United States General Accounting Office

GAO Report to Congressional Requesters

June 1998 POWER MARKETING

ADMINISTRATIONS

Repayment of Power

Costs Needs Closer

Monitoring

GAO/AIMD-98-164

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-279016 

June 30, 1998

The Honorable John R. Kasich

Chairman

Committee on the Budget

House of Representatives

The Honorable John T. Doolittle

Chairman, Subcommittee on Water

 and Power Resources

Committee on Resources

House of Representatives

This report responds to your request that we examine the monitoring of

the repayment of the power-related costs and debt1

 of four of the

Department of Energy’s (DOE) power marketing administrations (PMA). The

PMAs’ costs and the power-related costs of the agencies that produce the

power marketed by the PMAs are required by law to be repaid.2

 Repayment

is to be made through revenues from federal power sales. You expressed

concern about issues we previously reported related to the under-recovery

of certain power-related costs3

 and the large amount of debt

outstanding—more than $14 billion as of September 30, 1997. Specifically,

you asked us to determine (1) whether DOE or the Department of the

Treasury (Treasury) actively monitors the amount of debt to be repaid and

the appropriateness of the annual payments and (2) whether there is a

potential for financial loss to the federal government as a result of any lack

of such monitoring of the repayment.

We evaluated the effectiveness of the existing monitoring activities to

determine whether they ensure that repayment amounts are complete,

accurate, and timely. As agreed with your offices, we did not attempt to

1

PMA debt consists of reimbursable appropriations used to construct power facilities and certain

capital costs associated with irrigation facilities (i.e., “irrigation assistance”). The irrigation assistance

costs arise when the Secretary of the Interior determines that some of the capital costs allocated to

completed irrigation facilities are beyond the ability of irrigators to repay. In this report we refer to the

amounts to be repaid related to both power and irrigation facilities as debt. However, Department of

the Treasury officials do not consider these amounts to be receivables and record them as

appropriations paid.

2

Some power-related costs, such as those for environmental mitigation activities at certain projects,

are legislatively exempted from the repayment requirement; these legislatively exempt costs are not

the subject of this report.

3

Federal Electricity Activities: The Federal Government’s Net Cost and Potential for Future Losses,

volumes 1 and 2 (GAO/AIMD-97-110 and 110A, September 19, 1997) and Power Marketing

Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities

(GAO/AIMD-96-145, September 19, 1996).

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quantify the potential financial loss to the federal government resulting

from any ineffectiveness in monitoring repayment. This report covers the

four PMAs4

 and the power-related activities of the Department of the

Interior’s (DOI) Bureau of Reclamation (Bureau) and the Department of

Defense’s (DOD) Army Corps of Engineers (Corps). It also includes the

portion of capital expenditures for irrigation facilities that becomes

repayable through the PMAs’ power rates. We conducted our review from

December 1997 through June 1998 in accordance with generally accepted

government auditing standards. Additional information on our objectives,

scope, and methodology in conducting this review is contained in

appendix I.

Results in Brief Current monitoring activities do not ensure that the federal government

recovers the full cost of its power-related activities from the beneficiaries

of federal power. The full cost of the power-related activities—which are

to be recovered under current legislation and DOE policy—include all

direct and indirect costs incurred by the federal government in producing,

transmitting, and marketing federal power. Key participants responsible

for monitoring repayment include the Secretary of Energy, who is

responsible for ensuring that the PMAs’ power-related costs are recovered,

and the Federal Energy Regulatory Commission (FERC), which reviews the

PMAs’ rate proposals. However, neither of these entities is effectively

monitoring the rate-making process and the amounts due and repayments

made to ensure their accuracy, completeness, and timeliness. While the

Department of the Treasury receives and records the repayments, it is not

responsible for monitoring repayment.

Audits by external auditors and our own work have identified various

unrecovered power-related costs that have resulted in financial loss to the

federal government. In several instances in which problems with the

repayment of power-related costs have been reported to PMA management,

progress toward resolving the issues has been slow or nonexistent.

Unrecovered power-related costs relate to (1) Civil Service Retirement

System (CSRS) pensions and postretirement health benefits, (2) life

insurance benefits, (3) workers’ compensation benefits for Corps

employees at projects marketed by Southeastern, and (4) interest on some

of the federal appropriations used to construct certain projects. We

4

The four PMAs covered in this report are: Bonneville Power Administration (Bonneville),

Southeastern Power Administration (Southeastern), Southwestern Power Administration

(Southwestern), and Western Area Power Administration (Western). We sometimes discuss Bonneville

separately because it is different in size and characteristics than the others, which we refer to as the

three PMAs. We excluded the fifth PMA—Alaska Power Administration—from our analysis because

legislation has been enacted to sell it to nonfederal entities.

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estimated that the federal government’s unrecovered costs for CSRS

pensions and postretirement health benefits for PMA employees and

operating agency employees involved in power-related activities were

about $37 million for fiscal year 1996 and about $192 million (in constant

1996 dollars) for fiscal years 1992 through 1996. The full magnitude of the

under-recovery of power-related costs is unknown. Until an effective

monitoring system is implemented, the federal government will continue

to be exposed to financial loss due to the under-recovery of power-related

costs.

The current activities for monitoring the repayment of power-related costs

and debt are less extensive than those undertaken in prior years.

Previously, DOE’s Office of Power Marketing Coordination (OPMC)

monitored repayment and reviewed rate proposals before they were sent

to FERC for review; however, DOE disbanded OPMC in 1984 and its

monitoring duties generally were not assigned to another entity. OPMC

assessed whether appropriate costs were included in rates, but did not

review the PMAs’ power repayment studies in detail. In addition, FERC

previously had more latitude in reviewing the PMAs’ rates. The scope of

FERC’s review of the three PMAs’ rates was limited by the Secretary of

Energy’s 1983 revision to the delegation order under which FERC carries

out that function. The scope of FERC’s review of Bonneville’s rates was

limited by the passage of the Pacific Northwest Electric Power Planning

and Conservation Act (Northwest Power Act). The review procedures

previously performed by DOE’s OPMC and FERC provided greater assurance

that repayment amounts were accurate, complete, and timely. Better

monitoring is essential to protect the federal government’s right to recover

the costs of its investments that are to be repaid through power revenues.

Background The PMAs were established from 1937 through 1977 to sell and transmit

electricity generated mainly from federal hydropower facilities. Most of

these facilities were constructed and continue to be owned and operated

by the Bureau and Corps (operating agencies). The operating agencies

constructed these facilities as part of a larger effort to develop

multipurpose water projects that have functions in addition to power

generation, such as flood control, irrigation, navigation, and recreation. As

required by law, the PMAs give preference in the sale of power to public

power customers. These preference customers include public utility and

irrigation districts, customer-owned cooperatives, municipally-owned

utilities, and, in some cases, state governments and the federal

government.

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With the exception of Bonneville, the Congress appropriates money each

year to the PMAs for power-related purposes and to the operating agencies

for both power and nonpower purposes. The PMAs, other than Bonneville,

generally receive appropriations annually to cover operations and

maintenance expenses (O&M) and, if applicable, capital investments in

their transmission assets. Since 1974, Bonneville has operated without

annual appropriations from the Congress and has financed its activities

through a revolving fund.5

 Bonneville is, however, responsible for repaying

its pre-1974 appropriations.6

 The operating agencies receive

appropriations for all aspects of their multipurpose water projects,

including O&M expenses and capital expenditures.7

 The portion of these

appropriations expended for power-related purposes is allocated to the

PMAs for repayment by power customers.

