**STATEMENT OF JON C. WORTHINGTON**

**ADMINISTRTOR**

**SOUTHEASTERN POWER ADMINISTRATION**

**UNITED STATES DEPARTMENT OF ENERGY**

**BEFORE THE**

**SUBCOMMITTEE ON WATER AND POWER**

**COMMITTEE ON NATURAL RESOURCES**

**UNITED STATES HOUSE OF REPRESENTATIVES**

**OVERSIGHT HEARING ON THE PROPOSED**

**FISCAL YEAR 2008 BUDGET**

**March 8, 2007**

Madam Chairwoman and members of the Subcommittee, I am Jon Worthington,
Administrator of the Southeastern Power Administration (Southeastern),
and I appreciate this opportunity to present a written statement today,
March 8, at this Oversight Hearing on the FY 2008 Budget Requests for
the Bureau of Reclamation, the Federal Power Marketing Administrations,
and the Water Resources Division of the United States Geological Survey.

# PROFILE OF SOUTHEASTERN POWER ADMINISTRATION

The mission of Southeastern is to market and deliver Federal
hydroelectric power at the lowest possible cost consistent with sound
business practices to public bodies and cooperatives in the southeastern
United States in a professional, innovative, customer-oriented manner,
while continuing to meet the challenges of an ever-changing electric
utility environment through continuous improvements.

With an authorized staff of 42, Southeastern markets power produced at
22 multiple-purpose projects operated and maintained by the U.S. Army
Corps of Engineers (Corps). These 22 projects are divided into four
individual river systems, each of which has separate rate and repayment
schedules. This power is marketed in an 11-State marketing area.
Preference in the sale of power is given to public bodies and
cooperatives in accordance with Section 5 of the Flood Control Act of
1944 (16 U.S.C. 825s).

Southeastern coordinates the operations of the projects using customers'
load schedules and meets the North American Electric Reliability
Corporation's (NERC) control area criteria, while complying with Corps'
operational and environmental requirements. All of Southeastern's system
operators meet NERC certification standards.

Southeastern does not own or operate any transmission facilities and
carries out its marketing program by using the existing transmission
systems of the power utilities in the area. This is accomplished through
"wheeling" contracts with area transmission providers that agree to
deliver power to preference customers. In turn, Southeastern compensates
the transmission provider for the wheeling services.

Rate schedules are formulated to repay all of Southeastern's costs, as
well as all Corps costs allocated to power. Rate schedules are designed
to recover operation and maintenance expenses, purchased power and
wheeling expenses, and expensed interest annually. Rate schedules also
include the costs of capital investments that are recovered over a
reasonable number of years.

# PROGRAM ACCOMPLISHMENTS

The eighth worst drought in the past 100 years occurred on the
Georgia-Alabama-South Carolina System during FY 2006. In spite of the
drought, Southeastern sold 5,255 gigawatt-hours of energy, with revenues
totaling \$204 million, and repaid approximately \$4.5 million in
capital costs to the Treasury.

Southeastern recovered all costs associated with drought-related power
purchases by the end of FY 2006, including \$9.9 million financed using
the Continuing Fund. Continuing Fund expenditures were recovered by
passing-through the cost to Southeastern's customers within the month
following the purchase. Southeastern has implemented a similar
pass-through in the Kerr-Philpott System to recover purchase power costs
as they are incurred, thereby improving cash flow to the Treasury.

Southeastern has used the President's Management Agenda to become more
efficient and effective. We have integrated the principles of the
initiatives in the President's Management Agenda into our organization
and continue to work with the Office of Management and Budget and
offices within the Department of Energy (DOE) to ensure that the
performance measures are more focused and useful in making management
decisions. Southeastern has consistently achieved high ratings on DOE's
quarterly President's Management Agenda Scorecard process and met the
criteria for annual targets specified in the Program Assessment Rating
Tool. Southeastern is "Green" on all items that apply to the President's
Management Agenda. We continue to use this as an improvement tool.

Like most Federal agencies, Southeastern will face numerous retirements
over the next several years. To that end, Southeastern has an active
succession management plan that is reviewed on an ongoing basis. It was
modified last fiscal year to address the critical need of replacing four
out of five senior staff within the next five years and three
highly-skilled technical personnel in the next two years.

Southeastern continues to meet all cyber security requirements on its
three Information Technology (IT) networks. In addition, Southeastern
signed a Memorandum of Agreement (MOA) with the Corps on protocols to
share cyber security information and to formalize security issues. This
agreement will facilitate coordination efficiencies between our agencies
in the operation of the Federal hydropower system.

