Federal Power: The Role of the Power Marketing Administrations in a
Restructured Electricity Industry (Testimony, 06/24/99,
GAO/T-RCED/AIMD-99-229).

Pursuant to a congressional request, GAO discussed the role of the power
marketing administrations (PMA) in a restructured electricity industry,
focusing on five goals of deregulating the retail electricity market.

GAO noted that: (1) one major goal of deregulating the retail
electricity market is encouraging retail price competition; (2) removing
practices that treat potential competitors inconsistently and providing
customers with lower electricity prices are two major considerations;
(3) the PMAs are generally able to sell power more cheaply than other
providers in part because they sell electricity generated almost
exclusively by hydropower and because some of the government's costs are
not recovered through the PMAs' rates; (4) GAO estimated net financing
costs attributable to the PMAs to be about $585 million in fiscal year
1996; (5) unlike the investor-owned utilities, the PMAs are not required
to earn a profit; (6) the PMAs and Tennessee Valley Authority (TVA) also
have competitive advantages in financing, taxes, and regulatory
oversight; (7) protecting the environment is the second broad goal; (8)
because the electricity industry is a major source of air pollution, the
debate over restructuring includes the question of how changes in how
electricity is generated could affect the environment; (9) concern
exists that competitive markets may result in increased emissions of
pollutants from the burning of fossil fuels; (10) although the mix of
sources generating electricity may change, over 50 percent of TVA's
power is generated from coal, whereas less than 2 percent of the PMAs'
power is generated from coal; (11) the PMAs' hydropower may offer
potential environmental advantages over other electricity sources
because it is a clean, domestic, and renewable source of energy; (12)
however, hydropower facilities can have significant impacts on fish and
wildlife habitats; (13) balancing equity among shareholders is the third
broad goal; (14) Congress has the option of requiring the PMAs to sell
their power at market rates; (15) this would better ensure the full
recovery of the appropriated and other debt of about $22 billion through
the PMAs' power sales; (16) the fourth broad goal of restructuring is
maintaining the reliability of the interstate transmission grid; (17) an
issue that directly relates to the PMAs is the maintenance of reserves
that can be called upon to meet planned or unforeseen outages by power
providers; (18) the last broad goal is promoting deregulation by
redefining federal roles, such as those of federal regulatory agencies;
and (19) while restructuring has focused largely on deregulating the
retail market, some segments of the electricity industry may face new or
increased regulations to address market power and consumer protection
issues.

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

 REPORTNUM:  T-RCED/AIMD-99-229
     TITLE:  Federal Power: The Role of the Power Marketing
	     Administrations in a Restructured Electricity Industry
      DATE:  06/24/99
   SUBJECT:  Electric utilities
	     Energy marketing
	     Utility rates
	     Electric power generation
	     Air pollution control
	     Competition
	     Hydroelectric energy
	     Energy costs

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

Before the Subcommittee on Water and Power, Committee on Resources,
House of Representatives

For Release
on Delivery
Expected at
2 p.m.  EDT
Thursday
June 24, 1999

FEDERAL POWER - THE ROLE OF THE
POWER MARKETING ADMINISTRATIONS IN
A RESTRUCTURED ELECTRICITY
INDUSTRY

Statement of Victor S.  Rezendes, Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED/AIMD-99-229

GAO/RCED/AIMD-99-229T

(141350)

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

  DOE -
  FERC -
  NERC -
  PMA -
  RUS -
  SEC -
  TVA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are here today to discuss the role of the federal power marketing
administrations (PMAs) in a restructured electricity industry.  As we
near the close of the first electrified century, vast opportunities
face the electricity industry as we proceed into restructured, more
competitive markets.  Over the last 20 years, competition has been
replacing regulation in major sectors of the U.S.  economy, including
transportation, natural gas, and telecommunications.  As we enter the
next millennium, new emerging opportunities of a competitive
marketplace challenge the electricity industry.  As this
restructuring proceeds, we must consider how the existing federal
system of generating, transmitting, and marketing electricity is
managed. 

Our statement today is primarily based on the body of PMA work that
we have completed for this Subcommittee over the last 4 years.  We
also discuss our reports concerning the Tennessee Valley Authority
(TVA) because they relate closely to the PMA reports.  On the basis
of our review of the issues, we have identified several broad goals
of the effort to restructure the electricity industrygoals that
apply to both the private sector and government, including the PMAs. 
We will also discuss the role of the PMAs in this changing
electricity industry. 

In summary, Mr.  Chairman, our principal observations are the
following: 

  -- We have identified several broad goals of the electric
     industry's restructuring based on the various policymakers' and
     industry experts' opinions.  Today, we will discuss five of
     these goals that we believe particularly affect the PMAs:  (1)
     encouraging competition for retail consumers, (2) protecting the
     environment, (3) balancing equity among stakeholders, (4)
     maintaining the reliability of the transmission grid, and (5)
     promoting deregulation by redefining federal roles.  We will now
     summarize each goal and discuss its applicability to the PMAs. 

