B-125127, FEB. 14, 1956

B-125127, FEB. 14, 1956

TO THE HONORABLE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO LETTER OF NOVEMBER 21, 1955, FROM THE ADMINISTRATIVE ASSISTANT SECRETARY OF THE INTERIOR, PRESENTING FOR OUR CONSIDERATION VARIOUS QUESTIONS IN CONNECTION WITH THE TRANSMISSION AND DISPOSITION OF ELECTRIC POWER AND ENERGY PURSUANT TO SECTION 5 OF THE FLOOD CONTROL ACT OF 1944, 58 STAT. 887, 890; 16 U.S.C. 825S, AND THE EXPENDITURE OF APPROPRIATED FUNDS UNDER TITLE II OF THE PUBLIC WORKS APPROPRIATION ACT, 1956, PUBLIC LAW 163, APPROVED JULY 15, 1955, 69 STAT. 356.

THE QUESTIONS RELATED TO PROPOSED AMENDMENTS TO CONTRACTS ENTERED INTO DURING THE YEARS 1949 AND 1950 BETWEEN THE SOUTHWESTERN POWER ADMINISTRATION (HEREINAFTER REFERRED TO AS "SPA") AND THE FOLLOWING GENERATING AND TRANSMISSION COOPERATIVE (HEREINAFTER REFERRED TO AS "G AND T COOPERATIVES"): CENTRAL ELECTRIC POWER COOPERATIVE, N.W. ELECTRIC POWER COOPERATIVE, INC., KAMO ELECTRIC COOPERATIVE, INC., AND WESTERN FARMERS ELECTRIC COOPERATIVE. THE AMENDMENTS CONCERN (1) THE DELETION OF AN OPTION OF SPA TO PURCHASE THE TRANSMISSION FACILITIES, (2) THE SETTLEMENT OF ACCOUNTS ON A NET BALANCE BASIS, AND (3) THE INCLUSION OF AN ARBITRATION PROVISION.

THE CONTRACTS WERE INOPERATIVE DURING THE FISCAL YEARS 1954 AND 1955 DUE TO THE FAILURE OF CONGRESS TO APPROPRIATE FUNDS THEREFOR. HOWEVER, FUNDS WERE MADE AVAILABLE FOR THEIR REACTIVATION IN THE FISCAL YEAR 1956, UNDER TITLE II OF THE PUBLIC WORKS APPROPRIATION ACT, 1956. IN HOUSE REPORT P. 747 AND SENATE REPORT NO. 700, 84TH CONGRESS, 1ST SESSION, TO ACCOMPANY H.R. 6766, WHICH BECAME PUBLIC LAW 163, THE PROSPECTIVE APPROPRIATIONS COMMITTEES GAVE SPECIFIC STATEMENTS ON THE SUBJECT OF AMENDING THE CONTRACTS, AND THE FIRST TWO PARTS OF THE SUBMISSION RELATE THERETO.

PART I OF THE SUBMISSION INVOLVES THE RECOMMENDATION OF THE APPROPRIATIONS COMMITTEES AS SET FORTH IN THE REPORTS THAT THE OPTION TO PURCHASE BE DELETED. THE FOLLOWING STATEMENT WAS MADE IN HOUSE REPORT NO. 747:

"IN REACTIVATING THE CONTRACTS WITH THE G. AND T. COOPERATIVES, THE DEPARTMENT OF THE INTERIOR IS INSTRUCTED TO DELETE ANY ANY PROVISIONS PROVIDING FOR THE OPTION TO PURCHASE G. AND T. TRANSMISSION LINES OR OTHER FACILITIES BY THE SOUTHWESTERN POWER ADMINISTRATION. * * *"

AND IN SENATE REPORT NO. 700 IT WAS STATED:

"IT IS THE OPINION OF THE COMMITTEE THAT THE SECRETARY SHOULD GIVE CONSIDERATION TO AMENDING THE CONTRACTS AS FOLLOWS:

"1. DELETION OF THE PROVISION GIVING THE SOUTHWESTERN POWER ADMINISTRATION AN OPTION TO PURCHASE THE TRANSMISSION FACILITIES OF THE G. AND T. COOPERATIVES.'

