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Should the Federal Government Sell Electricity? November 1997

The prospect of using the proceeds from sales of federal power assets to help control the nation's budget has encouraged proposals to privatize all or parts of the program. But the sale of a revenue-producing asset--even one that may operate more efficiently with new ownership--might not yield budgetary savings over the long term. Selling such assets is tantamount to trading the future income that those assets could produce for a lump-sum payment today. The future income from the government's power program would equal the difference between program receipts (from power sales) and outlays (for operation and construction). A sale of federal assets produces long-term budgetary savings only if the sale price exceeds the present value of the income that the government gives up, less any increase in federal tax receipts after the sale.⁽¹⁾ Estimates of budgetary savings may say little about gains in efficiency from privatization, because market values reflect tax liabilities and costs of capital that are not part of the budgetary impact.

Nonetheless, selling many of the government's power assets--including the power-related facilities of the Bureau of Reclamation and the Corps of Engineers--would yield long-term budgetary savings (on a present-value basis) under certain assumptions about market value. (This chapter does not consider the Alaska Power Administration, which is now in transition to new ownership.) The budgetary savings from selling all power assets could be worth more than $16 billion in current dollars, assuming that the sales prices for all assets reflect assumptions of a high market value ($62 billion).

If one assumes the sales prices of the low-market-value case ($45 billion for all federal assets), auctioning the Tennessee Valley Authority's assets to the highest bidder would yield budgetary costs, not savings. Budgetary savings would still result from selling the power marketing administrations' assets in that case, but the budgetary cost of selling TVA assets would slightly exceed the combined savings from selling the PMA assets. Selling all the federal power assets under those circumstances would yield a net budgetary cost of $0.2 billion in present-value terms--close to being deficit neutral.

In both the high- and low-value cases, the Congressional Budget Office assumed that the sale of power assets would not affect the federal obligation for repaying public bonds issued by the TVA or secured by the Bonneville Power Administration.

If CBO's estimates of net budgetary income from future program operations could not be realized, the value of selling power assets for budgetary reasons would be enhanced. Realizing those projections should not be difficult for the smaller PMAs because they have so much latitude to raise power rates. For the TVA and the BPA, however, challenges to the income projections may come from new competitive limits on federal power rates, difficulties in expanding federal sales, or internal cost pressures.

For all the power agencies, three additional considerations could enhance a sale's prospects for budgetary savings. First, future subsidies not included here--such as appropriations for unprofitable new projects or forgiveness of the power agencies' debts--are possible. Second, additional third-party financing for the construction, maintenance, or operation of power facilities could be used in the future. In effect, the power agencies can obligate the federal government, in the absence of direct appropriations or explicit borrowing authority, to pay for those nonfederal expenditures. New subsidies or third-party financing would reduce the budgetary income from future program operations. Third, the market value of the power programs might be greater than assumed here if parts of the program were sold independently--such as transmission systems or particular generating projects--or if the sale included associated nonpower assets.

CBO's analysis of long-term budgetary effects does not represent an official estimate of the changes in budgetary receipts or outlays that could result from legislation requiring the sale of federal power assets. The Congressional Budget Office prepares those legislative cost estimates for purposes of budget enforcement and follows guidelines that would cause such estimates, prepared on a cash-value basis, to differ from the present-value estimates of long-term budgetary effects (see Box 3).
 

The separate budgetary treatment of mandatory and discretionary spending causes perhaps the greatest difference between legislative estimates and the long-term effects reported here. An estimate of the cost of legislation authorizing a sale of power assets would reflect only changes in mandatory spending, which would include the proceeds from the sale and the loss of future power receipts. Savings in discretionary spending for power operations would be scored separately, in annual appropriation bills. Other differences include the discounting of future values, the period of estimation, and the treatment of changes in tax receipts. The Joint Committee on Taxation, not CBO, would be responsible for estimating any change in tax receipts that might be attributed to particular legislation.
 

The Budgetary Impact of Power Operations: Power Receipts and Program Outlays

In general, the budgetary impact of operating the federal power program reflects two basic factors: the total amount of program spending for operation and construction each year, and the receipts from power customers. Under current law, each federal agency must set rates for the electricity it sells so that, over time, the revenues from sales will be sufficient to offset the program's costs for routine operations, capital projects (including interest charges), and certain nonpower activities. If electricity customers ultimately pay for all of the costs of the services they receive, the federal power programs should cost the government nothing in the long run.

