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Department of Energy

DOE04: Increase Electrical Power Revenues and Study Rates

Background

The federal government owns and operates major water resource management systems comprising nearly 130 dams. The systems control river flows, create navigable waterways, provide recreational areas, and generate hydroelectric power. The hydroelectric power is sold by the Department of Energy (DOE) through organizations known as Power Marketing Administrations (PMAs) at below-market rates to public, cooperative, and private utility customers. In most cases, PMA power supplements the electricity those utilities sell to their customers. Utilities in 34 states in the Southeast, Southwest, West, and Northwest receive PMA power.

The Flood Control Act of 1944 provides that PMA electricity should be sold "at the lowest possible rates to consumers, consis-tent with sound business principles."(1) PMA electricity rates are established on an at-cost basis to cover the costs of construction, operation, and maintenance of the hydroelectric facilities. However, assigned interest rates for repayment of the federal monies used to build these dams and facilities are generally well below the Treasury's cost of money. Also, the PMAs' hydroelectric power is cheaper because it is renewable energy that does not require the purchase of fuel to generate electricity. Even though most PMAs' power is provided to utilities at below-market rates, the U.S. Treasury receives nearly $3.4 billion annually from the sale of PMA electricity. There are two opportunities for the federal government to increase its revenues through the sale of PMA hydroelectric power.

The first opportunity for increasing revenues would not increase PMA charges to their utility customers. Currently, a number of power utilities offer their consumers energy conservation and efficiency programs called Demand Side Management (DSM). Considerable energy savings can be obtained if the utilities' DSM programs are promoted well and offer strong incentives to consumers to participate. The programs can be win-win situations because they reduce consumers' electricity bills, reduce fuel consumption, minimize environmental degradation, stimulate growth in industries that produce energy- efficient technologies, and lessen the demand for electricity that might otherwise force utilities to build costly new power generators.

Utilities that purchase and distribute PMA power can be given incentives to expand their current energy conservation programs or develop new ones. If a utility increases or initiates a new conservation program, the energy savings could be shared between the utility and the PMA. For example, if PMAs agreed to permit their utility customers to sell the energy saved to other utilities at market rates, the proceeds from such sales could then be shared between the utility and the U.S. Treasury. The increase in revenue could be substantial.

A second opportunity for increasing government revenues may entail slight increases in rates PMAs charge their customers. In recent years, these rates have not kept pace with the government's costs of financing the construction of the dam systems. Since the first federal hydroelectric projects were built, the Treasury's cost (its long-term interest rates) has increased, while interest rates on PMA hydroelectric projects and many project improvements have been kept artificially low at 1930 and 1940 levels. As Treasury long-term interest rates increased in the 1960s, 1970s, and 1980s, they exceeded the interest rates that PMAs elected to pay on project debts. The resulting differential created federal subsidies for these projects.

Since the 1950s, PMAs have been allowed to pay interest rates on new debts that are considerably below the govern-ment's cost of borrowing money. According to an Office of Management and Budget (OMB) study on PMA debt repayment, the Treasury has made a practice of borrowing money for the PMAs at 6 to 12 percent and accepting repayments on that debt at 2 to 4 percent.(2) This process, which continues today, results in an estimated revenue loss of over $360 million annually and an estimated $12.5 billion loss over the life of the PMA loans. This is inconsistent with the application of sound business principles required by the Flood Control Act. The revenue loss amounts to a taxpayer subsidy for those fortunate enough to live in PMA regions and receive PMA power through their local utility.

According to OMB, if the PMA rates were increased to cover the total cost of financing, the one-time rate increase to retail consumers would vary between 1 and 7 percent, depending primarily on the amount of power each utility purchases from a PMA in relation to the utility's total power output.(3) Utilities that receive only a small portion of their power from their regional PMA would pass on only a slight increase in rates. Utilities that receive a significant portion of their power from a PMA would pass on a more noticeable increase in monthly electricity bills. It is estimated that the average consumer receiving PMA power would experience a rate increase of about 5 percent--or an additional estimated $3.13 per month for a typical bill.(4) Even after this increase, utilities receiving PMA power would still be providing the cheapest electricity in the country.

While the interest rates for a few loans are determined by legislation, the interest rates on the debt for most PMAs is established by DOE. Thus, the decision to recover the full costs of government financing is a policy decision that can be made administratively by the Secretary.

Restructuring of debt may be examined as an alternative to rate revision and represents another opportunity for increasing federal revenues by allowing PMAs to refinance, for additional consideration, the present value of the current expected debt payments. Public and private sources of funds, terms and conditions of loans including interest rates and duration, and the remaining useful life of the assets subject to refinancing should be carefully considered. Options that minimize customer rate increases should be given priority. In assessing rate reform and debt restructuring alternatives, both the short- and long-term macroeconomic impacts on the region should be carefully analyzed.