IT IS STATED IN THE ADMINISTRATIVE ASSISTANT SECRETARY'S LETTER THAT THE CONTRACTS BETWEEN SPA AND THE G. AND T. COOPERATIVES, AS MODIFIED BY LETTER AGREEMENTS, PROVIDE, AMONG OTHER THINGS, THAT CERTAIN DEFINED ELECTRIC TRANSMISSION AND RELATED FACILITIES OWNED BY THE COOPERATIVES SHALL BE LEASED TO SPA FOR A PERIOD OF FORTY YEARS, AND SPA, IN RETURN, SHALL MAKE MONTHLY PAYMENTS TO EACH COOPERATIVE IN AN AMOUNT CALCULATED, FIRST, TO REIMBURSE THE COOPERATIVES FOR THE GENERAL ADMINISTRATIVE EXPENSES AND THE ACTUAL COST OF THE OPERATION AND MAINTENANCE, INCLUDING REPLACEMENTS, OF SUCH TRANSMISSION AND RELATED FACILITIES. EACH CONTRACT CONTAINS A PROVISION GRANTING TO SPA AN OPTION TO PURCHASE SIMILAR TO THE FOLLOWING EXAMPLE QUOTED IN THE LETTER:

"SECTION 1. GRANT. THE COOPERATIVE HEREBY GRANTS TO THE GOVERNMENT THE EXCLUSIVE RIGHT, AT THE OPTION OF THE GOVERNMENT:

"/A) TO PURCHASE THE TRANSMISSION SYSTEM AT ANY TIME DURING THE TERM OF THIS LEASE OPTION AGREEMENT FOR A SUM EQUAL TO THE PRINCIPAL OF THE COOPERATIVE'S REA LOAN ATTRIBUTABLE TO THE TRANSMISSION SYSTEM LESS THE ACTUAL AMOUNT OF THE RENTAL PAYMENTS THERETOFORE MADE BY THE GOVERNMENT ON ACCOUNT OF THE PRINCIPAL OF THE COOPERATIVE'S REA LOAN ATTRIBUTABLE TO THE TRANSMISSION SYSTEM; OR

"/B) TO PURCHASE THE TRANSMISSION SYSTEM UPON THE EXPIRATION OF THE TERM OF THIS LEASE OPTION AGREEMENT FOR THE SUM OF TEN DOLLARS ($10).

"EXERCISE OF THE RIGHT TO PURCHASE THE TRANSMISSION SYSTEM BY THE GOVERNMENT UNDER THE PROVISIONS OF SUBSECTION (A) OR (B), ABOVE, IS EXPRESSLY CONDITIONED AND CONTINGENT ON THE CONGRESS APPROPRIATING FUNDS SPECIFICALLY FOR THE PURCHASE OF SAID TRANSMISSION SYSTEM.

"IN THE EVENT THE GOVERNMENT IS IN DEFAULT AS TO ANY PAYMENTS UNDER THIS AGREEMENT AT THE TIME IT EXERCISES ITS OPTION UNDER SUBSECTION (A) OR (B), ABOVE, THE GOVERNMENT SHALL BE REQUIRED TO PAY ALL RENTAL PAYMENTS IN ARREARS BEFORE EXERCISING ITS OPTION TO PURCHASE.'

IT IS POINTED OUT IN THE ADMINISTRATIVE ASSISTANT SECRETARY'S LETTER THAT THE VALUE TO SPA OF THE RIGHT TO EXERCISE THE OPTION TO PURCHASE CAN BE DEMONSTRATED BY REVIEWING THE PAYMENTS WHICH WILL BE MADE BY SPA TO THE G AND T COOPERATIVES DURING THE TERM OF THE CONTRACTS, AND THE VALUE OF SUCH FACILITIES TO SPA IF, WITH CONGRESSIONAL APPROVAL, THE OPTION TO PURCHASE WAS EXERCISED BY SPA AT THE END OF THE FORTY-YEAR TERM OF THE CONTRACTS. ESTIMATES GIVEN IN THE LETTER ARE (I) THAT SPA IS OBLIGATED TO AMORTIZE BY MEANS OF MONTHLY PAYMENTS TO THE COOPERATIVES AN INVESTMENT IN TRANSMISSION AND RELATED FACILITIES IN THE TOTAL AMOUNT OF $34,115,647; (II) THAT SPA WILL BE OBLIGATED TO MAKE ANNUAL PAYMENTS TO THE G AND T COOPERATIVES FOR THE COST OF REPLACEMENTS ON THE FACILITIES IN AN AMOUNT ESTIMATED TO BE BETWEEN $341,156 AND $596,412, REPRESENTING DURING THE TERM OF THE CONTRACTS A TOTAL PAYMENT OF BETWEEN $13,646, AND $23,856,480 FOR REPLACEMENTS; AND (III) THAT THE VALUE OF THESE TRANSMISSION FACILITIES AT THE END OF THE FORTY-YEAR TERM OF THE CONTRACT, THAT IS, THE INITIAL INVESTMENT (AMORTIZED BY SPA'S RENTAL PAYMENTS) PLUS THE COST OF REPLACEMENTS (ALSO PAID FOR BY SPA) LESS DEPRECIATION, WILL BE IN THE ORDER OF 70 PERCENT TO 80 PERCENT OF THE INITIAL INVESTMENT.

