The federal government owns and operates numerous multipurpose water projects, many of which generate electric power. This power, which is generated subject to the needs of the project, is sold through five federal power marketing administrations (PMA)—the Southeastern Power Administration (Southeastern), the Southwestern Power Administration (Southwestern), and the Western Area Power Administration (Western) as well as the Alaska Power Administration and the Bonneville Power Administration. The PMAs are separate and distinct organizational entities within the Department of Energy (DOE). They are required to market hydropower primarily on a wholesale basis at the lowest possible rates consistent with sound business principles. By law, the PMAs give preference in the sale of federal power to public bodies and cooperatives (called “preference customers”), such as federal agencies, irrigation districts, municipalities, public utility districts, and other public agencies. Each PMA has its own specific geographic boundaries, federal water projects, statutory responsibilities, operation and maintenance responsibilities, and statutory history. In 1995, the three PMAs in our study—Southeastern, Southwestern, and Western—sold about 1.6 percent of the nation’s electricity. A federal water project consists of several resources, such as the dam, the reservoir, the land around the dam and reservoir, and, where hydropower is generated, the powerplant. In addition to providing hydropower, the dams at which hydropower plants are located serve a variety of other purposes, such as promoting fish and wildlife conservation and habitat enhancement and providing flood control, irrigation, navigation, recreation, water supply, and improved water quality. Each project must be operated in a way that balances its multiple purposes. In most instances, because generating power is not the project’s sole purpose, the amount of hydropower generated and marketed is affected by the availability and use of water for the project’s other purposes. The PMAs generally do not own, operate, or control the facilities that actually generate the electric power; almost always, they own, operate, and control the facilities that transmit power, and they market the power that is generated at the federal water projects. The 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’s Corps of Engineers (Corps)—referred to as “operating agencies.” Appendix II lists and describes various laws that guide the Bureau’s and the Corps’ management of federal water projects and hydropower plants. The federal power marketing program, which began in the early 1900s, has developed incrementally over the years. In 1937, the Bonneville Project Act created the Bonneville Power Administration to market federal power in the Pacific Northwest. In 1943, a decision by the Secretary of the Interior established Southwestern under the President’s war powers. The Congress provided the authority to create permanent PMAs with the passage of the Flood Control Act of 1944. The Secretary of the Interior established Southeastern in 1950 and the Alaska Power Administration in 1967. The last PMA, Western, was authorized under the DOE Organization Act of 1977 when the four existing PMAs were transferred from the Department of the Interior to DOE. Many hydropower plants provide electric power for the multiple needs of a federal water project, and the project’s operations have first priority for using it. The PMAs sell the hydropower that exceeds the project’s operational requirements on a wholesale basis to their preference customers and use the revenue earned to repay the costs to generate, transmit, and market power. Revenues from the sale of hydropower are also used to pay for a portion of the irrigation costs assigned for repayment through these revenues where the project serves irrigation. The sale of federal hydropower has also served social and economic development goals. This power is required to be sold at rates that are as low as practicable, consistent with sound business principles, to encourage its widespread use. The PMAs helped make electricity available for the first time to many consumers who lived in rural areas. Nonfederal hydropower projects also generate electricity subject to their multiple purposes. The Federal Energy Regulatory Commission (FERC) licenses and regulates these projects and their hydropower plants that affect the nation’s navigable waterways. FERC’s operating licenses for these hydropower plants are in effect for up to 50 years, after which relicensing must occur. Under provisions of such legislation as the Federal Power Act, as amended by the Electric Consumers Protection Act, FERC’s licensing and regulatory activities establish the conditions under which the project must operate, consistent with legal and policy developments. In licensing and relicensing nonfederal hydropower projects, FERC is required to give equal weight to both “developmental factors” (such as power, irrigation, and flood control) and “nondevelopmental factors” (such as protecting fish and wildlife habitat, conserving energy, and providing