The Department of the Interior’s Bureau of Reclamation (the Bureau) and the Department of the Army’s Corps of Engineers (the Corps) generate electricity at hydropower plants located at major federal water projects. Three agencies that market federal electricity—the Southeastern, Southwestern, and Western—are responsible for $7 billion of this debt. In response, the Chairmen of the House Committee on Resources and the Subcommittee on Water and Power asked GAO to focus on these three PMAs and to (1) examine whether the government operates them and the related electric power assets in a businesslike manner that recovers the federal government’s capital investment in those assets and the costs of operating and maintaining them and (2) identify options that the Congress and other policymakers can pursue to address concerns about the role of these three PMAs in restructuring markets or to manage them in a more businesslike fashion. The PMAs generally follow these laws and regulations; however, in some cases federal statutes and DOE’s rules also prohibit or are ambiguous about the recovery of certain costs. As we reported in September 1997, for fiscal years 1992 through 1996, as a result of its involvment in the electricity-related activities of Southeastern, Southwestern, and Western (the three PMAs), the federal government incurred “net costs” of $1.5 billion—the amount by which the full costs of providing electric power exceeded the revenues from the sale of power. In addition, the availability of many federal power plants to generate electricity is below that of nonfederal plants because, among other factors, the federal plants are aging and because the federal planning and budgeting practices, including those used by the Bureau and the Corps, do not always ensure that funds are available so that repairs can be made when they are needed. The resulting declines in performance decrease the marketability of federal power. The net cost to the Treasury and the performance problems of the federal power plants—when combined with competitive pressures on electricity suppliers to decrease their rates at a time when some federal hydropower project’s environmental costs need to be recouped by the PMAs—create varying degrees of risk that some of the federal investment at certain federal generation and transmission projects and rate-setting systems will not be repaid. For example, although the recovery of most of the federal investment in the three PMAs’ hydropower-related facilities is relatively secure, up to $1.4 billion of the federal investment for projects or rate-setting systems pertaining to these PMAs, out of a total federal investment of about $7.2 billion, is at some risk of nonrecovery. The Federal Hydropower Assets Need Repair

The availability of federal power plants to generate power is below that of other power plants. Divest the federal hydropower assets. Some representatives of the PMAs’ preference customers have advocated defederalizing the PMAs and the federal generating assets as a way of improving their operating efficiency and availability. Some of Southeastern’s, Southwestern’s, and Western’s customers are concerned that a sale would significantly raise their rates.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed various issues concerning the role of certain power marketing administrations (PMA) and other federal agencies in restructuring electricity markets, focusing on: (1) whether the government operates them and the related electric power assets in a businesslike manner; and (2) options that Congress and other policymakers can pursue to address concerns about the PMAs' role in restructuring markets and about their management.

What GAO Found

GAO noted that: (1) although federal laws and regulations generally require that the PMAs recover the full costs of building, operating, and maintaining the federal power plants and transmission assets, in some cases federal statues and the Department of Energy's rules are ambiguous about or prohibit the recovery of certain costs; (2) as GAO reported in September 1997, for fiscal years 1992 through 1996, the federal government incurred a net cost of $1.5 billion from its involvement in the electricity-related activities of the Southeastern, Southwestern, and Western Area Power Administrations; (3) the $1.5 billion was the amount by which the full costs of providing electric power exceeded the revenues from the sale of power; (4) the availability of federal power plants to generate electricity is below that of nonfederal plants because the federal plants are aging and because the federal planning and budgeting processes, as implemented, do not always ensure that funds are available to make repairs when needed; (5) the resulting declines in performance decrease the marketability of federal power; (6) to mitigate these funding delays, the Bureau of Reclamation, Army Corps of Engineers, PMAs and their preference customers have negotiated or are negotiating agreements whereby customers pay for needed repairs in advance; (7) the net cost to the Treasury and the decreased generating availability of the federal power plants--when combined with the competitive pressures on all electricity suppliers to decrease their rates and the need to recoup some federal hydropower projects' environmental costs--create varying degrees of risk that some of the federal investment in certain hydropower plants and facilities will not be repaid; (8) although the recovery of most of the federal investment in Southeastern's, Southwestern's, and Western's hydropower-related facilities is relatively secure, up to $1.4 billion out of about $7.2 billion of the federal investment in the electricity-related assets of these PMAs is at some risk of nonrecovery; and (9) three general options are available for the Bureau, the Corps, Southeastern, Southwestern, and Western to address their roles in emerging restructured electricity markets: (a) the Bureau and the Corps could continue generating and the PMAs could continue marketing power as in the past; (b) the current ownership structure could be maintained while improving how the federal assets are managed and operated; and (c) the federal government could divest the PMAs; the PMAs and the generating assets; or the PMAs, the generating assets, and the dam reservoirs.