992,
after Alabama put aside the lawsuit, the governors of the three
states signed an agreement with the Corps to work together through a
study to resolve their issues. This study is projected to be
completed in December 1997.
--------------------
\1 The eastern and western divisions of Western's Pick-Sloan program
market power from the Bureau's and the Corps' hydropower projects
(3,102 MW) on the upper-Missouri River and its tributaries.
\2 According to Bureau officials, the vast majority of planned
irrigation projects in the Pick-Sloan Program will likely not be
completed because they are infeasible and not cost-effective. See
Federal Power: Recovery of Federal Investment in Hydropower
Facilities in the Pick-Sloan Program (GAO/T-RCED-96-142, May 2,
1996).
\3 According to Interior, interstate water compacts, such as the
Colorado River Compact, and international water delivery requirements
are also important factors related to the management of water that
would affect potential divestitures.
POSTDIVESTITURE ROLE OF THE
BUREAU AND THE CORPS WOULD
DEPEND ON THE ASSETS
DIVESTED
-------------------------------------------------------- Chapter 4:1.1
The ability of the Bureau and the Corps to continue to balance the
purposes of a water project after a divestiture would depend largely
on the types of assets that were being sold. If only the PMA and its
transmission assets were divested, then the Bureau and the Corps
would continue to control how water is allocated, used, and released,
because they would continue to own and operate the dams, the
powerplants, and the reservoirs. According to Bureau, Corps, and PMA
officials, the impact of such a divestiture on the operation of a
water project and its multiple purposes would be manageable because
the buyer would have to dispatch and market power subject to the
Bureau's and the Corps' continued presence and decisions about water
releases. However, the Bureau and the Corps would have to deal with
a nonfederal entity with different incentives than the former PMA,
which was a fellow government agency that understood the need to
operate so as to meet multiple public purposes.
If the PMA, its transmission assets, and the Bureau's and the Corps'
hydropower plants were sold, then the Bureau and the Corps would
retain ownership of the dams and the reservoirs and would continue to
plan and manage the water. However, because water is released
through both the spillways (which would continue under the Bureau's
or the Corps' control) and the powerplant (which would be controlled
by the nonfederal buyer), a nonfederal entity would have some measure
of operational control over how and when water would be released.
Bureau, Corps, and PMA officials explained that the operating
agencies would have to be more vigilant than they have been when
dealing with the buyer of the PMA and the powerplants.
If the PMA, its transmission assets, the powerplants, the dams, and
the reservoirs were sold, the Bureau and the Corps would no longer be
responsible for managing how water is used and balancing the
projects' multiple purposes. As discussed later in this chapter, in
this case a regulatory agency, such as FERC, would have to consider
the projects' purposes when licensing and regulating postdivestiture
hydropower production and other activities at a divested project.\4
FERC officials noted that nonfederal water projects licensed by the
commission also have multiple purposes that must be accommodated.
--------------------
\4 According to FERC officials, FERC would likely license and
regulate any divestiture that involves the sale or transfer of the
powerplant.
IRRIGATION IS A UNIQUE PUBLIC
PURPOSE THAT WOULD
SIGNIFICANTLY AFFECT SOME
DIVESTITURES
---------------------------------------------------------- Chapter 4:2
The irrigation function at federal water projects presents issues for
divestitures that differ from the other project purposes.\5
Specifically, as of September 30, 1995, power revenues were scheduled
to pay for about $1.5 billion to recoup the federal capital
investment for completed federal irrigation facilities.\6 This amount
is to be repaid for periods of up to 60 years for individual
irrigation projects.\7 Under current repayment practices, this debt
is to be repaid without interest, and repayment of the debt can be
deferred until the end of the repayment period.\8 Moreover, according
to the Bureau's officials, because capital expenditures on irrigation
facilities are expected to continue to increase for renovating and
replacing existing facilities as well as constructing new ones, the
total amount of "irrigation assistance" could also increase over
time. However, most planned irrigation projects likely will not be
completed because they are infeasible and not cost-effective. If
Western, the related federal water projects, or irrigation projects
within Western's service area were sold to nonfederal entities, the
issue of how this federal investment in irrigation would be repaid
would have to be addressed.
Hydropower is used at some federal projects within Western's service
area to power the pumps that move water from the reservoirs and the
canals to the fields. In recent years, as much as about 30 percent
of all electricity generated by the Bureau's hydropower plants in
California's Central Valley Project (CVP) has been used for this
"project pumping." Moreover, at some federal irrigation projects, the
rate that has been charged for "project pumping" electricity has been
far below the rate that has been charged for commercial uses.
According to Bureau officials, at the Eastern Division of the
Pick-Sloan Program, the average rate per kWh sold in fiscal year 1995
was about 1.5 cents per kWh, while the rate for project pumping was
only about 0.2 cents per kWh. Any divestiture would need to clarify
whether the new owners would be required to provide power for
irrigation below the rates paid by other customers. If the dams and
the reservoirs were sold, then the government would have to negotiate
arrangements to accommodate the use of water for irrigation.
--------------------
\5 Among the three PMAs in our study, only Western transmits and
markets power from federal water projects that provide for
irrigation. Bonneville, too, has such projects.
\6 According to Bureau officials, revenues from the sale of federal
hydropower are scheduled to repay about 70 percent of the total
federal capital investment in completed irrigation projects. For the
Colorado River Storage Project, the Bureau and Western estimate the
amount to be about 95 percent.
\7 Under the principle of "aid to irrigation," the Secretary of the
Interior determines the amount of federal capital investment in
completed irrigation projects that irrigators can afford to repay.
Most of the remainder is assigned to be repaid through revenues from
the sale of federally marketed electric power. As of September 30,
1995, only $32 million of the outstanding irrigation debt had been
repaid.
\8 Because of the application of these repayment practices, the
present value of the $1.5 billion may be viewed as very small.
THE GOVERNMENT'S CONTRACTUAL
OBLIGATIONS MUST BE RECOGNIZED
---------------------------------------------------------- Chapter 4:3
As agencies of the federal government, the PMAs, the Bureau, and the
Corps have entered into a wide range of legally binding contracts in
conducting the generation, transmission, and marketing of hydropower.
Until the specific terms of a divestiture proposal and the
accompanying legislation are known, identifying possible
complications that could delay or otherwise affect the sale will be
difficult. However, even if the legislation establishes the
transferability of these contractual obligations, stakeholders might
be able to delay or complicate the divestiture process by filing
lawsuits. Although we did not review the thousands of contracts and
other agreements that could be affected by a divestiture, according
to Bureau and PMA officials, some of the government's current
contracts do not address the transfer of the government's contractual
obligations after a divestiture.
Historical precedence exists in the energy sector for addressing
extensive and complex contractual obligations. For example, after
FERC ordered the restructuring of the natural gas industry, thousands
of new contracts were written. FERC Order 636, which was issued in
1992, required, among other things, that all interstate pipeline
companies restructure their tariffs, services, rates, and contracts
and separate or "unbundle" their gas transportation and storage
arrangements. To conform to this order, gas pipeline companies
negotiated about 3,800 new contracts with their customers.
SELLING POWER TO PREFERENCE
CUSTOMERS IS AN IMPORTANT
CONTRACTUAL OBLIGATION
-------------------------------------------------------- Chapter 4:3.1
One of the PMAs' most important contractual obligations is selling
power to their "preference customers." The PMAs market hydropower on
a wholesale basis at the lowest possible rates, consistent with sound
business practices.\9 The three PMAs in our study have contracts to
sell power to over 990 customers at cost-of-service rates ranging
from about 1.5 cents to about 2.0 cents per kWh.\10 Although these
rates may increase in the future, they are significantly lower than
the average national wholesale rates of 3.4 cents per kWh for IOUs
and about 4.0 cents for publicly owned generating utilities.
Currently, the PMAs are renewing their power contracts. Western has
extended its contracts in the Pick-Sloan Program through 2020 and is
proposing 20-year extensions of power contracts at other projects.
According to PMA officials, it is unclear whether a buyer of a PMA
would have to continue selling power at low rates to preference
customers and, if so, for how long. If a PMA were divested, its
contractual obligations with its customers could be assigned in whole
or in part to the buyer.\11
--------------------
\9 Rates are set under the Flood Control Act of 1944, the Reclamation
Project Act of 1939, and 58 Fed. Reg. 59716.
\10 These rates are average PMA-wide rates that do not apply to all
projects from which the PMAs market power. For example, although
Western's average revenue rate per kWh in fiscal year 1994 was about
1.8 cents per kWh, the composite firm rate for the Central Valley
Project (CVP) in California, from which Western markets power, was
about 3.0 cents per kWh. Pursuant to Western's rate process in 1995,
Western reduced the CVP's composite firm rate to about 2.3 cents per
kWh for fiscal year 1996.
\11 Any divestiture proposal would need to consider the need to amend
the various laws requiring preference in the sale of federal power
for public bodies and cooperatives.
VARIOUS INTERCONNECTION AND
TRANSMISSION CONTRACTS AND
AGREEMENTS TIE PMAS INTO
REGIONAL GRIDS
-------------------------------------------------------- Chapter 4:3.2
In addition to power contracts, the PMAs have entered into
interconnection, transmission, and right-of-way contracts and
agreements that make them a vital part of regional power grids. For
example, in addition to power contracts with 83 customers, Western's
office in Folsom, California,\12 has numerous contracts and
agreements for providing transmission and interconnection services,
for buying power from utilities in the Pacific Northwest, for
delivering power to irrigation projects via the transmission grid of
another utility, and for acquiring rights-of-way and easements along
transmission lines. Western has a key contract with the Pacific Gas
and Electric Company (PG&E), first signed in 1967, that integrates
the operations of the PMA and the company. Under this complex
contract, Western provides peaking capability to PG&E in exchange for
firm power services;\13 PG&E also delivers 880 MW to Western's
preference customers. Moreover, to bring more power to its system,
Western also owns part of the Pacific Northwest-Southwest Intertie
and an interest in the California-Oregon Transmission Project, which
allows Western to transmit power from the Bonneville Power
Administration, Pacific Corp, and other utilities in the Pacific
Northwest.
Although Southeastern has no transmission assets, it has 17 contracts
with regional utilities (including regional IOUs, state public power
agencies, and electric cooperatives) to transmit power that is
generated by hydropower plants the Corps operates. These contracts
differ in the services provided, cancellation provisions, and
customers served. Seven of the utilities, including the Tennessee
Valley Authority (TVA), provide both transmission and ancillary
services. These contracts are described in appendix IV.
--------------------
\12 Western's Folsom office markets power from the Bureau's CVP,
which has a generating capacity of about 2,000 MW.
\13 Firm power refers to the power or the capacity that is intended
to be available at all times during a period covered by a commitment,
even under adverse conditions.