  -- One major goal of deregulating the retail electricity market is
     encouraging retail price competition.  Removing practices that
     treat potential competitors inconsistently and providing
     customers with lower electricity prices are two major
     considerations.  The PMAs are generally able to sell power more
     cheaply than other providers in part because they sell
     electricity generated almost exclusively by hydropower and
     because some of the government's costs are not recovered through
     the PMAs' rates.  We estimated net financing costs attributable
     to the PMAs to be about $585 million in fiscal year 1996.  In
     addition, unlike the investor-owned utilities, the PMAs are not
     required to earn a profit.  The PMAs and TVA also have
     competitive advantages in financing, taxes, and regulatory
     oversight. 

  -- Protecting the environment is the second broad goal.  Because
     the electricity industry is a major source of air pollution, the
     debate over restructuring includes the question of how changes
     in how electricity is generated could affect the environment. 
     Concern exists that competitive markets may result in increased
     emissions of pollutants from the burning of fossil fuels, such
     as coal.  Although the mix of sources generating electricity may
     change, currently, over 50 percent of TVA's power is generated
     from coal, whereas less than 2 percent of the PMAs' power is
     generated from coal.  The PMAs' hydropower, which is about 93
     percent of the PMAs' total power, may offer potential
     environmental advantages over other electricity sources because
     it is a clean, domestic, and renewable source of energy. 
     However, hydropower facilities can have significant impacts on
     fish and wildlife habitats. 

  -- Balancing equity among stakeholders is the third broad goal. 
     Legislation has been proposed to require the PMAs and TVA to
     sell their power at market rates.  As we discussed in recent
     reports, the Congress has the option of requiring the PMAs to
     sell their power at market rates.  This would better ensure the
     full recovery of the appropriated and other debt of about $22
     billion through the PMAs' power sales.  This would also lead to
     more efficient management of the taxpayers' assets.  This debt
     includes the costs of building and operating the federal
     electric power network as well as billions of dollars in
     irrigationrelated debt.  Such proposals would benefit federal
     taxpayers by better ensuring the full recovery of debt through
     the PMAs' rates.  One aspect that will require careful
     consideration is balancing the competing interests of various
     groups of stakeholdersratepayers, customers, investors, and
     taxpayers.  Yet, the PMAs are faced with the risk that the
     federal investment in hydropower will not be recovered if power
     generated by federal plants ultimately proves to be too
     unreliable or costly to be competitive. 

  -- The fourth broad goal of restructuring is maintaining the
     reliability of the interstate transmission grid.  An issue that
     directly relates to the PMAs is the maintenance of reserves that
     can be called upon to meet planned or unforeseen outages by
     power providers.  As we recently reported, hydropower's inherent
     flexibility in meeting different levels of demand creates an
     opportunity for hydropower to play a significant role in meeting
     demand during peak periods. 

  -- Finally, the last broad goal is promoting deregulation by
     redefining federal roles, such as those of federal regulatory
     agencies.  While restructuring has focused largely on
     deregulating the retail market, some segments of the electricity
     industry may face new or increased regulations to address market
     power and consumer protection issues.  Recent transmission
     policies have dealt with the concerns of market power in the
     ownership and control of transmission facilities.  For example,
     the PMAs' transmission rates and facilities may come under new
     federal regulation. 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

In 1997, residential, commercial, and industrial consumers spent
about $215 billion on electricity, making the market for electricity
larger than the markets for telecommunications, trucking, or airline
transportation services.  Over the last 20 years, competition has
been replacing regulation in major sectors of the U.S.  economy,
including transportation, natural gas, and telecommunications.  New
legislation and technological changes have created a climate for
change in traditional electricity markets at both the wholesale and
retail levels.  Through the Energy Policy Act of 1992 and subsequent
rulings by the Federal Energy Regulatory Commission (FERC), the
federal government has encouraged competition in the wholesale
electricity market.  At the retail level, the administration
estimates that competition will result in annual savings of $20
billion for consumers and $2 billion for the government.  Whereas
transmission and distribution will remain largely regulated and
noncompetitive, the retail market offers great potential for
competition.  Since 1992, 22 statesrepresenting about 60 percent of
the U.S.  population--have issued comprehensive deregulation orders
or enacted restructuring legislation.  Most of the remaining states
have the matter under active consideration.  The extent to which the
federal government should participate in fostering retail competition
has yet to be decided. 

The federal government--the nation's largest single producer of
electric power--generated nearly 10 percent of the nation's
electricity in 1998.  Since the New Deal, the federal government has
established water projects thatin addition to promoting agriculture,
flood control, navigation, and other activitiesproduce electric
power.  The federal government has played an important role by
selling electricity to rural America.  The Department of the
Interior's Bureau of Reclamation (Bureau) and the Department of the
Army's Corps of Engineers (Corps) generate electricity at hydropower
plants located at major federal water projects.  The Department of
Energy's (DOE) four PMAs,\1 along with TVA, generally sell this
electricity in wholesale markets mostly to publicly and cooperatively
owned utilities that, in turn, sell the electricity to retail
consumers.  Although not a PMA, TVA is a federal corporation and the
nation's largest single producer of power.  As restructuring moves
forward, the Congress, states, and the industry are considering how
the existing federal power system fits into the new environment and
how it is managed.  Against the backdrop of restructuring, the
Congress is compelled to reconsider the policies used to maintain and
manage the federal hydropower system. 