Section 9(c) of the Reclamation Project Act of 1939 and section 5 of the

Flood Control Act of 1944 generally require that the PMAs recover through

power rates the costs of producing, transmitting, and marketing federal

hydropower. Bonneville is covered additionally under the Northwest

Power Act. In addition, the PMAs that market power from multipurpose

projects also having irrigation as a purpose—Bonneville and Western—are

responsible for repaying certain irrigation assistance costs. Costs are

recovered by the PMAs through rates charged the customers who benefit

from the federal power. The PMAs generally repay appropriations expended

for O&M expenses in the same year that the expenses are incurred, but

generally repay appropriations expended for capital investments and other

debt, with interest, within the repayment period prescribed by law and/or

DOE order.

As shown in table 1, the PMAs differ substantially in annual revenues and

the amount of outstanding debt to be repaid to the federal government.

Table 1 and the notes thereto include information on (1) the outstanding

appropriated debt and irrigation costs that are to be repaid by the PMAs,

(2) Bonneville Power Administration Treasury bonds, and (3) certain

nonfederal debt.

5

Western also has three projects with revolving funds.

6

In addition to the outstanding pre-1974 appropriated debt and irrigation debt, Bonneville’s debt

includes Treasury bonds and obligations related to certain nonfederal power projects. Bonneville is to

repay all these debts, except those pertaining to irrigation facilities, with interest.

7

Following agreements reached with the operating agencies, Bonneville currently directly funds the

power-related O&M costs of Bureau projects in the Federal Columbia River Power System (FCRPS).

Beginning in 1999, Bonneville will directly fund Corps power-related O&M costs. In addition,

Bonneville also directly funds selected capital investments in FCRPS for both the Bureau and Corps.

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Table 1: Annual Revenues and

Outstanding Appropriated and

Irrigation Debt of the PMAs for the

Fiscal Year Ending and as of

September 30, 1997

Dollars in millions

PMA

Revenues for

Fiscal Year 1997

Outstanding

Appropriated Debtb

as of 

September 30, 1997

Outstanding

Irrigation Debt as of

September 30, 1997f

Southeasterna $168 $1,519 n/a

Southwestern 112 695c n/a

Western 793 3,142d $3,528

Bonneville 2,272 4,452d,e 857

Totals $3,345 $9,808 $4,385

aSoutheastern’s data on revenues and outstanding appropriated debt is based on draft financial

statements for fiscal year 1997.

bOur calculation of outstanding appropriated debt may differ from the amount of unpaid

investment reported by the PMAs in their annual reports primarily because the PMAs do not

include construction-work-in-progress in their totals.

cSouthwestern’s appropriated debt data are as of September 30, 1996; fiscal year 1997 data

were not available at the time of our review.

dIn addition to the appropriated and irrigation debt, Western and Bonneville also have

$163 million and $7,037 million of nonfederal debt, respectively. Bonneville also has

$2,499 million of medium- and long-term debt held by Treasury in the form of Bonneville Power

Administration bonds.

eAs a result of legislation passed in 1996 (Omnibus Consolidated Rescissions and Appropriations

Act of 1996 - Public Law 103-134, April 26, 1996, 110 Stat. 1321-350), Bonneville’s appropriated

debt was restructured to reduce the principal owed by about $2,560 million and increase the

associated interest rate by about 3.6 percentage points. This figure reflects that restructuring.

f

Since projects marketed by Southeastern and Southwestern do not have irrigation as a purpose,

irrigation debt is not applicable (n/a).

Source: Audited financial statements and other information provided by the PMAs.

DOE’s policy for implementing the cost recovery requirement is set forth in

DOE Order RA 6120.2,8 which states that all costs of operating and

maintaining the power system, as well as transmission and irrigation

assistance costs, are generally to be included in the rates set by the PMAs.

This order does not specifically identify and define all costs that must be

recovered. To define the full costs associated with producing, transmitting,

and marketing the federal hydropower, we referred to Office of

Management and Budget (OMB) Circular A-25 and federal financial

accounting standards recommended by the Federal Accounting Standards

Advisory Board (FASAB) and adopted by GAO, OMB, and Treasury. OMB

Circular A-25 defines the full costs of providing goods or services—in this

case federal power marketed by the PMAs—as all direct and indirect costs

8

Power Marketing Administration Financial Reporting, October 1, 1983.

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of delivering those goods or services. The federal financial accounting

standard9

 defines the full costs of an entity’s outputs as “the sum of (1) the

costs of resources consumed by the segment that directly or indirectly

contribute to the output, and (2) the costs of identifiable supporting

services provided by other responsibility segments within the reporting

entity, and by other reporting entities.” As we reported in 1996,10 applying

these definitions of full cost, the full cost of the power marketed by the

PMAs includes all direct and indirect costs incurred by the operating

agencies to produce the power, the PMAs to market and transmit the

power, and any other agencies to support the operating agencies and PMAs.

DOE Order RA 6120.2 requires the PMAs to annually conduct power

repayment studies to evaluate whether power rates are sufficient to

recover all costs that must be repaid within the rate-making period. These

power repayment studies form the basis for setting the PMAs’ rates.

Specifically, the power repayment studies must identify, among other

things, estimated revenues, expenses, repayments of debt, and the total

amount of debt to be repaid generally over the next 50 years.

Under the Department of Energy Organization Act of 1977 (DOE Act), the

Secretary of Energy is responsible for monitoring the PMAs to ensure that

all applicable costs are recovered. The Secretary has delegated to the

Deputy Secretary the primary responsibility for PMA-related issues. The

Deputy Secretary’s office is to review the rate proposals of the three PMAs

before they are sent to FERC for review. For Bonneville, in accordance with

provisions of the Northwest Power Act, the administrator develops the

rate proposals and submits them directly to FERC without review by the

Deputy Secretary.

FERC, an independent agency within DOE, reviews the three PMAs’ rates

under authority delegated to it by the Secretary of Energy under DOE

Delegation Order 0204-108.11 For Bonneville, FERC reviews rates under the

requirements of the Northwest Power Act. The Secretary’s delegation

order and legislation limit FERC’s review authority.

The public also plays a role in the rate review process. Whenever a PMA

proposes a new rate, a public hearing process takes place to obtain input

9

FASAB Statement of Federal Financial Accounting Standards (SFFAS) No. 4, Managerial Cost

Accounting Concepts and Standards for the Federal Government, June 1995.

10Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities

(GAO/AIMD-96-145, September 19, 1996).

11Delegation Order for Approval of Power Marketing Administration Power and Transmission Rates,

December 14, 1983, and subsequent amendments.

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on the proposed rate. This process ensures that members of the public,

such as PMA customers, have an opportunity to provide input for the PMAs’

consideration before the rate becomes effective. According to DOE and

FERC officials, most comments received during this public process are

received from customers, who have an incentive to keep rates as low as

possible.

See appendix II for more information on the legal responsibilities and

delegated authorities regarding PMA rate-making.

Current Monitoring of

Repayment Is

Ineffective

Current monitoring activities do not ensure that all power-related costs

are recovered and that cost recovery issues identified in audit reports are

resolved in a timely manner. There is little monitoring performed at DOE’s

departmental level and FERC’s monitoring efforts are limited in scope.

Neither DOE nor FERC performs independent, detailed reviews of the power

repayment studies that form the basis for the PMAs’ rates. Thus, there is

little assurance that the power repayment studies provide for complete,

accurate, and timely repayment of the PMAs’ power-related costs and debt.

Treasury’s involvement in the repayment process includes receiving and

recording the repayment transactions, but does not include monitoring the

repayment for appropriateness.