IN LIGHT OF THE FOREGOING, THE FOLLOWING QUESTIONS HAVE BEEN SUBMITTED FOR OUR CONSIDERATION:

"/1) IS SPA AUTHORIZED TO AMEND THE CONTRACTS WITH THE G AND T COOPERATIVES SO AS TO DELETE THE PROVISION WHICH GRANTS TO SPA AN OPTION TO PURCHASE CERTAIN TRANSMISSION AND RELATED FACILITIES OWNED BY THE G AND T COOPERATIVES?

"/2) IF QUESTION (1) IS ANSWERED IN THE AFFIRMATIVE, IS IT NECESSARY THAT SPA RECEIVE FROM EACH G AND T COOPERATIVE CONSIDERATION TO JUSTIFY THE DELETION FROM THE CONTRACT OF THE PROVISION GRANTING TO SPA AN OPTION TO PURCHASE CERTAIN TRANSMISSION AND RELATED FACILITIES OWNED BY THE G AND T COOPERATIVES?

"/3) IF QUESTIONS (1) AND (2) ARE ANSWERED IN THE AFFIRMATIVE, IT IS NECESSARY THAT THE CONSIDERATION RECEIVED BY SPA FROM THE G AND T COOPERATIVES BE EQUIVALENT IN VALUE ON A MONETARY BASIS TO THE ESTIMATED VALUE TO SPA OF THE TRANSMISSION AND RELATED FACILITIES AT THE END OF THE FORTY-YEAR TERM OF THE CONTRACTS, OR MAY COMPENSATING VALUES OTHER THAN MONETARY BE ACCEPTED IN DETERMINING THE SUFFICIENCY OF THE CONSIDERATION?

THE CONCERN OF YOUR DEPARTMENT OVER THE DELETION OF THE OPTION TO PURCHASE APPARENTLY STEMS FROM THE WELL-SETTLED RULE OF THE ACCOUNTING OFFICERS THAT WHERE RIGHTS HAVE VESTED IN THE UNITED STATES UNDER THE TERMS OF A CONTRACT NO OFFICER OR EMPLOYEE OF THE GOVERNMENT HAS AUTHORITY TO MODIFY SUCH TERMS EXCEPT IN THE INTEREST OF THE GOVERNMENT. 26 COMP. GEN. 280, 281.