Mr.  Chairman, we have identified several broad goals of electric
industry restructuring.  We will now discuss the five goals that
particularly affect the PMAs, including their relationship to the
PMAs in this changing environment. 

--------------------
\1 DOE's PMAs are the Bonneville Power Administration, Southeastern
Power Administration, Southwestern Power Administration, and Western
Area Power Administration. 

   ENCOURAGING RETAIL COMPETITION
---------------------------------------------------------- Chapter 0:2

One major goal of deregulating the retail electricity market is
encouraging retail price competition.  Several objectives support the
achievement of this goal.  These include removing practices that
treat potential competitors inconsistently and providing customers
with lower electricity prices.  Each of these objectives apply to
both the private sector and government, including the PMAs.  We will
now discuss these objectives. 

      THE PMAS AND TVA HAVE
      COMPETITIVE ADVANTAGES IN
      FINANCING, TAXES, AND
      REGULATORY OVERSIGHT
-------------------------------------------------------- Chapter 0:2.1

As the market moves from a regulated to a more deregulated retail
environment, it may be necessary to determine whether more consistent
treatment of power providers is warranted.  Favorable financing for
power-related facilities gives some federally assisted potential
competitors advantages in the marketplace.  For example, we have
reported that although the PMAs are generally required to recover all
costs, favorable financing terms\2 and the lack of specific
requirements to recover certain costs have resulted in net costs to
the federal government each year.\3 Net costs include net financing
costs, pension and post retirement health benefits, and certain
construction costs.  We estimated net financing costs attributable to
the PMAs to be about $585 million in fiscal year 1996.  In part
because the PMAs sell power generated almost exclusively from
hydropower, are not required to earn a profit, and do not fully
recover the government's costs in their rates, they are generally
able to sell power more cheaply than other providers.  We reported in
January that DOE's Southeastern Power Administration (Southeastern),
Southwestern Power Administration (Southwestern), and the Western
Area Power Administration (Western) sold wholesale electricity to
their preference customers,\4 from 1990 through 1995, at average
rates from 40 to 50 percent below the rates that nonfederal utilities
charged.\5 In the recent past, the rates of the Bonneville Power
Administration (Bonneville) were at or above market rates.  We also
reported that many rural electric cooperatives--many of which are PMA
preference customers--have had access to favorable financing (either
direct loans or guarantees) through the U.S.  Department of
Agriculture's Rural Utilities Service (RUS).  Such financing did not
fully reflect the government's net financing costs.  These costs were
about $874 million in fiscal year 1996.  Such financing would give
these cooperatives a competitive advantage if they were to compete
outside their traditional service areas against private competitors
that do not have access to such favorable interest rates. 

Another example of favorable financing concerns federal entities'
bond sales as compared with the criteria applied to other borrowers. 
Bond-rating services give the higher rating to bonds issued by
Bonneville and TVA because they are federal entities.  For example,
Standard & Poors' credit rating agency's AAA rating for TVA bonds
is not based on a default, risk-based analysis.  Instead, the bonds
are generally viewed as government-sponsored debt.  The resulting
lower bond interest rate gives these entities a competitive
advantage. 

Also, some electricity suppliers, such as investor-owned utilities,
are required to pay federal, state, and local taxes, but the PMAs and
TVA generally are not subject to them.\6 Municipalities and other
public power suppliers may also have favorable tax treatment that
would give them a competitive advantage if they were to compete
outside their traditional service areas.  To address this
possibility, legislation has been proposed, for example, that would
preclude government-owned utilities from using tax-exempt financing
to fund facilities if they choose to compete outside their
traditional service areas. 

Several inconsistencies also exist in the area of regulatory
oversight.  First, investor-owned utilities are subject to full
review and approval processes by FERC, while TVA is exempt from
regulation by FERC.  TVA's rates are reviewed only by its board of
directors.  All rates established by the PMAs are subject to a
limited review by FERC.  Second, by law, the transmission facilities
of Bonneville, Southwestern, and Western, as well as TVA and some
other smaller utilities, are exempt from FERC's jurisdiction of
transmission rates and open access.\7 And third, as a federal
instrumentality, TVA is not subject to antitrust legislation as are
private-sector firms.  Some TVA critics assert that this exemption,
together with the agency's total discretion in rate setting, allows
TVA to control the market by engaging in predatory pricing and other
anticompetitive activity. 

