B-226008, May 27, 1988, 67 Comp.Gen. 426

B-226008: May 27, 1988

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Western has specific authority to fix rates and establish charges in connection with its sales of electric power to all users and therefore is not limited by the Economy Act of 1932 to actual cost charges when furnishing services to other federal agencies. Authority to Pay Interest to the Western Area Power Administration: This is in response to a request from the Comptroller of the Navy for an opinion on whether the Department of the Navy has authority to pay interest to the Western Area Power Administration (Western). We are of the opinion that such interest payments are proper. The Navy assumed that the provision applied only to private sector users and that it was exempt by virtue of its status as a federal agency.

B-226008, May 27, 1988, 67 Comp.Gen. 426

Claims Against Government - Past Due Accounts - Liquidated Damages - Interest - Utility Services The Western Area Power Administration (Western) a Department of Energy electric power marketing agency, may properly assess late payment liquidated damages in the form of interest fees against federal agencies which fail to pay their electric power bills on time. Western has specific authority to fix rates and establish charges in connection with its sales of electric power to all users and therefore is not limited by the Economy Act of 1932 to actual cost charges when furnishing services to other federal agencies.

Authority to Pay Interest to the Western Area Power Administration:

This is in response to a request from the Comptroller of the Navy for an opinion on whether the Department of the Navy has authority to pay interest to the Western Area Power Administration (Western), an electric power marketing agency of the Department of Energy, on past due bills for electric power supplied by Western /1/ to the Navy. For the reasons outlined below, we are of the opinion that such interest payments are proper.

The Navy's current electric service contract with Western has been in effect since May 1984. That agreement provides that if the power user fails to pay any bill when due, an interest charge of 2 percent of the amount unpaid shall be added to the bill as liquidated damages. addition, on the first day of each succeeding month, an interest charge of 1 percent of the unpaid balance shall be added to the bill until the entire amount due has been paid.

This provision has been included in the Navy's contracts for over 10 years; however, Western only started to enforce the provision about 2 years ago. The Navy assumed that the provision applied only to private sector users and that it was exempt by virtue of its status as a federal agency.

The Navy questions whether the late payment penalties violate the provisions of section 601 of the Economy Act of 1932, 47 Stat. 417 as amended, 31 U.S.C. Sec. 1535 (1982). Among other things, the statute requires that goods and services provided by one federal agency to another shall be on an actual cost basis as determined by the agency or unit filling the order. The Navy believes these late payment fees may exceed the actual cost of the electric power and therefore constitute improper payments under the Economy Act of 1932.

Western contends that its sale of power and the late payment charges assessed against the Navy are not subject to the provisions of the Economy Act of 1932. Western asserts that the statute authorizing it to market electric power also grants it discretion to assess late payment charges.

We had an occasion to decide a similar case in 44 Comp.Gen. 683 (1965). In that case the Department of the Army complained that the Tennessee Valley Authority (TVA), in furnishing electric power to some Army installations, had billed it for certain penalties and surcharges. The Army argued that under provisions of the Economy Act of 1932, it was entitled to receive such power on an actual cost basis and that the penalties and surcharges by their nature exceeded the actual cost of the power TVA provided. Upon review of the TVA Act (16 U.S.C. Sec. 831n-4), we determined that TVA had discretion to establish conditions and rates for the sale of electric power to its customers. Based on our construction of the Act, we held that TVA has authority to sell electric power to government agencies without regard to the actual cost provisions of the Economy Act of 1932. We believe the holding in this case is applicable to the situation presented by the Navy and Western, providing Western has statutory authority to establish conditions and rates for the sale of electric power to its customers.

Western believes that the electric power marketing authority contained in the Reclamation Project Act of 1939 (43 U.S.C. Sec. 485h) provides it with authority similar to that of the TVA. Subsection (c) of 43 U.S.C. Sec. 485h vests certain discretion in the Secretary of Energy (which under 42 U.S.C. Sec. 7152(3) has been delegated to Western) to establish rates to produce revenues at least sufficient to cover each user's share of the annual operation and maintenance cost of the project. The statute also authorizes the Secretary to fix user charges so as to recover interest on an appropriate share of the construction investment. The statute fixes the interest rate floor at 3 percent but does not provide a ceiling. The statute further permits the Secretary to cover in his rate charges other fixed charges as he deems proper.

Liquidated damages in the form of interest charges are not part of the rate structure specified in the statute but are a means of making Western an economically viable entity and are themselves a direct cost. As was pointed out by Western's Area Manager in an April 4, 1986 letter to the Navy:

"... Western is fiscally responsible for its cost, i.e., its costs are entirely paid by its customers through power sales. Thus, the impact is not to the Treasury, but to Western's customers. Western is required to follow prudent business practices in marketing power. An interest cost is incurred when payments are not received in a timely manner. This cost affects the total amount of revenue which Western must recover and hence the rates at which Western markets power. As a practical business matter, Western cannot continue to permit a customer to make late payments because of the impact on costs and rates. It is not fair for the other customers to bear the burden of the Navy's late payments."

It is clear the authority under which Western markets its electric power to the Navy and others is the Reclamation Project Act of 1939, which does not exempt federal agencies from its coverage. The Reclamation Project Act provides Western with discretionary authority to set rates and establish charges for users. We are of the opinion that the late payment liquidated damages provision established by Western is a necessary extension of this statutory authority and does recover a cost to Western. We therefore conclude that the late payment liquidated damages in the form of interest charges are proper and may be paid by the Navy.

/1/ Western is not covered by the provisions of the Prompt Payment Act contained in Pub. L. No. 97-177, May 21, 1982, 96 Stat. 85. See paragraph 4e of Office of Management and Budget Circular 125, June 9, 1987.