GAO

United States General Accounting Office

Report to the Chairman, Subcommittee

on Interior and Related Agencies,

Committee on Appropriations,

House of Representatives

June 2000 HYDROPOWER

RELICENSING

Federal Costs Are Not

Being Recovered

GAO/RCED-00-107

Page 1 GAO/RCED-00-107 Hydropower Cost Recovery

Contents

Letter 3

Appendixes Appendix I: FERC’s Traditional Relicensing Process 24

Appendix II: Objectives, Scope, and Methodology 25

Appendix III: Comments From the Federal Energy Regulatory

Commission 27

Appendix IV: Comments From the Department of the Interior 30

Appendix V: GAO Contacts and Staff Acknowledgments 36

Figures Figure 1: Federal Agencies’ Hydropower-Program-Related

Administrative Costs Reported to FERC, Fiscal

Years 1985-98 11

Abbreviations

FERC Federal Energy Regulatory Commission

FPA Federal Power Act

NEPA National Energy Policy Act

OMB Office of Management and Budget

Letter 3

Appendixes Appendix I: FERC’s Traditional Relicensing Process 24

Appendix II: Objectives, Scope, and Methodology 25

Appendix III: Comments From the Federal Energy Regulatory

Commission 27

Appendix IV: Comments From the Department of the Interior 30

Appendix V: GAO Contacts and Staff Acknowledgments 36

Figures Figure 1: Federal Agencies’ Hydropower-Program-Related

Administrative Costs Reported to FERC, Fiscal

Years 1985-98 11

Abbreviations

FERC Federal Energy Regulatory Commission

FPA Federal Power Act

NEPA National Energy Policy Act

OMB Office of Management and Budget
Page 2 GAO/RCED-00-107 Hydropower Cost Recovery
Page 3 GAO/RCED-00-107 Hydropower Cost Recovery

United States General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-285047 Letr

June 30, 2000

The Honorable Ralph Regula

Chairman, Subcommittee on Interior

and Related Agencies

Committee on Appropriations

House of Representatives

Dear Mr. Chairman:

About 10 percent of all electricity produced in the United States is

generated by federal and nonfederal hydroelectric power (hydropower)

projects. Approximately half of the electricity generated by hydropower is

produced by federally owned and operated projects. Nearly all of the

remaining half is produced by about 1,000 nonfederal hydropower projects

that are licensed by the federal government, of which about 400 are located

on federal lands.1 Hydropower projects include dams, reservoirs, stream

diversion structures, powerhouses containing turbines driven by falling

water, and transmission lines.

The Federal Power Act, as amended (FPA), authorizes the Federal Energy

Regulatory Commission (FERC)—an independent five-member

commission appointed by the President and confirmed by the Senate—to

issue licenses to construct and operate nonfederally owned hydropower

projects, including those located on federal lands. Licenses can be issued

for a period of up to 50 years, after which the projects must be relicensed in

order to continue operating. Licenses that expire while undergoing

relicensing may receive temporary 1-year extensions, called annual

licenses, until relicensing is completed.

Although FERC continues to issue licenses to operate new, previously

unlicensed hydropower projects, most of the about 1,000 nonfederally

owned and operated projects were originally licensed several decades ago.

About 270 of these projects, including over 120 located on federal lands,

1

About 600 additional hydropower projects nationally are granted exemptions from the

federal licensing requirement, generally because of their small generating capacity. Unless

otherwise noted, the term “projects” in this report refers to larger, licensed projects.
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either are currently undergoing relicensing or have licenses that will expire

in the next 10 years.

In addition to FERC, federal and state resource agencies have

responsibilities for ensuring that hydropower projects meet the

requirements of environmental and planning laws that have been enacted

in recent decades. These requirements also apply to the relicensing of

many projects whose original licenses are expiring.

FPA requires licensees to pay reasonable annual charges in amounts fixed

by FERC to reimburse the United States for, among other things, the costs

of FERC’s and other federal agencies’ administration of the act’s

hydropower provisions. To identify these costs—virtually all of which are

now related to the relicensing process—FERC annually requests federal

agencies to report their hydropower-program-related costs for the prior

fiscal year. FERC then bills individual licensees for their shares of its and

the other federal agencies’ administrative costs, basing these shares largely

on the generating capacity and amount of electricity generated by the

licensees’ projects. FERC deposits the licensees’ reimbursements of its and

the other federal agencies’ administrative costs—together with other

annual charges and filing fees that it collects—into the U.S. Treasury as a

direct offset to its annual appropriation. Receipts that exceed FERC’s

annual appropriation are deposited in the General Fund of the U.S.

Treasury.

Because of your concern about increasing costs and controversies related

to federal agencies’ hydropower relicensing activities, you asked us to

identify and assess significant issues related to nonfederally owned and

operated hydropower projects. In this report, we assess one issue—the

status of efforts to recover the costs incurred by federal agencies to

administer the hydropower program. Our report does not address the

appropriateness of the agencies’ expenditures for the program but

considers only the adequacy of efforts by FERC and the other agencies to

recover costs they have incurred. Future work will assess other issues,

such as the adequacy of payments made by licensees for the use of federal

lands, the environmental and fiscal effects of delays in the relicensing

process, and the potential costs to federal and state governments to

remove nonfederal hydropower projects that are not relicensed.

