Federal power marketing administrations (PMAs) are part of the Department of Energy (DOE). The five PMAs sell electric power within 34 states—to all states except those in the Northeast and upper Midwest. They sold about 3 percent of the nation’s electric power output in 1994. Almost all of it is hydroelectric power generated by multiple-purpose dams built and operated by other federal agencies. The Chairman, Subcommittee on Water and Power Resources, House Committee on Resources, and the Ranking Minority Member, House Committee on Resources, asked us to review several issues relating to three of these PMAs—Southeastern, Southwestern, and Western. The primary focus of our review was to determine whether all power-related costs incurred through September 30, 1995, have been recovered through the PMAs’ electricity rates; whether the financing for power-related capital projects is subsidized by the federal government and, if so, to what extent; and how PMAs differ from nonfederal utilities and the impact of these differences on power production costs. In addition, we were asked to provide information on Federal Energy Regulatory Commission (FERC) oversight of the PMAs. Nationwide, there are five PMAs—the three on which this report is focused, plus the Alaska Power Administration and the Bonneville Power Administration. Established between 1937 and 1977, PMAs sell electricity primarily on a wholesale basis with the legislated goal of encouraging widespread use of power at the lowest possible cost to consumers consistent with sound business principles. By law, they are required to give priority in the sale of federal power to public power entities, such as public utility districts, municipalities, and customer-owned cooperatives. These customers are referred to as “preference customers.” PMAs helped make electricity available for the first time to many consumers who lived in rural areas. PMAs generally control and operate power transmission facilities, but do not control or operate the facilities that actually generate electric power. These power generating facilities are controlled by other federal agencies—most often by the Department of the Interior’s Bureau of Reclamation (Bureau) or the Department of the Army Corps of Engineers (Corps). The dams at which the power generating facilities are located also serve a variety of nonpower purposes, including flood control, irrigation, navigation, and recreation. The project must be operated in a way that balances all of these uses—and, in many instances, power is not the primary use. Responsibility for operating the facilities to serve all of these multiple functions rests with the Corps and the Bureau, which are called the “operating agencies.” Unlike most other federal agencies, PMAs are required by law to recover through rates funds appropriated for power-related costs. Funding for the three PMAs is generally through the annual appropriations process. The PMAs receive annual appropriations and make both capital expenditures, such as for PMA-controlled transmission facilities, and operating and maintenance (O&M) expenditures. PMAs generally pay for these expenditures by requesting Treasury to cut checks on their respective appropriation accounts. The operating agencies also receive appropriations. The operating agencies allocate the portions of those appropriations that are used to fund power-related capital and O&M expenses to the PMAs for recovery from power rates. The allocated portion includes all capital costs and O&M expenses that are solely related to the generation of power. In addition, a portion of the operating agency’s “joint costs” are allocated to the PMAs. These are capital costs and O&M expenses related not only to power production but to the dam’s other purposes. The operating agencies allocate the amount of joint costs that are power-related by applying a percentage established for each multiple-purpose project. PMAs recover these appropriations through revenues generated from power sales. The Reclamation Project Act of 1939 and the Flood Control Act of 1944 require PMAs to set power rates at levels that are forecasted as adequate to recover costs. The Reclamation Project Act of 1939 requires that rates for electric power be adequate to recover the power-related share of construction costs, to include interest charged at a rate of not less than 3 percent. The act also requires recovery of annual O&M costs and “other fixed charges as the Secretary deems proper.” The Flood Control Act of 1944 requires that rates for electric power be adequate to recover the cost of “producing and transmitting such electric energy.” Power-related capital costs are to be recovered “over a reasonable period of years.” These legislative provisions have been implemented by the Department of Energy in DOE Order RA 6120.2 (September 20, 1979, as revised on October 1, 1983). This order specifies that the total revenues of any project administered by a PMA must be sufficient to recover O&M costs in the year incurred, to recover federal investment in generation and transmission facilities within a 50-year period, and to recover capital costs allocated to completed Bureau of Reclamation irrigation