Appendixes to The Federal Government's Net Cost and Potential for Future Losses, Volume 2

The federal government spends more than a billion dollars annually to support the electricity-generating activities of the power marketing administrations and the Rural Utilities Service (RUS). At the same time, the federal government is vulnerable to future losses because of the financial difficulties faced by RUS borrowers, the Bonneville Power Administration, the Tennessee Valley Authority (TVA), and projects at each of the three power marketing administrations. The onset of competition in the electricity industry has heightened the risk of losses from these entities. GAO estimates that the net costs to the federal government totaled about $2.5 billion in fiscal year 1996. Cumulatively, for fiscal years 1992 through 1996, GAO estimates that the government's cost to run these entities has totaled about $8.6 billion, including more than $1 billion in RUS loan write-offs. As of September 1996, the federal government's direct and indirect financial involvement in the electricity-related activities of RUS, the power marketing administrations, and TVA totaled more than $84 billion. Future losses may arise if (1) RUS borrowers, the power marketing administrations, or TVA default on $53 billion in debt owed to the federal government or (2) the federal government incurs unreimbursed expenses to prevent default or breach of contract on the $31 billion in nonfederal debt. Some RUS borrowers, the power marketing administrations, and TVA are financially vulnerable, mainly because of uneconomical construction projects and the accumulation of substantial debt, which have resulted in high fixed costs. The second volume of this report contains background information on the federal entities included in GAO's review. The second volume also provides (1) a detailed explanation of GAO's objectives, scope, and methodology; (2) additional information on the likelihood of future losses to the federal government from the electricity-related activities of these entities; and (3) further details on the federal government's net costs related to these activities.

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.