THE BUREAU AND THE CORPS
ALSO HAVE MANY CONTRACTS AND
AGREEMENTS
-------------------------------------------------------- Chapter 4:3.3
Because of the number and complexity of their contracts and
agreements, the Bureau and the Corps were unable to provide us with
information related to every contract and agreement they have
implemented at the offices we visited. However, Bureau and Corps
officials provided us with information to illustrate the number and
types of contracts and other agreements that would have to be
assigned or terminated if a project's dam and/or reservoir were
divested. For instance, in Southeastern's service area, the Corps
has over 5,100 agreements for such things as easements for roads and
utilities; leases for public parks, agriculture, and concessions; and
licenses for fish and wildlife management. See appendix IV for a
description of these contracts and agreements. Likewise, the
Bureau's Great Plains Region in Billings, Montana, has over 2,200
contracts and agreements, which include the Bureau's 580 right-of-use
permits for such things as agricultural leases and permits concerning
buffers, buildings, crops, drainage, and weed control. See appendix
V for a description of these contracts and agreements.
ENVIRONMENTAL ISSUES WOULD
IMPACT THE GOVERNMENT'S ABILITY
TO DIVEST HYDROPOWER ASSETS
---------------------------------------------------------- Chapter 4:4
According to FERC officials, concerns about environmental impacts
have begun to affect the generation of hydropower. The uncertainties
about the federal government's future responsibilities in funding and
implementing actions to mitigate environmental impacts would greatly
affect the divestiture of any hydropower assets. Other types of
generating capacity, including coal-fired and nuclear powerplants,
have also faced environmental and related constraints that have
required costly mitigations.\14
--------------------
\14 Since the 1970s, the generation of electricity by using nuclear
fuel or burning coal has been affected by concerns about the
associated environmental impacts. In the aftermath of the accident
at the nuclear powerplant on Three Mile Island in 1979, the Nuclear
Regulatory Commission and state regulators have increased their
oversight of nuclear power plants, thereby increasing the financial
risk to utilities and billions of additional dollars to comply with
their new requirements. In addition, the enactment of legislation,
such as the Clean Air Act, has resulted in costly retrofits to
coal-fired powerplants or the burning of cleaner coal.
MITIGATING ENVIRONMENTAL
DAMAGES HAS RESULTED IN
FORGONE POWER REVENUES
-------------------------------------------------------- Chapter 4:4.1
The desire to mitigate any potential negative effects of water
projects on the environment, especially on the habitat of endangered
and threatened species, is increasingly constraining the ability of
the Bureau and the Corps, as well as nonfederal entities, to generate
hydropower, especially during hours of peak demand. Because of these
restrictions, the PMAs have forgone power revenues of millions of
dollars since the late 1980s.
In an example affecting Southeastern, the South Carolina Department
of Wildlife and Marine Resources sued the Corps in 1988, alleging
violations of the National Environmental Policy Act of 1969 at the
Richard B. Russell Dam. The Russell project has eight hydropower
units with a combined capacity of 600 MW--four conventional
hydropower units (the last of which came into commercial operation in
1986) and four pumpback units (which have never been in commercial
operation).\15 The U.S. District Court for the District of South
Carolina found that the Corps had violated the National Environmental
Policy Act by failing to complete an environmental impact statement
(EIS) and issued an injunction against the installation and operation
of the pumpback units. However, the Court of Appeals for the Fourth
Circuit partially reversed the district court and allowed the Corps
to install the pumpback units but not operate them until another EIS
had been completed. This supplemental EIS was completed and a
settlement agreement was negotiated that allowed environmental
testing. According to Southeastern, the PMA has lost power revenues
of about $36.1 million per year since 1994 because of the shutdown.
In another example that affects Western, the obligation to protect
endangered species has had a significant impact on the CVP's
operations. Bureau officials said that, in response to the
Endangered Species Act, the U.S. Fish and Wildlife Service listed
the winter run of the Chinook salmon as endangered. According to
these officials, to protect the needs of the salmon, the Bureau has
restricted the use of the five hydropower units at the CVP's Shasta
powerplant. They added that since 1987 these restrictions have
resulted in additional costs of about $50 million to purchase power
to meet Western's contractual obligations.
According to officials from the Bureau, FERC, and the PMAs, as well
as from environmentalist groups and trade associations, environmental
restrictions on water usage to generate power will likely continue in
the future. The effects will continue to include lost power revenues
or, conversely, increased costs to procure alternative power
supplies. For example, waterflow restrictions that are included
under the preferred alternative of the final EIS of the Glen Canyon
Dam could result in lost generating capacity of 442 MW in the winter
and 470 MW in the summer. According to the Bureau, the cost to
replace the lost capacity is about $44.2 million per year. The
preferred alternative, also known as the "modified low fluctuating
flow" alternative, features river flows that are substantially
reduced from historic levels, including flows that vary for purposes
of maintaining the habitat.\16 The benefit of these modifications in
managing water use include enhanced fish habitat and protection of
endangered or listed species.
--------------------
\15 The pumpback units are designed to allow water, after it has
passed through hydropower generating units, to be pumped back into
the reservoir during periods of low demand for electricity. Then,
the water can be used to produce power during periods of high demand
for electricity. These units pose an environmental concern because
the turbines may kill fish while operating in the pumping mode.
\16 Bureau of Reclamation: An Assessment of the Environmental Impact
Statement on the Operations of the Glen Canyon Dam (GAO/RCED-97-12,
Oct. 2, 1996).
CURRENT AND FUTURE
ENVIRONMENTAL ISSUES WOULD
AFFECT THE ABILITY OF THE
GOVERNMENT TO DIVEST
HYDROPOWER ASSETS
-------------------------------------------------------- Chapter 4:4.2
Defining who would be responsible for mitigating the environmental
impacts associated with federal water projects after a divestiture is
a crucial issue that would have to be addressed when policymakers
define the terms and conditions of the transaction. If only the PMA
(including the transmission assets) and/or the federal powerplants
were divested, then the government's responsibilities would generally
remain the same, unless specified otherwise in the divestiture
legislation.\17 If the government were to sell the dams and
reservoirs, however, the responsibilities and costs of actions to
mitigate environmental impacts would need to be allocated or
reassigned.
Moreover, with new and more comprehensive actions to mitigate
environmental impacts, the uncertainty surrounding the availability
of power would also need to be addressed. These actions frequently
entail restrictions on releases of water to generate electricity or
potentially significant, but unknown, future costs to mitigate
environmental impacts. If the PMA and/or powerplants were divested,
then uncertainty about the amount of power available for marketing
could lower the price that buyers would be willing to pay or
discourage some potential buyers from submitting bids. Likewise, if
the dams and the reservoirs were divested, uncertainty about the
amount of power that could be generated as well as uncertainty over
the costs of future environmental mitigations could likewise lower
the bids or discourage some prospective buyers from bidding. In
addition, the existence of more competitive electric markets would
also affect the attractiveness of purchasing the federal hydropower
assets.
Alternatively, if the government assumes some of the future liability
for the costs of actions to mitigate environmental impacts, taxpayers
may be forced to bear a significant, but currently unknown, future
liability. Moreover, according to officials of DOE's PMA liaison
office, because environmental laws could require an EIS, testing, and
cleanup when federal property is sold, additional costs to sell the
federal hydropower assets could be incurred. In addition, PMA and
Bureau officials stated that, in some cases, actions to mitigate
environmental impacts are ongoing and would have to be considered in
a divestiture of certain federal hydropower facilities.\18
--------------------
\17 FERC notes that if the powerplant were divested, but the dam and
reservoir remained in the hands of the Bureau or the Corps, it could
still be appropriate to impose constraints on the powerplant's
operations beyond those already imposed by the Bureau or the Corps.
For instance, FERC's operating license could require the powerplant
operator to cease its operations during hot periods to maintain the
appropriate water temperature and dissolved oxygen levels.
\18 For example, according to PMA officials, Western has committed to
ongoing environmental mitigations related to transmission lines,
communications sites, and other facilities.
THE RIGHTS AND CONCERNS OF
NATIVE AMERICANS WOULD AFFECT A
DIVESTITURE
---------------------------------------------------------- Chapter 4:5
Various rights and concerns of Native Americans would have to be
addressed in a proposal to divest federal hydropower assets. These
issues include (1) their water rights, (2) their claims to surplus
federal property, (3) the need to address rights-of-way for PMA
transmission lines across their lands, and (4) the government's
responsibilities under the Native American Graves Protection and
Repatriation Act to safeguard their cultural artifacts. In addition,
according to Western officials, the PMA is reserving some of its
capacity for Native American tribal entities that are expected to
become new preference customers.
The rights of Native Americans to water must be considered in a
divestiture. Several Native American tribal entities hold reserved
water rights with senior priority dates (for example, from time
immemorial or the 1850s or 1860s) on river systems with federal water
projects. Many of these entities have reserved water rights that
have yet to be quantified and have water uses that have yet to be
determined. The amounts of water associated with these rights and
the manner in which the rights are exercised would likely affect
hydropower operations and the distribution of power revenues. For
example, according to Bureau officials, one legal settlement with
tribes of the Fort Peck Reservation, Montana, included rights to
about 1 million acre-feet of water from the Missouri River.
Other potential claims of Native Americans would affect a divestiture
of PMAs and related hydropower assets. For example, under federal
legislation, excess federal real property in Oklahoma is subject to
transfer to the Secretary of the Interior in trust for Oklahoma
Native American tribal entities. According to Southwestern
officials, this legislation would complicate a divestiture, although
the extent of potential claims by Native Americans under this
legislation is difficult to determine because of the lack of
information about the prior ownership of lands on which the federal
assets are located. According to PMA officials, the PMAs have 880
miles of transmission lines located on rights-of-way that traverse
the lands of Native American tribal entities. In the event of a
divestiture of a PMA's transmission assets, if the Native Americans
agreed to a transfer of these rights-of-way to a buyer, they could
expect compensation. Finally, under the Native American Graves
Protection and Repatriation Act, certain Native American cultural
artifacts found on federal locations must be returned to the relevant
Native American tribal entity. Corps officials responsible for
managing federal water projects from which Southwestern markets power
explained that they have been involved in numerous cases in the past
several years involving this law.
Providing federal hydropower to Native Americans would also affect a
divestiture. According to Bureau and Western officials, in part
because the federal government has a trust responsibility with Native
American tribal entities and because those entities are expected to
become new preference customers, Western is entering into a process
to reallocate the power it will sell to its current and future
customers. For example, it is setting aside at least 4 percent of
its existing hydropower capacity at the Pick-Sloan Program for Native
Americans and other new customers. Western is also changing its
rules concerning power reallocations to make it easier for Native
American tribal entities to buy federal power. These obligations
would complicate a divestiture because they would involve selling
power to new preference customers and extending existing
contracts--for example, for 20 years (until the year 2020) at the
Pick-Sloan Program.