Results in Brief For fiscal years 1995 through 1998, federal agencies reported a total of

about $32 million in hydropower-program-related administrative costs.
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However, on the basis of our review, we estimate that for the 4 fiscal years,

about $12 million in federal costs to administer the hydropower program

either were not reported or may not be recovered because of appeals by

licensees. According to agency officials with whom we spoke and

documents that we obtained, costs were not reported, in part, because

some federal agencies that incurred costs to administer the hydropower

program (1) did not report any costs for any year to the Federal Energy

Regulatory Commission; (2) reported costs in some years but not in other

years; (3) did not report certain indirect costs (overhead), including

unfunded future federal pension and postretirement health benefits and/or

program-related legal costs; and/or (4) could not determine their costs. In

addition, our analysis of the agencies’ cost data showed that some of the

$32 million in costs that were reported have been withdrawn or may be not

recovered because they cannot be adequately supported. We traced these

problems to (1) the Commission’s failure to provide clear guidance to the

other federal agencies about what costs are recoverable and (2) the

agencies’ failure to improve their financial management and reporting

systems to accurately account for the costs that they report. Agency

officials expect the federal costs of administering the hydropower program

to increase substantially as more and larger projects approach their dates

for relicensing and as federal agencies take on additional responsibilities

resulting from recent changes in the relicensing process. As a result, we

estimate that tens of millions more dollars may not be recovered over the

next decade unless corrective action is taken. Therefore, this report

contains recommendations that, if implemented, would make clear what

administrative costs should be reported and ensure that the costs that are

reported are accurate. It also contains a matter for congressional

consideration that would provide an incentive to the agencies to report

their costs.

We obtained written comments on a draft of our report from the Federal

Energy Regulatory Commission and the Department of the Interior. These

agencies generally agreed with the thrust of our report’s findings,

conclusions, and recommendations, with certain exceptions. While

agreeing to provide the other federal agencies with general information on

reporting costs, the Commission did not indicate in its comments whether

it would clarify which of the other agencies’ administrative costs are

eligible for recovery under the Federal Power Act as we have

recommended. As a result, we have doubts about whether the problems we

have identified will be resolved.
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Background Hydropower has several advantages over other methods of generating

electricity. It is comparatively inexpensive to produce, can be increased

quickly in periods of peak demand, is renewable, and produces no air

pollution or radioactive wastes. Reservoirs created by hydropower projects

also often provide opportunities for other uses, such as boating, fishing,

flood control, irrigation, and municipal water supply.

Although hydropower has several advantages over other methods of

generating electricity, it has disadvantages as well. For example, projects

may prevent fish from moving upstream or downstream or may kill them as

they pass through turbines used to generate power. Projects can also

adversely affect water quantity and quality, as well as fish and wildlife

habitat, by disturbing natural streamflows.

Requirements Related to

Relicensing

FPA is the basic statutory authority governing the licensing and relicensing

of hydropower projects. However, during the decades that have passed

since FERC issued original licenses for most hydropower projects, the

Congress has enacted numerous laws that can affect the projects’

operations and the relicensing process.

Section 4(e) of FPA authorizes FERC to issue licenses to construct and

operate nonfederally owned hydroelectric projects. In deciding whether to

issue an original or renewed license, FERC must give equal consideration

to developmental and nondevelopmental values, such as power and fish

and wildlife. Under section 4(e), licenses for projects on federal lands that

the Congress has reserved for other purposes, such as national forests—or

that utilize federal facilities such as dams, outlets, or canals—are subject to

terms and conditions established by the head of the land management

agency responsible for protecting the lands or facilities.

In addition, section 10(a) of FPA requires FERC to solicit

recommendations from federal and state resource agencies and Indian

tribes on the terms and conditions proposed for inclusion in a license.

Under section 10(j), the license must include conditions for the protection,

mitigation, and enhancement of fish and wildlife, which must generally be

based on recommendations by federal and state fish and wildlife agencies.

Section 18 of FPA requires FERC to include conditions in the license

providing for fish passage as prescribed by federal fish and wildlife

agencies.
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Page 7 GAO/RCED-00-107 Hydropower Cost Recovery

In developing their recommendations on the terms and conditions

proposed for inclusion in a license, federal land management and resource

agencies must address the requirements of the Clean Water Act, the

Endangered Species Act, and several other environmental laws. In

addition, decisions to relicense hydropower projects must be made in

accordance with the National Environmental Policy Act (NEPA), which

requires federal agencies to assess the impacts of proposed actions that

may significantly affect the environment. Plans developed under federal

land management planning laws may also affect relicensing, principally by

serving as a basis for specifying conditions under section 4(e) of FPA.

The licensing terms and conditions prescribed or recommended by FERC

and federal and state land and resource agencies may call for minimum

water flows, the construction of fish passage facilities, or the installation of

screens and other devices to prevent fish from being injured or killed. They

may also limit reservoir drawdowns and require the purchase and

restoration of lands affected by projects.

Traditional and Alternative

Relicensing Processes

FERC’s traditional relicensing process includes seven steps that we have

grouped into two phases. (See app. I.) The first—the notification phase—

begins about 5 to 5-1/2 years before a project’s license expires, when the

licensee notifies FERC of its intent to seek relicensing. During this phase,

the licensee must consult with federal and state land and resource

agencies, which must identify studies that they believe should be

undertaken to determine the project’s impacts on fish and wildlife,

recreation, water, and other resources. If the licensee disagrees with the

need to conduct a study, either party may ask FERC to resolve the dispute.

After completing agreed-upon studies, the licensee prepares a draft

application and obtains comments from, and attempts to resolve any

disagreements on, needed actions with the relevant federal and state

agencies.

The second phase in the traditional process—the application phase—

begins when the licensee files a formal application to seek relicensing. This

filing must occur at least 2 years before the license expires. The application

is a comprehensive, detailed document that specifies the project’s

proposed operations, its anticipated impacts on resources and other land

uses, and proposed actions to mitigate adverse effects. FERC reviews the

application to ensure that it meets all requirements and then asks relevant

federal and state land and resource agencies to formally comment on it.

