United States. Congress. House. Committee on Resou.

Federal power marketing administration accounting practices : oversight hearing before the Subcommittee on Water and Power Resources, Committee on Resources, House of Representatives, One Hundred Fourth Congress, second session ... September 19, 1996 online

. (page 1 of 9)
Online LibraryUnited States. Congress. House. Committee on ResouFederal power marketing administration accounting practices : oversight hearing before the Subcommittee on Water and Power Resources, Committee on Resources, House of Representatives, One Hundred Fourth Congress, second session ... September 19, 1996 → online text (page 1 of 9)
Font size
QR-code for this ebook


A

\V) X FEDERAL POWER MARKETING ADMINISTRATION
v ACCOUNTING PRACTICES



Y 4. R 31/3: 104-101



T HEARING



Federal Pouer flarketing Adninistrat. . . c

>RE THE

SUBCOMMITTEE ON WATER AND POWER-
RESOURCES
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION
ON

ACCOUNTING PRACTICES FOR FEDERAL POWER
MARKETING ADMINISTRATIONS [PMAS]



SEPTEMBER 19, 1996



Serial No. 104-101



Printed for the use of the Committee on Resources







U.S. GOVERNMENT PRINTING OFFICE
35-568cc WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-053836-X



\VP FEDERAL POWER MARKETING ADMINISTRATION
^ ACCOUNTING PRACTICES



Y 4. R 31/3: 104-101

T HEARING

Federal Pouer Uarketing Adninistrat. . . /RE THE

SUBCOMMITTEE ON WATER AND POWER

RESOURCES

COMMITTEE ON RESOURCES

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION
ON

ACCOUNTING PRACTICES FOR FEDERAL POWER
MARKETING ADMINISTRATIONS [PMAS]



SEPTEMBER 19, 1996



Serial No. 104-101



Printed for the use of the Committee on Resources




/.->






U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1996



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053836-X



COMMITTEE ON RESOURCES



DON YOUNG, Alaska, Chairman



W.J. (BILLY) TAUZIN, Louisiana
JAMES V. HANSEN, Utah
JIM SAXTON, New Jersey
ELTON GALLEGLY, California
JOHN J. DUNCAN, Jr., Tennessee
JOEL HEFLEY, Colorado
JOHN T. DOOLITTLE, California
WAYNE ALLARD, Colorado
WAYNE T. GILCHREST, Maryland
KEN CALVERT, California
RICHARD W. POMBO, California
PETER G. TORKILDSEN, Massachusetts
J.D. HAYWORTH, Arizona
FRANK A. CREMEANS, Ohio
BARBARA CUBIN, Wyoming
WES COOLEY, Oregon
HELEN CHENOWETH, Idaho
LINDA SMITH, Washington
GEORGE P. RADANOVICH, California
WALTER B. JONES, Jr., North Carolina
WILLIAM M. (MAC) THORNBERRY, Texas
RICHARD (DOC) HASTINGS, Washington
JACK METCALF, Washington
JAMES B. LONGLEY, Jr., Maine
JOHN B. SHADEGG, Arizona
JOHN E. ENSIGN, Nevada



GEORGE MILLER, California
EDWARD J. MARKEY, Massachusetts
NICK J. RAHALL II, West Virginia
BRUCE F. VENTO, Minnesota
DALE E. KILDEE, Michigan
PAT WILLIAMS, Montana
SAM GEJDENSON, Connecticut
BILL RICHARDSON, New Mexico
PETER A. DeFAZIO, Oregon
ENI F.H. FALEOMAVAEGA, American

Samoa
TIM JOHNSON, South Dakota
NEIL ABERCROMBIE, Hawaii
GERRY E. STUDDS, Massachusetts
SOLOMON P. ORTIZ, Texas
OWEN B. PICKETT, Virginia
FRANK PALLONE, Jr., New Jersey
CALVIN M. DOOLEY, California
CARLOS A. ROMERO-BARCELO, Puerto

