GAO

United States General Accounting Office

Report to the Chairman, Committee on 

Resources, House of Representatives

February 2001 FEDERAL POWER

The Evolution of 

Preference in 

Marketing Federal 

Power

GAO-01-373

Page 1 GAO-01-373 Federal Power

United States General Accounting Office

Washington, D.C. 20548 Letr

February 8, 2001

The Honorable James V. Hansen

Chairman, Committee on Resources

House of Representatives

Dear Mr. Chairman:

For decades, the power marketing administrations (PMA)1

 of the 

Department of Energy (DOE) have provided electricity, generated largely at 

federal multipurpose water projects, to customers in over 30 states. To 

guide the PMAs’ efforts in marketing electricity, the Congress and the 

courts have directed the PMAs to give certain customers preference. 

Generally, preference is the opportunity to obtain priority access to federal 

power that has traditionally been sold at rates generally below those of 

other sources. Preference provisions come into play only when a potential 

customer that does not have preference (such as an industrial user or a 

commercial power company) and a preference customer (such as a 

municipally owned utility or a rural electric cooperative) want to buy 

federal power and not enough is available for both. As we enter the 21st 

century, the electricity industry is restructuring from one dominated by 

regulated monopolistic electric utilities to one that increasingly allows 

customers to choose their source of electricity. The Congress continues to 

consider legislation dealing with this industry’s restructuring, including the 

role of preference in the PMAs’ sale of electricity. 

To help in congressional deliberations on the future role of the PMAs and 

their preference customers, the Subcommittee on Water and Power asked 

us to (1) identify how federal legislation and major relevant court cases 

have, over time, directed the PMAs to give preference to particular 

customers in purchasing electricity and (2) discuss the status of preference 

in the PMAs’ electricity sales in light of the restructuring of the electricity 

industry.

To do this, we reviewed power-marketing and land reclamation statutes 

that contain provisions providing such preferences, which are referred to 

as preference clauses or provisions. We also reviewed numerous legislative 

1

The PMAs are the Bonneville Power Administration (Bonneville), which serves the Pacific 

Northwest; Southeastern Power Administration; Southwestern Power Administration; and 

Western Area Power Administration (Western).
Page 2 GAO-01-373 Federal Power

proposals, as well as numerous judicial and administrative cases, that have 

interpreted and applied the portions of various statutes that confer 

preference. A list of the statutes, court cases, and administrative rulings we 

reviewed appears in appendix I. A table showing the extent to which the 

PMAs are selectively affected by various preference-related statutes is 

contained in appendix II. 

Results in Brief The federal government began distributing its own electricity and 

regulating the industry in the early 1900s. The federal power system as 

initially established reflected the policies of the times, the status of the 

fledgling electricity industry, and the multiple purposes of federal water 

projects. For nearly a century, the Congress has enacted numerous statutes 

that designate types of customers (such as public bodies and cooperatives) 

and/or geographic areas for preference and priority in purchasing 

electricity from federal agencies. In general, the purpose of providing 

preference has been to (1) direct the benefits of public resources—

relatively inexpensive hydropower—to portions of the public through 

nonprofit entities, (2) spread the benefits of federally generated 

hydropower widely and encourage the development of rural areas, (3) 

prevent private interests from exerting control over the full development of 

electric power on public lands, and (4) provide a yardstick against which 

the rates of investor-owned utilities can be measured. The PMAs’ specific 

applications of various preference provisions have been challenged on a 

number of occasions in the courts. In some instances, the courts have 

directed a PMA to provide power to preference customers, and in other 

instances, they have supported the denial of power to such customers. 

The characteristics of the electricity industry have changed and continue to 

change, both regionally and nationally. Over the last 20 years, competition 

has been replacing regulation in major sectors of the U.S. economy, and 

new legislation and technological changes have created a climate for 

change in traditional electricity markets. In this context, the Congress has 

seen a number of proposals to restructure the electricity industry, including 

some that would encourage the states to allow retail customers a choice in 

selecting their electricity supplier. As these proposals are discussed, the 

Congress has continued to consider the role of preference in the PMAs’ sale 

of electricity. 
Page 3 GAO-01-373 Federal Power

Preference Clauses and 

Beneficiaries Have 

Evolved Over Time

Preference clauses have existed throughout the history of federal power 

legislation and have been directed to a variety of customers and regions of 

the nation. The Congress has mandated preference in the sale of electricity 

by federal agencies in a number of power-marketing and land reclamation 

statutes. The idea of establishing public priority or preference in the use of 

public water resources dates back to the 1800s, when the Congress decided 

to keep navigable inland waterways free from state taxes, duties, and the 

construction of private dams. The Reclamation Act of 1906, which is also 

referred to as the Town Sites and Power Development Act of 1906, is 

generally considered the federal government’s entry into the electric power 

field. The act grants preference in the disposition of surplus2

 hydroelectric 

power from federal irrigation projects for “municipal purposes,” such as 

street lighting.

As the availability and sources of electricity have changed over time, the 

types of preference clauses the Congress has included in legislation have 

evolved. For example, with the Federal Power Act of 1920, preference 

began to evolve from serving “municipal purposes” to serving particular 

classes of users,3

 such as public bodies4 and cooperatives.5 The 1920 act 

required the federal government, when faced with breaking a tie between 

competing equal applications, to give preference to states and 

municipalities in awarding licenses for hydroelectric plants owned and 

operated by nonfederal entities. The act defined a municipality as a city, 

county, irrigation district, drainage district, or other political subdivision or 

agency of a state competent under law to develop, transmit, utilize, or 

distribute power. One primary benefit that the Congress sought in giving 

priority to public utilities and cooperatives, which distribute power directly 

2

Surplus power is power in excess of a project’s operational requirements (e.g., pumping 

water to fields being irrigated). The generation of electricity was seen as a means of making 

the hydroelectric projects self-supporting and financially solvent and as a useful 

complement to the projects’ other purposes, which may include flood control, irrigation, 

navigation, or recreation.

