I READ WITH INTEREST THE ARTICLE "TIME'S UP FOR PUBLIC Power," in the July 1 edition of your publication, written by Charles Bayless, the former CEO of Tucson Electric Power Co. (and now CEO of Illinova - Ed.). Particularly striking was the sidebar on page 34, which accuses the Western Area Power Administration, a power marketing administration within the Department of Energy, of hiding costs and inappropriately handling a number of financial issues such as depreciation. I welcome the opportunity to respond to this misinformation.

The Bayless article relied erroneously relies on selected information from Western's 1994 annual report, hardly the most recent information available. While the sidebar asserts that Western must reflect depreciation in its rates, no mention was made of the footnotes to the financial statements published in the annual report, which clearly state that Western's rates, pursuant to law, are not depreciation-based. Congress has approved the use of amortization in the setting of our rates, recognizing the variable nature of hydrology and hydroelectric power generation. Far from "hiding" costs, Western fully and clearly disclosed its business practices, which were found by an independent auditor to be "in conformity with generally accepted accounting principles."

The article also omitted critical statements published in Western's 1994 annual report. That report explains that accumulated net deficits "represent differences between the timing of the recognition of expenses and the related revenues." Consider the article's criticism that Western's cumulative deficit totaled $248 million in 1994. This statement ignores the fact that the deficit is being amortized at current Treasury Department interest rates and was reduced to $8 million by the end of 1997. This reduction is due in no small measure to cost cutting by Western.

The "excess collections" of $267 million represent accumulated net revenues committed to repayment of the Federal investment in power and transmission. These revenues stem from factors such as better-then-expected hydrology and cost containment. Western is proud of the fact that it repaid $109 million in investment to the U.S. Treasury last year, and has repaid a total of $5.1 billion for interest and principal to date. This information is readily available in Western's 1997 annual report.

The article states that Western "has over collected revenues and underpaid expenses, charging $515 more to customers than paid in book expense." While admitting no knowledge of where the $515 million difference goes, the author speculates that the cash generated from over-collected depreciation "may have been used to subsidize water rates, recreation or other purposes." This statement again reflects a fundamental misunderstanding of how Western sets its rates.

Pursuant to law, Western assists in the repayment of irrigation investment at Bureau of Reclamation projects - investment that goes beyond the ability of irrigators to repay and a cost that is not recovered by investor-owned or other utilities. Western has no discretion to collect excess revenues to subsidize recreation or other purposes unless Congress specifically mandates the repayment of such costs. The FERC has specific authority to reject rates that contain unauthorized costs.

The article questions non-recovery of all employee retirement costs and life insurance premiums in Western's power rates. Again, this accusation is based on out-of-date information. Western is a rarity among Federal agencies engaged in business-like, revenue-producing activities, in that we will recover these costs in our rates.

Just like Tucson Electric, Western sets its rates based on costs. Despite some moves toward competition, most of the electric utility business still markets cost-based power to consumers. Western markets hydro-based resources that remain are relatively inflation resistant as compared to non-hydro generation, due to the absence of fuel costs. In addition, Western has no responsibility to meet load growth with relatively expensive additional power. It is because of these factors that Western's hydropower resources remain reasonably priced - not because of the alleged subsidies.

Kenneth G. Maxey

Chief Financial Officer

Western Area Power Administration

Editor's Note: For the record, we cut some portions of the original manuscript submitted by Charles Bayless, including these two sentences pertaining to his interpretation of WAPA's financial statements:

(1) "What makes this important is that the Flood Control Act of 1994 specifies that 'Rate Schedules shall be drawn having regard to ¼. the amortization of capital investment allocated to power over a reasonable number of years.' "

(2) "To me, not versed in public power accounting, reading WAPA's financial statements reminds one of Clairol advertisements - only their accountants know for sure." - B.W.R.

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