But preference customers still remain a "vocal political force."

With eyes turned again toward Congress, and possible energy legislation, opponents have thrown up yet another challenge to the sale of low-cost, allegedly subsidized power by the federal power marketing administrations. This time, congressional foes of PMAs have gained allies in several investor-owned utilities and in the findings of a report from the U.S. General Accounting Office, requested last year by Congress to aid its deliberations on electric restructuring.

While the congressional efforts of recent years to privatize PMAs have been suspended, critics of preference power believe the PMAs should be sold and the low-cost sales ended. They argue that both have become anomalies in a world moving toward markets. But defenders say preference power is needed to help those living in rural areas.

Others support PMAs "because they provide a form of competition to utilities," according to Chris Eckl, a government relations representative at the American Public Power Association. He says federal power was never meant to provide big profits for anyone, but to offer an alternative to private power. "It was a historic, well thought-out decision," says Eckl. "[Critics oppose PMAs], they say, to promote competition, but we maintain that they want to squelch competition before the market is even deregulated."

Looking at Rate Shock

The GAO report, released in November, gives fodder to those who want an end to preference power. The report, "Federal Power - Regional Effects of Changes in PMAs' Rates," is the U.S. General Accounting Office's response to a request last year by Reps. Don Young (R-Alaska) and John T. Doolittle (R-Calif.) for a report on "preference power" sales by PMAs. The report finds that slightly more than two-thirds of the "preference" customers that buy power directly from three of the PMAs - the Southeastern, Southwestern and Western Area power administrations - may experience relatively small or no rate increases if forced to pay market rates.

The GAO was responding to concerns that changing PMA ownership or ending preference power sales might cause rate shock, especially in rural or low-income areas, since evidence indicated that rates charged by federal PMAs to their preference customers - wholesale buyers such as co-ops and publicly owned utilities - ran about 40 to 50 percent below other prevailing rate levels during the period 1990 to 1995.

To help answer questions on the future role of PMAs, GAO provided a state-by-state analysis of the preference customers that purchase power from the three named PMAs: SEPA, SWAPA and WAPA. Specifically, GAO identified the: (1) the rate hike (if any) for preference customers forced to pay at market, (2) the extent of retail areas served by PMA preference customers; and (3) the character of those service areas (income level; rural vs. urban).

GAO finds that almost all of the Southeastern PMA's preference customers would see an average increase of up to one-half cent per kilowatt-hour over rates that in 1995 ranged from 3.5 cents to 6 cents per kWh. Most of the preference customers would experience rate increases of less than one-tenth cent per kWh. Preference customers receiving power from WAPA might see a variety of rate increases if market rates are charged. In California, Colorado and Nebraska, more than three-quarters of the preference customers could see increases of less than one-half cent per kWh. But in South Dakota and Utah, many preference customers might face rate increases exceeding 1.5 cents per kWh. Those customers, however, typically paid relatively low rates, raging from 1.5 cents to 3 cents per kWh. In turn, residential end-users could experience larger electric rate increases. In general, the GAO said, a wholesale rate hike of 1.5 cents per kWh for a preference customers would mean $10 to $15 more each month for a typical retail residential customer, depending on the state. Possible rate hikes for SWAPA customers would lie between the increase projected for SEPA and WAPA customers. [The GAO report is posted at http://www.gao.gov.]

Congress Eyes Long-Term Contracts

On Jan. 12, Reps. Bob Franks (R-N.J.) and Marty Meehan (D-Mass.) wrote to the project manager of the Western Area Power Administration, Robert C. Fullerton, complaining about a WAPA proposal to sign long-term contracts for below-market power. The proposed 20-year terms for contracts with the Central Valley Project, Washoe Project and Salt Lake City Area Integrated Projects were too long, the congressmen argued, especially since the electric industry was in flux. They called the beneficiaries of low-cost power a "vocal political force," but said that protecting the status quo was "unresponsive to the new electricity industry and the federal taxpayer."

Also, the congressmen believe that the federal subsidies received by PMAs such as WAPA are "substantial," as verified by the GAO and the Congressional Budget Office. Those subsidies only serve to distort the market, they argued. They added that signing 20-year contracts would compromise Congress's ability to reform or sell WAPA assets to non-federal interests.

The congressmen also believe that the long contracts would "further the discrepancy between the preference clause's intent of advancing 'municipal purposes' and the distribution of WAPA power to some of the nation's wealthiest communities." They pointed out that WAPA conducts no means testing for distribution of low-cost power. Franks and Meehen threatened that PMAs, "if they are to continue to exist, need to focus on end-users and offer true public benefits only to those in need."

The congressmen wrote the letter on behalf of the Northeast-Midwest Congressional Coalition, which boasts more than 100 congressional members.

IOUs Versus Public Power

But as the congressmen pointed out, the recipients of preference power are a vocal force, as evidenced by the Salt River Project's announcement that it had received a letter from the U.S. Department of Energy concluding that SRP has not violated its contractual commitments regarding preference power by using it in electric sales in a competitive market.

Tucson Electric Power and other investor-owned utilities had complained regarding sales by SRP of low-priced federal preference power outside its historic service territory through its for-profit power marketing subsidiary, New West Energy Corp. Tucson Electric Power's power marketing entity, New Energy Ventures, competes against New West Energy in California. And SRP is preparing for competition in Arizona, pursuant to that state's 1998 competition law. (See "BPA, TVA, Salt River: Playing Fair in Power Markets?" by Courtney Barry, and "Time's Up for Public Power," by Charles E. Bayless, Public Utilities Fortnightly, July 1, 1998, pp. 24, 32.)

In a Dec. 22 letter to SRP management from DOE General Counsel Mary Anne Sullivan, DOE concluded that commingling of preference power and non-preference power does not result per se in an illegal sale of preference power. Sullivan wrote, "The analysis concludes that SRP is not illegally selling preference power obtained from the United States through WAPA and that there is no prohibition on the sale of preference power to utilities (such as SRP) that sell portions of their preference power."

"Tucson Electric Power's allegations that SRP is selling federal preference power illegally through New West Energy are incorrect, and hopefully this analysis by DOE will put an end to these claims by one of New West's competitors," said Richard Silverman, SRP's general manager.

But Tucson Electric Power disagrees, according to TEP communications director Allen Lee Bunnell. He said that DOE's letter constitutes a narrow response to a fundamental question. Bunnell said the DOE decision still does not address "whether and how a public power entity can use tax-exempt status to support a private for-profit enterprise."

In fact TEP does not consider the DOE letter to be a final resolution of the issue. Bunnell pointed out that the DOE letter leaves the door open for the Department of Interior and the Department of Treasury to answer a lot of questions. TEP is waiting to hear their opinions and then will decide on how to proceed. But at present there is no timetable as to when those decisions will be made.

Lori A. Burkhart is a contributing legal editor to Public Utilities Fortnightly.

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