3

The Act of September 18, 1922, continued to give preference to municipal purposes for 

surplus power from the Salt River Project in Arizona.

4

“Public bodies” are defined differently in various statutes and include entities such as 

municipally owned electric utilities, irrigation districts, public utility districts, and state 

agencies. Bonneville and Western also consider Native American tribes to be public bodies. 

5

A cooperative is a nonprofit enterprise or organization owned by and operated for the 

benefit of those using its services.
Page 4 GAO-01-373 Federal Power

to customers without a profit incentive, was to obtain lower electricity 

rates for consumers. At that time, competitive rate setting was not used to 

provide lower electricity rates for service from regulated monopolies with 

dedicated service territories. The Congress has also provided preference to 

specified regions of the nation.

The notion of providing public bodies and cooperatives with preference for 

federal hydropower rests on the general philosophy that public resources 

belong to the nation and their benefits should be distributed directly to the 

public whenever possible.6

 Under the various preference clauses, 

preference customers are given priority over nonpreference customers in 

the purchase of power. In many cases, the preference provisions of federal 

statutes give the electric cooperatives, many of which are rural, and public 

bodies priority in seeking to purchase federally produced and federally 

marketed power. However, the courts have held that preference customers 

do not have to be treated equally and that all potential preference 

customers do not have to receive an allotment of federal power. Preference 

provisions come into play only when a potential customer that does not 

have preference (such as an industrial user or a commercial power 

company) and a preference customer (such as a municipally owned utility 

or a rural electric cooperative) want to buy federal power and not enough 

is available for both.

The Congress initially granted preference in the sale of federal electricity to 

public bodies and cooperatives for several reasons. First, it was a way to 

ensure that the benefits of this power were passed on to the public at the 

lowest possible cost, using cost-based rates, because the preference 

customers generally were entities that would not incorporate a profit in 

their rates. Second, it was also meant to extend the benefits of electricity to 

remote areas of the nation using publicly and cooperatively owned power 

systems. Additionally, the Congress gave preference to public bodies and 

cooperatives to prevent the monopolization of federal power by private 

interests. The rates charged by such nonprofit entities could then serve as a 

yardstick for comparison with the rates charged by public and private 

utilities.7

 For example, the Boulder Canyon Project Act of 1928 encouraged 

public nonprofit distributors to begin marketing power by allowing them a 

6

According to Bonneville’s statutes, its marketing area is the area into which Bonneville is to 

sell power for loads before offering power for sale outside that area.

7

See GAO’s comments on the Pacific Northwest Electric Power and Planning Conservation 

Act (EMD-79-4, Oct. 26, 1978). 
Page 5 GAO-01-373 Federal Power

reasonable amount of time to secure financing in order to construct 

generation and transmission facilities. According to the House Committee 

on Irrigation and Reclamation, one of the committees that drafted the 1928 

act, the allocation of power rights between the preference and 

nonpreference customers was expected to create competition among 

various entities, ensuring reasonable rates and good service. These entities 

included states, political subdivisions, municipalities, domestic watersupply districts, and private companies. The committee viewed the 

preference clause as a bulwark against the monopolization of power by 

private companies. Another, more recent embodiment of the premise that 

public resources should be provided to the public without an effort to 

profit from their sale is the Hoover Power Plant Act of 1984. This act gives 

preference primarily to municipalities and others for power generated at 

the Hoover Dam. It also authorizes the renewal of a preference power 

contract with an investor-owned utility, originally entered under the 

Boulder Canyon Project Act of 1928.

At about the same time as the Congress was enacting the Rural 

Electrification Act of 1936 to encourage cooperatives and others to extend 

their electric systems into nearby rural areas, it enacted other statutes that 

affect how federally generated electricity is sold, especially to 

cooperatives. The Bonneville Project Act of 1937, along with the earlier 

(1933) Tennessee Valley Authority (TVA) Act, extended preference to 

include nonprofit cooperative organizations.8

 The acts also authorized the 

construction of federal transmission lines to carry the power, thus 

minimizing regional reliance on private power companies. The two laws 

established a statutory framework of energy allocation policies in an era of 

extensive federal hydroelectric development. The 1937 Bonneville Project 

Act authorized the construction of federal power lines in order to transmit 

the federal power as widely as practicable. The act states that preference 

was provided to public bodies and cooperatives to ensure that the 

hydropower projects were operated for the benefit of the general public, 

particularly domestic (residential) and rural customers. The preference 

clauses in the Bonneville and TVA9

 acts were both viewed as yardsticks for 

evaluating the rates charged by private utilities.

8

The Bonneville Project Act defines a cooperative as a nonprofit organization of citizens 

supplying any kind of goods, commodities, or services, as nearly as possible at cost.

9

Although not a PMA, TVA is an independent multipurpose federal corporation that, among 

other activities, generates and markets electricity to customers in nearly all of Tennessee 

and parts of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and Virginia.
Page 6 GAO-01-373 Federal Power

Preference for public entities and cooperatives is also found in the 

Reclamation Project Act of 1939 and the Flood Control Act of 1944. The 

Reclamation Project Act of 1939, which provides guidance for projects 

operated by the Bureau of Reclamation, gives preference to municipalities, 

other public corporations or agencies, and cooperatives and other 

nonprofit organizations. The Bureau is an agency within the Department of 

the Interior whose projects generate much of the electricity sold by 

Bonneville and Western. The 1939 act limited preference for cooperatives 

to those financed at least in part by loans made under the Rural 

Electrification Act of 1936, as amended. The Flood Control Act of 1944, 

which gives guidance for projects operated by the U.S. Army Corps of 

Engineers, gives preference to public bodies and cooperatives. The Corps’ 

projects generate electricity sold by all four PMAs. The act requires that 

electricity be sold to encourage the most widespread use of power at the 

lowest rates to consumers consistent with sound business practices. The 

federal government was authorized to construct or acquire transmission 

lines and related facilities to supply electricity to federal facilities, public 

bodies, cooperatives, and privately owned companies. The legislative 

history indicates that priority was given to public bodies and cooperatives 

to expand rural electrification and to avoid monopolistic domination by 

private utilities.

