Power Marketing Administrations: Proposals for Market-Based Rates

Power Marketing Administrations: Proposals for Market-Based Rates

Order Code RL32798
CRS Report for Congress
Received through the CRS Web
Power Marketing Administrations:
Proposals for Market-Based Rates
Updated March 11, 2005
-name redacted-
Analyst in Energy and Environmental Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Power Marketing Administrations:
Proposals for Market-Based Rates
Summary
The federal government operates four agencies created to market power
generated at federally constructed multi-purpose dams. The four power marketing
administrations — Bonneville Power Administration (BPA), Southeastern Power
Administration (SEPA), Southwestern Power Administration (SWPA), and Western
Area Power Administration (WAPA) — sell power to publicly or cooperatively
owned utilities at rates based on their costs. These costs are specified in legislation
and include the government’s cost of operating hydropower facilities, a portion of the
construction costs, and interest payments on unpaid debt. With costs so defined,
interest rates generally below the government’s current cost of borrowing, and low
hydropower production costs, PMAs sell power below prevailing wholesale market
rates, an activity designed to encourage regional economic development. Proposals
to restrict or end this federal activity have been made over the last 20 years, and the
President’s FY2006 budget proposal raises these issues for the 109th Congress. This
budget states that the “Administration will propose legislation to bring PMA
electricity rates closer to the average market rates throughout the country.”
Increasing PMA prices to market rates would generate both costs and benefits.
Supporters argue that it would correct price signals, encourage conservation, and
increase returns to the Treasury. However, this proposal would increase costs for
consumers of PMA power and could have further ramifications for jobs and tax
revenues. The Pacific Northwest, which receives 40% of its power from BPA, would
likely see the largest economic effects.
This report provides background information on PMAs’ budgets and rates, and
briefly discusses the President’s proposal. It will be updated as events warrant.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budgetary Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Cost-Based Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The President’s Budget Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Benefits of Market Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Market Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Return on Federal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Drawbacks of Market-Based Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Increase in Consumer Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Regional Economic Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
List of Figures
Figure 1. PMA Regional Boundaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
List of Tables
Table 1. PMA Appropriations and Receipts, FY2005 . . . . . . . . . . . . . . . . . . . . . . 3

Power Marketing Administrations:
Proposals for Market-Based Rates
Background
The four federal power marketing administrations (PMAs) — Bonneville Power
Administration (BPA), Southeastern Power Administration (SEPA), Southwestern
Power Administration (SWPA), and Western Area Power Administration (WAPA)
— are separate and distinct entities within the Department of Energy (DOE).1 The
PMAs’ mission is to market power generated at federal multi-purpose water projects
“at the lowest possible rates to consumers consistent with sound business
principles.”2 Their primary customers are publicly or cooperatively owned utilities
in 33 states. (See Figure 1.)
Figure 1. PMA Regional Boundaries
Source: Western Area Power Administration, available Feb. 28, 2005, at
[http://www.wapa.gov/geninfo/mappma.htm].
On average, PMA power is among the lowest-priced electricity available in the
country. In FY2004, the PMAs’ average revenue per kilowatt-hour ranged from 2
1The PMAs were transferred from the Department of the Interior to the Department of
Energy through the Department of Energy Organization Act of 1977, P.L.95-91 (1977); this
act also established WAPA. The other PMAs were established between 1937 and 1950.
2Flood Control Act of 1944, P.L. 78-534, § 5 (Dec. 22, 1944).

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to 2.9 cents per kilowatt hour (¢/kWh).3 In comparison, in 2003 (the most recent year
for which data are available), average wholesale prices for non-federal power were
4.0 ¢/kWh4 and retail prices5 were 7.42 ¢/kWh. Compared with the prevailing
market rate for electricity, access to federal hydropower represents a significant cost
advantage. This suggests that the PMAs have been very successful in their mission
to provide federal power at the lowest possible cost to customers. However, it also
suggests that, all other things equal, PMA power would remain a competitive source
of electricity even if rates were raised significantly.
Over the past 20 years, Congress has repeatedly debated proposals to privatize
the PMAs or alter their rate structure. While most of these proposals have not
become law, Congress passed legislation in 1995 to sell the Alaska Power
Administration.6 The President’s FY2006 budget request indicates that the
Administration will “propose legislation to bring PMA electricity rates closer to the
average market rates throughout the country.”7 Prior to discussing the pros and cons
of such a proposal, the following two sections provide further background on PMAs’
budgets and rates.
Budgetary Context
With the exception of BPA, PMAs deposit their revenues in the U.S. Treasury
and are funded through annual appropriations. On average, the PMAs deposit
substantially more money into the Treasury than they receive in appropriations. (See
Table 1.) However, some of this money is appropriated to the federal dam-owning
agencies for annual and long-term expenditures attributable to their power production
activities.8 The remaining deposits represent debt payments and interest owed to the
Treasury.
3Excluding BPA, the rates were calculated by dividing each PMA’s total revenue by the total
electricity available for marketing. U.S. Department of Energy, FY2005 Congressional
Budget Request, Power Marketing Administrations (Feb. 2004). During the first half of
FY2004, BPA had an average priority firm rate of 2.9 ¢/kWh. BPA facts available online
at [http://www.bpa.gov/corporate/about_BPA/Facts/page5.cfm] on Mar. 4, 2005.
4U.S. Dept. of Energy, Annual Report of Electric Utilities, Form EIA-861 (2003).
5U.S. Dept. of Energy, Energy Information Administration, Electric Power Annual 2003,
DOE/EIA-0348 (Dec. 2004), p. 44.
6Alaska Power Administration Asset Sale and Termination Act, P.L. 104-58 (Nov. 28,
1995).
7U.S. Department of Energy, FY2006 Budget Summary (Feb. 2005), p. 116. Hereafter
referred to as FY2006 DOE Budget Summary.
8The Administration included a reclassification of PMA receipts as offsetting collections as
part of its FY2006 request. That is, the Corps expected $181 million in operation and
maintenance (O&M) activities at selected projects shall be reimbursed from PMA electricity
receipts, as a credit to the Corps O&M account, rather than these receipts being placed in
the Treasury and appropriations used to cover the Corps expenses, as has been the historic
practice. If offsetting collections go into effect, the difference between new budget
authority and Treasury deposits will decrease.

