Federal Electric Power: Operating and Financial Status of DOE's Power Marketing Administrations
Released: 1995-10-20T00:00:00

Letter

Operating Information

The PMAs—Alaska Power Administration (Alaska), Bonneville Power Administration (Bonneville), Southeastern Power Administration (Southeastern), Southwestern Power Administration (Southwestern), and Western Area Power Administration (Western)—were established from 1937 through 1977 to sell and transmit electricity generated mainly from federal hydropower facilities. With the exception of Alaska, the PMAs do not own or operate any of the power generation facilities. Most of these facilities were constructed and continue to be owned and operated by the Department of the Interior’s Bureau of Reclamation (Bureau) or the U.S. Army Corps of Engineers (Corps). The Bureau and the Corps constructed these facilities as part of a larger effort in developing multipurpose water projects that have other functions in addition to power generation, including flood control, irrigation, navigation, and recreation.

The PMAs, with the exception of Southeastern, have constructed and continue to own and operate a combined total of nearly 33,000 miles of transmission lines to carry out the PMAs’ role in selling and transmitting electric power. Power sold by the five PMAs accounted for about 3 percent of all power generated in the United States in 1993.

The PMAs vary widely in their operating characteristics and scope of activities. Alaska has 88 miles of transmission lines, and sales are limited to two areas in the State of Alaska. Southeastern owns no transmission facilities and relies on the transmission services of other utilities to transmit the power that it sells to customers in all or parts of 11 states. Southwestern is comparable to Southeastern in terms of sales volume but owns and operates about 1,400 miles of transmission lines in all or parts of six states. Western owns and operates over 16,000 miles of transmission lines serving customers in all or parts of 15 states. Bonneville owns and operates over 14,000 miles of transmission lines and sells to customers in all or parts of eight states. In 1994, Bonneville accounted for about 69 percent of total PMA revenues.

Figure 1 presents the service area and fiscal year 1994 operating revenue for each PMA. In addition, table I.2 in appendix I shows some operating statistics including the amount of generating capacity used to generate the power sold by the PMAs, and the number of power plants, miles of transmission lines, and employees for each PMA, as of September 30, 1994.

Each PMA has an administrator who is appointed by the Secretary of Energy. Each administrator is authorized to make decisions regarding the operation of the PMA, although the authority and duties of the administrator are subject to the supervision and direction of the Secretary.

The administrators testify before the Congress on the PMAs’ budgets, which are submitted as part of DOE’s annual federal budget. DOE establishes each PMA’s personnel limits as part of DOE’s total personnel ceiling. The administrator also has authority to propose rate adjustments to meet projected revenue needs. Except for Bonneville, the Deputy Secretary of Energy is responsible for approving rate adjustments for the PMAs on an interim basis. The Federal Energy Regulatory Commission has authority over final approval for all of the PMAs’ rates. In addition, the administrators work with numerous federal, state, and local agencies on issues such as flood control, fish and wildlife protection, and irrigation. For example, Bonneville is required to work with the Pacific Northwest Electric Power and Conservation Planning Council, which the Congress created in 1980 to coordinate power planning and fish and wildlife protection in the Pacific Northwest, among other things.

As required by law, all PMAs give preference in the sale of power to public power customers—customer-owned cooperatives, public utility and irrigation districts, and municipally owned utilities. Public power customers purchased about 63 percent of the power sold by the PMAs in fiscal year 1993. The remainder of the power is purchased by state and federal agencies and nonpreference customers, such as investor-owned utilities and industrial companies. Figure 2 shows the percentage of power sold by all the PMAs to each type of PMA customer during fiscal year 1993 in megawatt (MW) hours (MWh). (Table I.3 of app. I shows the quantity of power sold and associated revenues for all PMAs for each type of customer during fiscal year 1993.)