LICENSING AND REGULATING
DIVESTED HYDROPOWER ASSETS
WOULD INTRODUCE UNCERTAINTY
INTO THE DIVESTITURE PROCESS
---------------------------------------------------------- Chapter 4:6
Before a sale could be completed, the regulatory treatment of the
divested hydropower assets would need to be addressed. While many
options for regulating the operations of divested hydropower assets
exist, including regulatory regimes that could be established by
federal, state, or regional authorities, FERC currently licenses the
operation of nonfederal hydropower assets. With the proper
resources, FERC officials believe they could license and regulate
divested hydropower assets. They stated that the Bureau and the
Corps have been able to accommodate emerging issues at federal water
projects, such as environmental restrictions on water uses, with more
flexibility than FERC's quasi-judicial licensing process. They also
stated that the Commission's limited flexibility and the timing of
its actions on licensing stem from the authority of other federal and
state agencies to attach conditions to the license. Currently, FERC
primarily regulates the reasonableness of wholesale rates charged by
the PMAs and does not provide more detailed oversight of them and the
Bureau's and the Corps' assets and operations.
According to FERC officials, the extent of its regulation after a
divestiture would depend upon the specific assets divested. A FERC
operating license would not be needed if only the PMA's assets (its
right to market hydropower and, in the case of Southwestern and
Western, also the transmission facilities) were divested because the
operating agencies would continue to own and operate the powerplants.
The operating agencies would continue to manage the water as in the
past and the existing restrictions would likely remain in effect.
The buyer would market the power subject to the same conditions as
the former PMA--subject to the existing purposes of the water
project.
If a divestiture included the powerplants, the new owner would then
be required to obtain a FERC operating license, unless the
requirement for FERC's licensing and regulatory activities were
specifically exempted by legislation. Licensing a divested
hydropower plant could take a long time; FERC's licensing process
averages 2.5 years but it has taken as long as 10 to 15 years. In
granting an operating license for a hydropower plant, FERC is
required to weigh the plant's impact on such "nondevelopmental
values" as the environment and recreation. The licensing action
involves such numerous studies as the powerplant's impact on fish,
plant, and wildlife species; water use and quality; and any nearby
cultural and archeological resources. Moreover, the government of
each affected state would perform a water quality certification. In
addition, to accommodate any "nondevelopmental values," FERC could
restrict the use of water for generating electricity, resulting in
hydropower generating units that have been "derated"--that is, their
generating capacity has been reduced. For example, according to
studies by the Electric Power Research Institute,\19 from 1984 to
1989, 16 hydropower plants that had been relicensed were actually
derated while 8 powerplants increased their capacity. FERC officials
cautioned that if the powerplant, dam, and reservoir were sold, then
FERC's licensing process could revisit the management and uses of the
water and possibly change the available electric-generating capacity.
The uncertainty regarding the length of time to complete FERC's
licensing process as well as the amount of generating capacity after
licensing is completed could reduce the number and amounts of bids
for the resources. However, if the new owners of a hydropower plant
were allowed to operate the plant without a FERC license, they would
have a competitive advantage against other operators who are subject
to FERC's licensing requirements.
A congressional bill introduced on July 23, 1996, contained
provisions that would have provided an operating license with a
10-year term for divested hydropower assets. The owners would then
have been subject to a FERC license. In congressional testimony in
1995 regarding divestiture of the PMAs, the Chair of the FERC
suggested that divestiture legislation specify an automatic grant of
the 10-year operating license and require that the divested
powerplants continue to operate according to the preexisting
operating agreements.\20 Following a divestiture, FERC would then
subject the facility to the normal FERC licensing procedure.
According to FERC officials, FERC would be able to regulate divested
multipurpose federal hydropower assets because the Commission already
has this responsibility for 1,000 nonfederal hydropower facilities.
They said that most nonfederal hydropower plants have widespread
impacts and multiple uses because their associated dams and
reservoirs store water, thereby affecting water upstream, downstream,
and across state lines. However, to handle numerous divestitures or
complicated divestitures of federal hydropower assets, FERC would
need to request congressional authority to add new personnel and
resources.
--------------------
\19 The Electric Power Research Institute is the research entity of
the electric utility industry.
\20 Testimony of Elizabeth Moler, Chair, FERC, before the
Subcommittee on Energy and Power, Committee on Commerce, U.S. House
of Representatives. Privatization of the Federal Power Marketing
Administrations (House Report 104-46, July 19, 1995).
EFFECTS OF DIVESTITURE ON
WHOLESALE POWER RATES WOULD
VARY AMONG PMAS' CUSTOMERS
---------------------------------------------------------- Chapter 4:7
Precisely determining how the sale of the PMAs would affect the rates
charged to customers is difficult. Some of the PMAs' customers have
expressed concerns that a divestiture of the PMAs could lead to
significant rate increases, while some industry analysts have
contended that rate increases would be small for most customers.
However, some analysts believe that certain customers would be more
likely to see larger rate increases than others. These customers are
those who currently (1) buy a higher percentage of their total power
from a PMA than others do, (2) pay rates for a PMA's power that are
significantly lower than the market rates in the region in which the
PMA sells power, and (3) have few or no alternatives for buying power
elsewhere at relatively low rates. According to PMA and industry
officials, many of these customers are smaller ones located in
geographically remote areas. Other factors, such as increasing
competition in the wholesale market or mandated limits on rate
increases could mitigate the rate increases for these customers. The
change in retail rates to end-users (i.e., residential, industrial,
and commercial customers) would depend on how much rates increase for
the preference customers that serve them. However, the extent to
which preference customers pass these increases on to end-users could
be affected or mitigated by such things as their ability to increase
operating efficiency.
RELIANCE ON PMAS FOR POWER
WOULD AFFECT WHICH
PREFERENCE CUSTOMERS
EXPERIENCE THE GREATER RATE
INCREASES
-------------------------------------------------------- Chapter 4:7.1
According to some industry analysts, preference customers who buy a
higher percentage of their power from the PMAs would be more likely
to experience greater postdivestiture rate increases than those who
buy a lower percentage. (Most PMA preference customers buy power
from the PMA as well as from other sources, as shown in ch. 2.) For
example, if a customer buys 90 percent of its power from the PMA and
the buyer of that PMA increases the former PMA's rates by 50 percent,
the preference customer would see its overall rate for power from all
sources increase by about 41 percent, if all other factors were held
constant.\21 In contrast, if a preference customer buys only 10
percent of its power from the PMA, it would see its overall rate for
wholesale power from all sources increase by about 3 percent.
Because preference customers differ in how much they use the PMAs for
their power, they will not be affected equally by a divestiture. As
we mentioned in chapter 2, almost all (99 percent) of Southeastern's
customers purchase less than one-quarter of their total power from
that PMA. In contrast, Western provides over 40 percent of its
preference customers with more than half of their power. Therefore,
if other factors would remain constant, we expect that Western's
customers would generally experience larger average rate increases
than customers served by Southeastern.
--------------------
\21 The overall rate means the blended, weighted average rate for
power that the preference customer pays for power purchased from the
PMA and all of its other wholesale suppliers.
THE DIFFERENCE BETWEEN
PREVAILING MARKET RATES AND
EACH PMA'S RATES WOULD
AFFECT RATE INCREASES
-------------------------------------------------------- Chapter 4:7.2
Some industry analysts believe that, after a divestiture, the buyer
of a PMA would charge rates that conform to the prevailing market
rate for wholesale power in the geographic region in which the PMA
sells power.\22 As discussed in chapter 2, these prevailing market
rates are now significantly more than the rates the PMAs charge their
customers. Thus, the difference between what a PMA currently charges
its customers and the regional market rate could determine how much a
buyer would increase its rates after its sale. The lower the PMA's
current rate (relative to the existing market rate), the greater the
rate increase would be.
However, the differences between a PMA's rates and market rates for
wholesale power vary across a PMA's service area. For example,
according to our previously cited September 1996 report, the
difference between the average wholesale market rates of IOUs and
Southwestern's rates vary across its service area. In one part of
Southwestern's service area, its rates were 1.18 cents per kWh less
than the average wholesale rates of IOUs, while in another part of
Southwestern's service area, its rates were 3 cents per kWh less than
the average wholesale rates of IOUs. As a result, preference
customers in different regions would experience different rate
increases in the event of a divestiture.
--------------------
\22 FERC officials noted that if a buyer were subject to FERC's
jurisdiction, the buyer would have to obtain its approval before
changing to market-based rates.
ACCESS TO ALTERNATE POWER
SUPPLIERS WOULD AFFECT RATE
INCREASES
-------------------------------------------------------- Chapter 4:7.3
Those geographically remote preference customers that would not have
access to many alternate suppliers of electricity after a divestiture
would be the most susceptible to rate increases that would exceed
competitive market rates. Conversely, if a preference customer could
purchase power at competitive rates from other sources, the buyer of
a PMA would be less likely to raise its rates.\23
Representatives of the Edison Electric Institute maintain that
because the wholesale market is competitive, very few preference
customers will lack access to alternate suppliers following a
divestiture. They believe that, after a PMA is divested, preference
customers who relied heavily on that PMA will be able to buy power
from independent power producers, energy brokers, or energy marketers
at a relatively low cost. In addition, they contend that many
municipal and cooperative utilities already are competitive
participants in the wholesale market. However, representatives of
PMAs and their preference customers believe that having access to
alternate supplies of electricity is not enough. They note that even
in cases where preference customers may buy most of their electricity
from alternate sources, these customers often rely on the PMA for
power during hours of peak demand, particularly in regions in which
Southeastern and Southwestern sell power. Having access to
inexpensive power during times of peak demand is important to these
customers because typically power sold to meet this demand is more
expensive than power sold at other times.
Finally, the ongoing deregulation and restructuring of the electric
utility industry contributes to the difficulty of assessing the
potential impacts of a divestiture. Wholesale electric markets are
becoming increasingly competitive, offering preference customers and
other utilities the opportunity to buy from more than one supplier of
wholesale power. This trend creates additional uncertainty about any
potential rate impacts from a divestiture.
--------------------
\23 In a competitive market, a buyer of a PMA could charge an
isolated preference customer rates that equal the market rate in the
nearest geographic region in which power is available, plus
transmission charges. If the buyer tried to charge more than that,
the customer could obtain the power from another source; however,
some customers have access to wholesale power markets only through
transmission lines operated by the PMAs.
CHANGES IN WHOLESALE RATES
WOULD PRIMARILY DETERMINE
THE RETAIL RATES
-------------------------------------------------------- Chapter 4:7.4
Following a divestiture, the retail rates paid by residential,
commercial, and industrial consumers would reflect the changes in
rates experienced by the preference customers who serve them. For
example, retail customers served by preference customers who buy most
of their power from the PMA may see significantly higher rate
increases than retail customers who buy their power from preference
customers that buy a smaller percentage of their total power from the
divested PMA.
However, in many cases, determining how preference customers would
change the retail rates after a sale of federal hydropower assets
would be difficult. For example, in competitive markets, some
preference customers may be able to avoid passing on increased costs
to their retail customers by increasing their operational efficiency.
Alternatively, preference customers may choose to reallocate these
rate increases from one customer class to another--for example, from
industrial end-users to residential end-users--to keep operating
costs low at industrial facilities.