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Table 1. PMA Appropriations and Receipts, FY2005
PMA
New Budget Authority
Treasury Deposits
SEPA
$5,158,000
$174,493,000
SWPA
$29,117,000
$100,700,000
WAPA
$171,715,000
$273,404,000
Source: Department of Energy FY2006 Congressional Budget Request, Power Marketing
Administrations (Feb. 2005). “Treasury Deposits” are the total proprietary receipts, and equal gross
revenues minus offsetting collections.
The fourth PMA, BPA, has been self-financed since enactment of the Federal
Columbia River Transmission System Act in 1974.9 While BPA does not receive
appropriations, it does have permanent Treasury borrowing authority of $4.45 billion.
At the end of FY2004, BPA had used $2.9 billion of this authority.
Cost-Based Rates
Treasury receipts are based primarily on customers’ rate payments. It has been
the policy of the federal government to market PMA power at cost-based rates. The
PMAs are generally required to set these rates sufficiently high to recover specified
annual costs and repay, with interest (generally below the government’s cost of
borrowing), all reimbursable federal investments (as specified by authorizing
legislation). For example, these rates must cover operation and maintenance (O&M)
costs, interest costs, and the cost of power purchased from other utilities for resale.
The rates must also be sufficient to repay debt, including appropriations used to
construct the PMAs’ generation and transmission facilities, and to recover other
agencies’ power-related expenses — including O&M costs, interest costs, and debt
repayment. BPA’s rates must also cover non-federal bonds for Energy Northwest10
nuclear plants, and measures to protect fish and wildlife.11 In addition, Congress has
required that power rates cover some non-power costs; for example, BPA and WAPA
customers pay certain irrigation expenses.
While PMAs are generally required to set rates that recover their costs, a 1998
report by the General Accounting Office (GAO, now the Government Accountability
Office) found “un-recovered power-related costs related to (1) Civil Service
Retirement System (CSRS) pensions and post retirement health benefits, (2) life
insurance benefits, (3) workers compensation benefits for Corps employees at
9Federal Columbia River System Transmission Act, P.L. 93-454 (1974).
10Energy Northwest is a joint operating agency composed of 19 member utilities in the
Northwest. BPA contracted for generating capability from Energy Northwest nuclear power
plants. This contract included provisions for BPA to pay debt service whether or not the
projects were completed.
11General Accounting Office, Power Marketing Administrations: Their Rate Setting
Practices Compared With Those of Nonfederal Utilities, GAO/AIMD-00-114 (Mar. 2000),
p. 9.

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projects marketed by Southeastern, and (4) interest on some of the federal
appropriations used to construct certain projects.”12 While GAO did not estimate the
value of all under-recovered costs, it did estimate that unrecovered costs associated
with CSRS benefits for PMA employees were $192 million (1996 dollars) for
FY1992 through FY1996.13 However, the PMAs are now recovering this cost and
are working toward recovering other costs identified by the GAO.
The President’s Budget Request
The President’s FY2006 budget request indicates that the Administration will
“propose legislation to bring PMA electricity rates closer to the average market rates
throughout the country.”14 While legislation to implement this change has not been
introduced in the 109th Congress, the Administration suggests that such legislation
could require PMAs to increase their rates 20% per year until they reach market rates.
Additional information on the proposal has not yet been provided. However,
multiple bills to establish market-based rates — including H.R.1486 and S.161 in the
106th Congress — have been introduced in previous years.
Benefits of Market Rates
Proponents of the rate increase argue that it could correct market signals and
maximize returns on the federal investment. These factors are described below.
Market Signals. As described above, PMAs’ cost-based rates are much lower
than market averages. On a cost basis, the PMAs have some cost advantages
compared to other utilities. One of these advantages is that they market low-cost
hydropower (no fuel cost). Operating expenses for hydropower average 0.75 ¢/kWh
compared to 1.87 ¢/kWh for nuclear, 2.26 ¢/kWh for fossil steam, and 4.89 ¢/kWh
for gas turbine plants.15 In addition, the PMAs are generally not required to pay taxes
or to generate a return for investors.16 These factors keep PMA rates well below
market rates. Proponents of the increase argue that the low cost of PMA power
distorts the signals consumers receive regarding the true value of power, and that
increasing the price of PMA power would reduce or eliminate this distortion and
prompt consumers to decrease their electricity consumption.
12General Accounting Office, Power Marketing Administrations: Repayment of Power Costs
Needs Closer Monitoring, GAO/AIMD-98-164 (June 1998), p. 2.
13Ibid.
14FY2006, DOE Budget Summary, p. 116.
15U.S. Dept. of Energy, Energy Information Administration, Electric Power Annual 2003
(Dec. 2004), p. 49.
16GAO/AIMD-00-114, p. 6.