Subsequent statutes, while building on preference provisions provided by 

other federal power marketing laws, granted regional, geographic 

preference. The Pacific Northwest Power Preference Act, enacted in 1964, 

authorizes Bonneville to sell outside its marketing area, the Pacific 

Northwest region, surplus federal hydropower if there is no current market 

in the region for the power at the rate established for its disposition in the 

Pacific Northwest. The 1980 Northwest Power Act requires Bonneville to 

provide power to meet all the contracted-for needs of its customers in the 

Northwest, extending the regional preference provisions of the 1964 act to 

include not only hydropower but also power from Bonneville’s and 

customers’ other resources—including coal-fired and nuclear plants. As a 

result of this regional preference, Bonneville’s customers in the Pacific 

Northwest—including private utility and direct service customers as well 

as public utilities—have priority over preference customers in the Pacific 

Southwest. The act also requires Bonneville to generally charge lower rates 

to preference customers than to nonpreference customers. Such rates are 

based upon the cost of the federal system resources used to supply 

electricity to those customers.
Page 7 GAO-01-373 Federal Power

In September 2000, the 1980 Northwest Power Act was amended to allow 

Bonneville to sell preference power to existing “joint operating entities” 

(public bodies or cooperatives formed by two or more public bodies or 

cooperatives that were Bonneville preference customers by Jan. 1, 1999). 

As indicated in the legislative history of the amendment, the new entities 

could pool their members’ or participating customers’ power purchases 

from Bonneville, which could result in operating efficiencies and 

reductions in overhead costs for them, without reducing Bonneville’s 

receipts from the sale of power.10

The Congress also granted regional preference in the sale of electricity 

from federal projects to other parts of the country, such as the Northeast, 

that are not served by the PMAs or TVA. The 1957 Niagara Redevelopment 

Act establishes (1) a division of all power from the project into preference 

and nonpreference power, (2) a preference for public bodies and 

cooperatives, with an emphasis on serving domestic and rural consumers, 

and (3) a geographic preference for preference customers in New York and 

in neighboring states.

Other statutes give geographic preference to entire states or portions of 

states for purchases of electricity generated in those areas. For example, 

the 1928 Boulder Canyon Project Act gives preference to customers in 

Arizona, California, and Nevada for purchases of excess power from the 

Boulder Canyon Project. This preference language distinguishes among 

preference customers, giving the states (e.g., California) a priority over 

municipalities (e. g., Los Angeles).

Application of Preference 

Provisions Reviewed by the 

Courts

Although we found no instances in which the statutory preference 

provisions themselves were challenged, specific applications of these 

provisions by the PMAs have been challenged in the courts and in 

administrative proceedings. The cases have included disputes among 

preference customers and between preference and nonpreference 

customers of the various PMAs. In some instances, the courts have directed 

a PMA to provide power to preference customers, and in other instances, 

they have supported a PMA’s denial of power to such customers. General 

principles that may be drawn from the various court interpretations and 

rulings are that (1) PMAs must act in favor of customers specifically 

provided preference and priority in purchasing surplus power when 

10Pub. L. 106-273, 114 Stat. 802 (2000). 
Page 8 GAO-01-373 Federal Power

nonpreference customers are competing for this power, (2) PMAs have 

discretion in deciding how and to which preference customers they will 

distribute electricity when the customers are in competition with each 

other for limited power, and (3) preference customers do not have to be 

treated equally, nor do individual preference customers have an entitlement 

to all or any of the power. The Federal Energy Regulatory Commission has 

affirmed the application of preference clauses in its rulings, as has the 

Attorney General in an opinion interpreting the preference provision of the 

1944 Flood Control Act. A list of the court cases and administrative rulings 

we reviewed, with a brief description of each, is included in appendix I.

Restructuring of 

Electricity Industry 

Provides Another 

Opportunity for the 

Congress to Reassess 

Preference in PMA 

Marketing

The characteristics of the electricity industry on a national and regional 

basis have changed over time and continue to change. For example, the 

issues and problems of the 1930s, when rural America was largely without 

electricity and private utilities were not extensively regulated, were not 

those that confronted the Congress in later decades or that confront the 

Congress now. The issue of preference in power sales by the PMAs was of 

continuing interest during the 106th Congress. Not only was the Northwest 

Power Act amended in September 2000, but also a bill was introduced in 

the Senate in April 2000 to amend the Niagara Redevelopment Act. This bill 

would have eliminated the geographic preference allocating up to 20 

percent of the power from the Niagara Power Project to states neighboring 

New York. The preference status of sales to selected cooperatives and 

public bodies in those states, however, would not have been affected.11 In 

September 2000, a bill was introduced in the House of Representatives to 

eliminate all future sales of preference power; its provisions would have 

taken effect only as each existing power sale contract expired. 12 In October 

2000, another bill was introduced in the House of Representatives to 

authorize investor-owned electric utilities in California to purchase power 

directly from Bonneville at specified rates.13 The 106th Congress adjourned, 

however, without taking further action on these bills. As of January 30, 

2001, no bills directly relating to preference power had been introduced in 

the 107th Congress, according to DOE officials.

11S. 2361, 106th Cong., 2nd Sess. (2000).