CHANGES IN WHOLESALE POWER
RATES AND WATER ALLOCATIONS
WOULD DETERMINE THE REGIONAL
ECONOMIC IMPACT
-------------------------------------------------------- Chapter 4:7.5
The degree to which a regional economy would be affected by the
divestiture of a PMA would depend mostly on several factors--the
regional economy's reliance on that PMA's power, the amount of change
in overall retail electric rates, the importance of electricity in
the regional economy, and the extent to which water allocations from
the former federal water projects would be changed. Limited
available studies have shown the economic impacts of a rate change by
the PMAs to be minor on industrial and residential customers because
preference customers have relied on power from PMAs for only a small
portion of their total power and electricity has been a relatively
small portion of the cost of doing business for most commercial
enterprises and industries as well as a small portion of household
expenditures.\24 But regional economies that rely on such
electricity-intensive industries as primary metals and chemicals
would see the greatest amount of economic harm from any rate
increases after a divestiture. According to officials of the
Electricity Consumers Resource Council (ELCON),\25 the cost of
electricity for such industries as aluminum smelters, glass, and
chemicals can reach from 30 percent to 40 percent of production
costs. For example, in response to TVA's double-digit rate increases
of the 1970s, industries in its service area ceased their operations
and in some cases relocated to where electrical rates were lower.
TVA's annual sales to industrial customers declined from about 25
billion kWh in 1979 to 16 billion kWh in 1993.\26
Regional economies that rely heavily on water and water-dependent
industries (e.g., in which farming relies extensively on irrigation)
would also be affected by changes in water allocations after a
divestiture. Depending on the terms of the preexisting contracts and
the divestiture legislation, if the dam and reservoir were divested,
then the purposes served by the federal water projects and associated
water allocations could change. For example, FERC's operating
license could include, subject to existing laws, a condition that
more water be used for environmental purposes and less for
hydropower.
--------------------
\24 Allison, T., P. Griffes, and B.K. Edwards. Regional Economic
Impacts of Changes in Electricity Rates Resulting From Western Area
Power Administration's Power Marketing Alternatives. Chicago,
Illinois: Argonne National Laboratory, Mar. 1995.
\25 ELCON is the national association of large industrial electric
consumers. Its members buy about 4 percent of the nation's
electricity.
\26 Tennessee Valley Authority: Financial Problems Raise Questions
About Long-term Viability (GAO/AIMD/RCED-95-134, Aug. 17, 1995).
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
In response to divestiture proposals, on January 18, 1996, 39 Members
of Congress requested that we examine the issues related to the
divestiture of the power marketing administrations (PMA) and related
federal hydropower assets. On March 1, 1996, we received a separate
request letter from another Member of Congress. We agreed to report
on the issues related to divesting the federal hydropower assets,
including the PMAs; however, we did not evaluate whether or not the
PMAs and federal hydropower assets should be divested. We agreed to
provide information on (1) the Southeastern, Southwestern, and
Western Area Power Administrations, including their similarities and
differences, and their interactions with the agencies that operate
federal water projects (mostly, the Bureau of Reclamation, referred
to as "the Bureau" and the U.S. Army Corps of Engineers, referred to
as "the Corps"); (2) the main objectives and general decisions
involved in divesting federal assets, along with how these objectives
and decisions apply to federal hydropower assets; and (3) the
specific issues related to hydropower that should be addressed before
a divestiture of the PMAs. As requested, we included in our study
only Southeastern, Southwestern, and Western, which jointly sold
about 1.6 percent of the nation's total electricity in fiscal year
1995. We did not include the Bonneville Power Administration because
it has a unique financial situation\1 or the Alaska Power
Administration because it is being divested.
--------------------
\1 As we reported in Bonneville Power Administration: Borrowing
Practices and Financial Condition (GAO/AIMD-94-67BR, Apr. 19, 1994),
Bonneville faces significant operating and financial risks because of
its heavy reliance on borrowing, recent operating losses, and various
uncertainties. The efforts to improve Bonneville's financial
condition could cause increases in its electric rates, thus narrowing
the gap between Bonneville's rates and the costs of alternative
sources of power and encouraging some Bonneville customers to buy
power from other sources.
PROVIDING INFORMATION ON THE
PMAS, INCLUDING
SIMILARITIES, DIFFERENCES,
AND INTERACTIONS WITH
AGENCIES THAT OPERATE
FEDERAL WATER PROJECTS
------------------------------------------------------- Appendix I:0.1
To provide information on the similarities and the differences
between the PMAs, we obtained information for fiscal year 1994
regarding the Bureau's and the Corps' capacity to generate hydropower
as well as the PMAs' (1) sales of electricity in kilowatt hours
(kWh), (2) revenues from the sale of power in fiscal year 1994, and
(3) revenues per kWh sold. We also obtained data on how much power
each customer purchased from the PMA and from other sources. We
obtained data on the Bureau's and the Corps' capacity to generate
electricity and the PMAs' electricity sales and revenues that came
from the PMAs' fiscal year 1994 annual reports. The data on the
customers' sales and revenues came from the Energy Information
Administration (EIA) for calendar year 1994--the most recent EIA data
that were available at the time of our review. Although the PMAs had
published their fiscal year 1995 annual reports, we used data from
the previous fiscal year because this information was more comparable
to the EIA data. We also relied on data that had been collected and
analyzed for two recent GAO reports: Power Marketing
Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996) and Federal
Electric Power: Operating and Financial Status of DOE's Power
Marketing Administrations (GAO/RCED/AIMD-96-9FS, Oct. 13, 1995).
To obtain information on the working interactions between the PMAs
and the Bureau and the Corps, we interviewed agency officials at
various field offices of the Bureau, the Corps, Western,
Southeastern, and Southwestern. These officials described in detail
how the PMAs interact with the Bureau and/or the Corps to write the
operating plans and manuals for their river systems and water
projects, to update annual and monthly operating plans, and to
dispatch and schedule power generation on a continuous basis. We
also discussed the documents that guide the planning and operational
interactions between the PMAs and the Bureau or the Corps--for
example, the Bureau's annual operating plan for the Colorado River
Storage Project and the Corps' master manual for the Missouri River.
EXAMINING THE MAIN
OBJECTIVES AND GENERAL
DECISIONS INVOLVED IN
DIVESTING FEDERAL ASSETS
------------------------------------------------------- Appendix I:0.2
To examine the objectives and general decisions of a potential
divestiture of federal assets, such as federal hydropower assets, we
consulted officials from the Congressional Budget Office, the Office
of Management and Budget, the Edison Electric Institute, and the EOP
Group, Inc. We also contacted national representatives of the PMAs'
preference customers--the American Public Power Association and the
National Rural Electric Cooperatives Association--to discuss
potential policy tradeoffs that any divestiture of federal hydropower
assets would have to weigh. To the extent possible, we relied on
work we had previously performed, such as our study related to the
divestiture of the United States Enrichment Corporation.\2 We also
monitored the federal government's efforts to sell the Alaska Power
Administration and efforts by other countries to "privatize"
state-owned industries.
--------------------
\2 Uranium Enrichment: Process to Privatize the U.S. Enrichment
Corporation Needs to Be Strengthened (GAO/RCED-95-245, Sept. 14,
1995).
EXAMINING THE SPECIFIC
FACTORS THAT WOULD HAVE TO
BE ADDRESSED IN A
DIVESTITURE OF FEDERAL
HYDROPOWER ASSETS
------------------------------------------------------- Appendix I:0.3
To examine the specific factors that would have to be addressed if
Southeastern, Southwestern, and Western were divested as well as any
related hydropower assets, we interviewed officials from various
organizations, including the following in the Washington, D.C., area:
the American Public Power Association, the Edison Electric Institute,
EOP Group, Inc., the National Hydropower Association, and the
National Rural Electric Cooperatives Association. We also contacted
the following federal agencies in the Washington, D.C., area: the
Bureau, the Corps, the Congressional Budget Office, the PMA Liaison
Office in the Department of Energy, the Federal Energy Regulatory
Commission, and the Office of Management and Budget.
We performed detailed work at field locations of the PMAs, the
Bureau, and the Corps, which manage the marketing and generation of
federal hydropower. We interviewed agency officials and obtained and
analyzed documentation, such as authorizing, environmental, and
related legislation; regulations pertaining to power commitments and
water allocations; repayment schedules; contracts and agreements
(both power and nonpower); and environmental impact and related
studies. The specific offices and locations we visited were as
follows:
-- the Southeastern Power Administration, in Elberton, Georgia.
Because the Corps generates power that Southeastern markets, we
also performed work at the Corps' district offices in Nashville,
Tennessee; Mobile, Alabama; and Savannah, Georgia.
-- the Southwestern Power Administration, in Tulsa, Oklahoma.
Because the Corps generates the power that Southwestern markets,
we also contacted the Corps' district office in Tulsa .
-- the Western Area Power Administration's headquarters in Golden,
Colorado and its regional office in Folsom, California. We also
visited the Bureau's offices in Billings, Montana, Salt Lake
City, Utah, and Sacramento, California. These three offices
administer the generation of power from the Pick-Sloan (Upper
Missouri River Basin) Program, Colorado River Storage Project,
and Central Valley Project, respectively. Bureau officials
agreed that we selected the appropriate offices. Collectively,
these offices accounted for over 70 percent of both Western's
electricity sales and the revenues from those sales in fiscal
year 1995.
To examine the concerns of the PMAs' preference customers about the
potential impacts of divestitures, we contacted such groups as the
Southeastern Federal Power Customers, Inc. (for Southeastern); the
Southwestern Power Resources Association (for Southwestern); the
Midwest Electric Consumers Association (for Western's power generated
from the Pick-Sloan Program); and the Colorado River Energy
Distributors Association (for Western's power generated from the
Colorado River Storage Project).
We also discussed possible rate increases and regional economic
impacts that could occur after a divestiture. To examine this issue,
we contacted officials from the American Public Power Association,
the Edison Electric Institute, the National Rural Cooperatives
Association, and the PMAs.
------------------------------------------------------- Appendix I:0.4
We conducted our review from May 1996 through February 1997 in
accordance with generally accepted government auditing principles.
We provided a draft of this report to DOE (including the PMAs'
liaison office), the Department of the Interior (including the
Bureau), FERC, and the Department of Defense (including the Corps).
DOE, Interior, and FERC provided written comments which are included
in appendixes VI, VII, and VIII, respectively, along with our
responses. We met with officials of the Department of Defense,
including the Corps' Director of Hydropower Operations and the
Director of Operations, Construction, and Readiness. Defense also
provided clarifying comments that we incorporated into our report as
appropriate.