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Return on Federal Investment. The President’s budget states that
increasing PMAs’ rates would generate $3.2 billion17 in Treasury receipts over the
next 5 years and 12.4 billion over 10 years. While there is general agreement that
Treasury receipts would increase, there is likely to be disagreement regarding the size
of this increase. For a number of years, the Congressional Budget Office’s (CBO’s)
Budget Options Report has included its figure for Treasury receipts based on full
implementation of market rates. In its FY2005 report, this figure was $1.9 billion
over 10 years.18 Therefore, it is likely that CBO, in its reassessment of the
President’s budget, will forecast significantly lower receipts than did the President’s
request. Aside from the rate of implementation (in the first year for CBO and 20%
per year for the President’s budget), officials at CBO indicate there are other
differences leading to the variation in estimates. First, the President’s figure assumes
all of the revenue from a BPA rate increase will become Treasury receipts; CBO
assumed that BPA will choose to spend that money through its revolving fund.
Second, the President’s figures assume a larger gap between cost-based and market-
based rates than does the CBO figure.19
Drawbacks of Market-Based Rates
Opponents of proposals to increase PMAs’ rates argue that providing low-cost
power, to encourage regional economic development, remains an appropriate role for
the federal government. Furthermore, they argue that the proposal would hurt
individual electricity consumers and regional economies.
Increase in Consumer Prices. In general, increases in rates paid by
publicly and cooperatively owned utilities are passed on to their customers. The size
of consumer rate increases would be based in part on how legislation defines market
rates and how much of a utility’s power comes from the PMAs. With the exception
of the Pacific Northwest, PMA power accounts for less than 5% of generation in
other states served by PMAs. In 1999, a GAO assessment of the costs of fully
implementing market-based rates for three of the four PMAs found that most end-use
consumers would see relatively small rate increases (around 0.5 ¢/kWh).20 As a
percentage of energy prices, however, this is a real increase, and it could harm
energy-intensive industries. BPA provides 40% of all power in the Northwest; thus
the rate increases consumers would face in that region could be much more
substantial.21 Currently, studies of this option are limited by P.L. 101-101, which
17Executive Office of the President, Budget of the United States FY2006, Analytical
Perspectives (GPO, 2006), p. 239.
18Congressional Budget Office, Budget Options for FY2005, p. 84.
19According to CBO, it appears that the President’s budget assumes a market price based on
the spot market for electricity. CBO assumed a market rate for long-term contracts. Phone
conversation with Lisa Driscoll, CBO, on Mar. 1, 2005.
20According to the GAO, most bills would increase by less than $1, but some would rise by
as much as $25 per month. General Accounting Office, Federal Power: PMA Rate Impacts,
by Service Area, GAO/RCED-99-55 (1999).
21The Northwest Power and Conservation Council estimates that a typical household’s
(continued...)

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prohibits the use of federal appropriations to study the effects of increasing PMA
prices to market rates.22
Regional Economic Effects. As with individual consumer effects, the
regional implications of price increases are currently unknown and will depend on
a number of factors, including a region’s reliance on PMA power. By that standard,
the Pacific Northwest would almost certainly be the hardest hit. While a detailed
analysis has not been conducted, the Northwest Power and Conservation Council
estimates that full implementation of the rate increase would increase annual
electricity costs by $1.4 billion in the Northwest. Such an increase would directly
hurt electric-intensive industries, such as aluminum production, and could also raise
regional unemployment rates.
Discussion
While the Administration has not yet proposed legislation to implement this rate
increase, proponents and opponents are already voicing their arguments. Federal
encouragement of regional development was (and still is, in the view of many) an
appropriate role for the federal government, particularly in rural areas where private
incentives are lacking. For those whose economy and way of life are tied to this
system, this market-pricing alternative is particularly distressing. Even so, in a time
of tight federal budgets and energy supplies, certain taxpayer organizations,
environmental groups, and private energy suppliers argue that the federal government
should maximize returns from its investments in electricity supplies and should
encourage electricity conservation by increasing rates.
21(...continued)
electricity bill would increase $24 per month once market rates are fully implemented.
Northwest Power and Conservation Council, Staff Discussion of the Effects of the
Administration’s Budget Proposals Requiring the Bonneville Power Administration to Sell
at Market Rates (2005).
22Energy and Water Development Appropriations Act of 1990, P.L. 101-101, §506.

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