THE QUESTION AS TO WHETHER DELETION OF THE PURCHASE OPTION IS IN THE INTEREST OF THE GOVERNMENT CAN BEST BE DETERMINED BY A REVIEW OF THE LEGISLATION ENACTED SUBSEQUENT TO THE EXECUTION OF THE LEASE PURCHASE CONTRACTS. DISSATISFACTION BY CONGRESS IN THESE CONTRACTS WAS EVIDENCED BY ITS FAILURE TO PROVIDE FUNDS TO ENABLE ACTIVATION DURING THE FISCAL YEARS 1954 AND 1955. HOWEVER, CONGRESS PROVIDED FOR REACTIVATION OF THE CONTRACTS DURING THE FISCAL YEAR 1956 BY INCLUDING THE NECESSARY AUTHORIZATION FOR THE USE OF THE CONTINUING FUND IN TITLE II OF THE PUBLIC WORKS APPROPRIATION ACT, 1956. BY THIS ACTION CONGRESS DECISIVELY ESTABLISHED THAT REACTIVATION OF THE CONTRACTS WAS IN THE INTEREST OF THE GOVERNMENT. AS TO WHETHER REACTIVATION OF THE CONTRACTS ON THEIR PRESENT TERMS WAS CONSIDERED IN THE INTEREST OF THE GOVERNMENT, THE COMMITTEE REPORTS, ABOVE CITED, CLEARLY INDICATE THAT THE PURCHASE OPTION WAS OBJECTIONABLE AND WAS TO BE DELETED, AND THAT THE APPROPRIATION FOR REACTIVATION OF THE CONTRACTS WAS MADE WITH THAT UNDERSTANDING. IT THUS SEEMS CLEAR THAT FROM THE CONGRESSIONAL VIEWPOINT IT IS IN THE INTEREST OF THE GOVERNMENT TO MODIFY THE CONTRACTS BY DELETION OF THE PURCHASE OPTION AND ACCORDINGLY OUR OFFICE PERCEIVES NO LEGAL OBJECTION TO SUCH ACTION. CF. 34 COMP. GEN. 219. QUESTION (1) IS THEREFORE ANSWERED IN THE AFFIRMATIVE AND, AS THE DELETION IS CONSIDERED TO BE IN THE INTEREST OF THE GOVERNMENT SO AS TO JUSTIFY MODIFICATION, QUESTION (2) IS ANSWERED IN THE NEGATIVE.

PART II OF YOUR DEPARTMENT'S SUBMISSION INVOLVES THE RECOMMENDATION OF THE APPROPRIATION COMMITTEES AS SET FORTH IN HOUSE REPORT NO. 747 AND SENATE REPORT NO. 700, THAT THE CONTRACTS BE AMENDED TO ALLOW SETTLEMENT OF ACCOUNTS ON A NET-BALANCE BASIS. IT IS STATED THAT UNDER THE CONTRACTS BETWEEN SPA AND G AND T COOPERATIVES, SPA MAKES MONTHLY PAYMENTS TO THE COOPERATIVES IN AN AMOUNT CALCULATED TO (I) AMORTIZE DURING THE TERM OF THE CONTRACTS THE COOPERATIVES' INVESTMENT IN CERTAIN TRANSMISSION AND RELATED FACILITIES; (II) REIMBURSE THE COOPERATIVES FOR THE COST OF THE OPERATION AND MAINTENANCE, INCLUDING REPLACEMENTS, OF SUCH FACILITIES; (III) REIMBURSE THE COOPERATIVES FOR THAT PART OF THEIR GENERAL ADMINISTRATIVE EXPENSES APPROPRIATELY ASSIGNABLE TO SUCH FACILITIES; AND (IV) COMPENSATE THE COOPERATIVE FOR ELECTRIC POWER AND ENERGY, IF ANY PURCHASED BY SPA FROM THE COOPERATIVE. EACH COOPERATIVE, IN TURN, IT IS STATED, IS OBLIGATED TO MAKE A MONTHLY PAYMENT TO SPA, COMPUTED UNDER APPROPRIATED RATE SCHEDULES, FOR ELECTRIC POWER AND ENERGY PURCHASED BY THE COOPERATIVE FROM SPA. THE TABULATION OF ESTIMATED RECEIPTS AND EXPENDITURES SET FORTH IN THE SUBMISSION INDICATES THAT IF SETTLEMENT WERE ON A NET BALANCE BASIS, AN EXPENDITURE OF $4,065,647 WOULD BE REQUIRED BY SPA, WHEREAS IF SETTLEMENT WERE ON A GROSS BASIS, THE AMOUNT WOULD BE $6,374,647. IN THE EVENT SETTLEMENT MAY BE MADE ON A NET-BALANCE BASIS, IT IS ANTICIPATED BY YOUR DEPARTMENT THAT EACH CONTRACT WILL BE AMENDED TO INCLUDE A PROVISION SIMILAR TO THE FOLLOWING:

"SETTLEMENT OF ACCOUNTS ON NET-BALANCE BASIS

"SECTION 1. DEFINITION OF "NET-BALANCE IN MONEY.' AS USED HEREIN, THE TERM "NET BALANCE IN MONEY," FOR ANY PARTICULAR MONTH, SHALL MEAN EITHER THE TOTAL COMPENSATION DUE THE COOPERATIVE OR THE TOTAL COMPENSATION DUE THE GOVERNMENT FOR SUCH MONTH, WHICHEVER AMOUNT IS GREATER, UNDER THIS AGREEMENT AND THE POWER CONTRACT, POSSESS EITHER SUCH TOTAL COMPENSATION DUE THE COOPERATIVE OR SUCH TOTAL COMPENSATION DUE THE GOVERNMENT FOR SUCH MONTH, WHICHEVER AMOUNT IS LESS.