SELECTED FEDERAL STATUTES
AFFECTING THE MANAGEMENT OF
FEDERAL WATER PROJECTS AND THEIR
HYDROPOWER ASSETS
========================================================== Appendix II
The management of federal water projects by the Bureau and the Corps
is guided by many federal statutes, including federal reclamation and
water management statutes that are generally applicable to all water
projects, specific authorization and appropriation statutes for
individual projects, and environmental statutes. The effects of
these laws on the management of a water project and its hydropower
assets after a divestiture, as well as on legal liabilities retained
by the government or assigned to the buyer, depend on the specific
terms and conditions of the divestiture legislation, the provisions
of the related statutes in question, the types of assets divested by
the government (for instance, only the PMA or, alternatively, the PMA
and the generating assets and/or the dam and the reservoir), and
other issues. The three tables in this appendix describe some of the
statutes that agency officials stated could affect a divestiture
proposal, including legislation that applies to the Bureau and the
Corps related to the generation of hydropower (table II.1),
environmental legislation that affects hydropower generation (table
II.2), and legislation that would affect the issuance of a FERC
operating license that could be required if the powerhouse and/or dam
and reservoir were sold (table II.3). All of the tables exclude
project-specific legislation.
Table II.1
Key Hydropower-Related Legislation
Legislation Key components
-------------------------------------- ----------------------------------------
Reclamation Act of 1902 Establishes irrigation in the West as a
national policy and authorizes the
Secretary of the Interior to locate,
construct, operate, and maintain works
for the storage, diversion, and
development of water for the reclamation
of arid and semi-arid lands in the
western states.
Town Sites and Power Development Act Authorizes the Secretary of the Interior
of 1906 to lease surplus power or power
privileges, provided that the lease does
not impair the efficiency of the
irrigation project.
River and Harbor Act of 1909 Authorizes the Secretary of War to
acquire land owned and developed by
power companies at the St. Marys River
Falls in Michigan and to revoke their
water power "licenses."
Authorizes the Secretary of War to lease
water power rights at St. Marys River
Falls for a "just and reasonable"
compensation.
River and Harbor Act of 1912 Authorizes the Secretary of the Army,
upon recommendation of the Chief of
Engineers, to provide in any authorized
dam for navigation such foundations,
sluices, and other works as may be
considered desirable for future water
power development.
Flood Control Act of 1917 Requires that the Corps' surveys of
projects for flood control and
mitigation at rivers and harbors include
comprehensive studies of watershed
development, including water power.
Federal Power Act of 1920 Created the Federal Power Commission
(now the Federal Energy Regulatory
Commission or FERC) and authorizes it to
issue licenses to nonfederal entities to
construct and operate hydropower
facilities.
Requires the Corps to participate with
FERC in the review and approval of
nonfederal hydropower projects to assess
their impact on navigation of nonfederal
hydropower development.
River and Harbor Act of 1927 Authorizes new surveys on the
development of flood control, water
power, and navigation.
Boulder Canyon Project Act of 1928 Authorizes Arizona, California, and
Nevada to enter into a compact to
apportion the lower Colorado River.
Bonneville Project Act of 1937 Creates the Bonneville Power
Administration to market federal power
in the Pacific Northwest. Requires that
preference be given to public bodies and
cooperatives in the sale of electric
energy generated at the project.
Flood Control Act of 1938 Authorizes the Corps to install
generating facilities for future power
use at federal dams when approved by the
Secretary of the Army on the
recommendation of the Chief of Engineers
and the Federal Power Commission (now
FERC).
Reclamation Project Act of 1939 Limits sales of power to 40 years.
Sets forth general principles for
setting rates.
Describes preference in the sale of
power.
Prohibits marketing of electricity that
would impair the efficiency of the
project for irrigation purposes.
Flood Control Act of 1944 Formalizes the relationship between the
Corps and the power marketing agencies
(PMA), and establishes the relationship
between the PMAs and their preference
customers.
Requires that the management of surplus
electric power generated at the Corps'
facilities be delivered to the Secretary
of the Interior (now the Secretary of
Energy) who shall transmit and dispose
of such power so as to encourage the
most widespread use at the lowest
possible rates to consumers consistent
with sound business principles.
Designates public bodies and
cooperatives as "preference customers"
in the distribution of federal power
marketed by the PMAs.
Declares that the policy of the Congress
is to recognize the rights and the
interests of the states in water
resource development and requires
consultation and coordination with
affected states.
Authorizes the Corps to build and
maintain facilities for recreational
activities in reservoir areas.
Authorizes the Corps to supply reservoir
water for municipal and industrial
purposes. The Corps can do so only when
water in a reservoir is considered
surplus to amounts needed for authorized
purposes, provided that no contracts for
municipal and industrial water shall
adversely affect existing lawful uses of
such water.
Provides that the Corps' reservoirs may
include irrigation as a purpose in 17
western states.
Authorizes construction of dams on the
Missouri River.
Water Supply Act of 1958 Authorizes the Bureau or the Corps to
include storage capacity for municipal
and industrial water supply purposes
when building or enlarging reservoirs
under their jurisdiction.
Fish and Wildlife Coordination Act of Provides that fish and wildlife
1958 conservation receive equal consideration
and be coordinated with other project
purposes.
Flood Control Act of 1965 Permits the Secretary of the Army, with
the approval of the Congressional Public
Works Committee, to authorize water
resource development projects costing
$15 million or less.
River and Harbor and Flood Control Act Authorizes the Corps to reimburse
of 1968 nonfederal public bodies for work
performed on previously authorized water
resource projects. In addition to cash
payments, the act authorizes the Corps
to reimburse nonfederal bodies through
federal credits against local water
resource cooperation requirements. To
qualify for reimbursement, nonfederal
bodies must enter into agreements with
the Corps prior to reimbursement. The
agreements must specify the terms of
reimbursement, which is subject to a
federal cap for each project.
River and Harbor and Flood Control Act Provides for the publication of
of 1970 guidelines to ensure that federal
agencies evaluate the possible adverse
economic, social, and environmental
effects of a water resource project so
that their final decisions are made in
"the best overall public interest."
Expresses congressional intent that the
objectives of a water resource project
include enhancing national and regional
economic development as well as
environmental protection and
improvement.
Requires that each nonfederal interest
enter into a written agreement with the
Secretary of the Army to furnish its
required cooperation for any water
resources project before the Corps
begins constructing it.
Federal Columbia River Transmission Authorizes Bonneville Power
System Act Administration to issue revenue bonds.
Water Resources Development Act of Requires the Corps to study efficient
1976 methods of using hydropower at the
Corps' water resource development
projects.
Establishes the Alaska Hydroelectric
Power Development Fund to study and
develop the Corps' hydropower facilities
in Alaska.
Department of Energy Organization Act Created the Department of Energy (DOE),
of 1977 transferred federal responsibility for
the four existing PMAs from the
Department of the Interior to the DOE,
and created an additional PMA--the
Western Area Power Administration.
Public Utility Regulatory Policies Act Encourages cogeneration and small power
of 1978 production by requiring electric
utilities to offer to purchase electric
energy from cogeneration and small power
production facilities at reasonable
rates which do not discriminate against
these facilities.
Provides for simplified and expeditious
licensing procedures under the Federal
Power Act for small hydropower projects
in connection with existing dams.
Pacific Northwest Electric Power Authorizes Bonneville Power
Planning and Conservation Act Administration to plan for and acquire
additional power resources.
Requires federal agencies responsible
for managing, operating, or regulating
hydropower facilities on the Columbia
River to provide "equitable treatment"
for fish and wildlife with the other
purposes for which these facilities are
managed and operated.
Crude Oil Windfall Profit Tax of 1980 Provides tax incentives to small-scale
hydropower producers.
Water Resources Development Act of Requires nonfederal interests to bear
1986 all costs associated with new
development of hydropower at the Corps'
facilities.
Requires nonfederal interests to
contribute 50 percent of the cost of
preauthorization feasibility studies for
new hydropower at federal facilities.
Electric Consumers Protection Act of Amends the Federal Power Act to remove
1986 preference for applications by states
and municipalities in relicensing
actions and gives equal consideration to
nonpower purposes (e.g., energy
conservation, fish, recreation, and
wildlife) in comparison to power
purposes when making licensing
decisions.
Water Resources Development Act of Defines operation and maintenance
1990 activities in connection with hydropower
facilities at the Corps' projects to be
inherently governmental functions.
Energy Policy Act of 1992 Encourages open transmission of
electricity by allowing wholesale
electricity customers, such as municipal
distributors, to purchase electricity
from any supplier, even if that power
must be transmitted over lines owned by
another utility--referred to as
"wheeling of power." FERC can compel a
utility to transmit electricity
generated by another utility into its
service area for resale.
Water Resources Development Act of Authorizes the Secretary of the Army to
1996 increase the efficiency of energy
production or the capacity of a
hydropower generating facility at a
Corps' water resources project if the
Secretary determines that the increase
is economically justified and
financially feasible; will not result in
any significant adverse environmental
impacts; will not involve major
structural or operational changes in the
project; and will not adversely affect
the use, management or protection of
existing federal, state, or tribal water
rights.
Requires the Secretary of the Army to
provide affected state, tribal, and
federal agencies a copy of the proposed
determinations before proceeding with a
proposed uprating and to respond to any
comments that these agencies submit.
--------------------------------------------------------------------------------
Table II.2
Key Environmental Legislation Affecting
Hydropower Generation
Title of Legislation Key components
-------------------------------------- ----------------------------------------
National Historic Preservation Act of Requires federal agencies to consider
1966 the effect on any property listed or
eligible for listing on the National
Register of Historic Places before
authorizing or funding any project.
Wild and Scenic Rivers Act of 1968 Establishes a national wild and scenic
rivers system.
Prohibits federal agencies from
assisting any water resources project
that would have "a direct and adverse
effect on the values for which such
river was established."
Prohibits licensing under the Federal
Power Act of hydropower projects on or
directly affecting any river included in
the national wild and scenic rivers
system.
National Environmental Policy Act of Establishes a broad federal policy on
1969 environmental quality.
Requires federal agencies to prepare
"environmental impact statements" for
proposed major federal actions
significantly affecting the quality of
the human environment.
Endangered Species Act of 1973 Requires all federal agencies (in
consultation with the Secretary of the
Interior or Secretary of Commerce) to
carry out programs to conserve
endangered and threatened species, and
to ensure that their actions do not
jeopardize the continued existence of
listed species or destroy or adversely
affect critical habitats of listed
species.
Resource Conservation and Recovery Act Provides for management of hazardous
of 1976 waste.
Requires facilities that treat, store,
or dispose of hazardous waste to obtain
a permit and take corrective action to
clean up hazardous waste contamination.
Provides for regulation of underground
petroleum storage tanks.
Toxic Substances Control Act Provides for regulation of hazardous
chemicals.
Requires the Environmental Protection
Agency to issue regulations prescribing
methods for the disposal of
polychlorinated biphenyls.
Comprehensive Environmental Response, Provides for the cleanup of hazardous
Compensation, and Liability Act of substances.
1980
Requires federal agencies that intend to
terminate operations on real property to
identify those portions of the property
that are not contaminated by hazardous
waste or petroleum products.