Depending on the comments, FERC may ask the licensee to provide
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Page 8 GAO/RCED-00-107 Hydropower Cost Recovery

additional data and studies. When FERC is satisfied that these are

sufficient, it conducts an environmental analysis under NEPA. After

completing its environmental analysis, FERC negotiates with federal and

state fish and wildlife agencies on recommendations to mitigate the

project’s impacts on these resources. In addition to using FERC’s NEPA

analysis, federal land and resource agencies frequently conduct separate

environmental analyses under NEPA or assessments under other laws to

determine the license terms and conditions they will prescribe or

recommend to protect and enhance resources.

In recent years, the traditional relicensing process has often proved to be

lengthy and acrimonious. As a result, in 1997, FERC issued regulations

creating an alternative relicensing process. Termed the collaborative

process, it is intended to (1) speed relicensing by combining many of the

earlier consultations and studies with the later environmental reviews and

(2) reduce acrimony by improving communication and collaboration

among the participants in the process. The licensee may choose the

alternative process if it can demonstrate that the participants agree on its

use.

Requirements Related to the

Recovery of Administrative

Costs

Section 10(e) of FPA requires licensees to pay reasonable annual charges in

amounts fixed by FERC to reimburse the United States for, among other

things, the costs of FERC’s and other federal agencies’ administration of

the act’s hydropower provisions. These costs include those related to

licensing and relicensing projects and to monitoring them after relicensing,

as established in agreements reached through the collaborative process. In

fixing these and other section 10(e) charges, FERC must seek to avoid

increasing the price of power to consumers. FERC has recognized that any

increase in charges may have an impact on consumers and interprets this

provision to prohibit the assessment of unreasonable charges that would

be passed along to consumers.2

2

52 Fed. Reg. 18265.
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Page 9 GAO/RCED-00-107 Hydropower Cost Recovery

The Office of Management and Budget’s (OMB) Circular A-25-User Charges

(Circular A-25)—which provides guidance to federal agencies in setting

fees—calls for full cost recovery to the extent permitted by law, including

the recovery of all unfunded retirement costs. In addition, in 1995, the

Federal Accounting Standards Advisory Board—a body jointly established

by the Department of the Treasury, OMB, and GAO to consider and

recommend accounting principles for the federal government—issued a

new standard (number 4) on the concept of full cost recovery, including the

recovery of all indirect (overhead) costs.3

Millions of Dollars a

Year in Federal Costs

to Administer the

Hydropower Program

Are Not Being

Recovered

For fiscal years 1995 through 1998, federal agencies reported a total of

about $32 million in hydropower-program-related administrative costs.

However, on the basis of our review, we estimate that for the 4 fiscal years,

about $12 million in federal costs to administer the hydropower program

either were not reported or may not be recovered because of appeals by

licensees. According to agency officials with whom we spoke and

documents that we obtained, costs were not reported, in part, because

some federal agencies that incurred costs to administer the hydropower

program (1) did not report any costs for any year to FERC; (2) reported

costs in some years but not in other years; (3) did not report certain

indirect costs (overhead), including unfunded future federal pension and

postretirement health and/or program-related legal costs; and/or (4) could

not determine their costs. In addition, our analysis of the agencies’ cost

data showed that some of the $32 million in costs that were reported have

been withdrawn or may be not recovered because they cannot be

adequately supported. We traced these problems to (1) FERC’s failure to

provide clear guidance to the other federal agencies about what costs are

recoverable and (2) the agencies’ failure to improve their financial

management and reporting systems to accurately account for the costs that

they report. Agency officials expect the federal costs of administering the

hydropower program to increase substantially as more and larger projects

approach their dates for relicensing and as federal agencies take on

additional responsibilities resulting from recent changes in the relicensing

process. As a result, we estimate that tens of millions more dollars may not

be recovered over the next decade unless corrective action is taken.

3

Managerial Cost Accounting Concepts and Standards for the Federal Government:

Statement of Federal Financial Accounting Standard Number 4, Federal Accounting

Standards Advisory Board (Washington D.C.: July 1995).
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Page 10 GAO/RCED-00-107 Hydropower Cost Recovery

Many Administrative Costs

Have Not Been Reported

In 1985, the Department of Energy’s Inspector General observed that,

although FERC had been annually billing licensees for its own

administrative costs, it had not been billing them for the administrative

costs incurred by other federal agencies.4 Accordingly, in fiscal year 1986,

FERC began annually billing licensees for the prior fiscal year’s

administrative costs reported to it by other federal agencies. These

agencies have, in different years, included the Forest Service in the

Department of Agriculture; the National Marine Fisheries Service in the

Department of Commerce; the Corps of Engineers in the Department of

Defense; the Environmental Protection Agency; and the Bureau of Land

Management, the Bureau of Reclamation, the Bureau of Indian Affairs, the

Fish and Wildlife Service, and the National Park Service in the Department

of the Interior. Interior’s Office of the Solicitor has also provided data on its

costs.

For fiscal years 1995 through 1998, federal agencies reported about $32

million in hydropower-program-related administrative costs. (See fig. 1.)

However, other administrative costs were not reported.

4

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

1985).
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Page 11 GAO/RCED-00-107 Hydropower Cost Recovery

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

Source: GAO’s presentation of data from FERC.

Some federal agencies did not report any of their administrative costs to

FERC. For example, Interior officials estimate that the National Park

Service incurs costs of about $200,000 a year to administer the hydropower

program but never reports these costs to FERC. Similarly, an

Environmental Protection Agency official estimates that the agency incurs

annual costs of tens of thousands of dollars a year for the same purpose but

never reports the costs to FERC. Officials from both agencies said they

considered the amounts to be too small for them to account for and report

to FERC. By contrast, both the Bureau of Land Management and the

Bureau of Reclamation have annually reported comparable or smaller

costs.

