Federal PMAs within the Department of Energy (DOE) market wholesale power generated primarily at federal water projects. RUS and PMA Activities Result in Recurring Net Costs to the Federal Government

For fiscal year 1996, we estimate that the federal government incurred $2.5 billion in net costs, including about $982 million in RUS loan write-offs,from the electricity-related activities of RUS and the PMAs. TVA generally recovers all power-related costs from its ratepayers. Cumulatively over the last 5 years, we estimate that the net financing costs totaled about $3.8 billion (in constant 1996 dollars). Cumulatively, for fiscal years 1992 through 1996, we estimate that the net financing cost in constant 1996 dollars has been over $1.1 billion for the three PMAs and nearly $2 billion for BPA. Federal Government Faces Risk of Future Losses Due to Financial Vulnerability of Electricity-Related Entities

The federal government has financial exposure stemming from its over $84 billion of direct and indirect financial involvement in the electricity-related activities of RUS, the PMAs, and TVA. The federal government’s risk of future losses is directly related to the ability of the RUS borrowers, the PMAs, and TVA to set their rates in a competitive and/or regulated market at a level sufficient to recover all of their costs. As of September 30, 1996, the federal government had over $53 billion of primarily direct lending to RUS borrowers, the PMAs, and TVA and appropriated debt owed by the PMAs and TVA. For this indirect involvement, the federal government would incur future losses if it incurred unreimbursed costs as a result of actions it took to prevent default or breach of contract by the federal entity on nonfederal debt. The three PMAs market power that is substantially lower in cost than nonfederal utilities and thus, in the current operating environment, are competitively sound overall. However, as discussed in detail in appendix VII of volume 2, each of the three PMAs has one or a few projects or rate-setting systems with problems that, taken as a whole, make the risk of some future losses to the federal government probable. This would reduce the risk to the federal government. However, we believe that as long as TVA remains in a protected position similar to a traditional regulated utility monopoly, the risk of loss to the federal government is remote. Agency Comments and Our Evaluation

The comments from USDA, the three PMAs, BPA and TVA generally focused on our analysis of net financing costs and the federal government’s risk of future financial losses related to the electricity-related activities of these entities. We do not agree. Additional copies are $2 each.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed federal electricity activities, focusing on the: (1) federal government's net recurring cost from the electricity-related activities at the Department of Agriculture's Rural Utilities Service (RUS), the Department of Energy's power marketing administrations (PMA), and the Tennessee Valley Authority (TVA) for fiscal year (FY) 1996 and, where possible, the cumulative net cost for FY 1992 through 1996; and (2) likelihood of future losses beyond the net recurring costs to the federal government from these entities.

What GAO Found

GAO noted that: (1) the federal government incurs net costs of over a billion dollars annually in supporting the electricity-related activities of RUS and the PMAs; (2) GAO estimates that the net costs to the federal government for FY 1996 totaled about $2.5 billion--$0.4 billion for BPA, $0.2 billion for the three PMAs, and about $1.9 billion for RUS, including about $982 million in RUS loan write-offs; (3) the federal government is exposed to additional future losses beyond the recurring net costs resulting from the government's more than $84 billion in direct and indirect financial involvement in the electricity-related activities of RUS, the PMAs, and TVA as of September 30, 1996; (4) these potential future losses relate to the possibility that RUS borrowers, the PMAs, and TVA would be unable to repay the full $53 billion in debt owed to the federal government or that the federal government would incur unreimbursed costs as a result of actions it took to prevent default or breach of contract on the $31 billion in nonfederal debt; (5) this risk exists because certain RUS borrowers, the PMAs (to varying degrees) and TVA are financially vulnerable primarily as a result of uneconomical construction projects and the accumulation of substantial debt, which have resulted in high fixed costs; (6) the Southeastern, Southwestern, and Western PMAs generally market wholesale power that consistently costs at least 40 percent less than power sold by nonfederal utilities and are therefore currently competitively sound overall; (7) however, the three PMAs maintain this overall soundness in part because they do not recover all power-related costs; (8) if they were required to recover some or all of these power-related costs, their ability to remain competitive might be impaired and the risk of future financial loss to the federal government increased; (9) also, each has one or a few projects or rate-setting systems with problems that, taken as a whole, make the risk of some loss to the federal government probable; and (10) for TVA, the risk that the federal government will incur losses is remote as long as TVA retains a position similar to a traditional regulated utility monopoly in its service area.