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Department of Energy

DOE08: Support the Sale of the Alaska Power Administration

Background

The federal government markets power from its 129 hydroelectric projects throughout the United States through five Power Marketing Administrations (PMAs). These multipurpose projects are constructed and owned by the Department of the Interior's Bureau of Reclamation and the U.S. Army Corps of Engineers. They operate the projects for flood control, navigation, irrigation, and more recently, for recreational purposes. They also generate 45 percent of the nation's hydroelectric power as a by-product. This power is sold by the PMAs to local public, private, and cooperative utilities at cost. Supplemental power from these projects is provided to all but 16 states.

Unique among PMAs, the Alaska Power Administration (APA) owns, operates, and maintains two hydroelectric projects, Eklutna and Snettisham. Not only are these two projects confined to local Alaska markets, but, unlike the other PMAs, the APA's single-purpose projects are not the result of a water resource management plan, nor are they intended to remain indefinitely under federal government control.(1) Instead, they were created to encourage and promote economic development and to foster the establishment of essential industries in Alaska. To carry out their mission, they provide and encourage widespread use of hydroelectric power at the lowest possible rates, consistent with sound business principles.(2) It was for these purposes, rather than flood control, navigation, irrigation, and recreation, that the 30 megawatt (MW) Eklutna project was built in 1955 to serve the Anchorage and Matanuska Valley areas, and the 78 MW Snettisham project was constructed in 1975 to serve Juneau.

To date, the two projects have served their original purposes well.(3) Findings indicate that not only have they provided widespread, relatively low-cost, long-term supplies of renewable energy to the areas served and recovered the federal costs as intended in the authorizing legislation, but economic and industrial development has occurred to the point where their role in Alaska as major providers of electric power has greatly diminished. Together, these projects provide only about 8 percent of the total energy requirements of Alaska's electric utilities. Individually, the Eklutna project provides about 5 percent of the power needs in its market area, and Snettisham provides 80 percent of Juneau's power requirements.(4)

These findings indicate that the time has come for the federal government's divestiture of these projects, since the goals, as originally intended, have been met. It is no longer necessary for the federal government to operate a small separate power program in Alaska because:

--- the projects fill a small market niche;

--- economic and industrial development of the regions served has evolved as planned;

--- other providers have emerged that can serve the region's needs; and

--- the state and local electric utilities are poised to manage the projects in a manner consistent with Alaska's future energy and development needs.

It is against this backdrop that divestiture of APA projects must be reviewed.(5)

Although informal discussions of divestiture date back many years, it was not until 1986 that the formal proposal first appeared in the budget. Subsequent to this, a public comment process resulted in invitations of proposals to purchase the projects being extended in the spring of 1987 to electric utilities served by APA projects. In response to solicitations requests, the Alaska Energy Authority proposed to purchase the Snettisham Project, while three utilities, the City of Anchorage, the Matanuska Electric Association, and the Chugach Electric Association, submitted a joint proposal to purchase Eklutna. Finding both prospective purchasers well-qualified to own, operate, and maintain the projects, APA moved forward to draft purchase agreements.

APA and the proposing parties negotiated the purchase agreements, which set forth the terms, conditions, and responsibilities of each party for the orderly sale and transfer of the projects. The final agreements, signed in 1989, have been amended twice to extend the purchase deadline to February 1995. They reflect great care and deliberation to incorporate and address, to the extent possible, all views and concerns of interested parties to ensure a balance between federal taxpayers, federal agencies affected, state and local utilities, and retail customers. As a result, the divestiture proposal has widespread support.

Since the initiation of the proposal, the Alaska congressional delegation, three governors, local officials, the utilities, DOE, OMB, and the House Appropriations Committee have supported the divestiture proposal.(6) The only matter pending for the purchase agreements to take effect is for authorizing legislation to be enacted similar to H.R. 5516, which was introduced but not considered by the 102nd Congress. Current plans call for a similar bill to be presented to Congress this summer. Failure to pass the bill will result in the status quo and perpetuate the current administratively inefficient federal operation of these two projects.

Action

Legislation should be enacted that is the same as, or similar to, H.R. 5516 from the 102nd Congress authorizing the sale of the two Alaska Power Administration projects in accordance with the previously negotiated purchase agreements.

The sale of the APA assets will result in the transfer of approximately $80 million to the U.S. Treasury. This amount represents about 95 percent of the present value of the interest and principal payments the government would receive under continued federal ownership. The government would no longer be responsible for staffing and for funding the operation, maintenance, repair, and replacement costs of the two projects and would avoid potential future claims and liabilities, such as the 1964 earthquake damage to Eklutna.(7)

Implications

The public process leading to the purchase agreements has been conducted in a manner that ensured that the views of all interested parties were heard and, to the extent possible, accommodated and reflected in the current purchase agreements. Nevertheless, the General Accounting Office (GAO), some members of Congress, and public power interests may raise concerns once the legislation is re-introduced.

GAO's objections center around the fact that the sale price is negotiated rather than market-based. While a market-based price would certainly result in an increase in the asking price, it would do so at the expense of Alaska ratepayers and stakeholders and raise objections from members of Congress who consistently argue that the government should not make a profit from the sale of such government property.(8) In objecting to market rate studies of PMA electrical power, Congress has indicated that these public facilities should provide services at the lowest possible cost to consumers consistent with sound business principles; selling at market price would defeat this purpose. Rates charged to consumers would increase substantially to enable the buyers to recover the market-based selling price.(9)

Some public power interests are concerned that the APA sale will establish a precedent and lead to the sale of other PMA assets. This concern is unfounded since APA's unique situation cannot be considered as setting a precedent for other PMAs. Instead, divestiture of APA should be viewed as a unique situation that supports the concept of identifying unique circumstances where divestiture is beneficial to both the federal and state governments and affected local sectors. Another concern of the public power interests is that public utilities and cooperatives be given preference in any such sale of PMA assets. In the case of APA, the purchasers are either public power utilities or rural electric cooperatives, all of which have a history of effectively serving the regions of APA projects.