--------------------
\2 Favorable financing includes a requirement to repay the highest
interest-bearing appropriated debt first and interest rates on
appropriated debt that, before 1983, were below market rates.  We use
the term appropriated debt throughout this testimony because the
PMAs are required to set their electricity rates at levels that will
recover appropriations used for capital improvements by the Bureau
and the Corps.  These reimbursable appropriations are not considered
to be lending by the Treasury.  Pursuant to legislation passed in
1996, Bonneville's appropriated debt was refinanced to approximate
Treasury's current borrowing costs. 

\3 See Power Marketing Administrations:  Cost Recovery, Financing,
and Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept.  19,
1996), Federal Electricity Activities:  The Federal Government's Net
Cost and Potential for Future Losses (GAO/AIMD-97-110 and 110A, Sept. 
19, 1997), and Federal Power:  Options for Selected Power Marketing
Administrations' Role in a Changing Electricity Industry
(GAO/RCED-98-43, Mar.  6, 1998). 

\4 Preference customers include cooperatives and public bodies, such
as municipal utilities, irrigation districts, and military
installations. 

\5 See Federal Power:  PMA Rate Impacts, by Service Area
(GAO/RCED-99-55, Jan.  28, 1999). 

\6 TVA was expected to pay about $264 million in payments in lieu of
taxes in fiscal year 1998. 

\7 FERC Order 888 requires utilities under FERC's jurisdiction to
file nondiscriminatory open access transmission tariffs and offer
comparable transmission services to eligible third parties.  Order
889 requires utilities to develop same-time information systems to
make simultaneous transmission information available to those
entities that are selling power.  Bonneville, Southwestern, and
Western have voluntarily filed open-access transmission service
tariffs with FERC. 

   PROTECTING THE ENVIRONMENT
---------------------------------------------------------- Chapter 0:3

Because the electricity industry is a major source of air pollution,
the debate over restructuring includes how changes in how the
industry generates electricity could affect the environment.  A
relevant question is whether the existing body of environmental law
and regulation can accommodate future changes in electricity
generation and transmission or whether restructuring legislation
should have an environmental component to help ensure that further
developments in the electricity industry will be compatible with
environmental values. 

      FOSSIL-FUEL GENERATION
-------------------------------------------------------- Chapter 0:3.1

The combustion of fossil fuels, which account for about two-thirds of
the nation's electricity generation, results in airborne emissions. 
These emissions include pollutants that directly pose risks to human
health and welfare, such as sulfur oxides, nitrogen oxides,
particulate matter, carbon monoxide, and certain heavy metals.  Other
emissions may pose indirect risks; for example, carbon dioxide may
contribute to global warming.  Of the fossil fuel-fired steam
generators, coal-fired facilities contribute a large share of these
gases.  The Environmental Protection Agency currently regulates these
emissions, except carbon dioxide.  Any increase in fossil fuel-fired
generation may increase carbon dioxide emissions.  Some are concerned
that competitive markets may result in increased generation and
emissions of pollutants because (1) lower prices resulting from
restructuring would increase electricity purchases and, as a result,
(2) older, more polluting coal-fired generating facilities, which are
generally exempt from the Clean Air Act's new source emissions
standards, will be used more extensively.\8 Although the generation
mix may change, currently, less than 2 percent of the PMAs' power and
over 50 percent of TVA's power are generated from coal. 

To address these concerns, some have suggested various measures, in
addition to the continued enforcement of environmental standards
under the Clean Air Act, to counteract the anticipated increase in
the emissions of air pollutants after deregulation.  These include
(1) requiring a renewable portfolio standard, which directs utilities
to have a specific percentage of their generation power originating
from a renewable (non-air-polluting) source of energy; (2)
implementing pollution output controls, which focus on limiting
emissions without encouraging any particular kind of generation-type;
and (3) ratifying the Kyoto Protocol, which sets targets for
greenhouse gas emissions for developed nations. 

Yet, disagreements exist on how to control pollution.  It is argued
that a mandate for a renewable portfolio standard, for example, is
contradictory to the spirit of deregulation.  Instead, some industry
representatives have testified before the Congress that the federal
government should establish emissions standards for all generation
facilities.  These standards would be output-based, not favor a
particular fuel source, and allow market forces to determine the most
efficient means to develop cleaner coal plants and other
technologies, including renewable generation.  Any environmental
component of restructuring legislation, it is argued, should be
market based and incentive driven because in the long run,
competition will favor cleaner and more efficient facilities and
accelerate the turnover and upgrading of existing power plants. 

At least nine states have already adopted renewable portfolio
standards that require that specific percentages of the electricity
sold in their state be generated from renewable sources.  Such
sources include geothermal, hydro, solar, and wind energy.  The
administration's proposed renewable portfolio standard would require
electricity suppliers to eventually provide 7.5 percent of their
electricity sales from nonhydroelectric renewable technologies.  The
Congress is considering whether to promote fuel diversity by adopting
such a federal renewable portfolio standard.  A related issue is
whether to prescribe specific technologies or fuel sources as
renewable energy.  Including hydropower in a renewable portfolio
standard would make achieving the proposed standard easier and less
costly for electricity suppliers.  It would also increase the
importance of the nation's federal hydropower assets if they could be
tapped to meet any new requirements. 