Other federal agencies reported their hydropower-program-related costs in

some years but not in others. For instance, the Forest Service—which

reported an average of about $2.7 million a year for fiscal years 1996 and

1998—did not report any costs for fiscal year 1997. According to the

Dollars in millions

0

2

4

6

8

10

12

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Nominal dollars

1998 constant dollars
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Page 12 GAO/RCED-00-107 Hydropower Cost Recovery

agency’s national hydropower program coordinator, fiscal year 1997

“slipped through the cracks” because her position was vacant. Similarly,

the Bureau of Indian Affairs did not report $2.4 million in fiscal year 1995

costs until fiscal year 1997, or a year after it should have reported the costs

to FERC. According to Bureau officials, the need to report its costs to

FERC got lost as a result of personnel changes.

When agencies reported their costs, they often did so inconsistently. For

example, the Bureau of Indian Affairs included indirect costs (overhead)

for fiscal years 1995 and 1996, but not for fiscal year 1997. Similarly, the

Fish and Wildlife Service reported indirect costs for some, but not all, of its

regional offices in both fiscal years 1996 and 1997. Both agencies attributed

the inconsistencies to the low priority given to accounting for and reporting

these costs.

Moreover, while FERC included unfunded future federal pension and

postretirement health benefit costs as recoverable indirect costs, the other

agencies did not, even though those benefits will have to be paid by the

federal government in future years. According to officials from these

agencies, they had never been advised to include these costs. In 1996, we

reported that the cost of future pension benefits was about 11 percent of

the salaries of employees in the federal government’s Civil Service

Retirement System and that postretirement health benefits were estimated

to be $2,000 per year per employee.5

Agencies also reported their legal costs inconsistently. On the one hand,

FERC included its legal costs, and the Department of the Interior reported

the costs its Office of the Solicitor incurred in providing legal advice on

hydropower-program-related activities to the five Interior agencies that are

involved in administering the program. On the other hand, the Department

of Agriculture did not report the costs incurred by its Office of General

Counsel in providing legal advice to the Forest Service on such activities.

Other administrative costs that should have been reported were not

because they could not be determined. For instance, according to its fiscal

year 1998 budget justification, the Forest Service planned to spend about

$10 million on hydropower-program-related activities. However, the agency

reported less than $4.5 million to FERC. According to Forest Service

5

Power Marketing Administrations: Cost Recovery, Financing, and Comparison of

Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996).
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Page 13 GAO/RCED-00-107 Hydropower Cost Recovery

officials, a large but indeterminate portion of the remaining more than $5.5

million was spent on hydropower-program-related activities but charged to

other programs and activities. Similarly, the Bureau of Reclamation said it

could not determine the hydropower-program-related costs incurred in its

Pacific Northwest region for fiscal years 1996 and 1997 because these costs

were intermingled with a variety of other expenditures in a single account.

In addition, the Bureau of Land Management estimated that it did not

report as much as $250,000 in administrative costs to FERC for fiscal year

1999—a year that was outside the period covered by our review.

Some Administrative Costs

That Have Been Reported

May Not Be Recovered

Of the $32 million in hydropower-program-related administrative costs

reported by federal agencies for fiscal years 1995 through 1998, some may

not be recovered. In 1997, hydropower licensees began to challenge certain

federal agencies’ costs for which they had been billed. In a series of appeals

filed with FERC, the licensees asserted that FPA prohibits them from being

billed for certain costs, including costs not reported in the appropriate

fiscal year, agencies’ legal costs, some overhead costs, and costs whose

accuracy or sufficiency of documentation they believe FERC did not

adequately review.

At the order of an administrative law judge, the Bureau of Indian Affairs

submitted additional information on its fiscal year 1995 costs (because its

costs were the only ones appealed for that fiscal year) and it and other

federal agencies, except FERC, submitted additional information on their

costs for fiscal years 1996 and 1997. Some of the agencies revised their

earlier submissions to FERC to either add or reduce the amounts reported.

For example, the Bureau of Indian Affairs withdrew about $3.9 million of

its initially reported $6.2 million in costs for fiscal years 1995 through 1997

because it could not adequately support the costs.

In March 2000, counsels for FERC and the appellant licensees negotiated a

settlement agreement on the basis of the data and documentation

submitted by the federal agencies and jointly proposed that the

administrative law judge forward it to FERC’s five Commissioners for their

consideration. The proposed negotiated settlement would refund to the

appellants 77 percent of the final costs submitted by the Bureau of Indian

Affairs for fiscal year 1995 and 77 percent of the final costs submitted by

the Bureau and other federal agencies for fiscal years 1996 and 1997

without identifying which costs are being disallowed or why.
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Lack of Adequate Guidance

Contributes to Costs Not

Being Reported or

Recovered

One of the two reasons for the cost recovery problems that federal

agencies have experienced is that FERC has not provided clear guidance to

the other federal agencies on what costs should be reported.

In a 1986 report, we identified reporting deficiencies similar to those

discussed above and encouraged FERC to ensure the recovery of as many

hydropower-program-related administrative costs as possible.6 However, in

1987, despite the urging of hydropower industry groups and the

Department of the Interior, FERC declined to issue regulations or enter

into a memorandum of understanding with other federal agencies on cost

recovery because it had not determined that there was a need for formal

guidance. Instead, FERC issued one page of guidance to the agencies

requesting them to (1) identify their direct and indirect costs and (2)

indicate whether these costs were related to projects owned by

nonmunicipal utilities or by municipal utilities, which are charged

differently.

According to FERC officials, FERC uses OMB Circular A-25 as guidance for

reporting its hydropower-program-related administrative costs, and the

officials believe that other federal agencies should do so as well. However,

FERC’s one-page guidance does not mention the circular, and officials from

the other federal agencies told us that FERC has never advised them to use

it.