As shown in figure 3, as a whole, public power customers are not dependent on the PMAs as their sole source of power. For example, as shown in figure 3, in fiscal year 1993, Bonneville’s public power customers obtained about 46 percent of their overall power needs from sources other than Bonneville, while Southeastern’s public power customers obtained about 95 percent of their total power needs from sources other than Southeastern. At the same time, however, some of the PMAs’ public power customers purchase a large percentage of their power from PMAs. For example, during fiscal year 1993, more than 80 percent of Bonneville’s public power customers obtained more than 75 percent of their total power needs from Bonneville. Table I.4 of appendix I shows the quantity of power purchased by public power customers from PMAs and the total quantity of power obtained by the same customers from all sources during fiscal year 1993. Table I.5 of appendix I shows the number of public power customers for each PMA and the percentage of the customers’ overall power needs that were purchased from the PMA.

Financial Information

The Congress appropriates money each year to the PMAs for power-related purposes and to the federal operating agencies for both power and nonpower purposes. The PMAs, other than Bonneville, generally receive appropriations annually to cover operations and maintenance expenses and capital investments in their transmission assets.10, 11, In fiscal year 1994, the PMAs received about $328 million in appropriations. The operating agencies receive appropriations for all aspects of the multipurpose hydro projects, including operations, maintenance, and capital expenses related to power and also to other functions, such as irrigation and navigation. The operating agencies expended about $409 million on power-related operating and capital expenses and allocated these expenses to the PMAs for repayment during fiscal year 1994. The PMAs have no control over the amount of generation investment incurred by the operating agencies, which, by law, becomes repayable through rates charged by the PMAs.

In 1974, the Congress stopped providing Bonneville with annual appropriations and instead provided it with a revolving fund maintained by the Treasury and permanent Treasury borrowing authority, now limited to $3.75 billion. However, Bonneville remains responsible for repaying its debt stemming from appropriations expended by Bonneville prior to 1974 and debt stemming from appropriations expended by the operating agencies on power-related expenses.

Although most of Western’s projects are funded by appropriations, three projects—the Fort Peck Project, which is included in the Pick-Sloan Missouri Basin Program; the Colorado River Storage Project; and the Central Arizona Project—have revolving funds for operational, maintenance, and replacement costs. Western’s Boulder Canyon Project has permanent authority for the same types of costs as well as emergency expenditures. Nonfederal financing has been obtained for the Parker Dam, the Hoover Power Plant upratings, and the Buffalo Bill Power Plant. Nonfederal financing has been obtained for transmission construction through participation agreements with regional utilities. capital investments in generation facilities during the same fiscal year.Table II.1 of appendix II shows this same information for fiscal years 1985-94.

Legislation requires the PMAs to set their power rates at the lowest possible level consistent with sound business principles. The PMAs do not set their rates to earn a profit. Instead, they attempt to generate revenues sufficient to recover all costs incurred as a result of producing, marketing, and transmitting electric power, including repayment of the federal investment and other debt with interest. DOE requires each PMA to annually prepare a repayment study to test the adequacy of their rates and to show, among other things, estimated revenues and expenses, estimated payments on the federal investment, and the total amount of federal investment to be repaid.

The gross repayable investment assigned to be repaid by power revenues totaled nearly $34 billion, as of September 30, 1994. This amount includes $2.4 billion stemming from costs related to irrigation that Bonneville and Western must repay. PMAs had repaid about $11 billion (32 percent) of the gross repayable amount leaving more than $23 billion of outstanding debt, as of September 30, 1994. Figure 5 shows the gross repayable investment, the amount repaid, and the outstanding repayable investment (debt) for each PMA, as of September 30, 1994. Table II.2 in appendix II shows this information for fiscal years 1985-94.

The federal dams from which the PMAs sell electricity also serve a variety of nonpower purposes including flood control, irrigation, navigation, and recreation. The PMAs seek to balance the concerns of the authorized competing uses of the projects in scheduling and delivering power to their customers. In addition to the $34 billion invested in generation and transmission facilities, another $9.5 billion in appropriations has been expended to date by the operating agencies for these nonpower purposes. Unlike the appropriations used for power generation and transmission, appropriations expended for nonpower purposes are not repaid through power-related revenues. Figure 6 shows the percentage of appropriations expended by the PMAs and the operating agencies for both power and nonpower purposes, as of September 30, 1994. Figure II.1 and table II.6 of appendix II show appropriations expended by the PMAs and the operating agencies.