While mild opposition to the sale has been voiced by different stakeholders, the current terms and conditions are expected to be approved by Congress. On the whole, there should be minimal opposition to the sale and transfer of these projects. By all measures, it is time to divest. Studies indicate that state and local power utilities can operate and maintain the projects and align their management in a manner consistent with Alaska's energy needs and future growth requirements.

Fiscal Impact

The federal government will be relieved of the responsibility of owning and operating two small isolated hydroelectric projects in Alaska and of any liabilities for future maintenance, equipment replacement, and claims. Equally important, proceeds from the sale will recover nearly 95 percent of the present value of the original federal investment in APA projects and prescribed interest (estimated between $73.5 and $80.3 million, depending on certain conditions when the sale is approved), and forgone annual revenues of approximately $10 million will be nearly offset by the avoidance of annual expenditures averaging $4 million for management and operations and $6 million in principal and interest on the outstanding debt on these two projects.

In designing a break-even or cost-recovery sale of these two projects, the federal government meets two goals: first, it furthers the taxpayers' interests by recovering nearly all of the original investment, and second, it addresses the consumers' concerns that hydroelectric power continue to be provided without a significant increase in rates.

The fiscal impact of the sale of these two projects will be as shown in the following table.

Revenue and Expenses from the Sale of the 
Alaska Power Administration (Dollars in Millions) 
*************************************************
Fiscal Year
              1994      1995     1996      1997      1998      1999
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Revenue(10)   10.2     -10.5    -10.6     -10.4     -10.5     -10.5     

Proceeds from Sale11 80.3

Total Revenues 90.5 -10.5 -10.6 -10.4 -10.5 -10.5

Expenses: O & M(12) 4.0 - 4.0 - 4.0 - 4.0 - 4.0 - 4.0

Transfer Cost(13) 1.9

Principal(14)- 1.8 - 1.9 - 1.7 - 2.0 -1.9

Interest - 4.8 - 4.8 - 4.8 -4.7 - 4.7

NPV P&I(15) 81.4

Total Expenses 87.3 - 10.6 -10.7 -10.5 -10.7 -10.6 Revenue- Expenses 3.2 0.1 0.1 0.1 0.2 0.1

Budget Authority (BA), Outlays, and Revenues (Dollars in Millions) 
******************************************************************
Fiscal Year
            1994     1995     1996     1997    1998    1999    Total
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
BA          n/a      -3.9     -4.0     -4.1    -4.2    -4.3    -20.5     
Outlays     n/a      -3.8     -3.9     -4.1    -4.2    -4.2    -20.2     
Revenues    n/a     -10.5    -10.6    -10.4   -10.5   -10.5    -52.5     
Change
in FTEs     n/a     -35      -35      -35     -35     -35      -35

Note: The figures presented do not include future maintenance or repairs to the hydroelectric equipment, dams, or the infrastructure of transmission facilities and power lines, which is estimated to be approximately $5 million between fiscal 1994 through 1998.16

Endnotes

1. Eklutna Project Act of July 31, 1950, P.L. 81-628, 64 Stat. 382 (1950).

2. Ibid.

3. Letter from Secretary Hazel O'Leary, Department of Energy, to Chairman George Miller, House Committee on Natural Resources, July 2, 1993.

4. U.S. Department of Energy, Alaska Power Administration, Sale of Eklutna and Snettisham Hydroelectric Project, Divestiture Summary Report (Juneau, Alaska, April 1992), p. 1.

5. Letter from Secretary Hazel O'Leary, July 2, 1993.

6. Letter from Secretary Hazel O'Leary, Department of Energy, to Alaska congressional delegation, March 4, 1993; Letter from Governor Walter J. Hickel to Secretary Hazel O'Leary, Department of Energy, March 15, 1993; Letter from Governor Steve Cowper to Secretary James Watkins, Department of Energy, April 20, 1990; and House, Committee on Appropriations, Report 103-105 to accompany H.R. 2445, Report 102-105 to accompany H.R. 2445, Energy and Water Development Appropriations Bill, June 17, 1993, p. 129.

7. Eklutna Project, Alaska-Rehabilitation, P.L. 90-523, 82 stat. 875.

8. Letter from Executive Director Ronald A. Garzini, Alaska Energy Authority, to Secretary Hazel O'Leary, Department of Energy, May 19, 1993.

9. Joint Resolution Making Continuing Appropriations for Fiscal Year 1983, Section 166, P.L. 97-276, 96 Stat. 120 (1983).

10. Four-year revenue estimates used in fiscal year 1995 budget preparation based on 1992 repayment studies.

11. Eklutna sales price is fixed at $8,818,000 and Snettisham is estimated between $64,741,000 and $71,456,000, depending on the current revenue bond rate, estimated between 6.5 and 7.5 percent. Estimate is made for sales transaction date of October 1, 1993.

12. 1994 operating and maintenance budget is $4,010,000. For the purpose of this analysis, it is kept constant throughout the five years.

13. DOE, p. 35.

14. Data from fiscal year 1992 Alaska Power Administration power repayment study for Eklutna and Snettisham projects.

15. Net present values for principal and interest is derived by adding the remaining principal and interest payments on both projects and discounting them by 7.9 percent.

16. Replacement costs based on Alaska Power Administration investment replacement estimates, July 16, 1993.

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