--------------------
\8 While plants constructed before August 1971 are exempt, facilities
that are modified are subject to the standards. 

      NON-FOSSIL-FUEL GENERATION
-------------------------------------------------------- Chapter 0:3.2

The PMAs may offer potential advantages in the generation of
electricy from non-fossil fuels.  PMA hydropower, comprising about 93
percent of the PMAs' generation, is a clean, domestic, renewable
source of electricity.  Hydropower plants provide inexpensive
electricity and produce no pollution.  However, hydropower facilities
can have significant impacts on the surrounding area--especially fish
migration patterns and wildlife habitats.  To mitigate adverse
impacts, dams should maintain a steady stream flow and be designed or
retrofitted with fish ladders and fishways to help fish migrate.  As
we reported in September 1997, Bonneville spends hundreds of millions
of dollars annually to mitigate damage to fish and wildlife caused by
the federal government's hydropower operations.  This sum could
increase considerably in the future, according to Bonneville.  Such
costs may compromise Bonneville's ability to compete in a
restructured environment.  Conversely, TVA relies heavily on coal
generation. 

Restructuring also has environmental implications for nuclear energy. 
As we reported in May, industry experts expect that the deregulation
and restructuring of the electricity industry could result in the
early retirement of from 9 to 40 percent of the nation's nuclear
power plants.  Such plants may not be competitive with other sources
of electricity, in part, because of the high construction costs
resulting in part from changes in the Nuclear Regulatory Commission's
health and safety regulations issued after the Three Mile Island
accident.  Additionally, the cost of decommissioning--the disposal of
radioactive and other wastes so that the sites comply with
environmental standards--is negatively affecting the competitiveness
of some nuclear power plants.  As we reported in May, competition
could result in economic pressures that will affect the availability
of adequate funds for decommissioning and affect how utilities
address maintenance and safety in nuclear power plants.\9 Because of
restructuring, owners may retire some of the nuclear plants before
sufficient decommissioning funds have been accumulated.  In fact, 19
of 26 nuclear plants identified as likely to be retired early are
owned, in whole or in part, by licensees that have not accumulated
sufficient decommissioning funds.  More broadly, we also found that
nearly half of all the utilities with nuclear plant licenses were not
accumulating sufficient reserves through 1997 to pay for
decommissioning costs.  For example, we reported that TVA had
seriously underfunded its decommissioning reserves under certain
scenarios.  Whereas nearly 20 percent of TVA's power is nuclear, less
than 4 percent of the PMAs' power is nuclear. 

--------------------
\9 See Nuclear Regulation:  Better Oversight Needed to Ensure
Accumulation of Funds to Decommission Nuclear Power Plants
(GAO/RCED-99-75, May 3, 1999). 

   BALANCING EQUITY AMONG
   STAKEHOLDERS
---------------------------------------------------------- Chapter 0:4

One aspect of restructuring that will require careful consideration
is balancing the competing interests of various groups of
stakeholders that will be affected by the restructuring process. 
Stakeholders include ratepayers of investor-owned utilities,
preference customers of the PMAs, investors who own stock issued by
investor-owned utilities or bonds issued by Bonneville and TVA, and
federal taxpayers.  We will mention these stakeholders as we discuss
the recovery of stranded costs for generation assets and the
relationship of the PMAs' rates to market rates. 

      RECOVERY OF STRANDED COSTS
      FOR GENERATION ASSETS
-------------------------------------------------------- Chapter 0:4.1

As the industry moves to a restructured environment, some costs that
were incurred under the traditional regulated structure may not be
recoverable under competitive power rates.  These are generally
referred to as stranded costs, and estimates of their total value
have ranged from $10 billion to $500 billion.  State legislatures and
others have defined the specific components of stranded costs
differently.  Stranded costs may include power plants that are
rendered uneconomical by restructuring.  Nuclear plants with high
fixed costs, such as decommissioning costs, may be particularly
vulnerable.  Stranded costs may also include long-term, high-cost
power supply contracts mandated by federal legislation.\10 To date,
states have been responsible for deciding the extent to which
utilities can attempt to recover stranded costs for generation.  To
the extent that stranded costs are not fully recovered, investors and
possibly federal taxpayers must make up the difference and suffer the
financial consequences.  To the extent that customers are not allowed
to benefit immediately and fully from reduced retail rates while
stranded costs are being recovered, ratepayers suffer from higher
rates.  Using their discretion, individual states have allowed for
varying degrees of stranded cost recovery.  The administration's
restructuring proposal provides general support for utilities'
recovery of stranded costs.  Also, the proposal provides for imposing
mandatory transmission fees to ensure the recovery of the power and
any other costs assigned for recovery through the PMAs' and TVA's
power rates. 

