Response to APPA Letter

Pursuant to a congressional request, GAO evaluated comments submitted to the subcommittee by the American Public Power Association (APPA) on GAO's report on three power marketing administrations (PMAs): Southeastern Power Administration, Southwestern Power Administration, and Western Area Power Administration.

GAO noted that: (1) the primary objective of GAO's congressionally requested review was to determine whether PMAs' power rates recovered all power-related costs as of September 30, 1995, and to what extent, if any, the financing for power-related capital projects is subsidized by the federal government; (2) APPA stated that GAO's report seriously misrepresents the financial status of the PMAs by blending currently unrecovered power-related costs with financing subsidies to produce annual and cumulative estimates of uncollected costs related to the PMAs' operations; (3) carefully applying these criteria, GAO estimated that the unrecovered power-related costs financing subsidies for the three PMAs totalled about $300 million for fiscal year 1995; (4) while GAO recognizes the distinction between "unrecovered" and "unrecoverable," GAO believes that "unrecoverable" costs are essentially a subset of "unrecovered" costs; (5) however, most of this estimate pertains to the financing subsidy and unrecovered pension and postretirement health benefits, which are not recoverable under existing PMA practices; (6) APPA also stated that GAO selected an arbitrary method for calculating the "alleged financing subsidies"; (7) GAO defined the financing subsidy as the difference between Treasury's borrowing cost and the interest rate paid by the three PMAs to Treasury; (8) this interest differential is the result of explicit subsidies and the economic cost to the federal government of taking on interest rate risk in the structuring of the PMA financing; (9) GAO agrees with APPA and the PMAs that the most accurate way to assess the first component of the financing subsidy (the initial below market financing) would be to compare the PMAs' and Treasury's interest rates on a project-by-project basis in the year the project was placed in service; (10) GAO disagrees that the calculation proposed by APPA and the PMAs would accurately capture the full subsidy cost; (11) APPA stated that GAO engaged in selective and misleading comparisons of the PMAs and nonfederal utilities and that it was inappropriate to compare the cost of federal power produced with hydropower assets to the cost of nonfederal power produced from a variety of sources; (12) since the PMAs compete against all utilities, not just those that are primarily hydro-based, a comparison of power produced from hydroelectric facilities would generally be irrelevant to the overall competitive position of the PMAs; and (13) GAO's report provides an appropriates discussion of the relative advantages and disadvantages to PMAs have compared to nonfederal utilities.