####### PROGRAM GOALS

###### Wolf Creek Project

During FY 2007 and into FY 2008 Southeastern will be focusing on the
evolving situation at the Wolf Creek Project. The Wolf Creek Project is
operated by the Corps and is included in the Cumberland System, which
consists of nine hydropower projects operated in a completely
coordinated manner. Wolf Creek is the largest manmade reservoir in the
eastern United States. It encompasses over half of the usable storage in
the Cumberland System and regulates flow to four downstream projects.
The Wolf Creek Dam has experienced seepage problems since the mid to
late 1960's resulting from the Karst limestone characteristics of the
foundation material that typically contains fissures and clay-filled
seams. Over time, mildly acidic water begins to dissolve the surface and
any fractures or bedding planes in the limestone bedrock enlarge as the
bedrock continues to dissolve. Openings in the rock increase in size and
an underground drainage system begins to develop, allowing more water to
pass through and accelerating the formation of underground karst
(cave-like) features which are the cause of concern at Wolf Creek.
During the 1960's and 1970's, the Corps undertook measures to correct
the problem; however, these repairs have not provided the desired
results.

Amid increasing concern over the overall seepage occurring at the
project, in March 2005, the Corps instituted a revision to the
operational parameters of the Wolf Creek project. The project
elevations, which were normally permitted to fluctuate between the
seasonally varying project guide curve of elevation 723 (MSL) in the
summer and 700 (MSL) in the winter, were limited to seasonal variations
of 720 (MSL) and 690 (MSL), respectively.

This plan was intended to relieve some pressure on the dam and reduce
the foundation seepage, while still allowing a sufficient quantity of
water to be stored at the project, which could be used to meet down
stream flow requirements and satisfy congressionally-authorized project
purposes.

A number of studies have recently been conducted relating to the seepage
at the project. The most recent of these reviews was completed in
December 2006. This panel was composed of independent, outside experts
in their respective fields. As a result of the recommendations from the
studies that concluded the dam was at high risk of failure, the Corps
announced emergency measures and courses of action would be taken to
reduce imminent risk to human life, health, property, and severe
economic loss. The Corps' concern of failure and risk to human life is
not lost on Southeastern or Southeastern's customers.

Effective January 22, 2007, the Wolf Creek project elevation was lowered
to 680 (MSL) and will be maintained at this constant elevation. The
Corps has instituted an accelerated grouting program for the project
with the goal of having the grout work completed in one of the most
critical sections of the dam on or about April 1, 2007, and a second
critical area by Fall of 2007. In addition, a risk analysis will also be
completed in that same timeframe. Based on the results of the grouting
program and this analysis of project conditions, a revision to the new
operating plan may be warranted. The project will be constantly
monitored during this time period. If positive effects are not seen from
this incremental lowering, or if other conditions develop, further
actions will be necessary.

Modifications to the operating criteria of these projects are having a
dramatic impact on a number of stakeholders throughout the entire
system: loss of revenue to marina operators and other recreation-related
businesses; waterborne commerce; and unplanned water supply construction
costs for municipal governments and power plant operators. With the loss
of summer reservoir storage, the impact to Southeastern's hydropower
customers is also significant. The Cumberland System provides less
generation for the preference customers, which results in power delivery
deficiencies and load serving impacts to the 216 municipalities and
cooperatives located in the states of Tennessee, Kentucky, Georgia,
Illinois, Mississippi, Alabama, and North Carolina who rely on this
generation resource.

Southeastern continues to meet and coordinate with its customers and the
Corps regarding the revised operation of the Cumberland System.
Southeastern is presently formulating a strategy to market the remaining
energy in a system that, until the repair is accomplished and pool level
normalizes, will become a run-of-the-river generation resource. Our
short-term goal is to formulate rates and market the remaining energy to
ensure repayment of the Federal investment and recover all the Corps and
other costs (O&M).

**Power Operations**

In order to maintain compliance with NERC and the Southeastern Electric
Reliability Council (SERC) Reliability Corporation operating
requirements, Southeastern will ensure that operators are recertified on
a rotating basis and that all available power is reliably delivered to
the power grid for the benefit of Southeastern's customers.

###### Agency Rate

Southeastern's FY 2008 proposed budget includes a proposal whereby the
interest rate for new obligations incurred by Southeastern for
power-related investments will be set at the rate equivalent to what
Governmental corporations pay when borrowing in the market, identified
as the agency rate. This proposal will better align Southeastern's
interest rates with its investment risk and will be comparable to the
rates charged to the Bonneville Power Administration when it borrows
from the Treasury. This new interest rate will apply only to investments
with interest rates that are *not* set by law. All of Southeastern's
investments currently in service will continue to retain existing
interest rates. The new agency rate will result in increased annual
costs of less than one percent (1%), beginning in FY 2008.

###### Recovery of Emergency PPW Expenses Using the Continuing Fund

Southeastern has implemented rates that recover emergency power
purchases costs for the majority of its hydroelectric systems within the
fiscal year that costs are incurred. The 2008 Budget includes an
initiative for [all]{.underline} Southeastern hydroelectric systems to
recover emergency power purchase expenses from ratepayers within
one-year. This change will assure the Treasury is repaid in a timely
manner with minimal deficit impact if emergency costs are incurred.