Department of Energy The Secretary of Energy has delegated to the Deputy Secretary the

responsibility for monitoring the PMAs’ activities to ensure that

power-related costs and debt are repaid. The Deputy Secretary does so

through interaction with the PMA administrators in the field and with the

two Washington, D.C., PMA liaison offices at DOE headquarters.

The Deputy Secretary receives the rate proposal packages from the three

PMAs, approves the rates established by the three PMAs on an interim basis,

and sends the rate proposal packages to FERC for review. The sole staff

person in the Office of the Secretary involved in doing this told us that he

spends most of his time on national energy policy issues, such as the

administration’s recent proposal for restructuring the electricity industry.

He estimated that only about 30 percent of his time is spent on PMA

activities, little of which is devoted to detailed review of rate-making and

cost recovery issues. As a result, the Deputy Secretary’s office does not

perform the monitoring activities necessary to ensure that all of the

appropriate costs are included in the PMAs’ power repayment studies, on

which rates are based. In addition, not all information that would be

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relevant to FERC’s consideration of rate proposals, such as audit reports, is

routinely gathered and submitted to FERC.

Bonneville’s rates are established by the administrator and sent directly to

FERC for review without review by the Deputy Secretary’s office.

Therefore, as with the current situation for the three PMAs, there is no

assurance that FERC will routinely receive all information, such as audit

reports, that would be relevant to FERC’s consideration of Bonneville’s rate

proposals.

Federal Energy Regulatory

Commission

The Secretary of Energy has delegated to FERC the responsibility for

reviewing and approving the final rates of the three PMAs. According to

FERC officials, their review of the PMAs’ rate proposals focuses on reviewing

financial and other information provided to FERC by the PMAs. Although

FERC has the authority to do so, FERC officials told us that when reviewing a

rate proposal they generally do not obtain and review documentation

related to the three PMAs’ costs, such as audit reports that have raised cost

recovery issues, beyond that provided by the three PMAs. Under

Department of Energy Delegation Order 0204-108, FERC’s review of the

three PMAs’ rates includes assessing (1) whether the rates are the lowest

possible to customers consistent with sound business principles,

(2) whether the revenue levels generated by the rates are sufficient to

recover the costs of producing and transmitting electric energy, and

(3) the assumptions and projections used in developing the rate

components. However, according to FERC officials, the delegation order

allows FERC to reject a rate proposal only if it finds the proposal to be

“arbitrary, capricious or in violation of law.” According to FERC officials,

since this standard for rejection imposes a significant practical limitation

on FERC’s review of the three PMAs’ rates, FERC rarely disapproves a rate

request. FERC officials told us that they have rejected a rate proposal on

only one occasion. This proposal was by Western for the Parker-Davis

Project and FERC rejected it because it did not provide for the recovery of

significant expected costs of future power facility additions and

replacements.

FERC’s review and final approval of Bonneville’s rates is authorized under

the Northwest Power Act. This act requires FERC to assess whether

Bonneville’s rates (1) are sufficient to ensure repayment of the federal

investment in the Federal Columbia River Power System (FCRPS),12 (2) are

12Bonneville is part of FCRPS, which also includes the power-related operations of the Corps and the

Bureau. Bonneville is responsible for marketing power from the FCRPS.

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based on total system costs, and (3) reflect equitable allocation of

transmission system costs between federal and nonfederal users.

However, FERC’s review of Bonneville’s rate proposals is limited by its

interpretation of two court opinions issued by the Ninth Circuit Court of

Appeals, which is statutorily charged with reviewing actions arising under

the Northwest Power Act. FERC has interpreted the opinions to mean that it

may not obtain and review documentation other than that provided by

Bonneville and therefore FERC generally does not request additional

documentation from Bonneville in its consideration of Bonneville’s rate

proposals. In one case,13 the court held that under the Northwest Power

Act, FERC’s review of rates is limited to the three previously mentioned

standards specified in the act and that FERC’s limited review properly

reflects congressional desire to limit its role to financial oversight rather

than rate-making. In a second case,14 the court held that FERC should not

seek new evidence in reviewing Bonneville’s rate proposals. Instead, the

court held that FERC should evaluate the evidence developed by

Bonneville, which is required to develop a “full and complete record”

under section 7.(i) of the Northwest Power Act. As a result of its

interpretation of these court opinions, FERC generally does not request

additional documentation and limits its review to the documentation

submitted with Bonneville’s rate proposals.

For all four PMAs, FERC analyzes the PMA-provided information to determine

whether the proposed rates appear to be sufficient to recover the costs the

PMAs have included in the power repayment studies. FERC relies on the

amounts and due dates for repayment reported by the PMAs in the power

repayment studies as being complete, accurate, and timely. According to

FERC officials, they rely on the financial and other data provided by the

PMAs, and not on other evidence, such as audit reports. Based on its

restricted analysis, FERC either approves or disapproves the PMAs’ rate

proposals; it cannot modify a proposed rate. However, FERC officials told

us if FERC disapproves a PMA’s rate proposal, the existing (and typically

lower) rate remains in effect until the PMA submits a new one that is

reviewed and approved by FERC.

Department of the

Treasury

The Department of the Treasury’s role in the repayment process is

minimal. Currently, Treasury is responsible for receiving and recording the

repayments, but is not responsible for monitoring or assessing the

13Central Lincoln Peoples’ Utility District v. Johnson, 735 F. 2d 1101, 1115 (9th Cir. 1984).

14Aluminum Company of America et al. v. Bonneville Power Administration, 903 F. 2d 585 594 (1990).

Although this case deals with nonregional rather than regional rates, FERC has applied the holding of

this case to regional rate proposals.

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appropriateness of the repayment amounts and timeliness. In fact,

Treasury does not have available to it the information on amounts due,

due dates, and interest rates that would be necessary for it to do so. In

addition, since it has no role in rate-making, Treasury does not have staff

with the knowledge and expertise necessary to assess the PMAs’ power

repayment studies and rate proposals.

Ineffective Monitoring

System Has Resulted

in Financial Loss to

the Federal

Government

Audits by external auditors and GAO have identified various unrecovered

power-related costs that have resulted in financial loss to the federal

government. Until an effective monitoring system is implemented, the

federal government will continue to be exposed to financial loss due to the

under-recovery of costs. Better monitoring is essential to protect the

federal government’s right to recover the costs of its investments that are

to be repaid through power revenues.

The PMAs’ financial statements are audited by external auditors. The

results of the financial statement audits are contained in auditor’s reports,

reports on compliance with laws and regulations, reports on internal

controls, and management letters. All of these documents can contain

valuable information pertaining to cost recovery by the PMAs. For the three

PMAs, the external auditors have repeatedly identified certain

power-related costs that are not being recovered,15 even though they do

not specifically evaluate the PMAs’ power repayment studies as part of the

financial statement audits. Unrecovered costs that have been identified

relate to federal employee CSRS pension, postretirement health benefits,

life insurance benefits, workers’ compensation benefits, and certain

interest expenses related to federal appropriations. Some of the same cost

recovery issues also exist at Bonneville, but they have generally not been

raised by Bonneville’s external auditors in their audit reports. These types

of costs are recoverable under the definitions of full cost contained in OMB

Circular A-25 and Statement of Federal Financial Accounting Standard 

No. 4.

15The objective of a financial statement audit is to express an opinion on whether the statements are

fairly stated. A financial statement audit would not be expected to detect all issues related to

repayment or resolve all cost recovery issues identified.

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Examples of unrecovered costs identified by external and GAO auditors

that are symptomatic of the lack of effective monitoring of repayment16

include the following.