FERC officials told us that they have not advised the other federal agencies

to use Circular A-25 because they believe that FPA does not provide FERC

with the authority to require other federal agencies to use the circular or

any other particular standard for identifying and reporting recoverable

federal administrative costs under the act. Therefore, they believe it would

be inappropriate for them to provide the other federal agencies with

guidance on what costs they should report. Rather, FERC has accepted

whatever costs are reported by the other federal agencies as the basis for

annually billing licensees.

In response to the series of appeals by hydropower licensees, in 1998,

FERC asked OMB to provide the other federal agencies with direction on

reporting administrative costs and to require them to “certify” the accuracy

of their costs. However, in a 1999 meeting with officials from FERC and the

6

Energy Regulation: More Effort Needed to Recover Costs and Increase Hydropower User

Charges (GAO/RCED-87-12, Nov. 25, 1986).
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Page 15 GAO/RCED-00-107 Hydropower Cost Recovery

other agencies, OMB declined, noting that Circular A-25 and Federal

Financial Accounting Standard Number 4 call for full cost recovery to the

extent permitted by law.

According to Interior, Forest Service, and National Marine Fisheries

Service officials, following the 1999 meeting with FERC and OMB, they had

intended to propose guidance to FERC and OMB on recoverable

administrative costs and on reporting these costs under FPA but had not

done so. However, on the basis of our review, they drafted proposed

guidance and, in March 2000, forwarded it to FERC for comment. Licensees

have also recommended guidance for FERC to adopt. Whereas the

guidance proposed by the agencies calls for reporting all their costs to

administer the hydropower program, the guidance recommended by the

licensees does not. FERC had not commented on either the agencies’ or the

licensees’ suggestions as of June 1, 2000.

Lack of Adequate

Accountability for Costs

Also Contributes to Costs

Not Being Reported or

Recovered

The other reason that the federal agencies have not fully recovered their

costs to administer the hydropower program is that they cannot accurately

account for these costs.

The responsibility for producing accurate and reliable financial information

on their costs to administer the hydropower program rests primarily with

each of the federal agencies individually, rather than with FERC or OMB.

For example, the Chief Financial Officers Act of 1990, as expanded by the

Government Management Reform Act of 1994, calls for strengthening

financial accountability and producing more reliable cost and performance

information on federal operations.7 However, weaknesses in many of the

federal agencies’ financial management and reporting systems prevent

them from accurately accounting for their hydropower program costs.

These weaknesses include the inability to accurately report some costs and

to adequately document some costs that are reported.

For instance, the National Marine Fisheries Service told FERC that its costs

for fiscal year 1996 were “comparable” to its costs for fiscal year 1995 and

that FERC should bill licensees for this amount. However, the Service had

no system to identify the time its staff spent on hydropower-programrelated activities. Instead, in fiscal year 1997, it asked its staff to review

their personal daily appointment books for fiscal year 1996 to identify the

7

See High Risk Series: An Update (GAO/HR-99-1, Jan. 1999).
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activities and estimate the time spent on each hydropower project.

Similarly, to identify the time its staff spent on hydropower-program-related

activities, Interior’s Office of the Solicitor (1) sampled a week’s timesheets

for each month in the fiscal year and extrapolated the time to arrive at a

monthly estimate for all FERC-related activities and then (2) asked its staff

to rely on their memories to separate the time that they spent on

hydropower-program-related activities from the time that they spent on

other FERC-related activities, such as those related to oil or natural gas

pipelines.

Unreported and

Unrecovered Federal Costs

to Administer the

Hydropower Program Are

Projected to Increase

Substantially

The effects of the cost recovery problems experienced to date are likely to

be exacerbated by projected increases in federal costs to administer the

hydropower program. In total, tens of millions more dollars may not be

recovered over the next decade unless the problems are corrected.

One reason for these projected increases in federal administrative costs is

that the number of hydropower projects to be relicensed in the next

decade—including some whose original licenses have already expired—

will continue to grow. In addition, per-project federal administrative costs

are expected to rise because the proportion of very large projects to be

relicensed is growing. On average, the generating capacity of these very

large projects is five times greater than that of the projects whose licenses

expired in the last 8 fiscal years. Relicensing such large projects will

require more complex studies of their likely effects and more extensive

reviews by federal agencies of the licensees’ applications.

Recent changes in the relicensing process that have increased federal

agencies’ responsibilities are also expected to drive up their costs to

administer the hydropower program, according to agency officials. These

changes include (1) the new collaborative relicensing process—which

licensees are choosing with greater frequency—that combines many of the

earlier consultations and studies with the later environmental reviews and

thus requires earlier, more intensive, and more expensive involvement by

federal agencies and (2) more intensive monitoring requirements for

relicensed projects, as established in agreements reached through the

collaborative process. In addition, agency officials stated that a recent

court decision will require more substantial analyses to support the terms

and conditions that federal land and resource agencies wish to impose on

projects in order to protect or enhance resources.
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Page 17 GAO/RCED-00-107 Hydropower Cost Recovery

Forest Service officials estimated that, with the projected increases in the

number and size of projects approaching their dates for relicensing and the

recent changes in the relicensing process, their annual costs to administer

the hydropower program could double or triple over the next decade, from

about $10 million to as much as $30 million a year. Interior and National

Marine Fisheries Service officials estimated that their average annual

hydropower-program-related costs over the next decade could increase by

the same or an even greater multiple for many of the same reasons.