Finally, the federal government is hampered by legislation that restricts its ability to oversee electrical power issues. Currently, the government cannot study the effect of applying market rates to the sale of PMA power. Some contend that studying market-based rates of electrical power would automatically lead to raising PMA rates to market levels. Congress has included a provision in either the Energy and Water Development Appropriations Acts or continuing appropriations each year since 1982 to prohibit the use of government funds for the study of electricity market rates.

This prohibition from studying market rates could deter DOE from developing and implementing programs that can be beneficial. For instance, in the energy conservation program discussed above, a DOE study of electricity market rates would help deter-mine appropriate levels of revenue sharing between PMAs and utilities. There may be future instances when programs of potential benefit cannot be promulgated because of DOE's inability to collect and analyze needed information. This prohibition prevents DOE from carrying out its mission and acting in the best interests of the nation as a whole.

Actions

1. The Secretary should encourage Power Marketing Administrations (PMAs) in the Southeast, Southwest, western areas, and Bonneville to be more aggressive in promoting energy conservation programs with their subscriber utilities.

These utilities should be permitted to sell PMAs' electric power saved under conservation programs to other customers. Sale of the saved PMA power should be at market rates. The preferred utilities and the Treasury should share in the proceeds from the sale of saved PMA power. The opportunity to sell PMA power at market rates should be an incentive for utilities to expand or start up new energy conservation programs with their customers.

2. The Secretary should establish a new rate policy for PMAs in the Southeast, Southwest, western areas, and Bonneville. The new policy should require that PMAs recover full operating costs, including differentials in interest rate financing, of each PMA hydroelectric facility. Annual repayment rate studies are conducted by PMAs and can be used as a basis for analysis by DOE. By establishing PMA electrical power rates that cover all operating costs, the federal government will eliminate direct taxpayer subsidy of PMAs and also take responsible steps toward reducing the federal deficit. Debt restructuring may be considered as an alternative to rate reform.

3. Congress should remove the Energy & Water Development Appropriations Act prohibition against expending federal funds to conduct studies of market rates or other non-cost-based methods for the pricing of hydroelectric power by federal PMAs.

Any market-based electrical rate studies conducted by DOE should be made available to the public. Any market rate studies should apply to the southeastern, southwestern, western, and Bonneville PMAs. While the Tennessee Valley Authority (TVA) is not a PMA, it is also protected under the restrictive legislation. In fairness, TVA should not be excluded from the study. The government needs to be able to collect and analyze market information that is necessary to carry out its mission and act in the best interest of the country as a whole. Any such studies should be con-ducted by DOE using available resources.

Implications

The action to implement energy conser-vation programs would be beneficial to a broad range of stakeholders. Consumers of PMA power would take advantage of energy conservation rebates and incentives that would save money on their electrical bills. Utilities purchasing the saved energy would obtain additional power to help meet market demands. The utilities and the U.S. Treasury would receive additional income from the sale of the saved power.

The action to recover the full cost of PMA power would simply allow the federal government to meet all of its expenses while providing this service. Electricity bills for some consumers in parts of more than 34 states may slightly increase. However, these consumers currently pay substantially less for the electricity they consume than others who are not fortunate enough to live in areas receiving PMA subsidized power.

The action to allow market rate studies provides DOE with the authority it needs to carry out its mission.

Fiscal Impact

OMB has projected that the sale of saved electrical power at market rates could provide, in the first year of the program, a modest $31 million in additional federal revenues. OMB expects that the program would pick up momentum in succeeding years and accrue an estimated $75 million, $95 million, $163 million, and $163 million in fiscal 1996 through 1999 respectively. These are conservative estimates.

OMB also projected that increasing PMA electrical rates to cover the cost differential between Treasury costs when the projects went into service and the interest rates the PMAs are applying to their debt would increase federal government annual revenues by $60 million, $117 million, $117 million, $119 million, $119 million and $119 million in fiscal 1994 through 1999.

The debt restructuring alternative may result in the reduction of some of the subsidy and recovery of some revenues. Depending on financial assumptions used, the increase in annual debt service could range from zero to $2.4 billion. The effect on consumers' electricity rates may be adjusted by obtaining favorable issuance terms and repayment periods for new debt sold on the open market.

The increase in revenues from these actions is shown in the following table.

Budget Authority (BA), Outlays, and Revenues (Dollars in Millions) 
******************************************************************

Fiscal Year 1994 1995 1996 1997 1998 1999 Total ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Outlays 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Revenues 60.0 148.0 792.0 814.0 882.0 905.0 3,601.0 Change in FTEs 0 0 0 0 0 0 0

Endnotes

1. Flood Control Act of 1944, ch. 665, sec. 5 (December 22, 1944).

2. U.S. Office of Management and Budget, "Fact Sheet on Reform of Federal Power Marketing Administration Debt Repayment Practices," Washington, D.C., 1990, p. 3.

3. Ibid., p. 4.

4. Ibid.

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