Unrecovered Pension and

Postretirement Health

Benefits Costs

PMAs historically have not recovered the full costs of providing pensions

and postretirement health benefits for PMA employees and operating

agency employees involved in power production and marketing. As part of

their fiscal year 199417 financial statement audits, the three PMAs’ external

auditors raised the lack of recovery of these costs as a compliance issue in

reports to the PMA administrators. We determined that Bonneville also is

not recovering the full costs of pensions and postretirement health

benefits.18 In 1996, and again in 1997, we reported that the PMAs still were

not recovering the full costs to the federal government of providing these

benefits. We reported that the full costs of providing CSRS pensions were

not being recovered because the combined contributions of federal

employees and the PMAs do not cover the federal government’s full cost of

providing these benefits, including payments by other federal agencies.

The PMAs’ rates include only the costs actually paid by the PMAs, not the

additional payments by the Office of Personnel Management (OPM) related

to PMA and operating agency personnel involved in power-related

activities. We also reported that the full costs of providing the federal

government’s portion of postretirement health benefits were not being

recovered and would eventually have to be paid by the general fund of the

Treasury.

For fiscal year 1996, we estimated that the net cost to the federal

government of providing these benefits was about $37 million ($21 million

for Bonneville and $16 million for the other three PMAs). Cumulatively, for

fiscal years 1992 through 1996, we estimated that the net cost, in constant

1996 dollars, was about $192 million ($110 for Bonneville and $82 million

for the other three PMAs). These estimates covered only current PMA and

operating agency employees involved in power-related activities.

16Our objective was not to quantify the amounts of unrecovered costs and financial loss to the federal

government, but to show that financial loss occurred, which demonstrates that monitoring is

ineffective. However, in some cases we had estimated amounts while conducting previous work or

obtained estimates from the PMAs’ external auditors.

17Western’s external auditor first raised this issue in its review of Western’s fiscal year 1993 financial

statements.

18Bonneville’s external auditor told us that it considers this an area open to differing legal

interpretation and has not reported these as unrecovered costs. However, the auditor said that it had

discussed the ramifications of possible future liability for these costs with Bonneville’s management.

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All four PMAs have said that they plan to begin recovering the full costs of

providing these benefits. Bonneville began recovering some of these costs

in 1998 and plans to phase in full cost recovery over time, with full cost

recovery beginning in 2002.19 Bonneville estimated the amounts related to

operating agency personnel, since the operating agencies did not

determine the appropriate amounts and allocate the costs to Bonneville.

The three PMAs began recovering the full costs of CSRS pension and

postretirement health benefits for their own employees in 1998; however,

they have not begun to recover the costs for operating agency personnel.

According to PMA officials, the three PMAs will begin recovering the costs

for operating agency personnel if the operating agencies determine the

amounts to be recovered and allocate the costs to the PMAs. However, PMA

and operating agency officials told us that the operating agencies are still

deciding how this will be done. None of the four PMAs plans to recover

these costs retroactively by placing them in current power rates, according

to PMA officials.

Unrecovered Life

Insurance Costs

Similarly, the PMAs have not recovered the full costs of providing life

insurance benefits for PMA employees and operating agency employees

involved in power production and marketing. As part of their fiscal year

1994 financial statement audits,20 the three PMAs’ external auditors

reported to the respective administrators that the PMAs were not

recovering these costs. Recovery of the costs is still under consideration

by the three PMAs. We determined that Bonneville also had not been fully

recovering the costs of life insurance. However, Bonneville and operating

agency officials told us that Bonneville began recovering some of these

costs in fiscal year 1998 by including an estimate of the amounts related to

life insurance benefits in the estimates discussed above. As with CSRS

pensions and postretirement health benefits, Bonneville plans to phase in

full cost recovery in rates over time, with full cost recovery beginning in

2002.21

19Although Bonneville will not begin recovering the full amount of these costs through its rates until

2002, it plans to ensure that Treasury will be compensated for the period of time in which rates do not

fully reflect these costs. Accordingly, Bonneville plans to pay interest on such costs that are not

included in rates. Once these costs are included in rates, they will be repaid, with interest, over a

period of years, including the unpaid costs of any such benefits for the period 1998 to 2001. In this

manner, Bonneville plans to repay Treasury the full cost of these benefits, including interest.

20Western’s external auditor first raised this issue in its review of Western’s fiscal year 1993 financial

statements.

21Bonneville plans to recover these costs in a manner similar to its recovery of the CSRS pension costs

mentioned above. By 2002, Bonneville plans to include in its rates the full cost of employee life

insurance and plans to repay, with interest, any unpaid life insurance costs for the period 1998-2001.

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Unrecovered Workers’

Compensation Costs

Southeastern’s external auditor reported as part of its fiscal year 1995

financial statement audit that Southeastern was not recovering the full

costs to the federal government of providing workers’ compensation

benefits. Specifically, the auditor reported that the Corps was not

allocating any of its workers’ compensation costs to Southeastern and that

Southeastern was therefore not recovering these costs through rates.

Unrecovered Interest Costs Auditors have also identified instances of incorrect interest calculations

and/or payments by the three PMAs. The errors related to interest on

moveable equipment at Western, interest on deferred assets22 at the Harry

S. Truman Dam and Reservoir (Truman Project) marketed by

Southwestern, and calculations using incorrect interest rates at certain

projects marketed by Southeastern and Southwestern.

As part of its fiscal year 1993 financial statement audit, Western’s external

auditor reported that Western was not recovering about $3 million

annually in interest on moveable equipment. In fiscal years 1994 and 1995,

Western developed a common approach for all projects designed to ensure

that it recovered this interest in the future. However, Western’s external

auditor reported that the problem had not yet been resolved as of the end

of fiscal year 1995. Specifically, the auditor reported that certain area

offices had not calculated interest on an allocated amount of movable

equipment located at headquarters. Western did not address this issue

until 1996, when it began charging interest on the balance of all moveable

equipment. However, according to Western’s external auditor, Western did

not retroactively charge interest on moveable equipment for years prior to

1993.

We also found an error related to the calculation of interest on deferred

assets at the Truman Project, marketed by Southwestern. Because of fish

kills, the project has never operated at its 160,000 kilowatt capacity;

instead, only 53,300 kilowatts have been declared to be in commercial

operation. As a result, Southwestern has deferred from recovery the

estimated costs—$31 million—of the nonoperational portion of the

Truman Project. However, Southwestern’s stated policy is to recover the

interest expense of the Truman deferred investment annually.

Until 1994, the Corps calculated the interest expense for Truman and other

projects marketed by Southwestern. Interest costs were to be based on the

22At the Truman Project, deferred assets represent the costs for the nonoperational portion of the

project that are not yet being recovered through rates.

Page 13 GAO/AIMD-98-164 Power Marketing Administrations
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entire power-related construction costs of these projects, including the

$31 million Truman deferral. In 1995, Southwestern began calculating the

interest expense on the projects it markets. However, Southwestern’s

fiscal year 1995 calculation of interest expense for the Truman project

mistakenly excluded interest associated with the $31 million Truman

deferral. As a result, about $930,000 in interest on the Truman deferral was

not recovered. Southwestern officials acknowledged the mistake and said

that the underpayment of interest would be corrected in fiscal year 1996.

Southwestern did subsequently recover the $930,000 associated with the

Truman deferral, along with approximately $71,000 in additional accrued

interest.