Rico
MAURICE D. HINCHEY, New York
ROBERT A. UNDERWOOD, Guam
SAM FARR, California
PATRICK J. KENNEDY, Rhode Island



Daniel Val Kish, Chief of Staff

Elizabeth Megginson, Chief Counsel

Christine A. Kennedy, Chief Clerk /Administrator

John Lawrence, Democratic Staff Director



SUBCOMMITTEE ON WATER AND POWER RESOURCES
JOHN DOOLITTLE, California, Chairman



JAMES V. HANSEN, Utah

WAYNE ALLARD, Colorado

RICHARD W. POMBO, California

FRANK A. CREMEANS, Ohio

WES COOLEY, Oregon

HELEN CHENOWETH, Idaho

GEORGE P. RADANOVICH, California

WILLIAM M. (MAC) THORNBERRY, Texas

RICHARD (DOC) HASTINGS, Washington

JOHN E. SHADEGG, Arizona

JOHN E. ENSIGN, Nevada



PETER A. DeFAZIO, Oregon
GEORGE MILLER, California
BRUCE F. VENTO, Minnesota
SAM GEJDENSON, Connecticut
OWEN B. PICKETT, Virginia
CALVIN, M. DOOLEY, California
MAURICE D. HINCHEY, New York
SAM FARR, California



Robert Faber, Staff Director / Counsel

Valerie West, Professional Staff

Elizabeth Birnbaum, Democratic Counsel



(II)



CONTENTS



Page

Hearing held September 19, 1996 1

Statement of Members:

Doolittle, Hon. John T., a U.S. Representative from California 1

DeFazio, Hon. Peter, a U.S. Representative from Oregon 3

Prepared statement 4

Statement of Witnesses:

Calbom, Linda, Director, Accounting and Information Management Divi-
sion, U.S. General Accounting Office 6

Prepared statement 43

Shafer, J.M., Administrator, Western Area Power Administration, U.S.

Department of Energy 10

Prepared statement 58

Additional material supplied:

American Public Power Association 64

Due to the high cost of Printing the GAO Report referred to can be
found in Committee files 10



(III)



ACCOUNTING PRACTICES FOR FEDERAL
POWER MARKETING ADMINISTRATIONS



THURSDAY, SEPTEMBER 19, 1996

House of Representatives,
Subcommittee on Water and Power Resources,

Committee on Resources,

Washington, DC.
The subcommittee met, pursuant to call, at 2:55 p.m., in room
1334, Longworth House Office Building, Hon. John T. Doolittle
(chairman of the subcommittee) presiding.

STATEMENT OF HON. JOHN T. DOOLITTLE, A U.S.
REPRESENTATIVE FROM CALIFORNIA

Mr. Doolittle. The Subcommittee on Water and Power Re-
sources will come to order. The Chair apologizes for this delay — we
have had several key votes, and it seemed prudent to get through
them before we began.

The subcommittee is meeting today to hold an oversight hearing
on the accounting practices for the Federal Power Marketing Ad-
ministrations. We have several individual members who have
asked to be with us on the dais, and I ask unanimous consent that
the gentleman from New Jersey, Mr. Franks, the gentleman from
Massachusetts, Mr. Meehan, and the gentleman from South Caro-
lina, Mr. Spratt, be permitted to sit with the subcommittee and to
participate in the hearing. Hearing no objection, the unanimous
consent request is granted.

I want to welcome the witnesses who are here today to testify
concerning the Accounting Practices for the Federal Power Market-
ing Administrations [PMAS] and whether the PMAS currently re-
cover all of their costs as compared with other non-Federal utilities.

Last year, we were told by various witnesses who favor these
programs that they were shining examples of self-sustaining, prof-
itable government enterprises. We were told that these programs
were in no way subsidized. Other evidence and testimony indicated
that the picture was not so rosy.

