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Committee of Energy
ministration, Mr. Ron Wilkerson of Southwestern; and Mr. William Clagett of the Western Area Power Administration.
DEFEDERALIZATION OF PMA'S The President's 1986 budget request included a specific proposal for the sale of the Alaska Power Administration. Pursuant to that, in May 1985, the APA and the Alaska State Office of Management and Budget entered into an agreement to evaluate the issues involved in that proposal. The results of their study should be finalized next month and will be made available to the committee.
In fiscal year 1987, the Department of Energy plans to expand on this effort and pursue defederalization of all five Power Marketing Administrations. Utilities are not normally a Federal responsibility, and we believe that non-Federal owners could operate the PMA's just as efficiently or more efficiently than the Federal Government.
The administration will pursue defederalization through an open, competitive process which will include the development of legislative proposals. Working groups are being established to look at all possible options. Before the transmittal of defederalization legislation, we will seek the views of concerned groups and individuals, including congressional delegations, State and local officials, current customers, the financial community, and public power and private sector energy interests. Funds are included in the budget for operating the Power Marketing Administrations in 1987. It is expected that all the PMA's will transfer from Federal control by fiscal year 1991.
REPAYMENT PROPOSAL The President's fiscal year 1987 budget request also proposes to legislatively modify the repayment practices of the five PMA's. Our proposal calls for the PMA's to repay the unpaid balance of principal for power investments, assuming a useful service life of up to 50 years, at a level nct less than would be required under a straight-line amortization schedule. Repayments of principal under this proposal, if necessary, could be deferred, subject to the same terms and conditions applicable presently to deferred interest payments; that is, current interest rates would be paid on the portion of amortization deferred, because the deferral helps finance current operations.
The proposed changes are intended to protect the interests of the Nation's taxpayers. The impact of this repayment proposal is modest compared to the proposal made in last year's budget.
Mr. Chairman, that completes my statement. The Power Marketing Administrators have their own statements and I would be glad to answer any questions you may have.
Chairman HATFIELD. Madam Secretary, I recognize you are here on assignment. \Laughter.)
We accept that role, believing in the three branches of government.
DEFEDERALIZATION OF PMA'S On page 2, I would like to make sure that we have the horse before the cart, and I just want to do this purely for clarification. On the top of the page, you say, "The administration will pursue defederalization through an open, competitive process, which will include the development of legislative proposals."
Now, you go on to spell that out a little bit more clearly, but I want to make sure that we have Secretary Herrington, you and all the other witnesses here in total and complete agreement, including Mr. Jim Miller and others over in OMB. Would that not have read more appropriately, “The administration will seek legislative proposals before it pursues defederalization"? Bear in mind before you answer, we have already heard from the Secretary who happens to be a step higher in the hierarchy. (Laughter.]
Miss FITZPATRICK. Yes, sir, I was here, and the Secretary assures you, and I repeat the assurance, that there will be no transfer of any Power Marketing Administration without the approval of Congress.
Chairman HATFIELD. Thank you. That is good.
So then if I were your English teacher giving you this paper back, I would then suggest that the wording of that sentence would follow: "The administration would seek legislative approval before pursuing defederalization through an open, competitive process.”
Miss FITZPATRICK. Well, I had an English teacher, Mr. Chairman, who had three marks: a C-plus, a C-minus, and a C-me. That is a C-me, and I repeat, we cannot make a change in the status of the Federal Power Marketing Administrations without the approval of the Congress, and we will study it and come to the Congress with our proposal before any action is taken.
Chairman HATFIELD. You have no existing authority to proceed with the sale or divestment of any PMA or any part of any PMA at the moment? Miss FITZPATRICK. That is correct, Mr. Chairman.
REPAYMENT REFORM Chairman HATFIELD. Thank you. Nor would you have any authority at this time to modify the repayment practices of the five PMA's without new legislative authority? Let's put it this way: you don't have any such authority at this moment?
Miss FITZPATRICK. Mr. Chairman, I don't know that we have such authority. I do know that the Secretary is committed not to do that without legislative approval.
Chairman HATFIELD. Thank you.
As you know, dipping back into the classroom, repetition is the first law of learning. (Laughter.]
I don't want to be repetitious today as we have been with the Seco retary and other officials of the administration. Thank you, Madam Secretary, for a very succinct, clear, and disagreeable statement. (Laughter.] If you would like to proceed first to Alaska by the order of alphabet. Senator Burdick, do you have any questions for the Secretary? Senator BURDICK. Oh, yes.
Chairman HATFIELD. I am sorry. I do not excuse you yet, and we will hold Alaska for a few moments while the Senator from North Dakota asks questions.
DEFEDERALIZATION OF PMA'S Senator BURDICK. Thank you, Mr. Chairman.
I was listening intently to what the Chairman had to say about grammar and other things appertaining thereto, so I am going to ask you a question along that same line. What is the difference between defederalization and privatization?
Miss FITZPATRICK. Privatization, Senator, implies that the transfer would be made to a private party, say, an investor-owned utility. Defederalization means simply that the entity which takes over the PMA would not be a Federal agency. It could be a regional compact, it could be a State, it could be a consortium formed by the public power authorities that exist today, municipal power authorities, or rural electric co-ops. It is intended to be as broad as possible, that it not be a Federal agency.
Senator BURDICK. In either case, it is no longer a Federal agency.