As a result of its fiscal year 1994 financial statement audit, Southeastern’s

external auditor informed Southeastern’s management that, in several

instances, the Corps had improperly calculated interest expense on the

federal government’s outstanding power-related appropriations. According

to the auditor, these errors resulted from the misinterpretation of the

interest calculation guidance. For example, the external auditor reported

that since 1983, three Corps district offices had not applied the current

interest rate on plant additions, even though the policy has been to use

current interest rates since 1983. Instead, the Corps had been using the

original project interest rates, which for 1984 through 1994 ranged from a

low of 2.5 percent to a high of 6.1 percent. These interest rates were

considerably lower than the 7.1 to 12.4 percent interest rates that should

have been applied to hydropower investments during this period.

Under a methodology proposed by its auditor, Southeastern estimated that

as of September 30, 1994, using the incorrect interest rates had

understated interest expense by about $1.7 million at two of its four

rate-making systems.23 Southeastern officials did not agree with the

methodology proposed by its auditor and told us that the $1.7 million

represents the maximum amount of the interest understatement.

Southeastern subsequently took over the calculation of interest on federal

investment that had previously been done by the Corps; however, it did

not determine the total magnitude of the error. Southeastern officials told

us that they do not plan to recover these costs because they considered

them immaterial to Southeastern’s financial statements. We do not agree

that materiality in relation to financial statements is the appropriate

criteria for deciding whether to recover a known power-related cost.

23The two systems were the Georgia-Alabama-South Carolina system and the Cumberland Basin

system, which collectively encompass 19 of Southeastern’s 23 projects.

Page 14 GAO/AIMD-98-164 Power Marketing Administrations
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Similarly, as a result of its fiscal year 1994 financial statement audit,

Southwestern’s external auditor informed Southwestern’s management

that, for the years 1984 through 1988, the Corps had used interest rates

lower than those that should have been used to calculate interest on

additions to the federal power facilities marketed by Southwestern. The

auditor also noted that, as of fiscal year 1994, three Corps districts had

continued to use the lower interest rates to calculate interest.

Southwestern adjusted its books to properly record interest expense for

fiscal years 1989 through 1995 when it took over responsibility for

calculating interest on investment from the Corps in fiscal year 1995.

However, as of fiscal year 1996, Southwestern had not applied the

appropriate interest rates to additions to the federal investment for fiscal

years 1984 through 1988, and Southwestern officials told us that they do

not plan to do so.

A long delay in recovering the costs of a transmission line on which

construction began in 1965, and which was later abandoned, is another

example of the ineffectiveness of the current monitoring system.

According to the Bureau,24 a transmission line, which was planned to be

part of the Pacific Northwest-Pacific Southwest Intertie Project, was

abandoned in fiscal year 1969 due to sporadic funding. Western and its

external auditor agreed in 1996 that the total unrecovered amount for the

abandoned transmission line was about $20 million. However, even though

these costs were power-related, Western was able to delay making any

principal or interest payments to the federal government until 1997, about

28 years after the project had been abandoned.

The current monitoring efforts do not ensure that costs such as those

described above are fully recovered, and therefore that the federal

government does not incur unnecessary losses on power-related activities.

It is important to note that although the aforementioned unrecovered costs

have been documented, there is no assurance that all unrecovered costs

have been identified. Other instances of under-recovery could exist which

we did not identify as a result of the limited scope of our work. Thus, the

full magnitude of the unrecovered costs is unknown. If the PMAs were to

begin recovering all of these costs, in many cases they would first need to

develop estimates of the amounts to be recovered in cooperation with the

appropriate operating agency. These estimated costs would then need to

be included in the PMAs’ power repayment studies and rates for recovery,

as is commonly done now for other costs. If the PMAs were to begin

24Western was established on December 21, 1977, pursuant to Section 302 of the DOE Act. Power

marketing responsibilities and the transmission system assets—including those of the abandoned

project—previously managed by the Bureau of Reclamation were transferred to Western.

Page 15 GAO/AIMD-98-164 Power Marketing Administrations
B-279016 

including these unrecovered costs in power rates, the result could be

upward pressure on rates.

Current Monitoring

Activities Are Less

Extensive Than Those

Performed in Prior

Years

The current activities for monitoring the repayment of power-related costs

and debt are less extensive than those performed in prior years. For

several years prior to 1984, DOE’s Office of Power Marketing Coordination

(OPMC) monitored the PMAs’ activities and reviewed their rate proposals.

This provided some additional assurance that information provided to

FERC on costs to be recovered by the PMAs was complete and accurate. In

addition, before the Secretary of Energy’s order delegating to FERC the

authority to review the PMAs’ rates was revised in 1983, FERC had more

latitude in reviewing the PMAs’ rates. According to FERC officials, this

latitude enabled FERC to more actively review rate proposals and challenge

rates that they thought did not recover all relevant costs. FERC’s review of

Bonneville’s rate proposals was similarly broader before the passage of the

Northwest Power Act. The act limited FERC’s scope of review to the

standards specified in the act.

Office of Power Marketing

Coordination Practices

Prior monitoring practices used by OPMC, which was disbanded in 1984,

were more extensive than those performed by DOE today. According to

former OPMC officials, including the former director of that office, OPMC’s

monitoring practices included reviewing the PMAs’ rate proposals and

power repayment studies before they were sent to FERC. They told us that

one of OPMC’s key responsibilities was to assess whether appropriate costs

were included in rates, and the office employed a staff with expertise in

PMA rate-making to help it carry out this responsibility. However, OPMC did

not perform detailed reviews of the power repayment studies which form

the basis for the PMAs’ rate proposals.

According to DOE officials, when OPMC was disbanded, its monitoring

activities were not assigned to another entity and have not been

subsequently assumed by another entity. Although the two Washington

PMA liaison offices began to perform some of the functions of the

disbanded OPMC, they generally have not reviewed the PMAs’ rate proposals

and power repayment studies. As a result, the assurance that the PMAs’ rate

proposals provide for accurate, complete, and timely repayment was

decreased when OPMC was disbanded.

FERC Delegation Order

Revision

Because the Secretary of Energy’s 1978 delegation order did not specify

the standard of review, FERC interpreted the order as allowing the same

Page 16 GAO/AIMD-98-164 Power Marketing Administrations
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type of review that it had previously carried out as the Federal Power

Commission (FPC) when it applied its independent expertise in evaluating

the PMAs’ rate proposals.25 Subsequently, the December 14, 1983, revision

to the delegation order,26 which is currently in effect, limited FERC’s review

to the previously discussed three standards set forth in the order. In FERC’s

view, under this order, rate proposals can only be rejected if found to be

arbitrary, capricious, or in violation of law. In addition, the revision

indicated that the operating agencies’ policy judgments and interpretations

of laws and regulations were not reviewable by FERC. These limitations

significantly reduced FERC’s ability to ensure that all power-related costs

are included in the three PMAs’ rates.

Prior to the passage of the Northwest Power Act in 1980, the DOE

delegation order to FERC applied to all PMAs, including Bonneville. The

current delegation order does not cover Bonneville due to provisions of

the act. As previously discussed, the act limits the scope of FERC’s review

of Bonneville’s rates.

Conclusions While Treasury is responsible for receiving and recording the repayment

of the PMAs’ power-related costs and debt, it is not responsible for

monitoring repayment and is not in a position to effectively do so. DOE is

responsible under the law for monitoring the repayment of the PMAs’

power-related costs and debt and is in the best position to perform this

function. However, until an effective monitoring system is established by

DOE, including at FERC, the federal government will continue to be exposed

to financial loss.

Recommendations We recommend that the Secretary of Energy move quickly to enhance the

department’s oversight of the repayment of the PMAs’ power-related costs

and debt and thereby increase the likelihood that the federal government

will receive all money due it in a timely manner. To provide this additional

assurance, the Secretary of Energy should do the following.

