Navy's Transfer of Power System to Financially Troubled Guam Power Authority Has Been Delayed

GAO was asked to review the Island-Wide Power System on Guam, which is jointly operated by the Navy and the Guam Power Authority. The Navy and the Authority entered into a formal agreement providing for the pooling of power generation and transmission facilities and prorated cost sharing. The Power Pool Agreement, as orginally formulated, was to be a short-term arrangement to permit the Authority to demonstrate that it could successfully operate the system and eventually assume operational control of the entire system. The Authority has experienced financial difficulties and transfer of operational control has been delayed. The Government of Guam claims that the agreement is inequitable and has been the primary cause of the Authority's financial problems.

GAO believes that the agreement is basically equitable and that the Authority's financial difficulties stem from an inadequate rate structure, undercapitalization and the dramatic rise in fuel oil price. GAO also believes that the current arrangement has the necessary mechanism to permit the Authority to assume operational control of the Island-Wide Power System and for the Navy's transition to a customer status. This year Guam filed suit against the United States, claiming that Congress intended for the Navy to transfer the entire power system to Guam's civilian government under the Organic Act of 1950. Guam officials claim that the agreement is inequitable because the Navy: (1) charges amortization costs for its fixed assets in the power pool; (2) overvalued its fixed assets included under the agreement; and (3) is subsidized by the Authority because it has higher per-unit operating costs under the cost-sharing arrangement. GAO found that the Navy lacked sufficient documentation to support the service lives assigned to the power barge and powerplants which could result in excess amortization costs. Navy unit costs associated with its participation in the power pool are higher than the Authority's, but GAO does not believe this represents an inequity in the agreement, because higher costs to one party are an inherent possibility in such an arrangement. The Navy and the Authority disagree on the levels of reserve capacity needed for the Island-Wide Power System. GAO believes that the Authority must increase rates to keep up with rising costs.