The PMAs generated about $3.2 billion in power-related revenues in fiscal year 1994. In accordance with legislation, the PMAs deposit their annual revenues in the Treasury. These receipts are generally applied to expenses in the following order: (1) operations and maintenance expenses, (2) purchased and exchanged power costs, (3) transmission service fees, (4) interest expense, and (5) any debt service on Treasury bonds (Bonneville only). Any remaining revenues are applied to any remaining balance due on unpaid or deferred annual expenses, if any, and then toward the repayment on the federal investment. DOE requires the PMAs to pay their highest interest-bearing debt first whenever possible, consistent with applicable law.

The financial characteristics of the PMAs, in many respects, are a reflection of the various statutes and DOE policies and procedures that govern their operations. For example, except for Bonneville, the PMAs, as described earlier, receive appropriations annually to cover their operating and maintenance expenses and to finance capital investments. These financing methods differ from those used by investor-owned utilities. Such utilities generally pay for their operating expenses from operating revenue and finance capital investments by (1) issuing debt, (2) selling common or preferred stock, or (3) using cash generated from operations.

In addition, the PMAs’ weighted average interest rates on their outstanding debt to the Treasury ranged from 2.7 to 4.6 percent in fiscal year 1994.This compares with an average interest rate of 8.1 percent on outstanding long-term debt for the nation’s 179 largest investor-owned utilities in 1993, according to a DOE report. These utilities accounted for more than 97 percent of all revenues earned by investor-owned utilities in 1993. As a comparison to the average cost of the PMAs’ debt in relation to the average cost of the Treasury’s debt, the Treasury’s weighted average interest rate on the outstanding marketable interest-bearing public debt was 6.9 percent as of July 31, 1995.

As shown in figures 7 and 8, the PMAs’ financing methods and terms of repayment have led to a high amount of outstanding debt in comparison to total investment. These figures present two financial ratios that highlight the amount of debt that the PMAs have outstanding. The first ratio—debt to gross property, plant, and equipment—shows the outstanding portion of the PMAs’ debt, as a percentage of the total amount invested in these facilities. The second ratio—debt service to revenue—shows the amount of annual revenues used to pay principal and interest on outstanding debt (debt service) as a percentage of total revenues. Table II.5 of appendix II shows this information for each PMA during the period 1985-94.

Because the PMAs’ debt is at low interest rates, four of the five PMAs have been able to carry high levels of debt without a corresponding increase in financial risk. However, as explained in the following discussion on competitive issues, high levels of debt currently pose problems for Bonneville and could pose problems for other PMAs in a more competitive environment.

Competitive Issues

PMAs have been and generally remain among the sellers of wholesale electric power at the lowest cost. Their ability to operate as low-cost sellers stems from several factors, including the inherent low cost of hydropower relative to other generating sources, federal financing at relatively low interest rates, flexibility in the repayment of principal on the Treasury portion of the PMAs’ debt, the PMAs’ tax exempt status, and operating budgets that seek to break even rather than earn a profit or a return on investment. Partly because of these factors, the average revenue earned per unit of wholesale power sold by the PMAs is low in comparison to the national average for wholesale power sold by all utilities. The average revenue per kilowatt hour (kWh) sold by each PMA ranged from 1.2 to 2.5 cents in 1993. This was less than the national average for wholesale power in 1993 which, according to DOE’s Energy Information Administration, ranged from 3.3 to 4.1 cents, depending on the type of electric utility. The overall average was 3.6 cents. Figure 9 shows the average revenue earned per kilowatt hour of wholesale power sold for each PMA compared with the national average for wholesale power during fiscal year 1993. Table III.1 of appendix III shows (1) the total kilowatt hours of wholesale power sold and the associated power revenues by each PMA and (2) the nationwide total of kilowatt hours of wholesale power sold and associated revenues earned during fiscal year 1993.