• Require independent, outside reviews by qualified parties of the power

repayment studies prepared by the PMAs to increase assurance that all

power-related costs are included in rates. These reviews should assess

(1) the appropriateness of the assumptions and methodologies used in the

25See, e.g., U.S. Secretary of Energy, Bonneville Power Administration, 20 FERC par. 61,291 (Sept. 1,

1982), U.S. Department of Interior, Bonneville Power Administration, 34 F.P.C. 1462; 1965 (Dec. 14,

1965). The DOE Act transferred most of FPC’s functions to the Secretary of Energy and FERC.

26DOE Delegation Order No. 0204-108.

Page 17 GAO/AIMD-98-164 Power Marketing Administrations
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power repayment studies, (2) whether all power-related costs are

included, and (3) whether appropriate interest rates are used by the PMAs

and operating agencies to calculate interest to be charged on completed

projects or capitalized for projects being constructed. The results of the

reviews should be summarized in written reports. These independent

reviews should initially be done for each power repayment study the next

time it is updated. Thereafter, the frequency of the reviews should be

based on the results of prior review(s) and assessments of the risk of

financial loss to the federal government. The independent review costs, as

valid power-related costs, should be included in power rates.

• Include the full costs of CSRS pension and postretirement health benefits,

life insurance, and workers’ compensation benefits in the PMAs’ rates. The

costs should include not only those for PMA employees, but also those for

operating agency employees involved in power-related activities either

full-time or part-time, directly or indirectly. Amounts pertaining to

operating agency personnel should be obtained from the operating

agencies or, if necessary, estimated by the Department of Energy in

cooperation with the appropriate operating agency.

• Incorporate and maintain updated cost recovery guidance in DOE Order RA

6120.2 that ensures full recovery of power-related costs, including the full

costs of CSRS pension and postretirement health benefits, life insurance,

and workers’ compensation benefits for all PMA employees as well as

operating agency employees involved in power-related activities either

full-time or part-time, directly or indirectly.

• Establish a process within DOE for tracking and resolving issues that affect

the repayment of power-related costs and debt. Specifically, DOE should:

• Review the three PMAs’ (Southeastern, Southwestern, and Western) rate

proposals before they are sent to FERC. For all four PMAs (Bonneville,

Southeastern, Southwestern, and Western), review the reports

summarizing the results of the independent, outside evaluations of the

power repayment studies, for purposes of identifying any issues that

require follow-up and resolution with the PMAs.

• Review audit reports (Auditor’s Reports, Reports on Compliance with

Laws and Regulations, Reports on Internal Controls, and Management

Letters) for all four PMAs and ensure the timely resolution of all

identified management, cost recovery, and repayment issues.

• Ensure that all four PMAs pass onto FERC the reports referred to above

for its use in reviewing PMA rate proposals.

• Revise Delegation Order 0204-108 to give FERC more authority to review

and challenge the rate proposals of the three PMAs. Specifically, the

Secretary of Energy should (1) clarify that the “arbitrary and capricious”

standard does not preclude FERC from rejecting a rate proposal that it finds

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to be inconsistent with cost recovery guidance contained in DOE Order RA

6120.2, (2) allow FERC to go beyond the three specific standards of review

specified in the order, as necessary, and (3) allow FERC to modify a rate

proposal rather than merely accept or reject it.

In addition, we recommend that the Federal Energy Regulatory

Commission utilize this additional authority in its reviews of PMA rate

proposals, including analysis and consideration of audit reports and the

results of independent evaluations of the PMAs’ power repayment studies.

Agency Comments

and Our Evaluation

We provided a draft of this report to FERC, DOI, Treasury, DOD, DOE, and the

PMAs for comment. FERC, DOI, Treasury, and DOD generally agreed with the

report. FERC and DOD provided informal technical comments which we

incorporated into the report, as appropriate.

DOE’s Office of the Secretary did not provide written comments, but told us

that they concurred with the PMAs comments. The PMAs agreed with many

of the facts contained in our report, but disagreed with our conclusions

and recommendations for improving the monitoring. The PMAs’ comments

are reprinted in appendix III. Their major comments are evaluated below;

other comments are evaluated in appendix III. The PMAs also provided us

with informal technical comments which we evaluated and incorporated,

as appropriate.

The PMAs Are Already

Subject to Extensive

Oversight

The PMAs stated that current monitoring activities are extensive and

additional monitoring is not necessary. They cited 10 types of oversight,

monitoring, and appeals that are currently available over PMA repayment

practices, and stated that our recommendation for an independent, outside

review of the PMAs’ power repayment studies would seem to be an

unnecessary, expensive, and time-consuming duplication of existing

reviews. We do not agree. Based on our review, the current monitoring

activities are not designed to ensure that repayment is complete, accurate,

and timely. For example, none of the activities delineated by the PMAs

include detailed reviews of the PMAs’ power repayment studies, upon

which rates are based. Therefore, there is little assurance that these

repayment studies provide for complete, accurate, and timely repayment

of the costs that the federal government is entitled to recover under

current law.

Page 19 GAO/AIMD-98-164 Power Marketing Administrations
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Our report includes several examples of (1) significant power-related costs

that historically have not been recovered and (2) the lack of timeliness in

resolving cost recovery issues once they were raised. It is important to

note that our review was not designed to detect and quantify all losses, but

rather to evaluate the effectiveness of the system for monitoring

repayment and determine if there was the potential for financial loss to the

federal government. Based on our assessment of the monitoring system,

we concluded that there is the potential for loss to the federal government,

beyond the identified examples in the report, and therefore that the system

is ineffective and needs enhancing through closer monitoring of the PMAs’

repayment. However, in response to the PMAs’ comments, we have revised

our report to clarify that we are not proposing multiple detailed reviews of

the power repayment studies. Instead, the detailed, independent power

repayment study reviews should be performed and summaries of the

results of those reviews used by DOE to identify issues that require

follow-up and resolution with the PMAs and by FERC in assessing the PMAs’

rate proposals.

The PMAs also stated that the three PMAs’ respective financial statement

auditors perform compliance testing which already accomplishes our

recommendation that the power repayment studies be independently

reviewed to determine whether they provide for complete, accurate, and

timely repayment. We do not agree. As we state in the report, the objective

of a financial statement audit is to express an opinion as to whether the

statements are fairly stated and the audit would not be expected to detect

all issues related to repayment or cost recovery. The financial statement

audits—and other audits—have not included detailed reviews of the

power repayment studies that assessed their completeness, assumptions,

methodologies, and the reasonableness of estimates used. Since the

existing reviews of the power repayment studies have not included such

assessments to ensure that repayment is complete, accurate, and timely, it

is not possible to determine whether all cost recovery issues have been

identified. Moreover, the PMAs’ assertion relates to the compliance testing

at the three PMAs rather than at Bonneville, which receives a different type

of audit and less compliance testing, according to a Bonneville official. As

we state in our report, some of the same cost recovery issues exist at

Bonneville but generally have not been raised by its financial statement

auditor in audit reports.

Additionally, even when cost recovery issues have been identified as part

of the audits, they have often not been addressed in a timely manner by

the PMAs. For example, the unrecovered CSRS pensions and postretirement

Page 20 GAO/AIMD-98-164 Power Marketing Administrations
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health benefits cost issue was first reported by Western’s financial

statement auditor as part of its fiscal year 1993 audit and by Southeastern’s

and Southwestern’s auditors in 1994, but still has not been fully resolved

by PMA management.