"SECTION 2. SETTLEMENT OF ACCOUNTS. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN THIS AGREEMENT OR IN THE POWER CONTRACT, ON OR BEFORE THE TWENTIETH DAY OF EACH MONTH, THE COOPERATIVE AND THE GOVERNMENT SHALL EACH SUBMIT TO THE OTHER BILLING STATEMENTS SETTING FORTH IN NECESSARY DETAIL THE TOTAL COMPENSATION DUE FOR ALL SERVICES RENDERED BY EACH PARTY FOR THE OTHER DURING THE PRECEDING BILLING PERIOD UNDER THIS AGREEMENT AND UNDER THE POWER CONTRACT. WITHIN THIRTY DAYS AFTER THE DATE OF EACH SUCH BILLING STATEMENT, THE COOPERATIVE OR THE GOVERNMENT, AS THE CASE MAY BE, SHALL REMIT TO THE OTHER PARTY THE NET BALANCE IN MONEY DUE FOR SUCH PERIOD.'

IT IS NOTED IN THE SUBMISSION OF THE ADMINISTRATIVE ASSISTANT SECRETARY THAT APPROPRIATION LANGUAGE APPEARING IN TITLE II OF THE PUBLIC WORKS APPROPRIATION ACT, 1956, 69 STAT. 356, UNDER THE HEADING "OPERATION AND MAINTENANCE, SOUTHWESTERN POWER ADMINISTRATION" PROVIDES FOR NECESSARY EXPENSES OF OPERATION AND MAINTENANCE OF POWER TRANSMISSION FACILITIES AND OF MARKETING ELECTRIC POWER AND ENERGY PURSUANT TO THE PROVISIONS OF SECTION 5 OF THE FLOOD CONTROL ACT OF 1944, 16 US.C. 925S. SECTION 5 OF THE REFERENCED ACT PROVIDES, SO FAR AS HERE MATERIAL, THAT ALL MONEYS RECEIVED FROM SALES OF POWER AND ENERGY FROM PROJECTS WITHIN ITS PROVISIONS "SHALL BE DEPOSITED IN THE TREASURY OF THE UNITED STATES AS MISCELLANEOUS RECEIPTS.' IN THE LIGHT OF THE FOREGOING REQUIREMENT, THE FOLLOWING QUESTION HAS BEEN PRESENTED FOR OUR CONSIDERATION:

"/1) IS SPA AUTHORIZED TO AMEND THE CONTRACTS BETWEEN SPA AND THE G AND TO COOPERATIVES SO AS TO PERMIT THE SETTLEMENT OF ACCOUNTS BETWEEN SPA AND THE G AND T COOPERATIVES ON A NET BALANCE BASIS?