According to PMA officials, as of June 1995, with the exception of Bonneville, each PMA had rates that remain the lowest in its service area. These PMAs have experienced no major problems in terms of customers’ switching to other suppliers or having to negotiate new rates because of competition from other suppliers. On the other hand, Bonneville has experienced financial difficulty attributable to many factors including investments in nuclear plants. These difficulties coincide with other suppliers in Bonneville’s service area offering electric power service at rates at or below the rate at which Bonneville sells much of its power. Several of Bonneville’s customers have recently signed contracts with other suppliers, and other customers have indicated their willingness to negotiate with other suppliers. As noted in our 1994 report, Bonneville’s high debt and associated fixed costs and low financial reserves provide it with little flexibility to respond to any further operating losses, increasing the possibility that Bonneville would be unable to make its annual Treasury payment.

The circumstances in which Bonneville finds itself are part of a larger trend in the wholesale segment of the electric power industry. This segment of the market has grown increasingly competitive in recent years, in part, because of industry changes stemming from the Energy Policy Act of 1992, which allows easier access to power generation markets and promotes greater use of electric transmission lines. As part of the trend toward competition, the Federal Energy Regulatory Commission expects nationwide wholesale rates to decline. Because the PMAs sell most of their power at wholesale, they could be directly affected by this trend.

A PMA’s financial condition will play a role in determining whether it can compete with other suppliers. As mentioned earlier, a high debt-to-gross property, plant, and equipment ratio and a high debt service-to-revenue ratio could limit the flexibility of a PMA to match the rates of a competitor while still meeting financial obligations, including repayment of the federal investment. A PMA with rates below other suppliers’ rates in its service area has some flexibility to increase rates if necessary to meet its financial obligations. Conversely, a PMA with rates at or above the level offered by other suppliers in its service area, combined with a high level of debt, would have limited flexibility in reducing rates.

Agency Comments

We provided copies of a draft of this report to DOE for its review and comment. We received comments from DOE’s Bonneville Power Administration and DOE’s Power Marketing Liaison Office, which is responsible for the other four PMAs, and have included their comments and our response in this report as appendixes IV and V, respectively.

Bonneville stated that our report was factually correct and fairly reflected its competitive situation. For the other four PMAs, DOE commented that our report implied that the PMAs were inefficient and used inappropriate operating techniques that could leave the PMAs in a precarious position in the future. We did not evaluate the efficiency of the PMAs’ operations and have drawn no such conclusion. DOE also commented that it is inappopriate to compare investor-owned utilities’ method of operating at a profit with that of the PMAs. Our report does not make this comparision. Rather, it compares the PMAs’ average interest rates and the PMAs’ method of financing capital investments with those of investor-owned utilities. DOE suggested that we include several additional facts in our report that it believed should help explain more fully how the PMAs operate. We have expanded certain descriptive data to include facts suggested by DOE. DOE also provided technical corrections and clarifications that we incorporated where appropriate.

Scope and Methodology

To develop the financial information presented in this report, we interviewed officials of each PMA and reviewed data from the five PMAs’ annual reports and financial statements for fiscal years 1985 through 1994. To develop certain financial indicators, we used applicable repayment studies and financial statements. As appropriate, we interviewed officials of each PMA and used the PMAs’ data to develop operating information on the PMAs and to discuss competitive issues. We did not independently verify the accuracy of the PMAs’ data. In developing operating information, we also used available data from sources, such as the Congressional Research Service, DOE, the Federal Energy Regulatory Commission, and the National Academy of Public Administration. We used data from the Energy Information Administration to develop information on the extent to which the PMA’s public power customers purchase PMA-provided power.

We performed our review from April through September 1995, in accordance with generally accepted government auditing standards.

As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to appropriate congressional committees, federal agencies, and other interested parties. We will also make copies available to others on request.

This report was prepared under the direction of Victor S. Rezendes, Director of Energy and Science Issues in the Resources, Community, and Economic Development Division, who may be reached at (202) 512-3841 and Lisa Jacobson, Director of Civil Audits in the Accounting and Information Management Division, who may be reached at (202) 512-9508, if you have any questions. Major contributors to this report are listed in appendix VI.

Operating Information

Generator nameplate capacity (MW)

Fiscal year of initial operation (continued)

Generator nameplate capacity (MW)

Fiscal year of initial operation (continued)

Generator nameplate capacity (MW)

Fiscal year of initial operation (continued)

Generator nameplate capacity (MW)

Fiscal year of initial operation (Table notes on next page)

APA = Alaska Power Administration IBWC = International Boundary and Water Commission MW = megawatt PMA = power maketing administration PWUA = Provo River Water Users’ Association SRP = Salt River Project WPPSS = Washington Public Power Supply System Bonneville acquired all or part of the generating capability of three nuclear power plants owned by WPPSS. One plant is in commercial operation, and two have been terminated.

We do not include Southeastern’s 300-kilowatt Stonewall Jackson Project, which was energized in 1994. No power bills were issued for this project in fiscal year 1994.

Power plant was not yet in commercial operation.

Table I.2: Operating Statistics of PMAs, as of September 30, 1994

Generator nameplate capacity (MW)

Transmission lines (miles)

Annual federal employment (full time equivalent)

Table I.3: PMA Sales by Customer Type for Fiscal Year 1993

(continued) (continued) (continued)

APA = Alaska Power Administration BPA = Bonneville Power Administration kWh = kilowatt hour MWh = megawatt hour PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Not applicable. lnterdepartmental sales are sales to the facilities that play an integral role in the operation of WAPA’s projects.

Project use is mainly sales of electricity necessary to pump water at federal irrigation projects.

By law, BPA first serves customers located in the Pacific Northwest (legislatively defined as Oregon, Washington, and portions of Montana, Nevada, Utah, and Wyoming). BPA sells electricity that is surplus to the needs of the Pacific Northwest to customers outside the region, mainly those located in California. In 1993, these customers included public- and investor-owned utilities and one federal agency.

All of SEPA’s sales to federal agencies in 1993 were to the Tennessee Valley Authority.

Public power customer purchases from PMA (MWh)

Total power obtained from all sources (MWh)

APA = Alaska Power Administration BPA = Bonneville Power Administration EIA = Energy Information Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Washington Public Power Supply System Eleven public power customers received power from two PMAs; these customers are included in the total number of customers for each PMA from which they purchased power.

Financial Information

Other 0.1% Recreation 0.3% Fish & Wildlife 0.9% Municipal & Industrial 1.9% (Figure notes on next page)

APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Percentages may not total 100 because of rounding.

Table II.1: Appropriations Received by the PMAs and Appropriations Expended by the Operating Agencies on Power-Related Costs for Fiscal Years 1985 Through 1994

(19)

131.1 $(0.1)

APA = Alaska Power Administration BPA = Bonneville Power Administration DOE = Department of Energy PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Operating agency appropriation amounts are estimates provided by WAPA.

Table II.2: Gross Repayable Investment, Amount Repaid, and Total Outstanding Repayable Investment for Fiscal Years 1985 Through 1994

$19,764 $20,337 $20,088 $21,141 $21,456 $22,376 $23,648 $24,343 $25,331 14,904 15,237 15,243 15,409 15,911 16,113 16,410 17,279 17,640 $1,398 $1,406 $1,410 $1,419 $1,422 $1,428 $1,434 $1,442 $1,476 $4,032 $4,978 $4,714 $4,974 $5,021 $5,156 $5,335 $5,631 $5,891 APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration The total outstanding repayable investment amounts for WAPA do not include deferred expenses. Deferred expenses totaled $238 million, as of September 30, 1994.

Table II.3: PMAs’ Revenues, Expenses, and Accumulated Net Revenue (Deficit) for Fiscal Years 1985 Through 1994

(16.0) (0.3) (15.4) (1.9) (1.4) (1.2) 2,881.9 2,625.8 1,674.0 1,946.9 2,063.9 2,080.8 2,220.2 1,928.8 1,942.5 2,195.9 965.3 1,008.0 1,131.5 1,133.6 1,256.4 1,516.8 1,514.6 1,500.0 (64.9) (212.6) (273.6) (296.9) (60.7) (308.6) (373.5) (586.0) (580.8) (540.9) (264.2) 160. 9 (112.7) (409.6) (470.3) (11.5) (3.3) (29.5) (11.6) (99.4) (14.2) (4.9) (11.7) (41.3) (22.0) (18.1) (50.2)

1,291.0 1,456.2 1,689.9 1,774.6 1,760.0 1,715.3 1,564.1 1,451.9 (Table notes on next page)

APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Accumulated net revenue (deficit) is as of September 30, 1994.

Differences may occur in amounts as stated in the financial statements because of rounding.

In fiscal year 1991, APA changed its method of computing depreciation on utility plants from the compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1991 was a decrease in the accumulated net revenue (deficit) of about $16.0 million.

In fiscal year 1990, SEPA changed its method of computing depreciation on utility plants from compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1990 was a decrease in accumulated net revenues (deficit) by $138.2 million. The 1989 financial data for SEPA is as reflected in the 1989 financial statements. The 1989 financial data for SEPA were extracted from the 1989 financial statements in SEPA’s 1990 annual report. The financial statements were restated to reflect the change in the method of computing depreciation.

SWPA’s financial data for fiscal years 1985, 1986, 1988, 1989, and 1990 were extracted from the restated financial statements in SWPA’s annual reports.

In fiscal year 1990, SWPA changed its method for calculating depreciation on utility plants from the compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1990 was a decrease in accumulated net revenue (deficit) of about $114.4 million.

Because of prior year adjustments or revenue transfers, the accumulated net revenues (deficit) for certain years may not equal the prior year’s balance in this account plus current year net revenue (deficit).

WAPA’s financial data for fiscal year 1993 were extracted from the restated financial statements in WAPA’s 1994 annual report.

In fiscal year 1993, WAPA changed its method of accounting for depreciation of utility plant assets from the compound-interest method to the straight-line method. The cumulative effect of this change for years prior to 1993 was a decrease in accumulated net revenues (deficit) by $1.054 billion.

Table II.5: Financial Ratios for PMAs, as of September 30, 1994

Debt to gross PP&E APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration PP&E = property, plant, and equipment SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration The ratio of debt to gross property, plant, and equipment was calculated by dividing outstanding repayable investment (debt) by gross property, plant, and equipment.

The ratio of debt service to revenue was calculated by dividing principal debt repayments plus net interest expense by operating revenues.

APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Not applicable.

Competitive Issues

Average revenue (in cents per kilowatt hour sold)

Comments From the Department of Energy’s Bonneville Power Administration

Comments From the Department of Energy’s Power Marketing Liaison Office

The following are GAO’s comments on the Power Marketing Liaison Office’s letter dated September 15, 1995.

GAO’s Comments

1. The Power Marketing Liaison Office stated that our report implies that the PMAs generally use inefficient and inappropriate operating techniques that could leave them in a precarious position in the future. We disagree. Our report notes that the PMAs embody the various statutes and DOE policies that govern their procedures. Our report also points out that with the exception of Alaska, the PMAs do not own or operate the hydropower facilities from which they sell power nor do they have control over the amount of investment incurred by the agencies that operate and maintain the facilities. We did not attempt to assess the efficiency or appropriateness of the current operating techniques used by the PMAs or the operating agencies. 2. The Liaison Office stated that it is inappropriate to use investor-owned utilities’ methodology of operating for a profit as the only standard by which to judge the PMAs’ operations. Our report did not compare the fact that investor-owned utilities use a profit-based methodology with the fact that the PMAs’ are not allowed to earn a profit. We compared investor-owned utilities with the PMAs in two cases, both of which we believe are appropriate. First, concerning the manner in which the hydropower facilities and transmission assets were financed, we compared the PMAs’ cost of borrowing from the Treasury with investor-owned utilities’ cost of borrowing from private markets. We believe that this comparison allows the reader to independently assess the relative borrowing costs and potential financial advantages of PMAs versus private sector operations. Second, we explain that most capital investments in federal hydropower and transmission facilities are made through appropriations, which are essentially debt because they must be repaid through power revenues. We compare the PMAs’ method of financing with that of investor-owned utilities that can issue common or preferred stock in addition to debt. Because the PMAs cannot issue stock, it is reasonable to expect that they would have higher levels of debt than investor-owned utilities. We do not assess the levels of the PMAs’ debt in comparison to investor-owned utilities but rather in terms of competitive pressures and how the PMAs’ debt may affect their competitive situation. 3. The Liaison Office suggested several items that should be recognized in the report in order to avoid incorrect conclusions stemming from our comparison of PMAs with investor-owned utilities. The Liaison Office suggested that (1) the Congress never intended the PMAs to make a profit, (2) PMAs have a lower operating cost because their facilities were constructed at a time when construction costs were lower and the facilities have no fuel costs, (3) the PMAs’ high debt ratio results from the capital- intensive start-up costs associated with hydropower facilities and the longer service lives of these facilities and resultant longer repayment periods, and (4) the PMAs’ revenues can vary from year to year depending on water flow, and thus comparisons to nonhydro- based systems, such as those of investor-owned utilities, are misleading. First, our report acknowledges that the PMAs do not set their rates to earn a profit. Rather, they attempt to generate power revenues sufficient to cover all capital and operating costs. Second, although our report lists several reasons why the PMAs remain among the sellers of power at the lowest cost, our list was not intended to be exhaustive. Our intent was to inform the reader that, for many reasons the PMAs have been and generally remain among the sellers of power at the lowest cost. In addition, our report notes the inherent low cost of hydropower relative to other generating sources. Third, we do not compare the PMAs’ high levels of debt with the debt of investor-owned utilities. Instead, we explain how the PMAs’ debt, which is a fixed cost, may constrain the PMAs from adjusting to the increasingly competitive wholesale power markets in which they operate. Fourth, we do not compare any particular year’s revenues or generation of any of the PMAs with a nonhydro-based system of an investor-owned utility. Instead, our report notes that the PMAs’ revenues can vary depending on conditions, such as water flow, which may affect the amount of power that a PMA can sell. 4. The Liaison Office commented that the PMAs operate efficiently within congressional guidelines. The Liaison Office supported this comment by suggesting that the PMAs (1) normally return more funds to the Treasury than the annual congressional appropriations provided for the operating costs of the PMAs and the power-related costs of the operating agencies and (2) seek to balance the concerns of authorized competing uses of the projects and scheduling and delivering power to their customers. While PMAs may normally return more funds to the Treasury than they receive each year in annual appropriations, the repayment does not cover the Treasury’s interest expense associated with the PMAs’ debt. Second, our report notes that in addition to the $34 billion invested in power-related capital investments, more than $9.5 billion has been expended by the operating agencies for nonpower-related purposes, such as flood control, irrigation, and navigation. We revised our report to note that the PMAs must recognize and balance the concerns of these competing uses against the needs of their power customers. 5. We agree with DOE that because Bonneville accounts for the majority of the PMAs’ sales and revenues, its data tend to overshadow the other PMAs’ and may lead to inappropriate conclusions about all of the PMAs when the conclusions only apply to Bonneville. We have limited our presentation to factual material only. Our discussion of Bonneville’s competitive situation was not meant as a reflection on the other PMAs but instead was intended to show what can happen when a PMA with high fixed costs faces a competitive environment. Our report explains that as of the date of our report, the other PMAs were the low-cost sellers of power in their areas. 6. The Liaison Office commented that our report should reinforce the fact that the PMAs have no control over the amount of appropriations expended by the operating agencies for power generation equipment. We agree and have revised our report accordingly. 7. We agree with the Liaison Office that the two financial ratios we cite in our report (debt to gross property, plant, and equipment and debt service to revenue) should not be used alone to accurately assess the PMAs’ financial condition. We use these ratios only as indicators of the PMAs’ financial condition. However, for Bonneville, which now faces significant competition, the high debt service ratio is a critical indicator of its financial condition. Bonneville’s high debt and resultant fixed costs leave it with little flexibility to respond to competitive challenges. The substantial debt of the other PMAs is not currently a problem because they remain the sellers of power at the lowest cost in their service areas. However, competition is expected to result in a general decline in wholesale rates and, if they do not remain low-cost sellers, other PMAs could face a situation similar to Bonneville’s. We agree with the Liaison Office that the PMAs’ debt is at lower interest rates than those available today and that this has allowed PMAs to carry higher debt ratios without a corresponding increase in financial risk. However, as stated above, increased competition in wholesale power markets is a relatively new development and could pose serious challenges for each of the PMAs. 8. The scope of our review did not include an assessment of the quality of the power equipment employed by the PMAs.