Federal Agencies Cite the

Lack of an Incentive to

Accurately Account For and

Report Their Costs

Currently, FERC deposits licensees’ reimbursements of other federal

agencies’ administrative costs into the U.S. Treasury as a direct offset to its

annual appropriation. According to officials from several federal agencies,

allowing the agencies to retain licensees’ reimbursements of their

hydropower program administrative costs would provide a strong incentive

for the agencies to accurately account for and report their full costs. The

officials noted that the agencies accurately account for similar

reimbursements in other programs that they administer when they are

authorized to retain reimbursements to cover the costs of providing

services. For example, according to the National Marine Fisheries Service,

“...the procedures [the National Marine Fisheries Service] follows for FERC cost reporting

are not the same as the procedures it follows for ‘reimbursable’ tasks. Reimbursable tasks

are those for which we are reimbursed in full for our costs for either services or products.

These reimbursable tasks are tracked through accounting which is kept separate by task

number, with daily and often hourly entries....”
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Page 18 GAO/RCED-00-107 Hydropower Cost Recovery

However, agency officials also expressed concern that, if the Congress

authorized them to retain licensees’ reimbursements of their administrative

costs, it might also offset their appropriations by the amounts that they

retained. They noted that the reimbursements might not keep pace with the

rising costs of relicensing activities. They also expressed concern that this

approach would reduce their current flexibility to shift funds between

hydropower relicensing activities and other activities funded out of the

same budget accounts. Moreover, as we have observed, such an approach

to financing agencies’ activities raises issues of (1) congressional control

over accountability and priority-setting and (2) agencies’ management of

and competition for limited federal resources.8 For instance, allowing

federal agencies to retain administrative costs reimbursements reduces the

Congress’s ability to use these funds for other priorities.9

Conclusions The federal government may forgo tens of millions of dollars over the next

10 years unless FERC provides clear guidance on the costs that are

recoverable and other federal agencies improve their financial

management and reporting systems to identify and accurately report these

costs.

FERC has declined to provide clear guidance on cost recovery because it

believes that the need for such guidance has not been determined.

Conversely, we believe that the failure to recover about $12 million in

federal costs in just 4 fiscal years clearly establishes such a need. In

addition, FERC claims that FPA does not provide it with the authority to

require other federal agencies to use OMB Circular A-25 or any other

particular standard for identifying and reporting recoverable federal

administrative costs under the act. However, FPA does not prohibit FERC

from providing other federal agencies with guidance on what costs they

should report. Furthermore, other federal agencies have urged FERC to

provide such guidance and have even proposed guidance to FERC and

OMB.

8

Federal User Fees: Budgetary Treatment, Status, and Emerging Management Issues

(GAO/AIMD-98-11, Dec. 19, 1997).

9

Forest Service: Barriers to and Opportunities for Generating Revenue (GAO/RCED-99-81,

Feb. 10, 1999).
B-285047

Page 19 GAO/RCED-00-107 Hydropower Cost Recovery

In addition, all federal agencies that incur costs to administer the

hydropower program must ensure that their financial management and

reporting systems accurately account for the costs that they report.

However, the Congress has options for addressing other federal agencies’

administrative cost recovery that it can also consider.

Recommendations to

the Federal Energy

Regulatory

Commission

Because the federal government will likely be at risk of continuing to lose

millions of dollars a year until guidance is issued on which other federal

agencies’ costs are eligible for recovery under the Federal Power Act, we

recommend that the Chairman and Members of the Federal Energy

Regulatory Commission take the following actions:

• Issue guidance, developed in consultation with the Office of

Management and Budget and all affected federal agencies, that specifies

what federal administrative costs are eligible for recovery under the

Federal Power Act and how these costs are to be reported. This

guidance should take into account the Office of Management and

Budget’s Circular A-25-User Charges and Federal Financial Accounting

Standard Number 4.

• Report the Commission’s progress in developing this guidance in the

Commission’s fiscal year 2002 budget submission to the Congress in

February 2001.

• Report annually to the Appropriations Committees of the Congress any

failures by federal agencies to report costs in accordance with the

Commission’s guidance.

Recommendations to

the Secretaries of the

Interior, Commerce,

and Defense and to the

Chief of the Forest

Service and the

Administrator of the

Environmental

Protection Agency

Because the federal government will likely also continue to be at risk of

losing millions of dollars a year until the agencies produce accurate, timely,

and reliable information on their hydropower-program-related

administrative costs, we recommend that the Secretaries of the Interior,

Commerce, and Defense and the Chief of the Forest Service and the

Administrator of the Environmental Protection Agency take the following

actions:

• Ensure that their agencies’ financial management and reporting systems

are capable of producing accurate, timely, and reliable information on

hydropower-program-related administrative costs eligible for recovery

in accordance with the Federal Energy Regulatory Commission’s

prospective new guidance.
B-285047

Page 20 GAO/RCED-00-107 Hydropower Cost Recovery

• Report their agencies’ progress in improving their systems in their fiscal

year 2002 budget submissions to the Congress in February 2001.

Matters for

Congressional

Consideration

Should the Commission not report adequate progress in developing the

recommended guidance and/or federal agencies not report adequate

progress in improving their financial management and reporting systems in

their fiscal year 2002 budget submissions, the Congress may wish to

consider directing the Commission and/or the other agencies to accomplish

the action(s) by a certain date.

Additionally, the Congress may wish to consider whether to continue to

fund the costs incurred by federal agencies (other than the Commission) to

administer the hydropower program solely through the annual

appropriations process or to allow them to retain licensees’

reimbursements to offset some or all of these costs. In doing so, the

Congress would need to weigh any benefits that such a provision would

provide against the loss of flexibility over the use of the funds.