12H.R. 5113, 106th Cong., 2nd Sess. (2000).

13H.R. 5458, 106th Cong., 2nd Sess. (2000).
Page 9 GAO-01-373 Federal Power

Over the last 20 years, competition has been replacing regulation in major 

sectors of the U.S. economy. New legislation at the federal and state levels 

and technological changes have created a climate for change in traditional 

electricity markets. The extent to which the federal government should 

participate in fostering retail competition has yet to be decided.

Over the last several years, the Congress has deliberated on the 

restructuring of the electricity industry. As the Congress continues these 

deliberations, it is considering redefining existing federal roles, as well as 

how to more efficiently and equitably produce and distribute electricity to 

all customers. The way that the federal government generates, transmits, 

and markets federal preference power has not changed in the same manner 

as the industry surrounding it. In a March 1998 report,14 we noted that the 

Congress has options that, if adopted, would affect preference customers. 

Considering changes to the preference provisions would be consistent with 

the spirit of several of our testimonies15 before various Senate and House 

committees. Examining the legacy of existing federal programs in light of 

changing conditions can yield important benefits. At these hearings, we 

discussed the need to reexamine many federal programs in light of 

changing conditions and to redefine the beneficiaries of these programs, if 

necessary. In our testimony, we noted that as the restructuring of the 

electricity industry proceeds, the Congress has an opportunity to consider 

how the existing federal system of generating, transmitting, and marketing 

electricity is managed, including the role of preference in federal power 

sales.

Agency Comments We provided DOE with copies of a draft of this report. We met with officials 

of DOE’s Bonneville Power Administration and DOE’s Power Marketing 

Liaison Office, which is responsible for the other three PMAs. The PMAs 

generally agreed with the information in our draft report. They also 

observed that the previous administration did not support the repeal of the 

14Federal Power: Options for Selected Power Marketing Administrations’ Role in a 

Changing Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998).

15Budget Issues: Effective Oversight and Budget Discipline Are Essential—Even in a Time 

of Surplus (GAO/T-AIMD-00-73, Feb. 1, 2000); Congressional Oversight: Opportunities to 

Address Risks, Reduce Costs, and Improve Performance (GAO/T-AIMD-00-96, Feb. 17, 

2000); Managing in the New Millenium: Shaping a More Efficient and Effective Government 

for the 21st Century (GAO/T-OGC-00-9, Mar. 29, 2000); and Congressional Oversight: 

Challenges for the 21st Century (GAO/T-OCG-00-11, July 20, 2000).
Page 10 GAO-01-373 Federal Power

“preference clause” as part of the restructuring of the electricity industry. 

That administration did not incorporate such provisions in its bill to 

restructure the industry because it believed that federal restructuring 

legislation should be designed to ensure that consumers in all states benefit 

and that those in certain parts of the nation not be adversely affected. They 

also stated that, consistent with applicable statutes and current contracts, 

they have continually evaluated their roles and policies in light of changes 

occurring in the electric utility industry. They agreed with us that the 

Congress has the latitude to reconsider all laws containing both customer 

and geographic preference in federal electricity sales.

To examine the evolution of preference in the PMAs’ marketing, we 

reviewed statutes, federal court cases, rulings by the Federal Energy 

Regulatory Commission, and an Attorney General’s opinion on federally 

mandated preference in electricity licensing or sales by federal facilities. As 

requested, we performed detailed reviews of legislative histories for nine of 

these statutes. We also reviewed past GAO reports, testimonies, and other 

products that relate to preference in the PMAs’ electricity sales. We 

interviewed the staffs of the PMA liaison offices in Washington, D.C., as 

well as the General Counsels of each of the four PMAs. We reviewed 

various other preference-related documents, including relevant law review 

articles, issue briefs from trade associations, and the PMAs’ marketing 

plans.

We performed our review from October 1999 through January 2001 in 

accordance with generally accepted government auditing standards.

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

earlier, we plan no further distribution of this report until 5 days after the 

date of this letter. At that time, we will send copies to appropriate House 

and Senate Committees and Subcommittees; interested Members of the 

Congress; Steve Wright, Acting Administrator and Chief Executive Officer, 

Bonneville Power Administration; Charles A. Borchardt, Administrator, 

Southeastern Power Administration; Michael A. Deihl, Administrator, 

Southwestern Power Administration; and Michael S. Hacskaylo, 

Administrator, Western Area Power Administration. We will also make 

copies available to others on request.

If you or your staff have any questions or need additional information, 

please contact me or Peg Reese at (202) 512-3841. Key contributors to this 
Page 11 GAO-01-373 Federal Power

report were Charles Hessler, Martha Vawter, Doreen Feldman, and Susan 

Irwin.

Sincerely yours,

Jim Wells

Director, Natural Resources

and Environment
Page 12 GAO-01-373 Federal Power

Appendix I

Compendium of Selected Statutes, Court Apendxies

Cases, and Administrative Rulings Relating to 

Preference ApendxiI

Statute Relevant provisions

Act of March 3, 1877 (Desert Land Act)

[19 Stat. 377, 43 U.S.C. 321] 

Grants preference to certain classes of public users to surplus reclamation water 

from public lands.

Act of April 16, 1906 (Reclamation Act of 1906 or 

Town Sites and Power Development Act of 1906)

[34 Stat. 116, 117, 43 U.S.C. 522]

Establishes the first precedent for a municipality's preference to surplus hydropower 

generated at federal irrigation projects. Provides for the disposition of hydroelectric 

power from irrigation projects and requires the Secretary of the Interior to give a 

preference to power sales for municipal purposes.