Clean Water Act of 1977 Establishes a national goal of
eliminating pollutant discharges into
navigable U.S. waters and provides
policy goals to make federal waters safe
for fish, shellfish, wildlife, and
recreation.
Requires the Environmental Protection
Agency to enter into interagency
agreements with the Secretaries of
Agriculture, the Army, and the Interior
to provide maximum utilization of
federal laws to maintain water quality
through appropriate implementation of
area-wide waste treatment management
plans.
Provides for federal facility compliance
with all federal, state, interstate, and
local requirements respecting the
control and abatement of water pollution
in the same manner and extent as any
nongovernmental entity.
Requires nonfederal projects to have a
section 401 state water quality
certification or waiver before FERC can
issue a license.
Under section 404, projects that
discharge dredged or fill material into
"the waters of the U.S." must have a
permit from the Corps.
Fish and Wildlife Conservation Act of Encourages federal agencies to use their
1980 statutory and administrative authority
to conserve and promote wildlife
conservation of nongame fish and
wildlife and their habitats.
--------------------------------------------------------------------------------
Table II.3
Legislation With Which FERC Licensing
Actions Must Comply
Title of Legislation Key components
-------------------------------------- ----------------------------------------
Federal Power Act Pursuant to Part I of this Act, as
amended, FERC issues licenses to
nonfederal hydropower projects. Before
licensing any project, FERC must find
the project to be best adapted to a
comprehensive plan for improving or
developing a waterway or waterways for
beneficial public purposes and be
satisfied that the project meets the
various other requirements of Part I.
Electric Consumers Protection Act Requires FERC to include in any license
issued under the Federal Power Act
appropriate conditions to protect,
mitigate damages to, and enhance fish
and wildlife based on recommendations
from federal and state fish and wildlife
agencies.
Fish and Wildlife Coordination Act Requires FERC to consult with the U.S.
Fish and Wildlife Service and the
National Marine Fisheries Service before
acting on a license application.
National Historic Preservation Act Requires FERC, before licensing a
project, to consider the project's
effects on any site, structure, or
object included in, or eligible to be
included in, the National Register of
Historic Places and to afford the
Advisory Council on Historic
Preservation an opportunity to comment.
Wild and Scenic Rivers Act Bars FERC from licensing hydropower
projects on or directly affecting river
segments designated as, or selected for
study for possible inclusion in, the
National Wild and Scenic Rivers System.
National Environmental Policy Act Requires FERC to analyze the potential
environmental effects of a proposed
action and of reasonable alternatives.
Coastal Zone Management Act Bars the licensing of a project within
or affecting a state's coastal zone,
unless the state concurs with the
applicant's certification of consistency
with the state's approved coastal zone
management program.
Endangered Species Act of 1973 Requires FERC to ensure that licensing
actions do not jeopardize the continued
existence of listed species or destroy
or adversely affect their critical
habitats.
Clean Water Act Section 401 requires a project to have a
state water quality certification, or
waiver, before FERC can issue a license.
Section 404 requires a project, that
necessitates construction of a dam or
placement of fill in U.S. waters, have a
permit from the Corps.
American Indian Religious Freedom Act Requires FERC to avoid unnecessary
interference with traditional religious
practices of Native Americans.
Energy Policy Act of 1992 Sections 1701(b), 2401, 2402, and 2403
define fishways, require future FERC
licensees on public lands to obtain
rights-of-way permits from the Bureau of
Land Management or the Forest Service,
limit hydropower projects in the
National Park System, and authorize FERC
to permit the preparation of
environmental analysis documents by
FERC-approved contractors paid by the
applicant.
Pacific Northwest Electric Power Requires FERC to provide "equitable
Planning and Conservation Act treatment" to fish and wildlife; take
into account "to the fullest extent
practicable" the Northwest Power and
Conservation Planning Council's fish and
wildlife program; and consult and
coordinate, to the "greatest extent
practicable," actions with other
relevant agencies.
Wilderness Act Bars the licensing of projects within
designated wilderness areas.
--------------------------------------------------------------------------------
HYDROPOWER PROJECTS FROM WHICH THE
PMAS MARKET POWER
========================================================= Appendix III
Authorized purposes Reservoir
--------------------------------------------------------------------- ------------------
Fish Wate Wate Storage\
Operat Hydropow Nameplate Fiscal year and Flood r r c Surface\
ing er Generati capacity of initial Hydropow wildl contro Navigati Recreati Irriga qual supp Othe (acre- d
Agency project ng units \a(megawatts) operation er ife l on on tion ity ly r\b feet) (acres)
------ -------- -------- -------------- -------------- -------- ----- ------ -------- -------- ------ ---- ---- ---- -------- --------
Southeastern
-----------------------------------------------------------------------------------------------------------------------------------------------------
Corps Allatoon 3 74.0 1950 X X X X X X X 670,000 19,201
a
Buford 3 86.0 1957 X X X X X X X 2,554,00 47,182
0
Carters 4 500.0 1975 X X X X X 472,800 3,880
J. Strom 7 280.0 1953 X X X X X X X 3,850,00 71,100
Thurmond 0
Walter 4 130.0 1963 X X X X X 1,028,10 45,181
F. 0
George
Hartwell 5 344.0 1962 X X X X X X X 3,439,00 55,950
0
Robert 4 68.0 1975 X X X X 234,200 13,300
F.
Henry
Millers 3 75.0 1970 X X X X 331,800 17,201
Ferry
West 3 73.0 1975 X X X X X X 711,000 25,864
Point
Richard 4 300.0 1984 X X X X X X 1,488,20 26,653
B. 0
Russell
\e
John H. 7 204.0 1953 X X X X X X 3,293,60 83,200
Kerr 0
Philpott 3 14.0 1952 X X X X X X 318,300 4,060
Stonewal 1 0.3 1994 X X X X X \X 74,650 3,470
l
Jackson
\f
Barkley 4 130.0 1966 X X X X X X 2,082,00 93,430
0
J. Percy 1 28.0 1970 X X X X X 652,000 22,720
Priest
Cheatham 3 36.0 1959 X X X X X 104,000 7,450
Cordell 3 100.0 1973 X X X X X 310,900 12,200
Hull
Old 4 100.0 1957 X X X X X 545,000 22,500
Hickory
Center 3 135.0 1950 X X X X X 2,092,00 23,060
Hill 0
Dale 3 54.0 1948 X X X X X X 1,706,00 30,990
Hollow 0
Wolf 6 270.0 1951 X X X X X 6,089,00 63,530
Creek 0
Laurel 1 61.0 1976 X X X X X 435,600 6,060
Jim 3 30.0 1957 X X X X X 367,320 38,850
Woodruff
=====================================================================================================================================================
Subtot 82 3,092.3
al
Southwestern
-----------------------------------------------------------------------------------------------------------------------------------------------------
Corps Beaver 2 112.0 1965 X X X X X 1,952,00 31,700
0
Blakely 2 75.0 1956 X X X 3,761,50 48,300
Mountain 0
Broken 2 100.0 1970 X X X X X X 1,602,00 18,000
Bow 0
Bull 8 340.0 1953 X X X 5,408,00 71,240
Shoals 0
Clarence 2 58.0 1985 X X X X X X X 1,428,00 38,400
Cannon 0
Dardanel 4 124.0 1965 X X X 486,200 34,700
le
DeGray 2 68.0 1972 X X X X X 1,377,00 23,800
0
Denison 2 70.0 1945 X X X X 9,300,00 144,000
0
Eufaula 3 90.0 1965 X X X X X X 5,000,00 147,960
0
Ft. 4 45.0 1953 X X X 1,284,40 51,000
Gibson 0
Greers 2 96.0 1964 X X X X X 2,844,00 40,480
Ferry 0
Harry S. 2 53.3 1982 X X X X 8,120,00 209,300
Truman\ 0
g
Keystone 2 70.0 1968 X X X X X X 2,593,00 54,300
0
Narrows 3 25.5 1950 X X X 407,900 9,820
Norfolk 2 80.6 1944 X X X X 1,983,00 30,700
0
Ozark 5 100.0 1973 X X X X 148,400 11,100
Robert 2 7.4 1989 X X X X 306,400 13,700
D.
Willis
Robert 4 110.0 1971 X X X X X X 1,735,00 43,800
S. Kerr 0
Sam 2 52.0 1966 X X X X X X 5,610,00 142,700
Rayburn 0
Stockton 1 45.2 1973 X X X X X X X 1,674,00 38,288
0
Table 4 200.0 1959 X X X X 3,462,00 52,250
Rock 0
Tenkille 2 39.1 1954 X X X X 1,342,66 20,800
r Ferry 0
Webbers 3 60.0 1974 X X X X 760,000 10,900
Falls
Whitney 2 30.0 1955 X X X X X 2,100,40 49,820
0
=====================================================================================================================================================
Subtot 67 2,051.0
al
Western
-----------------------------------------------------------------------------------------------------------------------------------------------------
Corps Fort 5 218.0 1943 X X X X X X X X 18,700,0 249,000
Peck 00
Garrison 5 546.0 1956 X X X X X X X X 23,900,0 382,000
00
Big Bend 8 538.0 1965 X X X X X X X X 1,900,00 61,000
0
Fort 8 387.0 1954 X X X X X X X X 5,600,00 102,000
Randall 0
Gavins 3 122.0 1956 X X X X X X X X 492,000 32,000
Point
Oahe 7 786.0 1962 X X X X X X X X 23,300,0 373,000
00
Bureau Hoover 19 2,079.0 1936 X X X X X \X 29,775,0 162,700
00
Judge 2 154.0 1963 X X 14,700 750
Francis
Carr
Folsom 3 199.0 1955 X X X X X X 1,010,00 11,400
0
Keswick 3 117.0 1949 X X \X 23,772 640
New 2 300.0 1979 X X 2,420,00 12,500
Melones 0
Nimbus 2 14.0 1955 X \X 8,800 540
O'Neill 6 25.0 1967 X X 56,430 2,250
W. R. 8 202.0 1968 X X 2,040,00 13,000
Gianelli 0
Shasta 7 539.0 1944 X X X X X X 4,552,09 29,743
0
Spring 2 180.0 1964 X X X \X 241,000 3,220
Creek\h
Trinity 3 140.0 1964 X X X 2,447,65 16,535
0
Mount 2 200.0 1981 X 11,143 279
Elbert
Big 1 5.0 1959 X X Canal Canal
Thompson
Estes 3 45.0 1950 X X \X 927 42
Flatiron 3 95.0 1954 X X Tunnel Tunnel
Green 2 26.0 1943 X X 153,639 2,130
Mountain
Marys 1 8.0 1951 X X Tunnel Tunnel
Lake
Pole 1 38.0 1954 X X 3,068 185
Hill
Yellowta 4 250.0 1966 X X X X 1,328,36 17,300
il 0
Alcova 2 36.0 1955 X X 184,405 2,471
Boysen 2 15.0 1952 X X X 952,432 22,166
Buffalo 3 18.0 1995 X X X 646,565 8,324
Bill
Fremont 2 67.0 1960 X X X X 1,016,50 22,064
Canyon 7
Glendo 2 38.0 1958 X X X 789,402 12,400
Guernsey 2 6.0 1927 X X 45,612 2,375
Heart 1 5.0 1948 X X X \i \i
Mountain
Kortes 3 36.0 1950 X 4,739 83
Pilot 2 2.0 1925 X X Canal Canal
Butte
Seminoe 3 51.0 1939 X X 1,017,27 20,291
9
Shoshone 1 3.0 1995 X X X \i \i
Canyon 3 50.0 1953 X X X X X 2,051,51 35,181
Ferry 9
Davis 5 240.0 1951 X X \X 1,818,30 28,200
0
Parker 4 120.0 1942 X X X 646,200 20,400
Glen 8 1,288.0 1964 X X X X X X X X \X 27,000,0 160,784
Canyon 00
Blue 2 86.0 1967 X X X X X X X X X 940,800 9,180
Mesa
Crystal 1 28.0 1978 X X X X X X X X X 26,000 301
Flaming 3 152.0 1963 X X X X X X X X X 3,788,70 42,040
Gorge 0
McPhee 1 1.0 1993 X X X X X X X X X 381,100 4,469
Morrow 2 173.0 1970 X X X X X X X X X 117,165 817
Point
Towaoc 1 11.0 1993 X X Tunnel Tunnel
Upper 1 9.0 1962 X X X X Pipeline Pipeline
Molina
Lower 1 5.0 1962 X X X X Pipeline Pipeline
Molina
Elephant 3 28.0 1940 X X X X X X 2,110,30 36,897
Butte 4
Fontenel 1 10.0 1968 X X X X X X X X X 345,400 8,058
le
Stampede 2 4.0 1987 X X X X 227,000 3,450
Spirit 1 5.0 1995 X X X \i \i
Mountain
Lewiston 1 0.3 1964 X X X 14,660 750
\j
IBWC\k Amistad 2 66\l 1983 X X X \X 5,535,00 89,000
0
IBWC\k Falcon 3 32\l 1954 X X \X 3,978,00 115,400
0
PRWUA\ Deer 2 5.0 1958 X X X X 152,570 2,683
m Creek
=====================================================================================================================================================
Subtot 180 9,803.4
al
=====================================================================================================================================================
Total 329 14,946.7
-----------------------------------------------------------------------------------------------------------------------------------------------------
\a According to DOE, hydropower facilities routinely operate at
levels that exceed nameplate capacity. Nameplate capacity is the
rating of a generator under specified conditions as designated by the
manufacturer.
