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FEDERAL ENERGY REGULATORY COMMISSION 

WASHINGTON, DC 20426 

OFFICE OF THE CHAIR 

The Honorable Albert Gore, Jr. 

President of the Senate 

Washington, D.C~ 20510 

Dear Mr. President: 

January 21, 1997 

I am pleased to enclose the Federal Energy Regulatory 

commission's report on Government dam use charges under 

Section lO(e) (2) of the Federal Power Act. Section 10(e) (4) of 

the FPA requires that every five years the Commission review and 

report to Congress the appropriateness of the statutory limits on 

the charges. 

The report recommends that the limit set by Section lO(e) (2) 

remain unchanged. 

Enclosure 

Sincerely, 

~~f:-..~ 

Elizabeth A. Moler 

Chair 
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EXECUTIVE SUMMARY 

The Electric Consumers Protection Act of 1986 (ECPA) amended 

the Federal Power Act (FPA) by placing limits on the fees charged 

to hydroelectric projects for the use of Government dams or other 

structures owned by the United States. The Federal Energy 

Regulatory Commission (Commission), pursuant to Section 10(e) (1) 

of the FPA, levies and collects the annual charges. 

Section 10(e) (2) imposes limits on those fees, and Section 

10(e) (4) requires that, every five years, the Commission review 

the appropriateness of these statutory limits and report to 

Congress its recommendations thereon. 

The Commission has reviewed the fees in light of current 

economic and regulatory trends and in consideration of their 

statutory purposes. The fees continue to provide reasonable 

compensation to the Government. While there has been a slight 

decrease in the number of total projects (constructed and 

unconstructed) at Government dams in the last five years, there 

is no indication that this decrease is related to the dam-use 

fees. Significant structural and regulatory changes affecting 

electricity markets have occurred since 1995, and will continue 

to occur, at both the wholesale and retail level. These changes 

may affect the value of electric energy produced at Government 

dams and the appropriateness of the Section 10(e) (2) annual 

charge limitations, but it is too early to ascertain what that 

effect, if any, will be. This report therefore recommends to 

Congress that the limits set by Section 10(e) (2) remain at their 

present levels. 
FEES FOR THE USE OF GOVERNMENT DAMS: 

SECOND REPORT TO CONGRESS 

OF THE FEDERAL ENERGY REGULATORY COMMISSION 

Introduction 

The Electric Consumers Protection Act (ECPA) became law on 

October 16, 1986. ECPA slightly revised the existing provisions 

of Section 10 of the Federal Power Act (FPA) authorizing the 

Commission to collect annual charges from hydropower licensees 

whose projects make use of Government darns or other structures 

owned by the United States. In 1995, such charges were collected 

from 70 projects; an additional 28 projects will be subject to 

charges when they begin to generate power. 

Specifically, ECPA added new Sections 10(e) (2) and (e) (4) to 

the FPA. Section 10 (e) (2) states: 

In the case of licenses involving the use of Government 

darns or other structures owned by the United States, 

the charges fixed (or readjusted) by the Commission 

under [Section 10(e) (1)] for the use of such darns or 

structures shall not exceed 1 mill per kilowatt-hour 

for the first 40 gigawatt-hours of energy a project 

produces in any year, 1~ mills per kilowatt-hour for 

over 40 up to and including 80 gigawatt-hours in any 

year, and 2 mills per kilowatt-hour for any energy the 

project produces over 80 gigawatt-hours in any year. 

Except as provided in [Section 10(f)], such charge 

shall be the only charge assessed by any agency of the 

United States for the use of such darns or structures. 

Section 10 (e) (4) states: 

Every 5 years, the Commission shall review the 

appropriateness of the annual charge limitations 

provided for in [Section 10{e) (2)] and report to 

Congress concerning its recommendations thereon. 

This is the second five-year report on the appropriateness 

of the Section 10(e) (2) annual charge limitations. The report 

consists of four sections: a brief discussion of the history of 

charges for the use of Government darns, a review of the amounts 

collected by the Commission for such use, an examination of 

economic factors bearing on the appropriateness of the charge 

limitations, and the Commission's recommendations concerning the 

need for modification of the charges. 
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History of Charges for Use of Government Dams 

Before 1984, the Commission assessed charges for the use of 

Government dams on a case-by-case basis, in most cases using the 

shared net benefit method. In this method, the net benefit was 

estimated to be the difference between the value of the power 

(taken as the least expensive alternative power) and the cost of 

project power (computed from the costs of building and operating 

the project). The licensee was charged 50 percent of the 

levelized annual net benefit. 

The graduated flat rate approach was adopted in 1984. ~/ 

The Commission, concerned by the complexity of the shared net 

benefit method and with relatively large numbers of applications 

for license at Government dams pending before it, reconsidered 

its approach. After proposing a generic modification of the 

shared net benefit method and several possible alternatives, and 

after reviewing the resulting comments from more than 100 

parties, the Commission adopted the graduated values of one mill, 

one and one-half mills, and two mills per kilowatt-hour of annual 

generation. The Commission stated that this method: 

best balances the statutory goals of providing a 

reasonable return to the Federal government, 

encouraging hydropower development, especially small 

projects, and minimizing costs to consumers. [l/] 

The Commission also noted the simplicity of the method, which 

reduces the Commission's administrative effort and which allows 

hydropower developers to easily predict their costs. 