Consequently, last December, I asked the General Accounting Of-
fice to determine [1] whether all power-related costs are being re-
covered through the PMAs' electricity rates; [2] if the financing for
the PMAs and hydropower-related capital projects is subsidized by
the Federal Government; and [3] how PMAs cost-recovery pro-
grams compare with similar investor-owned and public power oper-
ated electric utilities.

Through hearings by this subcommittee, we have already learned
that the PMAs and the underlying Federal hydropower facilities

(l)



are often not maintained to industry standards and that decisions
are made that would be financially unacceptable for non-Federal
entities. I believe we will learn today from the GAO that the cost
recovery practices used by the Federal Government would put a
similarly run privately or publicly owned utility in deep financial
trouble, if indeed not bankruptcy.

While the GAO will have ample opportunity to present details of
their investigation, I believe it is safe to say that we are going to
hear today that the unrecovered power-related costs and financing
subsidies total nearly $300 million for fiscal year 1995 alone and
annually thereafter for the foreseeable future. In total, over the
last 30 years, GAO estimates that these costs have been in the bil-
lions of dollars.

Under the Flood Control Act of 1944 and subsequent authorizing
legislation, the PMAs are charged with marketing power at the
lowest rate consistent with sound business principles. This report
is an important contribution to the debate regarding the future of
the PMAs and related hydropower production facilities. It should
provide real insight into the question of whether there has been
more emphasis on the lowest rate and less on the concept of sound
business principles.

The subcommittee has learned that the Clinton Administration
has known of this problem for several years but has failed to come
forward to the Congress for consultation or to propose legislation
to address it. The Inspector General for the Department of Energy
within the Clinton Administration has, over the last several years,
reached conclusions similar to those disclosed today by the GAO
concerning cost-recovery shortfalls by the PMAs. In 1994 and 1995,
as a result of financial audits of the PMAs, the Inspector General
stated that the PMAs were not fully recovering the costs of operat-
ing these power projects.

Finally, I question the credibility of a letter I read a couple days
ago that was written by an organization that has not read the GAO
report, but was nonetheless critical of it. It is clear from reading
the letter that it contained facts with inaccuracies. But perhaps
more important is the thrust of the letter that the GAO is to be
faulted because it has failed to find illegal activity by government
employees.

They miss the whole point here. The GAO has been asked to in-
vestigate information which bears on policies adopted by prior Con-
gresses. It is clearly time to review these policies and change them.
You don't need illegal activity to justify a change in policy. Poor
management will suffice.

In closing, let me reiterate that I look forward to the testimony
of our witnesses. This issue is complex, and I do not believe we
have gotten to the bottom of it. We have a responsibility to oversee
these operations to ensure that the interests of the taxpayer are
protected, and that the appropriate policies and laws are in force
to make sure these programs are run using good business prac-
tices. At this point, I would like to recognize the ranking member,
Mr. DeFazio, for his statement.



STATEMENT OF HON. PETER DEFAZIO, A U.S.
REPRESENTATIVE FROM OREGON

Mr. DeFazio. Thank you, Mr. Chairman. I appreciate the oppor-
tunity. I don't believe that the real motivation for this hearing is
that, you know, we are here just to deal with the GAO report based
on the problems identified because, in fact, there are a number of
problems identified by the GAO report that I have advocated we
should deal with for years, particularly, the huge subsidies which
are mandated on ratepayers and taxpayers for the irrigation of pri-
vate lands in the western United States.

I would certainly agree with the GAO on that area, and I would
be happy to work with the Chairman for dramatic reforms in that
area. You know, simply ratepayers have nothing to do with nor
should they foot the bill nor should they subsidize irrigators. In the
case of the pumping power at Grand Coulee on the Columbia, it is
a loss of $25 million a year for that one project if we were allowed
by law to set a market rate for that power.

So, you know, I find that I find some merit there, and I find they
are in other parts of the proposal; that is, in particular, that we
should look at the interest subsidies in the Northwest. One power
administration recently negotiated with the Federal Government,
and we have set all of our repayment at market rate. So that has
been dealt with and perhaps the other PMAs as you look at a refi-
nancing of their debt in a similar manner.

