We agreed to provide information on (1) Southeastern, Southwestern, and Western, including their similarities and differences, and their interactions with the agencies that operate federal water projects (mostly, the Bureau and the Corps); (2) the main objectives and general decisions involved in divesting federal assets, along with how these objectives and decisions apply to the PMAs; and (3) the specific issues related to hydropower that should be addressed before a divestiture of the PMAs. These customers vary in size and in the quantity of electricity they purchase. The PMAs have a close working relationship with the Corps and the Bureau because, with a few exceptions, the Bureau and the Corps are responsible for operating the hydropower plants and for ensuring that electricity is generated subject to the other multiple purposes of each federal water project. This relationship is based in part on written documents and also on flexible arrangements that recognize the variability associated with water. Because the PMAs have a limited quantity of power for sale that must be allocated among many preference customers, these customers must obtain most of their electricity from other sources. The PMAs market power subject to the parameters of these written agreements and flexible arrangements. The flexible arrangements allow the operating agencies to balance a project’s multiple purposes, even if this reduces power production. In reviewing domestic and international divestiture experiences, we found a successful divestiture begins with a definition of the sale’s objectives, which typically include (1) reducing or eliminating the government’s presence in an activity that some view as best left to the private sector and (2) improving the government’s fiscal situation. In particular, they will shape the general decisions about which specific assets are sold, what conditions and liabilities will transfer with those assets, and how to implement the sale. For example, as an “aid to irrigation,” power revenue is counted on to repay about 70 percent of the federal government’s (nominal) capital investment in irrigation facilities at federal water projects in the West. The Specific Assets to Be Sold Would Need to Be Identified

As we found in our review of divestitures in other nations, an important, initial decision in a divestiture involves determining which assets to sell. (2) Sales of significant electricity-generating assets are not unusual. These issues include the multiple purposes of federal water projects; the existing contractual obligations and liabilities of the PMAs, the Bureau, and the Corps; the future responsibility for environmental liabilities and protecting endangered species, which already constrain the operations of many projects; the rights and concerns of Native Americans; and the future regulatory treatment of the hydropower assets. The potential effects on wholesale and retail electric rates, including potential regional economic effects, would also need to be considered. The Rights and Concerns of Native Americans Would Affect a Divestiture

Various rights and concerns of Native Americans would have to be addressed in a proposal to divest federal hydropower assets. 2.) Changes in Wholesale Power Rates and Water Allocations Would Determine the Regional Economic Impact

The degree to which a regional economy would be affected by the divestiture of a PMA would depend mostly on several factors—the regional economy’s reliance on that PMA’s power, the amount of change in overall retail electric rates, the importance of electricity in the regional economy, and the extent to which water allocations from the former federal water projects would be changed.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on: (1) profiles of three power marketing administrations, including their similarities and differences and how they interact with the agencies that operate federal water projects; (2) general parameters of the process by which federally owned assets can be sold; and (3) factors that would have to be addressed in a divestiture of federal hydroelectric assets, such as the relationship between power generation and the other purposes of federal water projects.

What GAO Found

GAO noted that: (1) the Southeastern, Southwestern, and Western Power Administrations all market the hydropower generated at federal water projects, but they serve different geographical areas and have different assets; (2) their customers vary in size and in their electric energy purchases; (3) PMAs are not the main source of electricity for most of their customers--in total the three PMAs in GAO's report supply about 7 percent of the electricity requirements of their customers; (4) the PMAs have a close working relationship with the Bureau of Reclamation and the Army Corps of Engineers--these interactions are based in part on written agreements and on flexible arrangements that recognize the operating agencies' role in managing water releases in a way that balances a project's multiple purposes. GAO also noted that: (1) two principal objectives have typically been cited by other nations and by the United States for selling government assets: (a) eliminating or reducing the government's presence in an activity that some view as best done by the private sector; and (b) improving the government's fiscal situation; and (2) these two objectives will affect many subsequent decisions needed to implement a sale, including: decisions about such concerns as what specific assets to sell, how to group these assets, what conditions and liabilities to transfer to the buyer, and what sales mechanism to employ. Finally, if, based on a broad policy evaluation of the pros and cons of privatization, a decision to divest federal hydropower assets is reached, several key issues specifically related to hydropower would need to be addressed, including: (1) balancing how water is used among the multiple purposes of federal water projects; (2) determining how to repay or otherwise address the federal capital investment in irrigation facilities of the affected projects; (3) assigning the numerous contractual obligations and liabilities of the Bureau, the Corps, and the PMAs; (4) handling Native Americans' claims to water, property and tribal artifacts; (5) determining the future responsibility for protecting the environment and endangered species--a commitment that already constrains the operations of many projects; (6) deciding the future regulatory treatment of divested hydropower assets; (7) the potential effects of a divestiture on wholesale and retail electric rates, and the regional economies; and (8) these impacts, to a large degree, would be determined by the prevailing wholesale electric rates of the local utilities in the region in which power from the PMA is sold, the region's reliance on this power, and the availability of other sources of power.