Congress adopted the graduated flat rate method in the ECPA, 

which fixed in law the graduated values as the maximum which the 

Commission shall levy. Congress also provided that, for the use 

of Government dams or structures, this charge shall be the only 

charge assessed by any agency of the United States. ~/ The 

~/ Order 379, 49 F.R. 22770 (June 1, 1984). 

l/ Id. 

21 Pursuant to Section 10(e) (1) of the FPA, the Commission also 

collects: (a) from major licensees (those with installed 

capacities greater than 1,500 kilowatts) annual charges for 

administration of the FPA; and (b) from licensees of 

projects occupying Government or Indian lands, annual 

charges for use of those lands. Pursuant to Section 10(f), 

the Commission collects fees from licensees which enjoy 

headwater benefits from Government projects. The Government 

dam charges discussed herein comprised less than seven 

percent of the Commission's total Section 10 fee collections 
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Commission currently levies the maximum values, as it has since 

adopting them in 1984. 

Amounts Collected Under Section 10(e) (2) 

In 1995, 70 of the 1,019 projects under license~/ by the 

Commission were subject to Government dam use charges under 

Section 10(e) {2) of the FPA. In 1991, 66 projects were subject 

to the charges. -The amounts collected annually from 1991 through 

1995 are shown below: 

Year Amount Number of Proiects 

1991 $4,314,500 66 

1992 4,675,928 66 

1993 6,125,595 70 

1994 5,008,263 70 

1995 6,692,415 70 

In addition, there are presently 28 projects under license 

at Government dams which are not being charged pending completion 

of construction and generation of power. 2/ 

Economic Considerations 

Significant structural and regulatory changes affecting 

electricity markets have occurred since 1995, and will continue 

to occur, at both the wholesale and retail level. These changes, 

which will encourage the development of competitively-priced 

electricity, ultimately may affect the value of electric energy 

produced at Government dams. 2/ However, the Commission cannot 

for fiscal year 1996. 

~/ Another 624 hydroelectric projects are exempted from 

licensing under Section 30 of the FPA or Section 405(d) of 

the Public Utility Regulatory Policies Act of 1978 (16 

U.S.C. § 2705) and are not subject to Government dam use 

charges. 

21 In 1991, there were 57 such projects. Four of those 

projects have become operational, and 25 have surrendered 

their licenses or had them terminated due to factors such as 

the licensee's inability to obtain power sales contracts or 

to finance studies required by the license. 

21 In reviewing the appropriateness of Government dam use 

charges under Section 10(e) (2), the Commission has thus far 

used as a benchmark the value of energy produced and has 

focused on the retail price of electricity to determine 
, 

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at this time ascertain with any certainty what that effect, if 

any, will be. 

On April 24, 1996, the Commission issued rules that require 

all public utilities that own, control, or operate facilities 

used for transmitting electric energy in interstate commerce to 

have on file with the Commission open access non-discriminatory 

transmission tariffs that contain, at a minimum, the terms and 

conditions of non-discriminatory service set out by the 

Commission. The rules also permit public utilities and 

transmitting utilities to seek the recovery of legitimate, 

prudent, and verifiable stranded costs associated with providing 

open access and transmission services under Section 211 of the 

FPA. The goal is to create a successful transition to more 

competitive wholesale bulk power markets which, in turn, should 

lower electricity costs to ultimate consumers. 21 In addition, 

regulators in numerous states have begun or are contemplating 

retail transmission access programs that will permit 

competitively-priced generation in retail power markets (~, 

California, Massachusetts, New Hampshire, New York, and 

Illinois) . 

What effect these events will have on the value of 

hydroelectric energy produced at Government dams, the 

appropriateness of our method for determining annual charges, and 

the appropriateness of the Section 10(e) annual charge 

limitations, is not yet known. While we believe that overall 

electricity prices will go down in the future, a variety of 

factors will influence the development of competitive markets, 

for example, the development of independent system operators, 

development of regional transmission groups, existence of 

generation market power, policies for utility mergers, 

development of innovative transmission pricing alternatives, and 

state retail access programs. Therefore, at this time we believe 

the Section 10(e) (2) annual charge limitations continue to be 

appropriate. 

changes in the value of power. 

21 Promoting Wholesale Competition Through ·open Access Nondiscriminatory Transmission Services by Public Utilities and 

Recovery of Stranded Costs by Public Utilities and 

Transmitting Utilities, Order No. 888, 61 Fed. Reg. 21,540 

(May 10, 1996), FERC Stats. & Regs. , 31,036 (1996), reh'g 

pending; Open Access Same-Time Information System (formerly 

Real-Time Information Networks) and Standards of Conduct, 

Order No. 889, 61 Fed. Reg. 21,737 (May 10, 1996), FERC 

Stats. & Regs. , 31,035 (1996), reh'g pending. 
I 

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Conclusion 

The current fees provide appropriate compensation to the 

Government similar to that provided at the time ECPA was enacted. 

Recommendation 

We recommend that the Congress make no change in the annual 

charge limitations of Section lO(e) (2) of the FPA.