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Summary
The federal Power Marketing Administrations (PMAs) provide millions of Americans served by not-for-profit public power and rural cooperative electric utilities with cost-based hydroelectric power produced at federal dams operated by the U.S. Army Corps of Engineers (Corps) and Bureau of Reclamation. The PMAs market federally generated hydropower, with a statutory right of first refusal granted to not-for-profit entities, including public power utilities and rural electric cooperatives (called “preference customers”), at rates set to cover all the costs of generating and transmitting the electricity, as well as repayment, with interest, of the federal investment in these hydropower projects. Because the PMAs are part of the U.S. electricity market and are also federal entities, congressional and administrative action in the last 20 years has primarily addressed increased federal oversight of PMA facilities and potential ways in which the U.S. Treasury could receive additional funding from the PMAs and their customers. Most recently, the Trump Administration proposed selling the transmission assets of the PMAs and changing the rate structure from “cost-based” to “market-based.” The American Public Power Association (Association or APPA) opposes these misguided proposals.
Another important aspect of the federal power program is the federally owned Tennessee Valley Authority (TVA). Congress established TVA in 1933 in the states of Tennessee, Alabama, North Carolina, Kentucky, Virginia, Mississippi, and Georgia. TVA’s authorizing statutes cite rural electrification, flood control, and navigation along the Tennessee River as reasons for its creation. Today, TVA is a robust public power partnership, providing affordable electric power to more than nine million people in an 80,000 square-mile territory. President Trump proposed to sell TVA’s transmission assets in his fiscal year (FY) 2019 budget proposal; APPA also opposes this proposal.
Background
There are four PMAs—Bonneville Power Administration (BPA), Western Area Power Administration (WAPA), Southwestern Power Administration (SWPA), and Southeastern Power Administration (SEPA). These entities market wholesale electric power to approximately 1,200 public power systems and rural electric cooperatives in 33 states.1 They also sell power to other public agencies and federal installations, as well as to for-profit, investor-owned utilities in years with high water flows or in special circumstances.
In accordance with federal law, PMA rates are set at the levels needed to recover the costs of the initial federal investment (plus interest) in the hydropower and transmission facilities. The PMAs annually review their rates to ensure full cost recovery. None of the costs are borne by taxpayers. Power rates also help to cover the costs of other activities authorized by these multipurpose projects, such as navigation, flood control, water supply, environmental programs, and recreation. The annual appropriations process is also important to the PMAs. Although the customers pay all the PMA costs through their power rates, as mentioned above, for WAPA, SEPA, and SWPA, those monies flow back to the U.S. Treasury and then must be appropriated by Congress. (BPA’s governing statute, amended in the 1980s, allows for a “revolving fund” so ratepayer money goes directly to BPA rather than to the Treasury.) In addition, the PMAs must receive yearly funding levels from Congress for purchasing and wheeling (transmitting) power in a drought situation or when the water at the dams is used for purposes other than for electricity production (i.e., recreation and environmental mitigation). This money for “purchase power and wheeling” is then paid for by the PMA customers through their rates.
Administrative and Congressional Action
Proposal to Sell PMA Transmission Assets
Several presidents have proposed selling or divesting the PMAs. Driving these misguided policy proposals has been the belief that doing so would save the federal government money or that the PMAs are no longer needed. Most recently, President Trump’s FY 2019 budget request and a June 2018 list of recommendations to “reform and reorganize the government” proposed to sell the transmission assets of BPA, SWPA, TVA, and WAPA, asserting that “ownership of transmission is best carried out by the private sector where there are appropriate market and regulatory incentives,” and that “increasing the private sector’s role would encourage a more efficient allocation of economic resources and mitigate risk to taxpayers.” This is the second year in a row that President Trump proposed selling PMA transmission assets. Though there was vociferous opposition to this proposal on Capitol Hill last year, the Administration doubled down this year by adding TVA to this proposal. As stated previously, PMA and TVA costs are paid by customers and not the federal government; none of the costs are borne by taxpayers. Furthermore, there is no factual evidence that selling the transmission assets of the PMAs would result in a more efficient allocation of resources. Rather, it is much more likely that any sale of these assets to private entities would result in attempts by the new owners to charge substantially increased transmission rates to PMA customers for the same service they have historically received. These arguments are merely a pretext for actions that would raise electricity costs for millions of people and businesses.
Not only did President Trump propose selling PMA and TVA transmission assets in his FY 2019 budget request, he also proposed to change the current cost-based rate structure for all four of the PMAs to a “market-based” rate structure. There again is no factual evidence to support the Administration’s claim that “[e]liminating the requirement that PMA rates be limited to a cost-based structure and requiring instead that these rates be based on consideration of appropriate market incentives, including whether they are just and reasonable, would encourage a more efficient allocation of economic resources, and could result in faster recoupment of taxpayer investments.” PMA customers already pay all of the costs associated with generating and transmitting power produced at federal dams, positioning the federal government to profit off of retail customers already covering all of the costs for their power supplies. Such a move would undermine regional economic development and almost certainly invite legal challenges from wholesale customers holding long-term contracts with the PMAs.