Act of December 19, 1913 (Raker Act)

[38 Stat. 242, 245]

Provides the city and county of San Francisco with a right-of-way over public lands 

for the construction of aqueducts, tunnels, and canals for a waterway, power plants, 

and power lines for the use of San Francisco and other municipalities and water 

districts. Prohibits grantees of the right to develop and sell water and electric power 

from selling or leasing those rights to any corporation or individual other than 

another municipality, municipal water district, or irrigation district.

Federal Water Power Act (1920) (Federal Power 

Act) 

[41 Stat. 1063, 1067, 16 U.S.C. 791a, 800]

Requires FERC (formerly the Federal Power Commission) to give preference to 

states and municipalities in issuing licenses for hydropower projects operated by 

nonfederal entities, if the competing applications are equally well adapted for water 

development. (Preference criteria in this act may be used in disposing of power to 

preference customers under the Boulder Canyon Act of 1928.)

Act of September 18, 1922

[42 Stat. 847, 43 U.S.C. 598] 

Gives preference to municipal purposes for surplus power from the Salt River Project 

in Arizona. 

Act of December 21, 1928 (Boulder Canyon 

Project Act) 

[45 Stat. 1057, 1060, 43 U.S.C. 617, 617d]

Requires the Secretary of the Interior to give preference within the policy of the 

Federal Water Power Act, i.e., to states and municipalities, when selling power from 

the project. Gives the states of Arizona, California, and Nevada initial priority over 

other preference customers.

Tennessee Valley Authority Act of 1933, as 

amended

[48 Stat. 58, 64; 49 Stat. 1075, 1076, 16 U.S.C. 

831, 831i]

Requires TVA to give preference in power sales to states, counties, municipalities, 

and cooperative organizations of citizens or farmers that are organized or doing 

business not for profit but primarily for the purpose of supplying electricity to their 

own citizens or members. Authorizes TVA to construct its own transmission lines to 

serve farms and small villages not otherwise supplied with reasonably priced 

electricity and to acquire existing electric facilities used to provide power directly to 

these customers.

Rural Electrification Act of 1936

[49 Stat. 1363,1365, 7 U.S.C. 901, 904]

Authorizes loans for rural electrification and grants preferences to states; 

municipalities; utility districts; and cooperative, nonprofit, or limited-dividend 

associations.

Bonneville Project Act of 1937

[50 Stat. 731, 733, 16 U.S.C. 832, 832b]

Requires BPA to give preference and priority to public bodies (nonfederal 

government agencies) and cooperatives. Allows the people within economic 

transmission distance of the Bonneville project (Washington, Oregon, Idaho, and 

Montana) a reasonable amount of time to create public or cooperative agencies so 

as to qualify for the public power preference and secure financing.

Act of May 18, 1938 (Fort Peck Project Act) 

[52 Stat. 403, 405, 16 U.S.C. 833, 833c]

Requires the Bureau of Reclamation to give preference and priority to public bodies 

and cooperatives.

Reclamation Project Act of 1939

[53 Stat. 1187, 1194, 43 U.S.C. 485, 485h (c) 

Requires the government, when selling surplus power from its reclamation projects, 

to give preference to municipalities and other government agencies, and to 

cooperatives and other nonprofit organizations financed in whole or in part by loans 

from the Rural Electrification Administration.
Appendix I

Compendium of Selected Statutes, Court 

Cases, and Administrative Rulings Relating 

to Preference

Page 13 GAO-01-373 Federal Power

Statute Relevant provisions

Act of October 14, 1940 (Water Conservation and 

Utilization Act)

[54 Stat. 1119, 1120 and 1124, 16 U.S.C. 590y, 

590z-7]

Authorizes water projects in the Great Plains and arid and semiarid areas of the 

nation. Gives preference in sales or leases of surplus power to municipalities and 

other public corporations or agencies; and to cooperatives and other nonprofit 

organizations financed in whole or in part by loans under the Rural Electrification Act 

of 1936.

Act of June 5, 1944 (Hungry Horse Dam Act) 

[58 Stat. 270, 43 U.S.C. 593a]

Authorizes the construction of the Hungry Horse Dam in western Montana for uses 

primarily in the state of Montana. This “Montana Reservation” has been interpreted 

as a geographic preference requiring a calculated quantity of power (221 average 

megawatts) from Hungry Horse Dam to be offered first for sale in Montana to 

preference and nonpreference customers before the calculated amount of power is 

offered to other BPA customers, including preference customers in other states.

Act of December 22, 1944 (Flood Control Act of 

1944)

[58 Stat. 887, 890, 16 U.S.C. 825s]

Gives preference to public bodies and cooperatives for power generated at Corps of 

Engineers projects and authorizes transmission to federal facilities and those owned 

by public entities, cooperatives, and private companies.

Act of March 2, 1945 (Rivers and Harbors Act of 

1945)

[59 Stat. 1021, 1022]

Provides for the distribution of power from the Snake River Dams and the Umatilla 

Dam in accordance with the preference provisions of the Bonneville Project Act.

Act of July 31, 1950 (Eklutna Act) 

[64 Stat. 382, 383 (repealed, Pub. L. 104-58)]

Gave preference to public bodies and cooperatives and to federal agencies in sales 

of power from the Eklutna project near Anchorage, Alaska.

Act of September 30, 1950

[64 Stat.1083]

Provides for the sale or lease of power from the Palisades Dam in southeastern 

Idaho to bodies entitled to preference under federal reclamation laws.

Act of June 18, 1954

[68 Stat. 255, 256] 

Requires the Secretary of the Interior to give preference in the sale of power 

generated at the Falcon Dam on the Texas/Mexico border to public bodies and 

cooperatives.

Act of July 27, 1954

[68 Stat. 573]

Authorizes BPA to purchase power generated at the Priest Rapids Dam in 

Washington. Requires BPA to sell the power according to the preference provisions 

applicable to other sales of BPA power.