Agency Comments and

Our Evaluation

We provided a draft of this report to Chairman of FERC; the Secretaries of

the Interior, Commerce, and Defense; the Chief of the Forest Service; and

the Administrator of the Environmental Protection Agency for their review

and comment. FERC and the Department of the Interior generally agreed

with our findings, conclusions, and recommendations. However, FERC did

not indicate in its comments whether it would issue specific guidance

identifying which other federal agencies’ costs are eligible for recovery

under FPA. Instead, it said it would (1) work with the other agencies to

clarify the technical requirements of OMB’s Circular A-25 and Federal

Financial Accounting Standard Number 4 and explain how FERC uses

them for determining its own costs and (2) recommend to OMB that OMB

convene an interagency group or provide supplemental direction if this is

necessary. Federal agencies already have Circular A-25 and Federal

Financial Standard Number 4 available to them and, presumably, can

currently call FERC staff with questions. Moreover, OMB has already

declined to provide additional specific guidance beyond that contained in

Circular A-25 and Federal Financial Standard Number 4. Accordingly, the

steps FERC proposes do not appear to improve on the present situation,

which has resulted in millions of dollars in unrecovered costs. Both OMB

Circular A-25 and Federal Financial Standard Number 4 call for full cost

recovery, but only to the extent permitted by law. As long as FERC
B-285047

Page 21 GAO/RCED-00-107 Hydropower Cost Recovery

continues to decline to clarify what costs are recoverable under FPA and

how they are to be reported, we do not believe the problems we have

identified will be resolved. Because FPA assigns the responsibility of fixing

annual charges to FERC, not OMB or any other entity, FERC is the agency

in the best position to clarify the ambiguities that have plagued federal

hydropower program cost recovery efforts. FERC’s comments and our

responses appear in appendix III.

Interior agreed with our report’s conclusions and recommendations on

FERC’s providing additional guidance but raised concerns about some

matters discussed in our draft report and made a number of technical

suggestions, which we incorporated where appropriate. These concerns

and suggestions, together with our responses to them, appear in appendix

IV.

The Environmental Protection Agency and the Department of Defense’s

Corps of Engineers told us they had no comments. We did not receive

comments from the Department of Agriculture’s Forest Service or the

Department of Commerce’s National Marine Fisheries Service in time for

inclusion in our report.

We conducted our work from August 1999 through June 2000 in accordance

with generally accepted government auditing standards. Appendix II

contains the details of our scope and methodology.

We are sending copies of this report to Representative Norm Dicks,

Ranking Minority Member of the Subcommittee on Interior and Related

Agencies, House Committee on Appropriations; the Honorable James

Hoecker, Chairman, Federal Energy Regulatory Commission; the

Honorable Bruce Babbitt, Secretary of the Interior; the Honorable Mike

Dombeck, Chief of the Forest Service; the Honorable William M. Daley,

Secretary of Commerce; the Honorable William S. Cohen, Secretary of

Defense; and the Honorable Carol Browner, Administrator, EPA. We will

also make copies available to others on request.
B-285047

Page 22 GAO/RCED-00-107 Hydropower Cost Recovery

If you have any questions about this report, please call me or

Charles S. Cotton at (202) 512-3841. Key contributors to this report are

listed in appendix V.

Sincerely yours,

Jim Wells

Director, Energy, Resources

and Science Issues
Page 23 GAO/RCED-00-107 Hydropower Cost Recovery
Page 24 GAO/RCED-00-107 Hydropower Cost Recovery

Appendix I

FERC’s Traditional Relicensing Process ApApenednxidexiIs

Source: GAO’s adaptation of data from FERC.

Step 7: License issuance and 

monitoring of terms and

conditions

Step 1: Decision to file 

and initial actions

Step 2: First-stage consultation

Step 3: Study execution and

draft application preparation

Step 4: Completion of secondstage consultation

Step 5: Application filing and

acceptance by FERC

Step 6: Application processing

and NEPA compliance actions

Notification phase

(5 to 5-1/2 years before license expires)

Application phase

(2 years before license expires)
Page 25 GAO/RCED-00-107 Hydropower Cost Recovery

Appendix II

Objectives, Scope, and Methodology ApendxiI

Concerned about increasing costs and controversies related to federal

agencies’ hydropower relicensing activities, the Chairman, Subcommittee

on Interior and Related Agencies, House Committee on Appropriations,

asked us to identify and assess significant issues related to nonfederally

owned and operated hydropower projects. In this report, we assess the

status of efforts to recover the costs incurred by federal agencies to

administer the hydropower program.

In conducting our work, we reviewed relevant provisions of the Federal

Power Act, as amended (FPA); the Federal Energy Regulatory

Commission’s (FERC) implementing regulations, the Office of Management

and Budget’s (OMB) Circular A-25, and Federal Financial Accounting

Standard Number 4. We also met and discussed this issue with OMB and

Federal Accounting Standards Advisory Board officials. In addition, we

interviewed and obtained documents from FERC headquarters officials, as

well as from headquarters and field officials in nine other federal agencies

that incur hydropower program costs. We also reviewed the cost data that

these agencies filed with the administrative law judge assigned to hear the

licensees’ challenges of the administrative costs reported to FERC by

certain agencies in fiscal years 1995, 1996, and 1997 and total costs

reported in fiscal year 1998. In addition, we discussed the appeals and the

data filed with the judge with counsels for FERC and the licensees. We did

not, however, independently verify the accuracy and completeness of these

data or the weaknesses of the accounting systems that may have led to

inadequacies in them. We also did not independently verify the

reasonableness of the agencies’ projections of likely future increases in

such costs. Our report does not address the appropriateness of the federal

agencies’ expenditures but considers only the adequacy of efforts by FERC

and the other agencies to recover costs they have incurred.

We attended a 3-day interagency training course on hydropower

relicensing, which included presentations by representatives of industry

and environmental groups, and a 4-day annual conference of the National

Hydropower Association, which was devoted in large part to relicensing

issues. In addition, we met with and obtained documents from participants

in various federal government, industry, and environmental groups,

including the Interagency Task Force on Hydropower, the Electrical Power

Research Institute, and the Hydropower Reform Coalition. We also visited

six hydropower projects in four western states (California, Idaho, Montana,

and Oregon) and discussed their operations and relicensing with project

staff. In addition, we spoke with representatives from FERC, other federal

agencies, states, environmental groups, and hydropower licensees about
Appendix II

Objectives, Scope, and Methodology

Page 26 GAO/RCED-00-107 Hydropower Cost Recovery

relicensing issues related to several other projects that we did not visit in

these and other states.