recreation). FERC’s regulatory activities with respect to electricity from the PMAs are limited to the authority delegated to it by the Secretary of Energy. FERC’s review of the PMAs’ rates is limited to (1) whether the rates are the lowest possible consistent with sound business principles; and (2) whether the revenues generated by the rates are enough to recover, within the period allowed, the costs of producing and transmitting electricity, including the repayment of the capital investment allocated to generate power and the costs assigned by acts of the Congress for repayment. FERC’s review also includes the assumptions and the projections used in developing the rates. Other than reviewing the PMAs’ rates, FERC has no jurisdiction over the operation of federal hydropower facilities. Each year the Congress appropriates money to the PMAs, the Bureau, and the Corps. The PMAs’ appropriations are generally to cover operations and maintenance (O&M) expenses associated with their power marketing activities and capital investments in their transmission assets. The Bureau’s and the Corps’ appropriations are for all aspects of the federal water projects, including capital investments as well as operation and maintenance (O&M) expenses related to generating power and to providing other functions, such as irrigation and navigation. Federal law calls for the PMAs to set power rates at levels that will repay their appropriations and the power-related O&M as well as the capital appropriations expended by the operating agencies generating the power. DOE’s implementing order specifies that appropriations used for O&M expenses must be recovered in the same year the expenses were incurred; however, it allows the appropriations used for capital investments to be recovered, with interest, over periods that can last up to 50 years. The order also allows the PMAs to defer payments on O&M expenses if the PMAs do not generate sufficient revenue in a particular year because of the variability of hydropower. Because O&M expenses that are deferred are amortized with interest, the amount of deferred expenses accrues interest until it is fully repaid and may require the PMA to increase its rates. The federal investment in water projects has nonreimbursable and reimbursable components. The nonreimbursable component refers to costs that are not reimbursable by revenues collected from the projects’ beneficiaries. The reimbursable component refers to costs that are recovered from the project’s ratepayers and other beneficiaries, such as power and irrigation users. This component includes the construction costs as well as the O&M expenses for power generation, transmission, and marketing; the construction costs allocated to irrigation and O&M expenses for irrigation, if applicable; and the construction costs allocated to municipal and industrial water supply as well as the related O&M expenses. The reimbursable component is further divided into investments repaid with interest (for example, for power and municipal and industrial water supply) and investments repaid without interest (for irrigation only). In 1986, the executive branch first attempted to sell a PMA when the President’s budget proposed selling the Alaska Power Administration to its preference customers. Despite the enactment of laws in 1995 and 1996 to authorize this transaction, the sale of the hydropower assets from which the Alaska Power Administration markets its power has not been completed, in part because of the need to resolve issues related to rights-of-way and easements. The length of time taken to complete the sale of the smallest of the five PMAs raises questions about the complexity and number of issues that will need to be addressed before the government can divest itself of the larger PMAs and their related hydropower assets. Numerous bills have been introduced to the Congress to sell the remaining PMAs, and some bills have included the sale of the related hydropower assets of the Bureau and the Corps. These bills have proposed selling only the PMA and its assets; the PMA and the related hydropower assets of the Bureau and the Corps; or all of these assets plus the related dams and reservoirs. For example, in 1996 legislation introduced in the House of Representatives proposed to divest, among other things, the PMAs and the associated power-generating assets through a competitive bidding process. The bill proposed that FERC be directed to grant a 10-year operating license to the buyers of the federal hydropower plants. It also exempted the divestiture from certain federal laws pertaining to the disposal of surplus federal property and to environmental protection, such as the Federal Land Policy and Management Act of 1976, the National Environmental Policy Act of 1969, the Endangered Species Act of 1973, and the Wild and Scenic Rivers Act of 1968. In response to divestiture proposals, on January 18, 1996, 39 Members of Congress requested that we examine the issues related to the divestiture of the PMAs and related federal hydropower assets. On March 1, 1996, we received a separate request letter from another Member of Congress.