Atomic Energy Act of 1954

[68 Stat. 919, 929, 42 U.S.C. 2064]

Provides for preference to public bodies and cooperatives in the sale of power from 

the Department of Energy's nuclear production facilities; also provides preference to 

private utilities serving high-cost areas not serviced by public bodies and 

cooperatives.

Act of August 12, 1955 (Trinity River Division Act)

[69 Stat. 719, 720]

Reserves 25 percent of the power from the Trinity power plants for preference 

customers in Trinity County, California.

Act of April 11, 1956 (Colorado River Storage 

Project Act)

[70 Stat. 105, 107]

Provides for the sale of power from the Colorado River Storage Project and 

participating projects to bodies entitled to preference under reclamation laws.

Niagara Redevelopment Act (1957)

[Pub. L. 85-159, 71 Stat. 401, 16 U.S.C. 836] 

Sets out preference and allocation provisions required to be included in FERC's 

license to the state of New York for the sale of power generated from the Niagara 

River. Contains several allocation mechanisms: (1) a division of all project power into 

preference and nonpreference power, (2) a preference clause for public bodies and 

cooperatives, particularly for the benefit of domestic and rural customers, (3) a 

provision that preference power sold initially to private utilities is subject to 

withdrawal to meet the needs of preference customers, (4) a geographic preference 

(80 percent of the preference power is reserved for New York preference customers 

and up to 20 percent for neighboring states), and (5) an allocation of a specific 

amount of power to an individual nonpreference customer for resale to specific 

industries. 

(Continued From Previous Page)
Appendix I

Compendium of Selected Statutes, Court 

Cases, and Administrative Rulings Relating 

to Preference

Page 14 GAO-01-373 Federal Power

Statute Relevant provisions

Flood Control Act of 1958

[Pub. L. 85-500, tit. II, 72 Stat. 305, 311]

Provides that a reasonable amount of power, up to 50 percent, from dams 

subsequently constructed by the Corps of Engineers on the Missouri River, shall be 

reserved for preference customers within the state in which each dam is located.

Atomic Energy Commission Authorization Act 

(1962)

[Pub. L. 87-701, 76 Stat. 599, 604]

Authorizes the sale of by-product energy from the Hanford New Production Reactor 

to purchasers agreeing to offer 50 percent of the electricity generated to private 

organizations and 50 percent to public organizations. (DOE has terminated the 

operation of this reactor.)

Flood Control Act of 1962 

[Pub. L. 87-874, tit. II, 76 Stat. 1180, 1191-1192 

and 1193-1194 (section 204, relating to the 

Snettisham project, repealed, Pub. L. 104-58)]

Requires “first preference” for customers in Tuolomne and Calaveras Counties in 

California for 25 percent of the additional power generated by the New Melones 

project. Required preference for federal agencies, public bodies, and cooperatives in 

power sales from the Snettisham project near Juneau, Alaska. 

Act of December 23, 1963

[Pub. L. 88-237, 77 Stat. 475] 

Requires the Secretary of the Interior to give preference in the sale of power 

generated at Amistad Dam on the Texas/Mexico border to federal facilities, public 

bodies, cooperatives, and privately owned companies.

Act of August 31, 1964 (Pacific Northwest Power 

Preference Act)

[Pub. L. 88-552, 78 Stat. 756, 758, 16 U.S.C. 837, 

837a, 837b, 837d, and 837h]

Authorizes the sale outside the Pacific Northwest of federal hydroelectric power for 

which there is no current market in the region or that cannot be conserved for use in 

the region. Provides that sales outside the Pacific Northwest are subject to 

termination of power deliveries if a BPA customer in the Pacific Northwest needs the 

power. Grants reciprocal protection with respect to energy generated at, and the 

peaking capacity of, federal hydroelectric plants in the Pacific Southwest, or any 

other marketing area, for use in the Pacific Northwest. Explicitly provides that the 

Hungry Horse Dam Act's geographical preference for power users in Montana is not 

modified by this act.

Colorado River Basin Project Act (1968)

[Pub. L. 90-537, 82 Stat. 885, 889 and 901, 43 

U.S.C. 1501, 1523 and 1554]

Authorizes the purchase of nonfederal thermal power for the Central Arizona 

irrigation project. Authorizes, subject to the preference provisions of the Reclamation 

Project Act, the disposal of power purchased, but not yet needed, for the project.

Pacific Northwest Electric Power Planning and 

Conservation Act (Northwest Power Act) (1980)

[Pub. L. 96-501, 94 Stat. 2697, 2712 , 2723, and 

2734, 16 U.S.C. 839c, 839e, and 839g] 

Explicitly retains the preference provisions of the Bonneville Project Act of 1937 and 

other federal power marketing laws. Requires BPA to provide power to meet all the 

contracted-for needs of its customers in the Northwest. As a result of this regional 

preference, BPA's public as well as private utility and direct service industry 

customers in the Pacific Northwest have priority over preference customers in the 

Pacific Southwest. Requires BPA to charge lower rates to preference customers than 

to nonpreference customers. Also requires BPA to offer initial 20-year power sale 

contracts to specific nonpreference as well as preference customers throughout the 

Pacific Northwest: (1) publicly owned utilities, (2) federal agencies, (3) privately 

owned utilities, and (4) directly served industrial customers. 

Hoover Power Plant Act of 1984 

[Pub. L. 98-381, 98 Stat. 1333, 1335, 43 U.S.C. 

619a]

Gives preference power to municipalities, an investor-owned utility, and others for 

power generated at the Hoover Power Plant. 

Electric Consumers Protection Act of 1986

[Pub. L. 99-495, 100 Stat. 1243]

Amends the Federal Power Act to provide that preference does not apply to 

relicensing. (Retains preference for original licenses.)