**Financial Reporting**

Southeastern staff is working with Corps' financial staff to improve the
timeliness and streamline delivery of annual financial data for auditing
purposes.

####### HOW SOUTHEASTERN RELATES TO GENERATION AGENCIES

# Southeastern maintains cooperative working relationships with the Corps of Engineers in both the South Atlantic Division and the Great Lakes and Ohio River Division. The Georgia-Alabama-South Carolina, Kerr-Philpott and JimWoodruff Systems' financial and operating issues are regularly discussed within the Southeastern Federal Power Alliance. Cumberland System financial and operating issues are addressed within the Team Cumberland organization. Southeastern is committed to maintaining open communications with its customers and the Corps. 

####### 

####### CLIMATE CHANGE, ALTERNATIVE ENERGY, AND ENERGY CONSERVATION

Southeastern addresses climate change issues by providing educational
and technical services to our municipal and cooperative customers.
Specific programs include partnering with the American Public Power
Association to develop a web-based tool that enables our customers to
access technical energy efficiency information for their large
commercial and industrial customers. Southeastern also assisted the City
of College Park, Georgia, in acquiring renewable energy resources for
its power portfolio mix. We have also partnered with DOE's wind program
to provide educational services in the mountainous region of the
agency's service area.

In addition, based on FY 2006 generation, Southeastern saved the
equivalent of the amount of energy in 9.3 million barrels of oil, 2.7
million tons of coal, or 57.3 billion cubic feet of gas through
hydropower generation, and prevented greenhouse emissions of
approximately 4.7 million tons of carbon dioxide, 14,100 tons of sulfur
dioxide, and 11,300 tons of nitrogen oxides.

####### 2008 BUDGET REQUEST

The FY 2008 budget request, Attachment 1, provides for \$6.463 million
in appropriations for program direction and \$62.215 million for
Purchase Power and Wheeling. Southeastern relies on existing
transmission systems to transmit Federal Power to its customers at a
cost of \$36 million. Southeastern also purchases \$26 million in
replacement power and pump storage energy. Purchase power and wheeling
expenses are financed entirely with offsetting collections and net
billing. Use of offsetting collections and net billing enables
Southeastern to operate more like a business by allowing Southeastern's
revenues to pay for purchase power and wheeling costs rather than using
appropriations. There are no new program starts included in
Southeastern's FY 2008 budget request.

Madam Chairwoman, this concludes my presentation of Southeastern's FY
2008 budget request and program status. If you or any of the
Subcommittee members have questions, I will be pleased to answer them.

# BUDGET REQUEST SUMMARY

+----------------------------------------+----------+----------+-------+
|                                        | **       |          |       |
|                                        | (dollars |          |       |
|                                        | in       |          |       |
|                                        | thou     |          |       |
|                                        | sands)** |          |       |
+----------------------------------------+----------+----------+-------+
| ** **                                  | **FY     | **FY     | **FY  |
|                                        | 2006**   | 2007**   | 2     |
|                                        |          |          | 008** |
|                                        | *        | **Co     |       |
|                                        | *Appropr | ntinuing | *     |
|                                        | iation** | Reso     | *Requ |
|                                        |          | lution** | est** |
|                                        |          |          |       |
|                                        |          | *        |       |
|                                        |          | *Appropr |       |
|                                        |          | iation** |       |
+----------------------------------------+----------+----------+-------+
| **Program                              | *        | *        | **6,  |
| Direction**........                    | *5,544** | *5,602** | 463** |
| ..................................\... |          |          |       |
+----------------------------------------+----------+----------+-------+
| Purchase Power and Wheeling            |          |          |       |
| (PPW)........................          |          |          |       |
+----------------------------------------+----------+----------+-------+
| Purchase                               | 12,000   | 12,000   | 2     |
| Power.......                           |          |          | 6,370 |
| ...................................... |          |          |       |
+----------------------------------------+----------+----------+-------+
| Wheeling..................             | 35,198   | 35,198   | 3     |
| ...................................... |          |          | 5,845 |
+----------------------------------------+----------+----------+-------+
| **Subtotal, Purchase Power and         | **       | **       | **62, |
| Wheeling.......**.............         | 52,742** | 52,742** | 215** |
+----------------------------------------+----------+----------+-------+
| Offsetting Collections,                | -32,713  | -32,713  | -4    |
| PPW.................................   |          |          | 8,413 |
+----------------------------------------+----------+----------+-------+
| Alternative Financing/Net              | -14,485  | -14,485  | -1    |
| Billing........................\...    |          |          | 3,802 |
+----------------------------------------+----------+----------+-------+
| **Total, Budget Authority,             | *        | *        | **6,  |
| Southeastern Power                     | *5,544** | *5,602** | 463** |
| Administration**..............         |          |          |       |
| ...................................... |          |          |       |
+----------------------------------------+----------+----------+-------+