We conducted our work between August 1999 and June 2000 in accordance

with generally accepted government auditing standards.
Page 27 GAO/RCED-00-107 Hydropower Cost Recovery

Appendix III

Comments From the Federal Energy

Regulatory Commission ApendxiI

Note: GAO comments

supplementing those in the

report text appear at the end

of this appendix.

See comment 1.

See comment 1.
Appendix III

Comments From the Federal Energy

Regulatory Commission

Page 28 GAO/RCED-00-107 Hydropower Cost Recovery
Appendix III

Comments From the Federal Energy

Regulatory Commission

Page 29 GAO/RCED-00-107 Hydropower Cost Recovery

The following is GAO’s comment on the Federal Energy Regulatory

Commission’s letter dated June 14, 2000.

GAO Comment 1. Federal agencies already have the OMB and Federal Financial Standard

Number 4 guidance documents available to them and, presumably, can

currently call FERC staff with questions. Moreover, OMB has already

declined to provide additional specific guidance beyond that contained

in Circular A-25 and Federal Financial Standard Number 4. Accordingly,

the steps FERC proposes do not appear to improve on the present

situation, which has resulted in millions of dollars in unrecovered

costs. Both OMB Circular A-25 and Federal Financial Standard Number

4 call for full cost recovery, but only to the extent permitted by law. As

long as FERC continues to decline to clarify what costs are permitted

to be recovered under FPA and how they are to be reported, we do not

believe the problems we have identified will be resolved. Because FPA

assigns the responsibility of fixing annual charges to FERC, not OMB or

any other entity, FERC is the agency in the best position to clarify the

ambiguities that have plagued federal hydropower program cost

recovery efforts.
Page 30 GAO/RCED-00-107 Hydropower Cost Recovery

Appendix IV

Comments From the Department of the

Interior ApendxiIV

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.
Appendix IV

Comments From the Department of the

Interior

Page 31 GAO/RCED-00-107 Hydropower Cost Recovery

Now on p. 6.

See comment 1.
Appendix IV

Comments From the Department of the

Interior

Page 32 GAO/RCED-00-107 Hydropower Cost Recovery

Now on p. 20.

See comment 2.

Now on p. 3.

See comment 4.

Now on p. 6.

See comment 5.

Now on p. 6.

See comment 6.

Now on p. 7.

See comment 7.

Now on p. 8.

See comment 8.
Appendix IV

Comments From the Department of the

Interior

Page 33 GAO/RCED-00-107 Hydropower Cost Recovery

See comment 10.

See comment 9.

See comment 11.

Now on p. 6.

See comment 12.
Appendix IV

Comments From the Department of the

Interior

Page 34 GAO/RCED-00-107 Hydropower Cost Recovery

The following are GAO’s comments on the Department of the Interior’s

letter dated June 15, 2000.

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

2. We agree that such information, among other factors, may be useful to

consider for the purpose of making a determination on how best to

fund the hydropower program.

3. We revised our report to state explicitly that it does not address the

appropriateness of federal agencies’ hydropower program

expenditures but considers only the adequacy of efforts by FERC and

the other agencies to recover the costs they have incurred.

4. About 600 of the 1,600 projects referred to by the Fish and Wildlife

Service are exempt from licensing under FPA largely because of their

small size, leaving about 1,000 licensed projects. We have clarified the

language in our report to make clear that our report is generally

focused on the licensed projects whose consideration results in the

bulk of federal expenditures.

5. Our reference to hydropower as a renewable source of energy is

intended as a narrow, descriptive one, based solely on its reliance on

naturally occurring rainfall for energy production, and is used without

consideration of any effects that projects might have on other

resources or potential alternative uses of those resources.

6. We incorporated this change.

7. We believe the statement adequately serves the limited purpose for

which it is included—providing background information on significant

steps in the relicensing process as described in the FERC Hydroelectric

Project Relicensing Handbook.

8. We added the information that agencies use FERC’s environmental

analyses to determine conditions they should impose for protecting

federal lands and facilities.

9. We deleted this statement and made appropriate changes to other

sections of the report.
Appendix IV

Comments From the Department of the

Interior

Page 35 GAO/RCED-00-107 Hydropower Cost Recovery

10. We did not intend to suggest that retained payments covering prior

years’ administrative costs should be the only source of funding for the

agencies’ subsequent hydropower program activities. Our report notes

likely increases in the agencies’ hydropower program costs over the

next decade, and nothing would prevent the Congress from

supplementing those retained funds as it sees fit. Nonetheless, we

modified our draft report to clarify that the Congress may wish to

consider the payments covering prior years’ administrative costs as the

source of either some or all of the funding for the agencies’ hydropower

activities. The Congress could then consider the agencies’ need and

diligence in cost recovery as criteria for annual appropriations.

11. The source of our data is FERC. Differences between the numbers may

relate to the inclusion or exclusion of exempted projects that may also

be scheduled for consideration (see comment 1). However, were

unable to determine the cause for the difference because the Bureau of

Land Management did not indicate the source of its data.

12. We added language to clarify the description of section 4(e).
Page 36 GAO/RCED-00-107 Hydropower Cost Recovery

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Jim Wells, (202) 512-3841

Charles S. Cotton, (202) 512-3841

Acknowledgments In addition to those named above, Alan Dominicci, Leanne Flama, Richard

P. Johnson, Chester Joy, Jon Ludwigson, and George Senn made key

contributions to this report.

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