\b Other authorized purposes include reregulation, water
conservation, and low-flow augmentation.
\c Total reservoir storage at highest controlled water surface.
\d Water surface at total storage.
\e Four additional units at the Richard B. Russell project are being
tested.
\f The Stonewell Jackson project has a single 300-kilowatt station
service unit; excess power is marketed by Southeastern.
\g The Harry S. Truman project has six units installed, and four are
commercially operable. The remaining units are scheduled to return
to service by July 1997 and December 1998, respectively.
\h Spring Creek uses the Whiskeytown Reservoir as a forebay. Spring
Creek Debris Dam has no powerplant. A forebay is a reservoir from
which water is taken to run equipment, such as a turbine.
\i Heart Mountain, Shoshone, and Spirit Mountain are supplied from
the Buffalo Bill Reservoir.
\j Primarily used as station service for Lewiston Fish Hatchery.
\k The International Boundary and Water Commission (IBWC) operates
the Falcon and Amistad projects, which are international storage
projects located on the Rio Grande River between Texas and Mexico.
The power output is divided evenly between the United States and
Mexico.
\l U.S. share (50 percent) of plant capacity.
\m Operated by the Provo River Water Users' Association (PRWUA) for
the Bureau.
Source: U. S. Army Corps of Engineers, Bureau of Reclamation, and
Western Area Power Administration.
CONTRACTS OF THE SOUTHEASTERN
POWER ADMINISTRATION AND THE CORPS
OF ENGINEERS IN SOUTHEASTERN'S
SERVICE AREA
========================================================== Appendix IV
Contract Number Term Notes
-------------------- -------------------- ----------------------- --------------------
Sale of power to 269 127 contracts with Southeastern has
preference customers customers served allocated power to
through Southern 303 preference
Company, Municipal customers or to
Electric Authority of entities directly
Georgia, Oglethorpe serving preference
Power Corporation, customers. 269
South Carolina Electric customers have
and Gas, and South individual contracts
Carolina Public Service with Southeastern
Authority transmission and rely on
lines are 20-year Southeastern to
contracts that become arrange
evergreen (self- transmission.
renewing) with 2-year
cancellation notices. Other customers
provide their own
85 customers served transmission or
through Virginia Power receive their
Company, Appalachian allocations through
Power Company, Carolina cooperatives or
Power and Light associations that
Company, and Florida act as agents for
Power Corporation the customers.
transmission lines have
evergreen contracts
with cancellation
notices ranging from 60
days to 3 years.
45 contracts with
customers served
through Duke Power
Company transmission
lines are being
renegotiated.
12 preference customers
served by Kentucky
Utilities Company have
20-year contracts that
become evergreen with
3-year cancellation
notices.
Sale of power to 8 Contract with South Customers buy
preference customers Carolina Public Service Southeastern power
that provide Authority is an for their own use or
transmission evergreen contract with for distribution to
services a cancellation notice their retail
of 60 days for customers and
Southeastern and 90 transmit power over
days for the authority. their own lines or
arrange transmission
The Tennessee Valley over another
Authority (TVA) has an utility's lines. TVA
evergreen contract with provides both
a 3-year cancellation transmission and
notice. ancillary services;
the others provide
Contracts with Alabama only transmission.
Electric Cooperative,
South Mississippi
Electric Power
Association, East
Kentucky Power
Cooperative, Southern
Illinois Power
Cooperative, Dalton
(Georgia), and
Henderson (Kentucky)
are 20-year contracts
that become evergreen
with 2-or 3-year
cancellation notices.
Sale of power to 5 Contracts with Big Southeastern does
entities that act as Rivers Electric not have individual
agents for Corporation, South contracts with the
preference customers Mississippi Power 36 preference
Association, Municipal customers
Energy Agency of represented by these
Mississippi, and agents.
Central Electric Power
Cooperative (2
contracts) are 20-year
contracts that become
evergreen with 2-or 3-
year cancellation
notices.
Sale of power to 2 Florida Power These contracts are
nonpreference Corporation has an for the sale of
customers evergreen contract with excess power from
a 2-year cancellation the Woodruff and
notice. Stonewall Jackson
projects.
Monongahela Power
Company has a 10-year
(minimum) contract that
becomes evergreen in
2004 with a 2-year
cancellation notice.
Transmission and 7 Contract with the This contract
ancillary services Southern Company, contains an
renegotiated in 1996, assignability clause
is a 10-year contract that requires FERC's
that becomes evergreen approval of any
with a 2-year sale, assignment, or
cancellation notice. transfer of the
contract.
Contracts with Virginia
Power Company, Carolina Power and
Appalachian Power Light Company has
Company, South Carolina two contracts.
Electric and Gas, and
Carolina Power and
Light Company are
evergreen with
cancellation notices
ranging from 1 to 3
years.
Contract with Duke
Power Company is being
renegotiated.
Transmission 2 Contracts with These contracts do
services only Oglethorpe Power not include
Corporation and ancillary services.
Municipal Electric
Authority of Georgia
are 20-year contracts
that become evergreen
with 2-year
cancellation notices.
Rehabilitation of 17 Terms vary from 1996 to These are current
power plants 2003, depending on the and planned
power plant. contracts between
the Corps of
Engineers and
contractors to
rehabilitate six
power plants at an
estimated cost of
about $201 million.
Water supply 26 Terms vary These entities have
contracts contracts with the
Corps of Engineers
to purchase water
from federal
reservoirs.
=========================================================================================
Total 336
-----------------------------------------------------------------------------------------
Source: Southeastern Power Administration and U.S. Army Corps of
Engineers.
In addition, Southeastern and the Corps have the following
arrangements:
-- On December 31, 1996, Southeastern and Kentucky Utilities
Company executed a new contract for power sold to 12 municipal
customers in the Kentucky Utilities system. This is a 10-year
contract that turns evergreen after June 30, 2007, with a 3-year
cancellation notice requirement.
-- Southeastern buys power to operate various pumpback units at the
Corps' hydropower plants.
-- Southeastern has net billing arrangements with Florida Power
Corporation, Alabama Electric Cooperative, South Carolina Public
Service Authority, and TVA, whereby Southeastern "nets" the
costs of purchase power from power sales.
-- Southeastern's contract with TVA includes a capacity
interruption credit arrangement. If Southeastern cannot meet
its capacity requirements, it gives TVA a credit for the
capacity not available.
-- Southeastern has Memorandums of Understanding (MOU) which serve
as operating agreements with the Corps and TVA.
-- The Corps has 5,194 outgrants including easements for roads and
utilities, public park leases, agricultural leases, commercial
concession leases, fish and wildlife management licenses, and
various personnel privileges.
-- The Corps has issued thousands of land-use permits as part of
its Shoreline Management Program, including private and
community dock permits as well as land activity permits.
ILLUSTRATIVE CONTRACTUAL
OBLIGATIONS AND AGREEMENTS:
BUREAU OF RECLAMATION, GREAT
PLAINS REGION, BILLINGS, MONTANA
=========================================================== Appendix V
Area office Type of contract Number Term Notes
--------------- ---------------- ---------------- ---------------- ------------------
Eastern Power contracts 25 Variable With water users
Colorado (including
reclamation
projects and
Native Americans)
for project
pumping
580 Variable Agricultural
leases and permits
for buildings,
buffers, crops,
drainage, weed
control, etc.
57 Variable With other federal
and state agencies
for such things as
recreation and
reservoir
operations
Water service 65 Water service - Provide water
and repayment 40 years supplies and
contracts Distribution - distribution
in perpetuity services, and
repayment of the
federal investment
Temporary water 32 1 to 5 years Short-term water
service supplies for such
contracts purposes as dust
abatement,
emergencies, and
road construction
=========================================================================================
Subtotal 759
Montana Cabin permits 265 5 years and more With nonfederal
parties for in-
holdings on Bureau
lands
Concession 3 10 years and
contracts more
Garbage 2 Annual
contracts
Law enforcement 2 5 years,
agreements renewable
subject to
budget
availability
Road maintenance 1 Indefinite
contract
Memorandum of 1 Indefinite
Understanding
(MOU) with the
Bureau of
Land Management
for
management
assistance
MOU with the 1 Indefinite
Montana
Department of
Fish, Wildlife,
and Parks for
management of
wildlife area
Cooperative 1 Indefinite
management
agreement with
National Park
Service for
joint government
camping area
Water service 13 Water service -
and repayment 40 years
contracts Distribution -
in
perpetuity
Temporary water 61 1 year
service
contracts
=========================================================================================
Subtotal 350
Wyoming Permits and 1,013 Variable Includes leases;
agreements interagency
agreements for
recreation, game,
and fish; and
permits for cabins
Temporary water 20 1 year
service
contracts
Water service 68 Water service -
and repayment 40 years
contracts Distribution -
in perpetuity
=========================================================================================
Subtotal 1,101
=========================================================================================
Total 2,210
-----------------------------------------------------------------------------------------
Source: The Bureau of Reclamation's Great Plains Region, Billings,
Montana.