As in previous years, congressional reaction to proposals to sell off PMA and TVA transmission assets and change the cost-based rate structure was swift and strong. On March 22, led by Senators Maria Cantwell (D-WA) and Jim Risch (R-ID), 23 senators sent a letter to Office of Management and Budget (OMB) Director Mick Mulvaney voicing their opposition to these proposals. “There is a long bipartisan tradition of opposing similar past proposals, including last year’s proposal that recommended selling off federal PMA transmission assets. Unfortunately, this year’s budget is broader in scope, potentially undermining reliable and affordable electric service in our states,” the senators wrote. The next day, 59 members of Congress wrote to House Budget Committee leadership, saying the proposals “[W]ould inevitably rise in order to fulfill the profit motive of private owners as the federal government once again attempts to ‘fix’ something that is not broken.” The House letter was led by Representatives Paul Gosar (R-AZ), Kurt Schrader (D-OR), Dan Newhouse (R-WA), Rick Crawford (R-AR), and Chuck Flesichmann (R-TN).
TVA Divestment
President Obama’s FY 2014 budget directed OMB to examine ways to reform, and possibly eliminate, TVA through divestiture. The President’s budget proposal argued that “reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation, can help put the Nation on a sustainable fiscal path.” The premises underlying this budget instruction—that TVA is unnecessary and negatively impacting the federal budget—are incorrect. TVA ceased receiving money from the federal government in 1959, is now fully funded through electric sales and power bond financing, and has continually reformed itself to respond to the changing needs of its customers. Although TVA does currently have debt on its books, this debt is not tied to the federal budget deficit. Moreover, the debt TVA holds currently is not unusual in the electric power industry, where power plants can cost billions of dollars, and are financed over 30 to 50 years.
The President’s budget instruction regarding TVA triggered a great deal of negative feedback from TVA stakeholders in and outside of Congress. A June 2014 report by Lazard Frères & Co. LLC (Lazard), a financial advisory and asset management firm that was commissioned by OMB to conduct a strategic review of TVA, concluded that TVA’s financial and operational plans were sound and that TVA should not be divested from the federal portfolio. Responding to this feedback, the President’s FY 2015 budget stated that “TVA has undergone a major internal review and taken significant steps to improve its future operating and financial performance.” However, the FY 2015 budget also endorsed severing or reducing federal ties with TVA, possibly by transferring ownership to state or local shareholders. APPA was pleased to see that President Obama’s FY 2017 budget did not include any proposals related to divesting TVA. Unfortunately, President Trump proposed selling TVA’s transmission assets in his FY 2019 budget (see above). Led by Senator Lamar Alexander (R-TN), the entire Tennessee delegation and others from TVA’s footprint sent a letter to President Trump on April 18 asking him to reconsider his proposal.
Hydropower Cost Allocation
Due in part to the continued tight federal fiscal environment, recent years have seen a growing trend of dam operating agencies (the Corps and Bureau of Reclamation) attempting to shift more and more costs to hydropower customers without the concomitant benefits. The most notable of these efforts was at two projects in the Cumberland System in SEPA territory in 2015. Under the Dam Safety Act, 15 percent of dam safety costs are deemed “joint costs” and assigned to authorized project beneficiaries, which includes hydropower customers, and 85 percent are paid through the normal appropriations process. The Corps wanted to shift the cost of the dam safety repairs to authorized project beneficiaries by incorrectly classifying them as “major rehabilitation,” meaning that 100 percent of the costs would be considered “joint costs” and disproportionately borne by power customers. Shifting the costs of dam safety improvements from the operating agency—whether it be the Corps or Bureau of Reclamation—to not-for-profit, customer-owned utilities is not only unfair, but contradicts the spirit of statutes, such as the Flood Control Act of 1944 and the Reclamation Project Act of 1939, which direct federally operated dams to market power to “preference” customers (not-for-profit utilities get a right of first refusal to purchase power from federal dams) at the lowest cost possible consistent with good business practices. Moreover, such a shift could make the emissions-free, reliable, and affordable hydropower produced at these projects uneconomic.
APPA joined PMA stakeholders from across the country and in Congress to push back against the Corps’ effort, which if successful, would have set a very bad precedent for cost allocation in other PMA regions. On October 2, 2015, DOE announced new rates for the Cumberland System that correctly applied the Dam Safety Act, meaning that 15 percent of dam modification costs are allocated to project beneficiaries (including hydropower customers). This was a significant win for hydropower customers. That said, public power must remain vigilant, as a caveat was included in the announcement: “…Southeastern wishes to make clear that interagency discussions of this issue remain ongoing. If, as a result of those discussions, other relevant federal agencies provide a factual and legal basis for a contrary determination, the applicability of the Dam Safety Act would be reconsidered.”
American Public Power Association Position
APPA strongly opposes proposals to divest the transmission assets of BPA, SWPA, TVA, and WAPA and to change the PMA’s cost-based rate structure to a market-based rate structure. The Association supports the continued existence and federal ownership of the PMAs and TVA, the sale of federally generated hydropower at cost-based rates, increased customer involvement in funding critical operation and maintenance activities, and increased federal emphasis on funding these same activities. APPA also continues to strongly oppose any action by Congress or the Administration that would modify the federal power program in ways that could result in substantial, unjustified electric rate increases for public power utilities, create adverse economic impacts, or reduce competition. Finally, the Association strongly opposes any efforts to disproportionately assign costs to federal hydropower users for which they receive no additional benefits.
1 The following states receive a portion of their power from the PMAs. BPA: Washington, Oregon, Idaho, and Montana (part). WAPA: Arizona, California, Colorado, Iowa, Kansas (part), Minnesota, Montana (part), North Dakota, Nebraska, New Mexico, Nevada, South Dakota, Texas (part), Utah, and Wyoming. SWPA: Arkansas, Kansas (part), Louisiana, Missouri, Oklahoma, and Texas (part). SEPA: Alabama, Florida, Georgia, Illinois, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia.