The Department of Energy’s (DOE) PMAs sell power primarily to preference customers—cooperatives and public bodies, such as municipal utilities, irrigation districts, and military installations—that are located in the PMAs’ service territories. Many of these preference customers then resell the power to industrial, commercial, and/or residential end-users. To estimate any potential rate changes if market rates are charged (after a divestiture of the PMAs or otherwise), we calculated how much, in cents per kilowatthour (kWh), each preference customer paid, on average, for power purchased from (1) all sources, including the PMAs, and (2) sources other than the PMAs, including the wholesale market, in 1995. Then, we took the difference between these two, considering the latter to be the market rate. To map the areas that preference customers serve, we identified the counties and towns that the customers reported serving in Electrical World: Directory of Electric Power Producers. It is important to note that our analysis included only those customers that purchased power directly from the PMAs and that our analysis shows higher rate increases than would be likely if market rates decline. To develop information on the characteristics of the areas that preference customers reported serving, for each county and town we obtained data on 1989 household incomes and the extent to which the population is urban or rural, as reported in the 1990 census, the latest data available. Appendix III provides additional details on our scope and methodology. Overall, about 68 percent of Southeastern’s, Southwestern’s, and Western’s preference customers may experience relatively small rate increases. In our analysis, the increases that we considered relatively small (0.5 cent per kWh or less), moderate (from greater than 0.5 cent up to 1.5 cents), and relatively large (greater than 1.5 cents) represent amounts above the average rates that preference customers paid for power from all sources (both PMAs and others) in 1995. These base rates typically ranged in 1995 from 3.5 to 6.0 cents for Southeastern’s preference customers, from 1.5 to 3.5 cents for Southwestern’s preference customers, and from 1 to 4 cents for Western’s preference customers. The increases represent the difference between these average rates and what preference customers would have to pay if they purchased all of their power at market rates. For example, if a preference customer of Southeastern paid a combined 3.5 cents per kWh for power from the PMA and other sources in 1995 and paid 3.9 cents for power from non-PMA sources, we assumed the customer’s rates would rise from 3.5 to 3.9 cents—a relatively small increase of 0.4 cent—if it had to pay market rates for all its power. Our calculation of the increase in a residential end-user’s monthly electricity bill represents the amount of the preference customer’s increase times the average monthly consumption of electricity by residential end-users in the preference customer’s state. As shown in figure 1, 98 percent of Southeastern’s preference customers may see relatively small rate increases of 0.5 cent per kWh or less if they pay market rates for PMA power. For Western and Southwestern, about half of their preference customers would see relatively small rate increases and about 25 to 30 percent of the customers for each PMA would see relatively large increases. Figure 2 breaks out these potential increases by state and, of the total amount of power consumed in each state, indicates the percentage provided by the PMA. Estimated increase (cents/kWh) Relatively small, 0.5 cent (or one-half cent) or less Moderate, greater than 0.5 cent to 1.5 cents Relatively large, greater than 1.5 cents (In 85 percent of the cases, this increase is between 1.5 cents and 3 cents.) (Figure notes on next page) Estimated increase in preference customers' rates (cents/kWh) As shown in figure 2, in virtually every state Southeastern serves, at least 85 percent of the preference customers may see relatively small rate increases. Slightly more than half of the PMA’s preference customers may see increases of less than 0.1 cent per kWh. If these preference customers pass their rate increases through proportionally to the residential end-users they serve, the residential end-users would see their average monthly electricity bill increase by $1 or less. In most of Southeastern’s states, the maximum increase that a preference customer would pass on to its residential end-users ranges between $1 and $8 per month, depending on the state. The only relatively large rate increase for a preference customer served by Southeastern may be in Illinois, which has one preference customer. In states served by Western, preference customers may see a variety of rate increases. For example, as shown in figure 2, over 75 percent of the preference customers in California, Colorado, and Nebraska may experience relatively small rate increases. In these three states, residential end-users served by most preference customers would see less than $2.50 increases in their average monthly electricity bills. However, a significant number of Western’s preference customers may see moderate increases. As shown in figure 2, at least 25 percent of the preference customers in many Western states, such as Iowa, Minnesota, and South Dakota, may experience average rate increases from greater than 0.5 cent up to 1.5 cents per kWh. If these preference customers proportionally pass these costs along to their residential end-users, the end-users would pay from $3 to $14 more in their average monthly electric bills, depending on the state. Finally, in several states served by Western, a number of preference customers may see average rate increases that exceed 1.5 cents per kWh. For example, 60 percent of the preference customers in South Dakota and 33 percent of the customers in Utah may see rate increases exceeding 1.5 cents per kWh. In turn, residential end-users who receive power from these utilities would see larger increases in their electricity bills. For example, in states with larger rate increases, if a preference customer’s rate increases by 1.5 cents per kWh, residential end-users would pay about $10 to $15 more per month for electricity, depending on the state. Preference customers who may see these larger increases typically paid relatively low rates, ranging from 1.5 to 3.0 cents per kWh and bought most or all of their power from Western. Taken together, Southwestern’s preference customers may experience higher rate increases than Southeastern’s customers but lower increases than Western’s. As shown in figure 2, in most of Southwestern’s states, a majority of the preference customers may see relatively small increases of 0.5 cent per kWh or less on base rates that typically ranged from 1.5 to 3.5 cents. In turn, residential end-users that receive power from most of Southwestern’s preference customers’ would see their electricity bills increase by less than $3 a month. However, in Oklahoma, 79 percent of the preference customers may see larger increases that exceed 1.5 cents per kWh. Most of these customers paid less than 1.5 cents per kWh—less than half the 1995 national average market rate—and purchased all of their power from Southwestern. Residential end-users of these preference customers typically would pay about $22 more in their average monthly electricity bills. As we discussed in our March 1998 report, it is important to remember that in many cases where rate increases may be relatively large (greater than 1.5 cents per kWh), the preference customers paid about 1 to 1.5 cents per kWh in 1995 for PMA power. These rates on average were about 2.5 to 3 cents per kWh lower than what utilities paid in the private market nationwide. Conversely, in many cases where rate increases may be relatively small, that is, 0.5 cent per kWh or less, preference customers generally paid rates close to the market rates. If market rates are charged (after a PMA divestiture or otherwise), preference customers would pay the same rates as utilities that lack access to PMA power. As we discussed in our March 1998 report, if the Congress chose to change the status quo regarding rates, it could mitigate the size of potential rate increases by using several approaches, such as establishing rate caps. A preference customer’s rate increase also depends on what portion of its total power comes from the PMA. Generally, the less a preference customer relies on a PMA’s power, the less the rate increase may be. Preference customers in states served by Southeastern may experience small increases because they purchase a small portion of their power from the PMA. In 1995, 99 percent of Southeastern’s preference customers purchased less than 25 percent of their power from the PMA. Overall, most preference customers purchase a majority of their power from sources other than the PMAs and, as a result, currently pay market rates for that power. In contrast, preference customers that purchase a large portion of their power from a PMA are more likely to experience larger increases. For example, among the 60 percent of the preference customers in South Dakota that may experience rate increases of at least 1.5 cents per kWh if market rates are charged, most bought over 70 percent of their power from the PMA in 1995. Overall, PMA power represented about 23 percent of South Dakota’s total electricity consumption in 1995. Usually, preference customers that rely on a PMA for most or all of their power are smaller utilities that deliver 100,000 megawatthours or less to their end-users annually. It is important to also note that because our estimates of potential rate increases are based on market rates in 1995, our methodology is conservative.