Senator BURDICK. The administration is advancing a proposal to sell or privatize the Power Marketing Administrations. There is a claim that this privatization will result in deficit reduction. I am concerned this would only result in a short-term reduction, whereas the long-term continued Federal operation would result in greater deficit reduction once the Federal investment is retired. If the administration's motivation in this matter is simply deficit reduction, why not hold on to these assets; then, once the Federal investment is retired, revenues would far exceed those revenues which OMB estimates would be received through privatization in 1991?
Miss FITZPATRICK. Senator, that short-term budget deficit reduction is a secondary effect and intention of the proposal. The principal reason that the proposal is being made is in order to keep the Federal Government out of activities which are not properly or most effectively the role of the Federal Government. So the emphasis is on the defederalization and not on budget reduction or deficit reduction.
Senator BURDICK. The Federal Government has been in this area for a long time. Suddenly, it has decided it shouldn't be there?
Miss FITZPATRICK. No, Senator. I think that everyone agrees that the history of Power Marketing Administrations goes back more than 50 years and that the involvement of the Federal Government at that time, and for many years after that, was most proper and necessary for the development of these resources and the well-being of the areas that they serve.
The proposal now is that those areas and the resource development have matured to the point where they could now take control of their
own resources on a regional basis and that it is no longer necessary for the Federal Government to be involved.
INCREASED ELECTRIC RATES Senator BURDICK. I am concerned that the sale of these assets would result in a private owner financing their investment at a higher rate of interest. Would this lead to an increase in electric rates charged to consumers in order to recover the higher cost of financing?
Miss FITZPATRICK. Senator, we have been taking a look at what the interest might be and some possible financing arrangements. That is in the very early stages of study, and we don't think we are able, now, to predict what the interest rates might be. As we know, interest rates are trending downward, but we also realize that they can be rather volatile.
Senator BURDICK. Would there be a tendency under private financing to pay higher rates than under Government financing?
Miss FITZPATRICK. In the cases where the applicable interest rates are now in the range of about 3 to 4 percent, I think that that is probably true. Many of the interest rates are higher than that. The policy has been for some years that all new investment and new installations being brought on line be financed at the then current interest rates, and I think probably market rates now could be below what those rates would have been.
Maybe somebody would want to correct me on that, but I think that at least the interest rates that are currently being applied cover a rather broad range.
Senator BURDICK. We are comparing rates at any particular period of time?
Miss FITZPATRICK. That is correct.
Senator BURDICK. Of course, now there is a difference in the rates from a year ago and so forth. As of a particular time, it is my contention that the rates under private financing would be higher, and I think you agree. Miss FITZPATRICK. That could be true; yes.
MARKETING PREFERENCE Senator BURDICK. What assurances would there be to require a private owner to comply with the various marketing preferences?
Miss FITZPATRICK. One of the basic guidelines, Senator, that we are using in pursuing this proposal, is that the current benefits of the customers, including the preference clause, should be recognized and the means should be found to protect them.
Senator BURDICK. What would happen to existing purchase and sale contracts now pending?
Miss FITZPATRICK. All of those contracts and rights evolved from them are included in the guideline that I just mentioned. There is no intention, for example, to abrogate existing contracts. All of that would be subject first to review to see exactly what the contracts require and then negotiation with the parties.
WAPA MARKETING OF SURPLUS POWER Senator BURDICK. On another matter, currently, electric cooperatives in my area are experiencing enormous surpluses of power. Is WAPA aware of this problem, and do you see areas where WAPA could facilitate the marketing of this surplus power?
Miss FITZPATRICK. Could I ask the Administrator of WAPA to answer that question?
Senator BURDICK. Certainly.
Mr. CLAGETT. Senator, I appreciate the question. We are aware of the surpluses. Unfortunately, they are in neighboring areas, also. I can assure you, we are doing everything we can to be cooperative and helpful, but unfortunately, if the loads aren't there, it is very difficult to sell a surplus product
Senator BURDICK. Mr. Chairman, I think that is all I have at the moment
Chairman HATFIELD. All right
The Senator may have further questions that he may, of course, submit for the record.
The Senator from South Dakota?
Senator ABDNOR. I would like to ask Miss Fitzpatrick and, if it is possible, Mr. Clagett, a question. I am not a school teacher. Unlike the chairman, I tried teaching school and doubt I would measure up to him. That is, all right, though. I'll ask a question and you be the teacher.
DEFEDERALIZATION OF PMA'S Is both the defederalization and the privatization of the Public Power Administration a dead issue now? Miss FITZPATRICK. We are proposing defederalization, Senator, yes. Senator ABDNOR. Are you going to introduce legislation now. Miss FITZPATRICK. Yes, we would introduce legislation. Senator ABDNOR. You know it will be opposed by some of us? Miss FITZPATRICK. Pardon me?
IMPACT ON IRRIGATION ACTIVITIES Senator BDNOR. I think there are a lot of problems with this proposal. Have you ever thought about it? I couldn't help but wonder what would happen if you were successful. My State, Mr. Chairman, gave up well over 500,000 acres of land for the Missouri River reservoir. They certainly didn't ask for the dams at the time. It wasn't their idea. We were, however, supposed to get certain things in return, and I am not going to go back into that story again.
One of the things we were going to get, along with irrigation and a number of other things, was some 170 megawatts of power that was going to be reserved for irrigation. How would that work? How could we keep the Federal Government committed to that if you were to sell these reservoirs off? Would we just forget all our past promises and everything that we were going to do?