Federal Power

In recent years, various bills have been introduced to divest the federal assets used for generating, transmitting, and marketing hydroelectricity. At the request of various members of Congress, GAO agreed to develop a primer discussing issues to be considered in any discussion of the divestiture of federal hydropower assets, including federal power marketing administrations (PMAs). GAO agreed to provide information of the Southeastern, Southwestern, and Western PMAs, including similarities and differences, and their interactions with the agencies that operate federal water projects (mostly, the Bureau of Reclamation and the Army Corps of Engineers); the main objectives and general decisions involved in divesting federal assets; and the specific issues related to hydropower to be addressed before a divestiture of the PMAs. GAO found that while Southeastern, Southwestern, and Western all market hydropower generated at federal water projects, they serve different geographical areas and have different assets. The PMAs are not the main source of electricity for most of their customers; the three in the GAO survey supply only about 7 percent of the electricity requirements of their customers. However, because their power is purchased primarily during times of peak demand at rates that are, on average, half the rates charged by other utilities, great demand exists for PMA power. Implementing divestiture of hydropower assets include 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. 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 would need to be addressed. These include balancing how water is used among the multiple purposes of federal water projects; assigning the numerous contractual obligations and liabilities of the Bureau, the Corps, and the PMAs; handling Native Americans' claims to water, property, and tribal artifacts; and determining the future responsibility for protecting the environment and endangered species. The potential effects of a divestiture on wholesale and retail electric rates, which in turn would affect regional economies, are other important issues.

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.