A second issue regarding stranded costs that involves federal
taxpayers as stakeholders is the recovery of loans or the cost of
loan guarantees made by the Rural Utilities Service.  These were
provided for rural electric cooperatives, many of which are PMA
preference customers.  To the extent that retail competition may be
allowed in electric cooperatives' service areas, the repayment by the
cooperatives of over $32 billion in federal direct or guaranteed
loans is increasingly placed at risk.  In March 1998, we testified
that RUS had written off about $1.5 billion in loans and that RUS
questioned the prospects of full repayment of another $10.5 billion
in loans.\11 We also reported that outstanding loans to borrowers
that were currently considered viable by RUS may become stressed in
the future because of high costs and competitive or regulatory
pressures.  We concluded that the federal government will probably
incur losses on some of these loans in the future. 

A third issue concerning stranded costs--the adequacy of accumulating
decommissioning reserves--has already been mentioned.  From an equity
viewpoint, arguments can be made that reserves, when inadequate,
should be funded by current ratepayers, future ratepayers, investors,
or possibly federal taxpayers. 

--------------------
\10 The Public Utility Regulatory Policies Act of 1978 requires
utilities to buy power offered to them by certain suppliers at rates
equal to a utility's cost of providing its own generating capacity. 
In many cases, such rates are now well above current market costs. 

\11 See Rural Utilities Service:  Risk Assessment for the Electric
Loan Portfolio (GAO/T-AIMD-98-123, Mar.  30, 1998). 

      MARKET RATES EXCEED PMA
      RATES
-------------------------------------------------------- Chapter 0:4.2

On a national scale, the administration estimates that, on average, a
typical family of four would save $232 annually on electricity
purchases and the reduced costs of other goods and services if the
administration's restructuring plan were implemented.  The federal
government would also benefit from retail competition.  Using various
scenarios, we estimated that the federal government could expect
cumulative savings in its electricity bills of from $600 million to
$6.5 billion from 1998 through 2015 because of retail competition.\12

However, although several states have already mandated varying rate
reductions in their restructuring plans, not all customers in all
states would see price reductions from nationwide retail competition. 
Residential customers in some states that currently have electricity
rates below the national average may see their rates rise, according
to several studies.  For example, DOE estimates that electricity
rates averaged across all customer classes would actually increase
somewhat in Montana, Oregon, and Washington State under the
administration's restructuring proposal. 

The PMAs are currently required to set their power rates at the
lowest possible level consistent with sound business principles. 
They generally follow applicable laws and regulations regarding the
recovery of costs.  We have reported that the PMAs' rates have
generally been lower than the market rates.  If the PMAs were
authorized to charge market rates for power in conjunction with
federal restructuring legislation, some preference customers who now
purchase power from the PMAs at rates that are less than those
available from other sources would see their rates increase.  As we
recently reported, slightly more than two-thirds of the preference
customers, which are located in varying portions of 29 states, that
purchased power directly from Southeastern, Southwestern, and Western
would experience relatively small or no rate increasesincreases of
one-half cent per kilowatthour or lessif those PMAs charged market
rates.\13

As we reported, the Congress has the option of requiring the PMAs to
sell their power at market rates to better ensure full recovery of
the appropriated and other debt\14 that is recoverable through the
PMAs' power sales.\15

This debt totaled about $22 billion at the end of fiscal year 1997
and included nearly $2.5 billion in irrigation costs that are to be
recovered through the PMA's power sales.\16 This option would likely
also lead to more efficient management of the taxpayers' assets. 

Another issue affecting the future price of PMA power is the
reliability of federal generating assets.  In March, we reported that
the Bureau's and the Corps' hydropower plants are generally less
reliable in generating electricity than nonfederal hydropower plants. 
We concluded that these agencies were unable to obtain funding for
maintenance and repairs as needed and therefore delayed repairs. 
These delays caused frequent, extended outages and inconsistent plant
performance.  For example, at the Bureau's Shasta plant in
California, the need to repair the generating units was identified in
1983.  However, funding did not become available until 1995, when the
customers provided advanced funding, and, according to a Bureau
official, repairs will not be completed until 2003.  The uncertainty
of the federal planning and budget processes to provide timely and
predictable funding for maintaining and repairing the federal power
assets may be seen as evidence that the Bureau and the Corps cannot
provide electricity as efficiently as the nonfederal sector. 
Although PMA power has been generally priced less than other
electricity, as wholesale markets become more competitive, the PMAs'
customers will have more suppliers from which to buy electricity.  As
nonfederal electricity rates decline in competitive markets, a
portion of the PMAs' debt of about $22 billion may be at risk of
nonrecovery if the market for PMA power is diminished. 

--------------------
\12 See Federal Electricity:  Retail Competition Could Create
Government Savings (GAO/RCED-97-244, Sept.  30, 1997). 

\13 See GAO/RCED-99-55, and Federal Power:  Regional Effects of
Changes in PMAs' Rates (GAO/RCED-99-15, Nov.16, 1998).  To estimate
potential rate changes, we calculated how much, in cents per
kilowatthour, each customer paid, on average, for power purchased
from (1) all sources, including the PMAs, and (2) sources other than
the PMAs, including the wholesale market, in 1995.  Then, we took the
difference between the two, considering the latter to be the market
rate. 