But recovering all the costs can take a very long time. In the interim, annual revenues and costs may diverge significantly. The main reason is that federal agencies, like all regulated utilities, establish power rates that treat operating costs and capital costs differently. Federal power rates include a component for current operating costs, so that customers generally pay for those costs as they occur. But power rates reflect only the costs of capital projects through depreciation and interest charges; therefore, there is a lag between the expenditure on capital by a federal agency (and by other utilities) and the ultimate reimbursement from customers. For example, outlays for large capital projects take place within a few years, but power rates may recover those costs only over the next 10 to 50 years, depending on the life of the investment.

Current Budgetary Impact of Operations Reflects Status of Capital Program

The implications of cost-recovery methods for identifying the budgetary impact of federal power operations are straightforward. In a typical year, the routine operating costs of the TVA and the PMAs are largely offset by electricity receipts from customers in that same year. Thus, the extent to which a program's net outlays are positive (net spending) or negative (net receipts) depends primarily on the difference between new capital spending and past capital recovery.

All of the federal power agencies collected more money from customers in 1995 than they spent on routine operating costs--including expenditures for power operations and maintenance and for certain nonpower programs that are a part of the agencies' rate base (see Figure 5). In that year, the federal power programs had receipts from nonfederal customers totaling $8.7 billion, compared with routine operating expenditures totaling $4.7 billion. The programs had an operating surplus--that is, net budgetary receipts--of about $4 billion that year because their customers were still paying back the $48 billion invested by the government for power facilities, plus associated interest charges.
 

Figure 5. Federal Utilities' Spending and Receipts, Fiscal Year 1995

SOURCE: Congressional Budget Office using information from the 1995 annual reports of the Tennessee Valley Authority and the power marketing administrations.

NOTE: Revenues for the Bonneville Power Administration exclude the Treasury credit against the annual payment ($56 million) for current fish and wildlife costs. Interest and amortization for the TVA and the BPA are for publicly held debt.

Future Budgetary Impact Reflects Forgone Income

Over time, the budgetary impact of selling power assets that the government now holds would reflect the value of the future stream of net power receipts that the government would forgo. Evaluating the budgetary impact of selling today's assets means ignoring assets the government may acquire in the future and, as a result, future outlays for capital spending. If operating costs are fully recovered as they occur and new capital spending can be ignored, the net power receipts that are forgone will equal what the government would otherwise collect to finish repaying past capital spending.

Each of the federal power programs keeps data indicating when funds must be collected from customers to recover the costs of past capital investments. To determine the present value of future payments on principal and interest--for completed plants, work in progress, and (especially for the TVA and the BPA) canceled projects--CBO relied on agencies' repayment schedules for capital spending through 1995. (In the absence of new program subsidies, omitting new capital spending should have little impact on the estimation of net outlays in the long term because that spending would trigger new collections from rate payers to pay off the debt.) The analysis discounts the income due over the next 30 years (a general estimate for the remaining productive life of those assets) at a rate of 7 percent (the current cost of federal borrowing for long-term debt). That accounting ignores government costs for preparing a sale. For a 1995 proposal to sell assets of the Southeastern Power Administration, CBO estimated that such costs could equal $6 million.⁽²⁾

On that basis, the present value of future payments on debt--and the budgetary impact of continuing the federal power program--is about $46 billion (see Table 13). For each agency, that value reflects three basic factors: the original size of the investments, the age of the investments (old projects are booked at preinflation costs, and the investments have had time to be paid off), and past repayment activity (payments can be rescheduled). Whether future market conditions may constrain future payments on debt depends on current federal rates (and how far below market rates they are) and the productivity of federal investments (incomplete or canceled projects do not support sales). In general, the budgetary value to the government of keeping power assets is greatest for the agencies that have the largest outstanding debts and the highest interest costs.
 

Accordingly, the loss of budgetary income from selling the assets of the Southwestern, the Southeastern, and the Western Area Power Administrations would be small: the original investments were generally small (compared with those of the BPA and the TVA) and were largely completed several decades ago. Altogether, the present value of the future net income from SWPA, SEPA, and WAPA operations--$4.5 billion--represents about 50 percent of the government's historical expenditures on power assets for those agencies, excluding work in progress on the SEPA's Russell Dam.

By contrast, the greatest loss of potential income would come from selling the agency with the largest debt: the Tennessee Valley Authority (see Box 4). The present value of the TVA's future net income--$28 billion--represents more than 80 percent of the government's historical expenditures on power assets for that agency. Much of the TVA's capital investment in coal and nuclear plants, including more than $6 billion for deferred (that is, inactive but not yet canceled) nuclear plants, was made in recent decades.
 