National Defense Authorization Act for Fiscal Year 

1994

[Pub. L. 103-160, 107 Stat. 1537, 1935]

For a 10-year period, reserves power that becomes available because of military 

base closures for sale to preference entities in California that are served by the 

Central Valley Project and that agree to use such power for economic development 

on bases closed or selected for closure under the act.

(Continued From Previous Page)
Appendix I

Compendium of Selected Statutes, Court 

Cases, and Administrative Rulings Relating 

to Preference

Page 15 GAO-01-373 Federal Power

Statute Relevant provisions

Energy and Water Development Appropriations 

Act, 1996

[Pub. L. 104-46, 109 Stat. 402, 420]

Authorizes BPA to sell excess power outside the Pacific Northwest on a firm basis for 

a contract term not to exceed 7 years, if the power is first offered to public bodies, 

cooperatives, investor-owned utilities, and direct service industrial customers 

identified in the Northwest Power Act. 

Public Law 106-273, 114 Stat. 802, 2000 Amends the Northwest Power Act of 1980 to allow BPA to sell preference power to 

joint operating entities' members who were customers of BPA on or before

January 1, 1999.

Court case Relevant decision

Arizona Power Pooling Association v. Morton, 527 

F.2d 721, (9th Cir. 1975), cert. denied, 425 U.S. 

911 (1976)

The court applied the Reclamation Project Act of 1939's preference clause to 

governmental sales of thermally generated electric power from the Central Arizona 

Project. The court held that under the act's preference clause, the Secretary of the 

Interior must give preference customers an opportunity to purchase excess power 

before offering it to a private customer. The court also held that preference 

customers do not have entitlement to federal power.

Arizona Power Authority v. Morton, 549 F.2d 1231 

(9th Cir. 1977), cert. denied, 434 U.S. 835 (1977) 

The court held that the implementation of geographic preferences in the allocation of 

federal hydroelectric power under the Colorado River Storage Project Act in a 

manner that discriminated among preference customers was within the discretion of 

the Secretary of the Interior and not reviewable by the court.

City of Santa Clara v. Andrus, 572 F.2d 660 (9th 

Cir.), cert. denied, 439 U.S. 859 (1978) 

The court held that the Secretary of the Interior could not sell federally marketed 

power to a private utility, even on a provisional basis, while denying power to a 

preference customer. Only if the available supply of power exceeds the demands of 

interested preference customers may power be sold to private entities. Preference 

means that preference customers are given priority over nonpreference customers in 

the purchase of power. However, preference customers do not have to be treated 

equally, nor do all potential preference customers have to receive an allotment.

City of Anaheim v. Kleppe, 590 F.2d 285 (9th Cir. 

1978); City of Anaheim v. Duncan, 658 F.2d 1326 

(9th Cir. 1981) 

The court held that the preference clause of the Reclamation Project Act of 1939 

was not violated by the sale of federal power to private utilities on an interim basis 

when preference customers lacked transmission capacity to accept such power 

within a reasonable time and did not offer to buy power when it was originally sold. 

As a result, there was no competing offer between a preference and a 

nonpreference customer. 

Aluminum Company of America v. Central Lincoln 

Peoples' Utility District, 467 U.S. 380 (1984), rev'g 

Central Lincoln Peoples' Utility District v. Johnson, 

686 F. 2d 708 (9th Cir. 1982) 

The Supreme Court held that terms of contracts, which the Pacific Northwest 

Electric Power Planning and Conservation Act required BPA to offer to certain 

nonpreference customers, did not conflict with the applicable preference provisions. 

The preference provisions determine the priority of different customers when there 

are competing applications for power that can be allocated administratively. Here, 

however, the contracts in question were not part of an administrative allocation of 

preference power, and the power covered by the initial contracts was allocated 

directly by the statute. Since BPA was not authorized to administratively allocate this 

power, there could be no competing applications for the power, and the preference 

provisions did not apply to the transactions.

ElectriCities of North Carolina, Inc. v. 

Southeastern Power Administration, 774 F.2d 

1262 (4th Cir. 1985)

A challenge to SEPA's 1981 allocation policy for the Georgia-Alabama power 

system, changing the location and list of preference customers, was denied. The 

court held that the allocation of preference power is discretionary and that the 

preference provision of the Flood Control Act is too vague to provide a standard for 

the court to apply to SEPA's actions.

(Continued From Previous Page)
Appendix I

Compendium of Selected Statutes, Court 

Cases, and Administrative Rulings Relating 

to Preference

Page 16 GAO-01-373 Federal Power

Court case Relevant decision

Greenwood Utilities Commission v. Hodel, 764 F. 

2d 1459 (11th Cir. 1985), aff'g Greenwood Utilities 

Commission v. Schlesinger, 515 F. Supp. 653 

(M.D. Ga. 1981) 

A challenge to sales of capacity without energy to investor-owned utilities was 

denied. The court held that the Flood Control Act's preference provision did not 

establish an entitlement to power or standards for eligibility for power. The statute is 

too vague to permit judicial review of sales and allocations decisions.

Arvin-Edison Water Storage District v. Hodel, 610 

F. Supp. 1206 (D. D.C. 1985) 

Irrigation districts' claim to an allocation of power ahead of other preference 

customers (super preference) for WAPA power was denied. The preference clause 

of the Reclamation Project Act does not provide a superpreference for irrigators; it 

only provides that public entities be given preference over private entities. The 

clause does not require that all preference customers be treated equally or that they 

even receive an allocation. The allocation decision is within an agency's discretion 

and cannot be reviewed by the court.

Brazos Electric Power Cooperative, Inc. v. 

Southwestern Power Administration, 828 F.2d 

1083 (5th Cir. 1987)

The court upheld the dismissal of a challenge by an electric cooperative to an 

exchange arrangement between a SWPA customer and an investor-owned utility. 