\14 Other debt is primarily debt for certain irrigation facilities
and nonfederal nuclear power plants. 

\15 See GAO/AIMD-97-110 and 110A and GAO/RCED-98-43. 

\16 This total does not include any portion of TVA's debt.  TVA's
outstanding debt totaled nearly $26 billion, as of March 31, 1999. 

   MAINTAINING THE INTERSTATE
   GRID'S RELIABILITY
---------------------------------------------------------- Chapter 0:5

The reliability of the high-voltage transmission system has been the
responsibility of the North American Electric Reliability Council
(NERC), a not-for-profit entity with voluntary membership from all
segments of the electricity industry.  NERC reports that the existing
system for setting and encouraging compliance with the industry's
reliability standards is not sustainable in a new environment where
power flows on the grid are changing, the number of transactions is
increasing dramatically, and new types of business entities are using
the transmission system in ways that have not previously been used. 
NERC believes that mandatory reliability standards are needed.  It
also believes that the Congress should authorize a new, independent
self-regulating reliability organization with oversight by FERC, a
position largely supported by the administration. 

Another aspect of reliability that is changing under restructuring is
the control or dispatching of power over the transmission lines.  An
emerging patchwork of regional electric transmission grids, often
working at cross purposes, threatens the system's reliability and it
is time for federal regulators to address the problem, according to a
survey of state regulators completed in March 1999.\17 The survey
also reported that uncertainty over the future of transmission
management is harming the competitive position of utilities in
regions where the issue is unresolved.  The problem arose with the
implementation of FERC Order 888.  Since that time, FERC has
encouraged the creation of new, regional transmission groups, such as
integrated system operators that would be responsible for ensuring
that loads match resources available to the system.  These operators
are not to be controlled by the power generators.  Currently, FERC is
strongly encouraging, but not requiring, owners of transmission
facilities to participate in geographically broad transmission
organizations.  According to FERC, these organizations are expected
to improve the efficiencies of transmission grid management by
adopting better pricing and congestion management, improving the
grid's reliability, removing remaining opportunities for
discriminatory transmission practices, improving market performance,
and facilitating lighter-handed regulation.  In May, FERC issued a
notice of proposed rulemaking that seeks comments on proposed minimum
characteristics and functions for the regional transmission
organizations.  Its impact on the PMAs is unclear.  As an example,
Bonneville has explored participating in a regional transmission
group in the Northwest but may need clear legal authority to join. 
The administration's proposal would provide such clarity. 

FERC currently has authority over most of the nation's interstate
power grid.  But about one-third of the integrated grid is not under
FERC's jurisdiction with regard to mandatory open transmission
access.  For example, over 30,000 miles of transmission lines owned
by Bonneville, Southwestern, and Western, as well as 17,000 miles
owned by TVA, are not under FERC's jurisdiction.  To maximize the
economic benefits of restructuring, some proposals would extend
FERC's authority to include all of the nation's transmission
facilities in the lower 48 states. 

The restructured environment also creates uncertainty regarding
access to investment capital for new or upgraded transmission
capacity.  The building of high-voltage transmission facilities is
being delayed at a time when the need for additional capacity grows
in some areas, according to an April 1999 report on transmission
restructuring.\18 For-profit entities may be needed to provide
capital if other entities are unwilling or unable to provide enough
capital for new or upgraded facilities.  On the other hand, a
restructured market may reduce the need for new transmission lines by
using, for example, distributed generation and cogeneration\19 that
would reduce the need to transmit power and that are supported under
the administration's restructuring plan. 

On a more technical note, reliability encompasses the maintenance of
reserves that can be called upon to meet planned and unforeseen
outages by power providers.  The decisions on how to provide for
standby reserves in a restructured environment have not been
finalized.  Of particular relevance for today's hearing is what role
the federal government's hydroelectric facilities could play in
providing reserves in the restructured market.  As we noted in a
March 1999 report on the maintenance and repair of federal hydropower
plants, hydropower's inherent flexibility in meeting different levels
of demand translates into the significant role that hydropower may
play in meeting demand during peak periods and providing such
services as maintaining reserves.\20 Depending on the actions taken
by federal and state regulators in the near future, a separate market
for such services as maintaining reserves is beginning to develop,
and utilities with hydropower could capture a market niche and take
the opportunity to earn additional revenues. 

--------------------
\17 Crossed Wires, Neil Palmer & Associates and The Terra Group. 

\18 Credit Implications of the ISO-Transco Debate, Duff & Phelps
Credit Rating Co.  (April 1999). 

\19 Distributed generation systems include fuel cells, solar cells,
and small turbines, which supply power closer to consumers than a
central generation station.  Cogeneration systems produce electricity
and another form of energy, such as heat or steam, using the same
fuel source. 

\20 See GAO/RCED-99-63. 

