Power Marketing Administrations:

Their Ratesetting Practices Compared With Those of Nonfederal Utilities

AIMD-00-114: Published: Mar 30, 2000. Publicly Released: May 2, 2000.

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Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) power marketing administrations (PMA), focusing on: (1) how the PMAs set their rates to recover costs; (2) how the PMAs' ratesetting practices compare to those of investor-owned and publicly owned utilities; and (3) the impact of the PMAs' ability to defer repayment of portions of their debt on their future competitiveness.

GAO noted that: (1) the PMAs determine the adequacy of rates by performing annual reviews of their projected costs and revenues, using processes and assumptions that are to identify and factor into rates costs that are legally recoverable, while keeping rates as low as possible; (2) Southwestern, Southeastern, and most Western Area Power Administrations projects make this determination through power repayment studies (PRS); (3) Bonneville uses a revenue requirement study; (4) these studies analyze historical data and project estimated future costs and revenues as a key part of ratesetting; (5) regulatory oversight and the processes and assumptions that guide cost recovery vary among PMAs, investor-owned utilities (IOU) and publicly owned generating (POG) utilities; (6) in addition, rates are affected by responsibilities to investors and taxing authorities and whether the entity operates in a cost-based or market-based environment; (7) all the entities GAO reviewed had some kind of public process that took place when changes in rates were under consideration; (8) however, PMAs differed significantly from IOUs and POGs in two areas; (9) they have the flexibility to defer repayment of appropriated debt until the year due, which is typically longer than other utilities are able to defer repayment of their debts; (10) unlike IOUs and POGs, PMAs do not have to generate a return for owners and generally do not pay taxes; (11) while PMAs have the flexibility to defer repayment of appropriated debt until the year due, in practice they have repaid significant portions before due and generally retire high interest rate debt first; (12) nevertheless, the financing costs as a percentage of operating revenues of three of the PMAs--Bonneville, Southeastern, and Western--are high relative to IOUs and POGs; (13) these high financing costs may become more significant in an increasingly competitive electricity industry; (14) while the high financing costs will pose challenges for these three PMAs, all of the PMAs have important cost advantages that enhance their competitive positions as industry restructuring proceeds and other utilities attempt to cut costs and become more efficient; (15) key among the PMAs' advantages is that they market low-cost hydropower, much of it generated from facilities built decades ago at low cost; (16) in addition, in contrast to IOUs and POGs, PMAs are generally not required to pay taxes or generate a return for owners; and (17) because of these inherent cost advantages, the PMAs overall are well positioned competitively.

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