facilities that are beyond the capability of irrigators to repay (also called “irrigation assistance”). Under the order, capital investments have a longer recovery period than O&M costs. PMAs are generally required to recover, without interest, appropriations used to fund O&M costs in the same year that the expenses are incurred. In contrast, the PMAs are required to recover appropriations that fund capital investments (which we refer to as appropriated debt), with interest, over a specified repayment period. The recovery period is generally 50 years for assets used to generate power and 35 to 45 years for assets used to transmit power. The order specifies that the adequacy of power revenues be tested by the preparation of an annual study, known as a “power system repayment study,” which is submitted by the PMAs for approval to the Secretary of Energy. This study forecasts power-related capital and O&M costs that the PMAs will be required to recover in the future. It also forecasts revenues expected to be forthcoming under current rates. If the study projects that revenues will not be adequate to recover power system costs over the remainder of the repayment period, rates may be increased or other cost recovery actions may be taken. During the year, PMAs generate revenues based on the rates they have established in accordance with the power repayment studies. The three PMAs bill customers for power sales. Southeastern’s and Southwestern’s customers generally make payments directly to a U.S. Department of Treasury “lock box” at a bank. The bank processes the account payments and transfers the cash to Treasury’s General Fund, where it is categorized as miscellaneous receipts. To finance their operations, Southeastern and Southwestern request Treasury to cut checks on their respective appropriations accounts. Western and its customers deposit collections directly to Treasury’s “lock box” or federal reserve bank and then the receipts are posted to various Treasury accounts. Western either seeks annual appropriations from these accounts to finance its operations, or for certain accounts has the legal authority to spend funds without further appropriations. Those Treasury accounts include the Reclamation Fund; Colorado River Dam Fund; Boulder Canyon Project Fund; Falcon and Amistad Operating and Maintenance Fund; Central Valley Project Restoration Fund; Lower Colorado River Basin Development Fund; Upper Colorado River Basin Fund; and Colorado River Basins Power Marketing Fund. In this report, we refer to the recovery from revenues of power-related operating and maintenance appropriations and capital construction costs as a “repayment” or “payment” to Treasury, even though in most cases the PMAs do not write a check or otherwise transfer funds to Treasury. Ideally, over the course of a year, collections received by Treasury will offset, or “repay,” amounts appropriated to the PMAs and operating agencies for O&M expenses, as well as an amortized amount of capital construction costs. The PMAs, pursuant to the DOE Order, monitor expenses and revenues to ensure that power rates are sufficient to generate revenue to recover expenses. The DOE Order prescribes the sequence in which PMAs are to offset expenses with revenues as follows: (1) operations and maintenance, (2) purchased and exchanged power, (3) transmission services, and (4) interest. The remaining revenues are to be applied to the balance due on any payments of annual expenses that have been deferred (these are called “deferred payments,” which the Order requires be repaid with interest) and then toward the repayment of capital investments. The Order also covers other subjects, including priority of capital cost repayment, interest rate calculation, and other PMA ratemaking and accounting criteria. Collectively, Southeastern, Southwestern, and Western Area Power Administrations market power in 30 states. (See figure 1.1.) In fiscal year 1995, they had total power sales of almost $1 billion. The power they sell is produced at 102 power plants built and run primarily by the Corps of Engineers or the Bureau of Reclamation. The three PMAs differ substantially in size and revenue. (See table 1.1.) Western is the largest, accounting for more than four times the revenue of either Southeastern or Southwestern. Southwestern and Western have their own transmission facilities, while Southeastern relies entirely on the transmission services of other utilities. Collectively, the three PMAs are responsible for repaying about $5.4 billion of appropriated debt. (See table 1.2.) For 1995, the weighted average interest rate on this outstanding debt was 4.9 percent. (See chapter 3 for a more detailed discussion of appropriated debt balances and weighted average interest rates.) Additional specific information about each PMA follows. Southeastern. The Southeastern Power Administration was created in 1950 to market federal power on a wholesale basis. The 23 hydroelectric power plants from which Southeastern markets power are all operated by the Corps. About half of the plants (with more than 60 percent of the generating capacity) have been added since 1960. In 1995, Southeastern marketed power to 296 customers.