THE HOUSE COMMITTEE ON APPROPRIATIONS, IN HOUSE REPORT NO. 747, GAVE CERTAIN INSTRUCTIONS TO THE DEPARTMENT OF THE INTERIOR CONCERNING REACTIVATING THE CONTRACTS. ONE WAS THAT THE CONTRACTS SHALL PROVIDE "THAT THE SPA AND THE G. AND T. COOPERATIVES WILL SETTLE ACCOUNTS FOR POWER PURCHASED AND SOLD ON THE BASIS OF NET-BALANCES AS IS DONE UNDER EXISTING CONTRACTS TO WHICH SPA AND PRIVATE UTILITIES ARE PARTIES.' SENATE COMMITTEE ON APPROPRIATIONS, IN SENATE REPORT NO. 700, RECOMMENDED IN THIS RESPECT THAT THE SECRETARY OF THE INTERIOR GIVE CONSIDERATION TO AMENDING THE CONTRACTS. "3. TO ALLOW THE SOUTHWESTERN POWER ADMINISTRATION AND THE G. AND T. COOPERATIVES TO SETTLE ACCOUNTS ON A NET- BALANCE BASIS.' THE CONFERENCE REPORT, HOUSE REPORT NO. 1085, CONTAINED THE FOLLOWING STATEMENT CONCERNING SETTLEMENT OF ACCOUNTS: "THE MANAGERS ON THE PART OF THE HOUSE ARE IN AGREEMENT THAT THE STATEMENT IN THE SENATE REPORT WITH RESPECT TO SETTLING ACCOUNTS ON A NET BALANCE BASIS INCLUDES OPERATION AND MAINTENANCE COSTS ON GENERATION AND TRANSMISSION CO-OP FACILITIES.' IT HAS BEEN HELD THAT IT IS PROPER FOR THE GOVERNMENT TO ACCEPT SERVICES AND SUPPLIES IN RETURN FOR ELECTRIC ENERGY. 28 COMP. GEN. 38. WHILE UNDER THE FACTS THERE CONSIDERED ADJUSTMENTS WERE REQUIRED BETWEEN MISCELLANEOUS RECEIPTS AND THE APPROPRIATION CONCERNED, THERE WAS NOT INVOLVED AN APPROPRIATION MADE UPON THE BASIS THAT SETTLEMENT WOULD BE FOR THE NET BALANCE DUE.

IT IS CLEAR FROM THE ABOVE EXCERPTS FROM THE COMMITTEE REPORTS THAT THE NET BALANCE ARRANGEMENT WAS CONSIDERED AS AN INTEGRAL PART OF THE CONTINUING FUND AUTHORIZATION FOR SPA. THAT "THE AMOUNT REQUIRED IN THE CONTINUING FUND" WOULD BE REDUCED THEREBY IS INDICATED FROM THE DISCUSSIONS BEFORE THE SUBCOMMITTEE, SENATE COMMITTEE ON APPROPRIATIONS, IN THE HEARINGS ON THE PUBLIC WORKS APPROPRIATIONS FOR 1956, PAGE 397. VIEW OF SUCH A CLEAR AND UNMISTAKABLE EXPRESSION OF INTENT IN THE COMMITTEE REPORTS AS TO THE BASIS UPON WHICH EXPENDITURES WERE TO BE MADE FROM THE CONTINUING FUND, OUR OFFICE WOULD NOT BE REQUIRED TO OBJECT TO INCLUSION OF THE PROPOSED CONTRACT PROVISION AUTHORIZING SETTLEMENT ON A NET BALANCE BASIS PROVIDING CONGRESS IS INFORMED WITH RESPECT TO ALL TRANSACTIONS UNDER THE CONTRACTS. THE QUESTION IS ANSWERED ACCORDINGLY.

PART III OF THE LETTER STATES THAT NEED FOR ARBITRATION MAY ARISE UNDER THE PROVISIONS OF A PROPOSED AMENDMENT TO THE CONTRACTS BETWEEN SPA AND THE COOPERATIVES AND THE LETTER SETS FORTH A PROPOSED ARBITRATION PROVISION RELATING TO OPERATION AND MAINTENANCE COSTS. OUR DECISION IS REQUESTED AS TO ITS PROPRIETY. HOWEVER, IN A BRIEF SUBMITTED BY THE COOPERATIVES TO OUR OFFICE ON THE GENERAL POINTS HERE INVOLVED, IT IS STATED THAT THE COOPERATIVES ARE OPPOSED TO THE PROPOSED ARBITRATION PROVISION AS SET FORTH IN THE SUBMISSION FROM YOUR DEPARTMENT.

SINCE THE NEED FOR AN ARBITRATION PROVISION IS SPECULATIVE AND AS THE COOPERATIVES ARE NOT IN AGREEMENT WITH THE CLAUSE PROPOSED BY YOUR DEPARTMENT, THERE APPEARS NO NECESSITY FOR THE RENDITION OF A DECISION AT THIS TIME ON THE QUESTION. HOWEVER, IF AND WHEN THE NEED FOR AN ARBITRATION PROVISION ARISES AND THE TERMS OF A PROVISION HAVE BEEN MUTUALLY AGREED UPON BY SPA ..END :