I can't agree on the discussion of environmental costs. Some of
the environmental recovery efforts are consequent to Federal trea-
ties, treaties with tribes, treaties with foreign nations; Canada in
the case of salmon in the Northwest. And I don't believe that the
ratepayers of a small region of the country should have total re-
sponsibility of either carrying the lion's share or the burden of pay-
ing for those costs.

So, you know, I have a hard time finding that, you know, these
should be considered as subsidies as opposed to a shared burden
that is being paid for partially by ratepayers and partially in the
national interest.

But the thing that I find most disturbing here is that, you know,
the proposal, which is lurking in the background which drives this
report and drives this hearing, is the Franks-Meehan bill. It is an
extraordinary piece of legislation. We have just gone through the
waiver of laws by the timber salvage rider of the Pacific Northwest,
which I opposed.

And now we are confronted with, under the guise of privatization
and save the taxpayers money, the second most extraordinary
waiver of Federal environmental laws in the history of the United
States in recent years. This bill does waive all environmental laws.
It is clear the Clinton Administration says it waives all environ-
mental laws. The analysis that I have conducted and others have
conducted says it does. The authors say no.

Well, it does and it does for a simple reason. These projects, if
they are not required to carry those environmental burdens, look
pretty good to the private sector. If they have to carry public bur-
dens, if they have to carry environmental burdens, if you have to
pay for past debt, suddenly these projects don't look so attractive.
In fact, some of them today are producing power after they meet



all their obligations at a cost which exceeds the market rate in the
western United States in the current free market and the change
that is going on in that market.

So it is not unintentional that the Franks-Meehan bill waives the
environmental laws and sets basically the status quo, whatever
that might be, in place for 10 years, whether it is adequate or not
actually. It is intentional because, otherwise, the authors of the
bill, whoever they might be, whether it is a private power interest
or others intended that so that these projects would be more attrac-
tive.

If we are going to look fairly at the sale of Federal power market-
ing agencies, we have to look at a fair return to the taxpayers and
a continuation of many burdens that today's private power is not
being asked to carry. And, you know, under those conditions, I be-
lieve these projects would be a much less attractive target.

So, in any case, I would be happy to move ahead with a number
of the reforms that are recommended. We have already adopted at
least one of the major cost subsidy issues that has been reformed
in the Pacific Northwest, and some other PMAs could come up to
that. I would be happy to give the relief from the irrigation sub-
sidies, which is the second largest cost identified.

The third largest cost identified is something that is a govern-
ment mind problem; that is, you are not paying for Federal Govern-
ment retirement and programs. The military pays about a penny,
and other parts of the government are paying only a fraction of the
costs of the retirement of their employees. And the PMAs are, un-
fortunately, not much of an exception in this area. It is something
that warrants attention on a governmentwide basis. There is no
reason to pick on the PMAs. Thank you, Mr. Chairman.

[The prepared statement of Hon. Peter A. DeFazio follows:]

Prepared Statement of Hon. Peter A. DeFazio

Mr. Chairman:

This hearing is not really about accounting and management problems at the fed-
eral power marketing administrations. I agree that there are problems with repay-
ment of federal investments, but those problems can be fixed without huge increases
in electric rates and without huge increases in electric rates and without gutting
environmental restoration efforts at federally-owned dams across the nation, as the
PMA sale proponents are proposing.

One of the problems identified in this GAO report is the fact that the law pre-
vents the Pick-Sloan project from properly allocating the costs of irrigation invest-
ments. I'm not sure that these costs should ever be borne by power users, to be hon-
est. The investments were made to benefit irrigators and under our very generous
irrigation project laws, if the irrigators can't pay, power users and the U.S. tax-
payers pick up the tab.