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
ENERGY
=========================================================== Appendix V
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on DOE's letter dated February 18,
1997.
1. We believe that our presentation of positions regarding
divestitures is balanced. In forming this discussion, we contacted
organizations that favored (for example, the Edison Electric
Institute) and that opposed (for example, the American Public Power
Association) the divestiture of federal hydropower assets. In our
study, we used statements and publications from both proponents and
opponents of divestiture of these assets. Our purpose in including
international experiences with divestitures was to focus on some
important, common factors that have motivated divestitures, instead
of examining the outcomes of divestitures in specific nations or of
specific enterprises.
2. We agree with DOE that an evaluation of divestiture impacts on
various groups as well as on the U.S. Treasury should be an integral
part of any debate of the pros and cons of divesting federal
hydropower assets. However, we did not revise the report based on
this comment. As agreed with the congressional requestors and as
noted in chapter 1, the purpose of this report was to discuss issues
that need to be addressed, if and when a decision is made to divest
the federal hydropower assets. The evaluation of whether or not
these assets should be privatized and the discussion of the specific
benefits and costs of such a divestiture were outside the scope of
our review.
3. We agree that the federal transmission system is a valuable asset
now and would be in the event of a divestiture. However, the report
already contains information regarding the PMAs' transmission assets
and services to regional utilities. In addition, as suggested by
DOE, we expanded chapter 4 to address, among other things, Western's
investment in the California-Oregon Transmission Project and the
Pacific Northwest-Southwest Intertie as well as Western's important
contract with the Pacific Gas and Electric Company for transmission
services and peaking and firming power.
4. DOE states that proposed divestitures of federal hydropower
assets are part of a larger, ongoing debate about the role of public
power in a changing electric utility industry. DOE believes that our
report should address the impact of a divestiture on this ongoing
debate. We did not revise the report because such an evaluation was
beyond the scope of our review.
5. We revised chapter 3 to reflect DOE's statement that problems in
maintaining and repairing federal hydropower assets were experienced
in the Southeast, but perhaps not elsewhere. The report was also
revised to state that the availability of the Corps of Engineers'
hydropower plants in the Southeast has improved.
6. Although DOE agrees with the report that the delays the
government has experienced in divesting the Alaska Power
Administration illustrate the problems that could be encountered in
divesting the other, larger, PMAs, DOE suggests that we should "draw
more lessons from this experience." However, in our view, the
executive summary and chapter 1 of this report draw sufficient
lessons from the Alaska experience. In addition, large sections of
this report, particularly in chapter 4, illustrate many problems that
could affect the divestiture of the remaining PMAs.
7. According to DOE, nonfederal water projects regulated by FERC may
not be comparable to federal ones, because federal multipurpose water
projects generally do not have hydropower generation as their main
purpose whereas nonfederal projects do. However, we did not revise
the report because FERC officials noted that (1) nonfederal water
projects, like federal ones, have widespread impacts upstream and
downstream and serve a variety of purposes and (2) the FERC license
accommodates purposes that include hydropower as well as such others
as fish and wildlife habitat enhancement, recreation, and water
quality improvement. According to FERC officials, because federal
water projects are sufficiently comparable to nonfederal ones, FERC's
licensing process could successfully accommodate the purposes of
federal projects.
8. DOE suggests that resolution of transmission line easements,
rights-of-way, and land issues deserves greater emphasis,
particularly in cases where PMA transmission lines cross the lands
owned by other federal agencies (many of these rights are in
perpetuity and nontransferable) and private owners (many of these
rights will revert to the original landowner). However, we believe
that our report, in chapter 4 and in appendix IV adequately addressed
the issue highlighted by DOE. In addition, chapter 4 has been
revised in response to comments from DOE to reflect the importance of
addressing the transferability of transmission line rights-of-way
across the lands of Native American tribal entities.
9. We agree that the section on Native American rights and concerns
should be expanded to address rights-of-way across lands of Native
American tribal entities. We have revised chapter 4 accordingly.
10. We agree that the report should be revised to clarify (1) the
basis for setting the PMAs' rates and (2) that rates are not low for
some projects and can vary during the year. We have made appropriate
revisions to the executive summary, chapter 2, and chapter 4.
11. We agree that the report should be revised to note that the
divestiture of a PMA's assets could require an environmental impact
statement to comply with the National Environmental Policy Act.
Therefore, we have revised chapter 4.
12. DOE notes that certain federal hydropower assets could become
"stranded" once retail competition arrives because they would be
unable to produce power at competitive market rates. In response,
buyers could choose to bid on other, more valuable assets
("cherry-picking"), thereby leaving the government with less
competitive, less valuable assets. DOE adds that the cherry-picking
of valuable assets could be minimized by the way assets could be
grouped for sale. We agree that some federal hydropower assets could
be "stranded" and difficult to sell. The price that a prospective
buyer would be willing to pay might not be determined by the book
value of an asset. Rather, the price a buyer would be willing to pay
would depend on a variety of factors, such as the price at which the
power could be sold under given market conditions. We disagree that
by grouping federal hydropower assets for sale in a certain way, the
government would likely obtain a higher price. Though the grouping
of assets would be important (as discussed in chapter 3), we disagree
that the underlying value of these assets could be fundamentally
altered and raised to the book value by merely packaging the assets
for sale in a certain way.
13. DOE said our report is silent on the treatment of federal
employees after a divestiture; however, chapter 3 states that a
variety of labor-related issues would need to be considered in the
event of a divestiture, including the possibility of severance
packages. It also notes that the costs of these issues would need to
be considered to assess the impact on the government of a
divestiture.
14. Because we agree that the impact of increased deregulation and
restructuring on potential divestitures should be recognized, we
revised the executive summary and chapter 4.
(See figure in printed edition.)Appendix VII
COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR
=========================================================== Appendix V
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on Interior's letter dated February
20, 1997.
1. We agree with Interior about the importance of identifying the
assets that would be considered for sale--for example, the
hydropower-generating assets that are owned by the Bureau and the
Corps. We also agree that the existence of these assets would make a
divestiture more complex by adding such issues as how to coordinate
integrated facilities and manage the competing demands on these
multipurpose facilities. Therefore, we have added text in the
executive summary explaining that the PMAs own the right to market
electricity as well as the transmission lines (except for
Southeastern), while the Bureau and the Corps own the hydropower
generation assets. Our report already explains some of the
complexities involved in divesting only the PMA; the PMA and the
Bureau's and the Corps' hydropower-generating assets; and the PMA,
the hydropower-generating assets, and the remaining assets of the
federal water projects (e.g., dams and reservoirs).
2. We agree that the PMAs do not generate electricity but only
transmit and market the electricity generated by hydropower plants
that are owned and operated by other agencies (i.e., the Bureau and
the Corps). As stated in our response for comment 1, we have
clarified this point in the executive summary. Regarding the
Bureau's point that PMA electricity is "surplus," we have revised
both the executive summary and chapter 1 to state that the generation
of hydropower by the Bureau and the Corps and the sale of this
electricity by the PMAs is affected by the availability and use of
water for the other purposes of federal water projects. We addressed
the laws describing the agencies' use of electricity for project
purposes in a footnote to chapter 1.
3. We did not revise the executive summary as suggested by Interior
to mention that both the Bureau and the Corps have preexisting and
long-term contractual obligations for water delivery that take
precedence over hydropower purposes. Preexisting contractual
obligations are already discussed as a separate issue in the
executive summary and in chapter 4. In addition, water delivered for
municipal and industrial water uses as well as for
irrigation--contained in preexisting long-term contracts--are also
mentioned in the executive summary and in chapter 4 as issues that
would need to be considered in the event of a divestiture of federal
hydropower assets.
4. Because we agree with Interior that the role of the Bureau and
the Corps in balancing water among federal water project purposes
becomes especially significant during a drought, we revised chapter
4. In addition, we agree that a divestiture would need to consider
interstate water compacts and international requirements for water
deliveries. We added a footnote to chapter 4 to recognize this
comment.
5. We revised the executive summary and chapter 4 as suggested by
Interior to expand on the rights and concerns of Native Americans as
well as the Secretary of the Interior's trust responsibility.
6. We disagree with Interior's comment that the report needs to be
clarified regarding irrigation assistance because the report
addresses irrigation assistance adequately. For example, the
executive summary clearly discusses the issue and states that the
$1.5 billion federal investment in irrigation facilities is scheduled
to be recovered through power revenues.
7. Although Interior suggests that our report should more clearly
address the issue of revolving funds, we did not make substantive
revisions in this regard. The issue of revolving funds is a complex
one that merits its own review--in particular, the budgetary
treatment of these funds after a divestiture. However, we added a
footnote in chapter 3 to recognize the existence of these funds.
8. Similar to DOE's comment number 14, the Bureau states that our
report pays insufficient attention to the current deregulation and
restructuring of the electric utility industry and its impact on
customers as it relates to a potential divestiture. We revised our
report in both the executive summary and in chapter 4 to address the
Bureau's comment about these changes in the electric utility
industry.
(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE FEDERAL ENERGY
REGULATORY COMMISSION
=========================================================== Appendix V
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the letter of the Federal Energy
Regulatory Commission (FERC), dated February 24, 1997:
In its comments, FERC stated that the report provided an "excellent
overview of the matters that would need to be addressed" in divesting
the federal hydropower assets. FERC also provided a number of
clarifications. We agreed with all of those clarifications and
incorporated all of them into our report. For example, in response
to FERC's comments, we added a footnote in chapter 3 to explain how
the PMAs could be affected by FERC's open transmission access order
(Order 888). Furthermore, we clarified in chapter 4 that FERC's
limited flexibility in licensing hydropower projects, as described in
the report, stems from the authority of other federal and state
agencies to attach mandatory conditions to a FERC license.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Mehrzad Nadji, Project Manager
Jeanine M. Brady, Communications Analyst
Stephen Brown, Economist
Ernie Hazera, Evaluator
Margaret Reese, Advisor
John H. Skeen, III, Managing Editor
Daren Sweeney, Evaluator
OFFICE OF THE GENERAL COUNSEL
Doreen S. Feldman, Assistant General Counsel
Kathleen A. Gilhooly, Senior Attorney
ATLANTA REGIONAL OFFICE
Philip Amon, Evaluator
Martha Vawter, Evaluator
DENVER REGIONAL OFFICE
Daniel Feehan, Evaluator
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