   PROMOTING DEREGULATION BY
   REDEFINING FEDERAL ROLES
---------------------------------------------------------- Chapter 0:6

While restructuring has focused largely on the generation sector of
the electricity industry, some segments of the industry may face new
or increased regulations to address market power and consumer
protection issues.  For example, the PMAs' transmission rates and
facilities may come under new federal regulations.  We will now
briefly discuss the possible new roles of some federal agencies in a
restructured electricity industry. 

      TRANSMISSION
-------------------------------------------------------- Chapter 0:6.1

FERC recently testified to the Congress that legislation on
transmission issues is needed to ensure the full development of
competition.  The agency recommends (1) bringing all transmission
facilities in the lower 48 states within its open access transmission
rules, (2) clarifying its authority to promote regional management of
the transmission grid through regional transmission organizations,
and (3) establishing a fair and effective program to protect the
reliability of bulk power. 

FERC's open access transmission policies address the concern of
market power related to the ownership and control of transmission
facilities.  Fair and open access to reliable transmission service is
essential to competition in power markets.  In 1992, the Congress
broadened FERC's authority to direct transmission service on a
case-by-case basis.  Subsequently, FERC has prohibited, through
regulatory orders, vertically integrated utilities from
discriminating against their competitors by limiting or denying
access to their transmission facilities.  The administration's
restructuring plan would place Bonneville, Southwestern, and Western
under FERC's authority to review proposed transmission rates under
its just and reasonable and not unduly discriminatory standard. 

FERC has suggested that regional transmission organizations, such as
independent system operators and independent for-profit companies,
would address barriers to competition by eliminating bias in
transmission operations and allowing the efficient and reliable
operation and planning of the transmission grid.  The
administration's bill would authorize FERC to require transmitting
utilities to transfer operational control of transmission facilities
to a regional system operator to facilitate competition.  Bonneville,
Southwestern, and Western would be required to participate in the
regional transmission organizations, if required by FERC. 

      MERGERS AND ACQUISITIONS
-------------------------------------------------------- Chapter 0:6.2

FERC believes that it should continue to consider market power issues
in reviewing applications for mergers or other asset acquisitions. 
Last month, FERC testified that that the Congress should expand its
jurisdiction over the transfers of generation facilities.  Currently,
FERC can review a transaction involving a public utility only when it
involves other facilities over which it has jurisdiction, such as
transmission facilities or contracts for wholesale sales.  However,
transactions involving only generation assets do not necessarily fall
under FERC's jurisdiction even though the concentration of generation
assets may directly affect wholesale competition.  FERC also
testified that the Congress should give it explicit, direct
jurisdiction over mergers of public utility holding companies--a role
historically held by the Securities and Exchange Commission (SEC). 

The Public Utility Holding Company Act was enacted in 1935 to break
up the large trusts that controlled the nation's electric and gas
distribution networks.  An important feature of the 1935 Act was that
it authorized SEC to break up the massive interstate holding
companies, which it regulates, and require them to divest their
holdings until each became a single consolidated system serving a
specific geographic area.  The 1935 Act also permitted holding
companies to engage only in business that was essential and
appropriate for the operation of a single integrated utility.  This
latter restriction eliminated the participation of nonutilities in
wholesale electric power sales.  The law contained a provision that
all holding companies had to register with SEC, which was authorized
to supervise and regulate the holding company system. 

Last month, SEC testified that the Congress should repeal the 1935
Act conditionally.  According to SEC, although portions of the 1935
Act largely duplicate other existing regulation and controls imposed
by the market, a need to protect consumers continues.  Specifically,
SEC called for added flexibility and authority for FERC to engage in
more extensive regulation and oversee transactions among affiliates
in holding company systems. 

The mandatory purchase provision of the Public Utility Regulatory
Policies Act of 1978 was partly intended to foster the
commercialization of renewable energy by requiring utilities to
purchase power from cogenerators and renewable energy facilities. 
However, the 1978 Act, in some cases, resulted in high prices to
consumers because some of the mandatory contracts were based on
forecasts of high fuel prices, according to the Congressional Budget
Office\21 and others.  These factors rendered the contracts
uneconomical for utilities in a competitive market.  Legislative
proposals, including the administration's, call for the prospective
repeal of this provision.  The mandatory purchase provision may be
replaced with other regulatory requirements to ensure that these
sources of energy continue to enjoy market access through, for
instance, a renewable portfolio standard and a public benefit
program. 

--------------------
\21 See Electric Utilities:  Deregulation and Stranded Costs,
Congressional Budget Office (Oct.  1998). 

-------------------------------------------------------- Chapter 0:6.3

This concludes our formal statement.  We look forward to working with
this Subcommittee in the coming months in discussing options for
addressing the PMAs' role in a changing electricity industry.  If you
or other Members of the Subcommittee have any questions, we will be
pleased to answer them. 

   CONTACT AND ACKNOWLEDGMENT
---------------------------------------------------------- Chapter 0:7

For future contacts regarding this testimony, please contact Vic
Rezendes at (202) 512-3841.  Individuals making key contributions to
this testimony were Peg Reese, Charles Hessler, and Daniel
Garcia-Diaz. 

*** End of document. ***