Most Cost Recovery

Disagreements Involve

Policy Matters

The PMAs stated that the failure to recover costs that we identified in this

and previous reports largely involved differing interpretations of law or

policy, rather than a failure to follow clear guidance. While differing

interpretations of law or policy can lead to a failure to recover

power-related costs, this is one reason closer monitoring is needed so that

issues can be resolved in a more timely manner. For example, as discussed

above, Western’s financial statement auditor first recommended that

Western begin recovering CSRS pension and postretirement health benefits

costs in 1993. This issue has only recently begun to be resolved. Some of

the delay in resolving the issue could be attributable to differing

interpretations of law or policy. However, a monitoring system at the DOE

level would likely have identified this as an issue that might also exist

elsewhere and would have facilitated quick resolution at all four PMAs to

ensure that the federal government did not continue to suffer financial

loss. As we state in our report, the amount of the four PMAs’ unrecovered

CSRS pension and postretirement health benefits costs over a 5-year period

(fiscal years 1992-1996) was an estimated $192 million (in constant 1996

dollars). This financial loss could have been mitigated by timely

identification of the scope of the problem at the DOE level and resolution at

each of the PMAs.

The PMAs also maintain that OMB Circular A-25 and federal accounting

standards do not apply when “the amount to be priced is provided for by

statute or regulation.” This statement does not appear to be relevant to the

unrecovered costs identified in our report, which the PMAs have now

agreed should be recovered. Recovering these power-related costs is in

accordance with laws and regulations. Moreover, statutes, regulations, and

DOE Order RA 6120.2 require that the PMAs’ power-related costs be included

in rates, but do not specifically identify and define all costs that must be

recovered. Therefore, using guidance set forth by OMB Circular A-25 and

federal accounting standards to help define the full costs of federal power

is appropriate.

Description of

Unrecovered Costs Is

Misleading

The PMAs state that the description of unrecovered power-related costs

included in our report is misleading in that it claims that four types of

power-related costs are not being recovered. The PMAs further state that

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they generally agree that these costs should be recovered and have been

taking steps to ensure that this occurs, beginning in fiscal year 1998. They

also object to our characterization of progress towards resolving problems

as slow or nonexistent. However, as our report demonstrates, progress

toward resolving some of the cost recovery issues has been slow. For

example, Western delayed making principal or interest payments on a

transmission line for about 28 years after the project was abandoned. The

total amount of the unrecovered costs during that time period was

approximately $20 million.

No progress has been made toward resolving certain other cost recovery

issues. For example, our report discusses unrecovered workers

compensation costs at Southeastern that were reported as a result of

Southeastern’s fiscal year 1995 financial statement audit. The PMAs’

comments acknowledge that these costs should be included in rates;

however, no progress has been made to do so. In addition, Western’s

financial statement auditor reported as part of its fiscal year 1993 financial

statement audit that Western was not recovering about $3 million annually

in interest on moveable equipment. Western subsequently recovered

interest for 1993 and later years; however, it has not taken any steps to

recover interest for prior years, even though DOE policy has always been to

recover interest on the federal government’s outstanding investment in

power-related activities. Similarly, our report describes unrecovered

interest costs at Southeastern and Southwestern related to the application

of incorrect interest rates to the federal investment that remain

unrecovered.

The PMAs state that many of the findings reported by the external auditors

and GAO were initially raised by PMA personnel. They also state that

because the errors related to unrecovered interest on federal investments

at certain projects were raised by the three PMAs’ external auditors, that “it

is apparent that the present oversight and monitoring practices are

working.” We do not agree. Many of the issues we discuss had been

problems for a number of years before they were identified. Further, while

financial audits are an important element of monitoring, they do not

relieve management of its responsibility to establish an effective

monitoring system within its own organization.

FERC’s Authority Is Broad

Enough to Ensure

Repayment

The PMAs believe that FERC’s current authority is sufficient to allow FERC to

provide effective monitoring and oversight of the three PMAs’ repayment.

This is at odds with FERC’s position. FERC officials told us that, in their

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opinion, the “arbitrary and capricious” standard specified in the current

delegation order is very difficult to meet and thus imposes a significant

practical limitation on FERC’s review authority. As a result, FERC rarely

disapproves a rate request. Our recommendation involves returning to a

more general delegation of authority to FERC that does not impose

unnecessary limits on its review authority, including the “arbitrary and

capricious” standard that was not a part of the Secretary of Energy’s

previous delegation order.

We agree with the PMAs’ position that revising the delegation order to allow

FERC to modify the three PMAs’ rate proposals, rather than merely accepting

or rejecting them, is worthy of consideration. This change, along with the

removal of the restrictions on FERC’s review, would better enable FERC to

help ensure that costs are recovered. As a result, we have revised our

recommendation pertaining to revising the delegation order.

As agreed with your offices, unless you publicly announce its contents

earlier, we will not distribute this report until 30 days from its date. At that

time, we will send copies to appropriate House and Senate Committees;

the Ranking Minority Members of the House Committee on the Budget and

the House Committee on Resources’ Subcommittee on Water and Power

Resources; interested Members of the Congress; the Secretary of Energy;

the Secretary of the Interior; the Secretary of Defense; the Secretary of the

Treasury; the Chairman of the Federal Energy Regulatory Commission; the

Director of the Office of Management and Budget; and other interested

parties. We will make copies available to others upon request.

Please call me at (202) 512-8341 if you or your staff have any questions.

Major contributors to this report are listed in appendix IV.

Linda M. Calbom

Director, Resources, Community, and Economic Development

Accounting and Financial Management Issues

Page 23 GAO/AIMD-98-164 Power Marketing Administrations
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

26

Appendix II 

Legal Responsibilities

and Delegated

Authorities for

Bonneville,

Southeastern,

Southwestern, and

Western Area Power

Administrations

28

Appendix III 

Comments From the

Four Power

Marketing

Administrations

29

Appendix IV 

Major Contributors to

This Report

37

Table Table 1: Annual Revenues and Outstanding Appropriated and

Irrigation Debt of the PMAs for the Fiscal Year Ending and as of

September 30, 1997

5

Page 24 GAO/AIMD-98-164 Power Marketing Administrations
Contents

Abbreviations

CSRS Civil Service Retirement System

DOD Department of Defense

DOE Department of Energy

DOI Department of the Interior

FASAB Federal Accounting Standards Advisory Board

FCRPS Federal Columbia River Power System

FERC Federal Energy Regulatory Commission

FPC Federal Power Commission

O&M operations and maintenance

OMB Office of Management and Budget

OPM Office of Personnel Management

OPMC Office of Power Marketing Coordination

PMA power marketing administration

Page 25 GAO/AIMD-98-164 Power Marketing Administrations
Appendix I 

Objectives, Scope, and Methodology

We were asked by the Chairmen of the House Budget Committee and the

Subcommittee on Water and Power Resources, House Resources

Committee, to examine the monitoring of the repayment of the

power-related costs and debt of the Department of Energy’s (DOE) Power

Marketing Administrations (PMA). Specifically, the Chairmen asked us to

determine (1) if DOE or the Department of the Treasury actively monitors

the amounts of debt to be repaid and the appropriateness of the annual

payments and (2) if there is a potential for financial loss to the federal

government due to lack of such monitoring. We determined whether the

current activities for monitoring repayment effectively ensure that

repayment amounts are complete, accurate, and timely, but did not

attempt to quantify the financial loss to the federal government resulting

from any monitoring ineffectiveness.

This report provides information on the Bonneville, Southeastern,

Southwestern, and Western Area Power Administrations. It also includes

the power-related activities of the Department of the Interior’s Bureau of

Reclamation (Bureau) and U.S. Army Corps of Engineers (Corps), which

own and operate virtually all of the multipurpose federal water projects

that provide power to the PMAs’ customers.