Major Contributors to This Report

Resources, Community, and Economic Development Division

Accounting and Information Management Division

Office of the General Counsel

Bibliography

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The Columbia River System: The Inside Story. U.S. Department of Energy, Bonneville Power Administration. DOE/BP-1689. Sept. 1991.

Electric Trade in the United States, 1992. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0531(92). Washington, D.C.: Sept. 12, 1994.

Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets. U.S. Department of Energy, Energy Information Administration. SR/EMEU/92-02. Washington, D.C.: Nov. 1992.

Financial Statistics of Major U.S. Investor-Owned Electric Utilities, 1993. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0437(93)/1. Washington, D.C.: Jan. 1995.

Financial Statistics of Major U.S. Publicly Owned Electric Utilities, 1993. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0437(93)/2. Washington, D.C.: Feb. 1995.

Fitch Research. “Fitch Competitive Indicator.” New York: Fitch Investors Service, L.P., Jan. 30, 1995.

Garrison, K. and D. Marcus. “Changing the Current: Affordable Strategies for Salmon Restoration in the Columbia River Basin.” New York: Natural Resources Defense Council. Dec. 1994.

Hearing: Review of the Proposed Sale of the Power Marketing Administrations (held on May 7, 1986). U.S. House of Representatives, Committee on Government Operations. Washington, D.C.: U.S. Government Printing Office, 1986.

Hydroelectric Power Resources of the United States, Developed and Undeveloped, January 1, 1992. Federal Energy Regulatory Commission. Washington, D.C.: Jan. 1992.

The Inspection of Power Purchase Contracts at the Western Area Power Administration. U.S. Department of Energy, Office of Inspector General. DOE/IG-0372. Washington, D.C.: May 9, 1995.

Oversight Hearing: BPA Proposed Fiscal Year 1994 Budget (held in Washington, D.C., Apr. 28, 1993). Part I. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1993.

Oversight Hearing: BPA Electric Power Resources Acquisition (July 12, 1993). Part II. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources.

Oversight Hearing: BPA Columbia River Salmon Restoration (held in Boise, Idaho, Sept. 24, 1993). Part III. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994.

Oversight Hearing: BPA Competitiveness (held in Eugene, Oregon, Sept. 25, 1993). Part IV. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994.

Oversight Hearing: BPA Proposals (held in Washington, D.C., Oct. 28, 1993). Part V. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994.

Power Marketing Administrations: A Time for Change? U.S. Congressional Research Service. Washington, D.C.: Mar. 7, 1995.

President’s Private Sector Survey on Cost Control. Task Force of the President’s Private Sector Survey on Cost Control. Washington, D.C.: Aug. 31, 1983.

Reinventing the Bonneville Power Administration. National Academy of Public Administration. Washington, D.C.: Dec. 1993.

Scotto, D. and B. Chapman. “Electric Utilities Outlook: 1995 and Beyond.” New York: Bear Stearns, Jan. 1995.

A Study of Power Marketing Administration Selected Financial Management Practices. U.S. Department of Energy. Washington, D.C.: Oct. 1988.

A Study of Power Marketing Administration Selected Financial Management Practices, Appendices. U.S. Department of Energy. Washington, D.C.: Oct. 1988.

Subsidies and Unfair Competitive Advantages Available to Publicly-Owned and Cooperative Utilities. Putnam, Hayes & Bartlett, Inc. Washington, D.C.: Sept. 1994.

Related GAO Products

Bonneville Power Administration’s Power Sales and Exchanges (GAO/RCED-95-257R, Sept. 19, 1995).

Bonneville Power Administration: Borrowing Practices and Financial Condition (GAO/AIMD-94-67BR, Apr. 19, 1994).

Bonneville Power Administration: GAO Products Issued Since the Enactment of the 1980 Pacific Northwest Power Act (GAO/RCED-93-133R, Mar. 31, 1993).

Federal Electric Power: Views on the Sale of the Alaska Power Administration Hydropower Assets (GAO/RCED-90-93, Feb. 22, 1990).

Policies Governing Bonneville Power Administration’s Repayment of Federal Investment Still Need Revision (GAO/RCED-84-25, Oct. 26, 1983).

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