The investor-owned utility's arrangement with preference customers does not violate 

the preference provision of the Flood Control Act. Even though the investor-owned 

utility receives some economic benefits, this is not a sham sale of preference power.

ElectriCities of North Carolina, Inc. v. 

Southeastern Power Administration, 621 F. Supp. 

358 (W.D.N.C. 1985)

SEPA's decision to create two divisions and sell some power to nonpreference 

customers in its Western Division while excluding preference customers in its 

Eastern Division is not subject to challenge by those excluded, who have no right or 

entitlement to allocations of SEPA power.

Salt Lake City v. Western Area Power 

Administration, 926 F.2d 974 (10th Cir. 1991)

The court held that WAPA reasonably interpreted the preference provisions of the 

Reclamation Project Act of 1939 in determining that preference applied only to 

municipalities that operated their own utility systems, and not to every city or town 

that fit the act's definition of “municipality.”

Administrative ruling Relevant decision

Municipal Electric Utilities Association of the State 

of New York v. Power Authority of the State of New 

York (PASNY), 21 FERC ¶ 61,021 (Oct. 13, 1982); 

PASNY v. FERC, 743 F.2d 93 (2d Cir. 1984)

FERC held that in the Niagara Redevelopment Act, the Congress defined the term 

“public bodies” as those governmental bodies that resell and distribute power to the 

people as consumers. The appellate court affirmed that preference rights under the 

act accrue to public bodies and nonprofit cooperatives that are engaged in the actual 

distribution of power. In determining the ultimate retail distribution of the power sold 

to them, public entities could resell the power to industrial and commercial users, not 

just to domestic and rural customers. The court also described “yardstick 

competition,” a theory that underlies preference. The court stated that the Congress, 

while concerned with meeting the needs of rural and domestic consumers, believed 

that all interests could best be served by giving municipal entities the right to decide 

on the ultimate retail distribution of the preference power sold to them. This belief 

was founded on the so-called “yardstick competition” principle, which assumes that if 

the municipal entities are supplied with cheap hydropower, their lower competitive 

rates will force the private utilities in turn to reduce their rates, with resulting benefits 

to all, including rural and domestic consumers.

Massachusetts Municipal Wholesale Electric 

Company v. PASNY, 30 FERC ¶ 61, 323 ( Mar. 27, 

1985)

FERC reaffirmed parts of an earlier decision interpreting the Niagara 

Redevelopment Act as providing allocations of preference power for states 

neighboring New York and clarified which states were included. FERC held that any 

public body or nonprofit cooperative in a state neighboring New York within 

economic transmission distance of the Niagara Power Project is entitled to an 

allocation of preference power. FERC also held that only publicly owned entities that 

are capable of selling and distributing power directly to retail consumers are public 

bodies entitled to preference under the act. 

(Continued From Previous Page)
Appendix I

Compendium of Selected Statutes, Court 

Cases, and Administrative Rulings Relating 

to Preference

Page 17 GAO-01-373 Federal Power

Legend

BPA = Bonneville Power Administration

FERC = Federal Energy Regulatory Commission

SEPA = Southeastern Power Administration

SWPA = Southwestern Power Administration

TVA = Tennessee Valley Authority

WAPA = Western Area Power Administration

Administrative ruling Relevant decision

Disposition of Surplus Power Generated At Clark 

Hill Reservoir Project, 41 Op. Atty Gen. 236 (1955) 

The Attorney General construed section 5 of the Flood Control Act of 1944, 

providing preference to public bodies and cooperatives, to mean that if there are two 

competing offers to purchase federal power, one by a preference customer and the 

other by a nonpreference customer, and the former does not have at the time the 

physical means to take and distribute the power, the Secretary of the Interior must 

contract with the preference customer on condition that within a reasonable time 

fixed by the Secretary, the customer will obtain the means for taking and distributing 

the power. If within that period the preference customer does not do so, the 

Secretary is authorized to contract with the nonpreference customer, subject to the 

condition that should the preference customer subsequently obtain the means to 

take and distribute the power, the Secretary will be enabled to deal with the 

preference customer. The Secretary's duty to provide preference power is not 

satisfied by the disposition of the power to a nonpreference customer under an 

arrangement whereby the nonpreference customer obligates itself to sell an 

equivalent amount of power to preference customers. 

(Continued From Previous Page)
Page 18 GAO-01-373 Federal Power

Appendix II

PMAs Affected by Selected Statutes Relating 

to Preference in the Sale of Electricity ApendxiI

Legend

BPA = Bonneville Power Administration

SEPA = Southeastern Power Administration

SWPA = Southwestern Power Administration

WAPA = Western Area Power Administration

Affected PMA(s)

Statute BPA SEPA SWPA WAPA

Reclamation Act of 1906 X X

Act of September 18, 1922 X

Boulder Canyon Project Act (1928) X

Bonneville Project Act of 1937 X

Fort Peck Project Act (1938) X

Reclamation Project Act of 1939 X X

Water Conservation and Utilization Act (1940) X X

Hungry Horse Dam Act (1944) X

Flood Control Act of 1944 X X X X

Rivers and Harbors Act of 1945 X

Act of September 30, 1950 X

Act of June 18, 1954 X

Act of July 27, 1954 X

Trinity River Division Act (1955) X

Colorado River Storage Project Act (1956) X

Flood Control Act of 1958 X

Flood Control Act of 1962 X

Act of December 23, 1963 X

Pacific Northwest Power Preference Act (1964) X X

Colorado River Basin Project Act (1968) X

Pacific Northwest Electric Power Planning and Conservation Act (1980) X

Hoover Power Plant Act of 1984 X

National Defense Authorization Act for Fiscal Year 1994 X

Energy and Water Development Appropriations Act, 1996 X

Public Law 106-273, 2000 X

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