Assessing Monitoring

Effectiveness and the

Potential for Financial

Loss to the Federal

Government

To determine if current monitoring activities ensure that all repayments

were accurate, complete, and timely, we first determined who has the legal

responsibility for ensuring that the PMAs recover all power-related costs

and repay debt and then obtained an understanding of the current system

for monitoring the repayment. We did this by researching relevant laws,

regulations, and court cases and interviewing senior officials from DOE

headquarters; the two PMA liaison offices in Washington, D.C.; the four

PMAs; the Department of the Treasury; the Federal Energy Regulatory

Commission (FERC); and the operating agencies (the Department of the

Interior’s Bureau of Reclamation and U.S. Army Corps of Engineers).

We then assessed the potential for financial loss to the federal

government. In doing so, we relied extensively on audited financial

information for each of the four PMAs. Specifically, we obtained and

analyzed the external auditors’ reports of the results of their financial

statement audits, reports on the PMAs’ compliance with laws and

regulations, reports on the effectiveness of the PMAs’ systems of internal

controls, and letters to management highlighting cost recovery and other

issues. Many of these reports contained information on cost recovery

issues. For each PMA, we reviewed the most recently available reports as

Page 26 GAO/AIMD-98-164 Power Marketing Administrations
Appendix I 

Objectives, Scope, and Methodology

well as those for several previous years. In addition, we reviewed and

synthesized recent GAO reports that assessed cost recovery by the PMAs. In

performing the reviews that resulted in these previous reports, we had

developed a good understanding of the PMAs’ requirement for recovering

power-related costs and for several of the costs that were not being fully

recovered. We also reviewed reports by the DOE, DOI, and DOD Inspector

General offices.

After developing an understanding of cost recovery and repayment issues

at each of the four PMAs, we corroborated our understanding of those

issues by interviewing appropriate officials. Specifically, we corroborated

the results of our analyses by interviewing DOE officials and the PMAs’

external auditors.

Determining Whether

Current Monitoring

Activities Are as Extensive

as the Prior Ones

We identified how current activities for monitoring the repayment of the

PMAs’ power-related costs and debt differ from prior ones by obtaining and

reviewing documentation on organizational changes within DOE pertaining

to the monitoring of the PMAs. Specifically, we obtained and reviewed

organization charts and delegation orders spanning more than a decade. In

addition, we interviewed officials from DOE, the PMA liaison offices, the

PMAs, the Department of the Treasury, and FERC. To follow up on these

discussions, we also interviewed former officials of DOE’s disbanded Office

of Power Marketing Coordination (OPMC), which previously monitored the

PMAs’ activities in the late 1970s and early 1980s. Among the officials we

interviewed was the former director of OPMC. We then assessed whether

these changes could affect the potential for financial losses to the federal

government.

We conducted our review from December 1997 through June 1998 in

accordance with generally accepted government auditing standards.

Page 27 GAO/AIMD-98-164 Power Marketing Administrations
Appendix II 

Legal Responsibilities and Delegated

Authorities for Bonneville, Southeastern,

Southwestern, and Western Area Power

Administrations

Secretary of 

Energy

Deputy 

Secretary

3 PMA 

Administrators

BPA 

Administrator

FERC

Delegated 

authority 

under Del. Order 

0204-108 

to approve 

or disapprove 

rates on final 

basis

Delegated 

authority 

under Del. 

Order 0204-108 

to develop 

and propose 

rates

Submit 

rate proposals 

for approval 

under 

Del. Order 

0204-108

Responsible for PMAs under DOE Act; 

delegated oversight responsibility to 

Deputy Secretary under Del. Order 0204-108

Northwest 

Power Act

Final rate approval for 

3 PMAs under Del. Order 

0204-108; approval of 

BPA rates on interim 

and final basis under NWPA

Approves 

rates on interim 

basis for 3 PMAs 

& submits rate 

proposals to FERC 

under Del. Order 

0204-108

Submits rate proposal 

for approval under 

Northwest Power Act

Responsibility 

to develop 

and propose 

rates

RA 6120.2

All 4 PMAs 

responsible 

for implementing 

financial reporting 

policies, procedures, 

and methodology

Note: The three PMAs are Southeastern, Southwestern, and Western Area Power Administrations.

Page 28 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 29 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

Page 30 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

See comment 2.

See comment 1.

Page 31 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

See comment 1.

Page 32 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

See comment 3.

See comment 1.

Page 33 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

See comment 4.

See comment 5.

Page 34 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

The following are GAO’s comments on the Department of Energy’s letter

dated June 5, 1998.

GAO Comments 1. Discussed in the “Agency Comments and Our Evaluation” section of the

report.

2. Our involvement in raising cost recovery issues to the Congress should

not be considered a part of the monitoring process designed by the

Secretary of Energy to ensure that he or she fulfills his or her

responsibility to recover these costs. Our audit work is generally

performed at the specific request of the Congress and cannot be

considered to be routine, ongoing monitoring of PMA activity.

3. We believe that the return of the federal government’s investment in the

PMAs’ power-related activities to the Treasury through scheduled payments

is an expectation of the federal government and the taxpayers, and should

not necessarily be thought of as a record of achievement. While we agree

that the PMAs have made substantial repayments to Treasury on a timely

basis, this report and our previous reports1

 clearly point out that the PMAs

have not recovered all of the costs that the federal government has

incurred to produce, market, and transmit federal power.

4. We disagree. There should not be diversity among the PMAs in recovering

the costs discussed, or in recovering other costs that are power-related.

Clarifying the requirement that these costs be recovered in DOE Order RA

6120.2 would help ensure the necessary consistency among the PMAs and,

as discussed previously, would avoid any confusion which might arise

from differing interpretations regarding these costs in the future.

Moreover, significant unrecovered cost categories identified in future

monitoring efforts, such as detailed reviews of the PMAs’ power repayment

studies, should be specified as recovery requirements in the DOE Order. In

addition, since Bonneville is not subject to the delegation order under

which DOE reviews the other three PMAs’ rate proposals before they are

sent to FERC, monitoring of cost recovery issues at Bonneville at the DOE

level is curtailed; clarifying cost recovery guidance in DOE Order RA 6120.2

is especially important to ensure power-related costs are treated alike

among all the PMAs.

1

Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities

(GAO/AIMD-96-145, September 19, 1996) and Federal Electricity Activities: The Federal Government’s

Net Cost and Potential for Future Losses, volumes 1 and 2 (GAO/AIMD-97-110 and 110A, September 19,

1997).

Page 35 GAO/AIMD-98-164 Power Marketing Administrations
Appendix III 

Comments From the Four Power Marketing

Administrations

5. The PMAs’ willingness to provide audit reports, including management

letters, to FERC will enhance FERC’s ability to effectively evaluate the PMAs’

rate proposals. However, as noted in our response to comment 4, it is

important to include this requirement in RA 6120.2 because Bonneville is

not subject to the delegation order under which DOE transmits case

materials to FERC.

Page 36 GAO/AIMD-98-164 Power Marketing Administrations
Appendix IV 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Robert E. Martin, Assistant Director

Donald R. Neff, Senior Audit Manager

Patricia B. Petersen, Senior Auditor

Margaret A. Mills, Communications Analyst

Office of the General

Counsel, Washington,

D.C.

Thomas H. Armstrong, Assistant General Counsel

Amy M. Shimamura, Senior Attorney

Seattle Field Office David W. Bogdon, Senior Evaluator

Larry L. Feltz, Senior Evaluator

Robert J. Bresky, Jr., Evaluator

(913818) Page 37 GAO/AIMD-98-164 Power Marketing Administrations
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