I'd like to point out to the Chairman that Northwest power users and the federal
government are currently helping to subsidize irrigated agriculture in our region to
the tune of hundreds of millions of dollars each year. For example — irrigation
project pumping power at the huge Grand Coulee Dam on the Columbia River is
set by law at less than one-tenth of one cent per kilowatt-hour. If the rate was set
at market rates — let's say about 2.1 cents per kilowatt hour — the Bonneville Power
Administration would collect at least $25 million a year more than it now collects.
According to the GAO, electric ratepayers are footing a large percentage of the bill
for irrigation investments at a number of projects in the Northwest.

If we look across the West, we see much the same picture. Power users are all-
too-often picking up the tab for subsidized irrigation. I'd like to work with Chairman
Doolittle to reduce these subsidies and provide a fair return to the Treasury for the
federal investments in irrigated agriculture. We could start with the legislation con-
sidered in the full committee yesterday that transfers federal assets at fire sale
prices to the Calsbad Irrigation District in New Mexico.



And I'd be happy to work with the gentleman to address the other legitimate con-
cerns raised in this GAO report.

But his hearing is not being held with the aim of improving management at the
PMAs. It is being held for one reason and one reason only: the Chairman of the sub-
committee and Senator Dole, his party's standard bearer in the presidential cam-
paign, want to build a case for selling the PMAs to the highest bidder. Senator Dole
wants to sell the PMAs to help finance his tax cuts. Chairman Doolittle wants to
do it, I assume, because of his conviction that private enterprise would better man-
age these projects, notwithstanding the almost certain electric rate hikes for mil-
lions of residential electric ratepayers from Georgia to South Dakota to California
and the Pacific Northwest.

I'm pleased to welcome to our committee the sponsors of a bill that would sell the
PMAs to the highest bidder. I'm glad they're here today, because it makes the un-
derlying agenda for this hearing quite clear.

A lot of the focus in the PMA sale debate has been the rate impacts for electric
consumers — especially rural electric consumers — now served by the federal power
marketing administrations. We know, for instance, that a PMA auction would prob-
ably increase wholesale electric rates for South Dakota residents by 146 percent.
That would translate into a 40 percent rate hike at the retail level for residents of
Pierre, South Dakota, for example. Average residential rate increases in Eastern
Montana would be 27 percent. Texas, 10 percent. Utah, 12 percent, the list goes on.

Of course, these PMA sale proposals are nothing more than tax increases by an-
other name. But that's really not the worst aspect of the proposals we have seen.

The Franks bill, the Dole plan, and the proposal that this committee approved
last year to sell Southeastern would sell these federal dams — lock, stock and bar-
rel — and exempt their future operations from all of the nation's environmental laws.
I'm sure the sponsors of these proposals will insist that their bills do nothing of the
kind. But just read the legislation.

Section 202 of the Franks-Meehan bill would require the Federal Energy Regu-
latory Commission — which regulates privately owned hydroelectric projects around
the nation — to issue a ten year license for these federal projects once they are sold
Unlike every other FERC license for every other private hydropower project, these
licenses would not be subject to the Clean Water Act, the Endangered Species Act,
the National Environmental policy act, the Wild and Scenic Rivers Act or any other
federal environmental law. According to this bill, these licenses could not be licenses
would be the "sole and exclusive" exclusive" regulations governing these newly
privatized projects.

The Franks-Meehan bill — and the Dole proposal — would be an absolute disaster
for salmon recovery efforts in the Pacific Northwest. This bill and the D61e plan
would doom the once-magnificent salmon runs of the Columbia River basin to ex-
tinction.

The Franks-Meehan bill and the Dole proposal would be an equally devastating
environmental disaster for every other federal hydropower project around the na-
tion. That's one of the reasons the administration opposed the Southeast Power Ad-
ministration sale proposal last year

And one of the many reasons that this committee's efforts to auction federal hy-
dropower projects without the associated environmental responsibilities is doomed
to failure is simply that the public will not stand for it.

Mr. Doolittle. Thank you. I would like to introduce our panel
of witnesses. We have Linda Calbom, Director of the Accounting
and Information Management Division, U.S. General Accounting
Office. Let me ask you all to come forward and remain standing for
the oath.

Greg Kutz, Assistant Director of the Accounting and Information
Management Division, U.S. General Accounting Office; Thomas
Armstrong, Assistant General Counsel of the same division of the
General Accounting Office; and then J.M. Shafer, Administrator of
the Western Area Power Administration. He will be accompanied
by his counterparts, Mike Diehl from the Southwestern Power Ad-
ministration and Charles Borchardt from the Southeastern Power
Administration.



6

So if the three of you will also come forward? I realize Mr. Shafer
is a witness, but the other gentlemen may be offering comments,
so we would like to have you all take the oath.

[Witnesses sworn.]

Mr. DOOLITTLE. Thank you. Let the record reflect each answered
in the affirmative. Please be seated. I would like to note for the
record that some representatives of the public power community
who had provided information to the GAO for this report and who
had requested a letter from the subcommittee inviting them to tes-
tify declined after they received the letter.

Under our committee rules, witnesses are asked to limit their
oral statements to 5 minutes, but their entire statements will ap-
pear in the record. In this case, I have agreed to allow 15 minutes
for the GAO testimony, given the extensive nature of the GAO re-
port.

I believe our witnesses are generally familiar with those lights.
At the beginning of the fourth minute, that yellow light will go on,
at the expiration or the end of the fifth minute, the red light will
go on signaling that it will be time to wrap up. The Chair will rec-
ognize Ms. Calbom for her testimony.

STATEMENT OF LINDA CALBOM, DIRECTOR, ACCOUNTING
AND INFORMATION MANAGEMENT DD7ISION, U.S. GENERAL
ACCOUNTING OFFICE; ACCOMPANIED BY GREG KUTZ, AS-
SISTANT DIRECTOR, ACCOUNTING AND INFORMATION MAN-
AGEMENT DD7ISION, U.S. GENERAL ACCOUNTING OFFICE;
AND THOMAS H. ARMSTRONG, ASSISTANT GENERAL COUN-
SEL, ACCOUNTING AND INFORMATION MANAGEMENT DD7I-
SION, U.S. GENERAL ACCOUNTING OFFICE

Ms. Calbom. Thank you, Mr. Chairman. Mr. Chairman and
members of the subcommittee, I am happy to testify on a report we
are issuing today in response to a request from you and the rank-
ing minority member of the full committee. As you mentioned, I am
accompanied by Mr. Greg Kutz of our Accounting and Information
Management Division, and Mr. Tom Armstrong of our Office of
General Counsel.

You and the ranking minority member asked us to answer three
questions about three power marketing administrations, Southeast-
ern, Southwestern, and Western. As you mentioned, Mr. Chairman,
you specifically asked us to determine (1) whether all power-related
costs incurred through September 30, 1995, had been recovered
through the PMAs' electricity rates, (2) if the financing for capital
projects is subsidized by the Federal Government and, if so, to
what extent, and (3) how these PMAs differ from non-Federal utili-
ties and the impact of these differences on power production costs.
We were not asked to and did not address whether any changes in
PMA cost-recovery practices or financing should be made.

Before I get into the answers to these questions, let me provide
some brief background information. Southeastern, Southwestern,
and Western, sell power produced at 102 hydroelectric dams built
and run primarily by the U.S. Army Corps of Engineers or the De-
partment of Interior's Bureau of Reclamation. Most of these hydro-
power facilities were originally designed for other purposes in addi-
tion to producing electricity.



The three PMAs receive annual appropriations to cover operating
and maintenance expenses and capital expenditures. Federal law


1 3 4 5 6 7 8 9

Online LibraryUnited States. Congress. House. Committee on ResouFederal power marketing administration accounting practices : oversight hearing before the Subcommittee on Water and Power Resources, Committee on Resources, House of Representatives, One Hundred Fourth Congress, second session ... September 19, 1996 → online text (page 1 of 9)