Similarly, the present value of future income from the Bonneville Power Administration--$13.6 billion--represents about 70 percent of the government's past expenditures on power assets for that program. Much of the BPA's hydropower capacity was completed more than 40 years ago, but half of the agency's current debt obligations are for nuclear plants started in the 1970s. The BPA owes $4.4 billion for canceled nuclear plants and $0.7 billion for environmental projects, which, although fully represented in the agency's rate base, do not contribute to power sales.

Agencies may have to raise rates in the future to assure sufficient income to meet repayment obligations. For the smaller power agencies--the SWPA, the SEPA, and the WAPA--that would not be a difficult prospect; current pricing policies have left federal power rates far below market rates in parts of the country. Indeed, the basic design of the federal power programs assured that they would not result in the highest power rates possible. The law requires federal agencies to sell electricity to their customers at cost, consistent with sound business practices.
 

The Budgetary Impact of Changing Tax Receipts

Tax receipts can affect the estimation of total budgetary savings from an asset sale in two ways: through tax liabilities, which lower the market's assessment of future cash flow and therefore the market value of federal assets, and through net changes in tax receipts to the federal government. Long-term budgetary savings should reflect the sum of sales proceeds and any net change in tax receipts minus the value of forgone net receipts from program operations. In general, if the efficiency gains from new ownership are small, the net change in tax receipts will be small, too. CBO estimates that future increases in federal taxes will total $0.5 billion in current dollars (see Table 13).

Tax Liabilities Diminish Market Value

Any liability for federal, state, and local taxes diminishes a purchaser's future cash flow from federal power assets. As a result, the market value of those assets, the potential proceeds from their sale to the highest bidder, and the future budgetary savings from their sale are all diminished as well. The drop in savings that can be attributed to the effect of federal tax liability on sales price is offset by future direct payments of federal taxes by the purchasing firm. However, total federal tax receipts, which are important for estimating budgetary savings, may not change.

Federal Taxes Depend on National Income

Additional changes in federal tax receipts will result from a sale only as an indirect consequence of changes in national economic output or changes in the national mix of taxable income. As a rough rule, the change in federal tax receipts reflects the product of the marginal tax rate--generally around 25 percent for wages, interest, business income, and corporate income--and any change in the value of economic output. Any increase in the new owner's taxable income from raising power rates would not constitute a net addition to federal receipts, because that income would occur at the expense of diminished income in other sectors of the economy.

Accordingly, CBO estimates that additional tax receipts from the sale of PMA assets (including the power-related assets of Reclamation and the Corps) will be 25 percent of the present value of the increase in power output with private management--assumed to equal 5 percent of current PMA sales, valued at current federal power rates. No additional tax receipts will come from privatizing the TVA's assets, because CBO assumes that the increase in sales under new ownership only matches the increase that will probably take place under continued government management. That is, the increases in future output by the TVA will produce additional taxable income, too.

The gain in power output (and efficiency of private production) for individual assets may not correspond exactly to the gain in national output (and social efficiency). Any rise in national output as a result of privatization would also reflect the benefits of market-based pricing (including improved decisions about consumption by power customers) and better allocations of resources throughout the economy. Such social gains are difficult to assess. For example, resources displaced either by increased power output--for example, in the production of natural gas, heating oil, or power from other sources--or by reduced operating costs may not be readily reemployed in other activities. The actual amount of displacement--and hence the ultimate social gain from privatization--may depend in part on current market conditions. Also, some economic resources will be diverted to conducting the sale and integrating federal assets into private systems. In the short term, transaction costs may reduce economic output before any gains in power output can accrue.

Taxes Also Depend on Income Mix

The only general tax effects of a change in ownership, aside from any change in national output, would be produced by a shift in the economy's mix of taxable income. Under federal ownership of power assets, power receipts are now used to pay for employees and contractors of power agencies, interest on the federal debt resulting from power investments, and government spending not related to power programs--all three of which are sources of taxable income. Under private operation, the mix of taxable income would probably shift initially to include more income from business and, depending on how the owner financed the purchase, less income from interest. (Federal payments of interest would decline because the sale proceeds would reduce the national debt.) The marginal tax rates for personal, business, corporate, and interest income are very similar. This analysis therefore assumes that total tax receipts do not change because of changes in the income mix.

Assumption of a 5 Percent Gain in Output Yields a Modest Tax Gain

Counting only the present value of federal tax receipts that can be ascribed to a 5 percent increase in PMA power sales (valued at current power rates) would raise the total budgetary savings from the sale of all federal power assets by about $0.5 billion. This study does not attribute any change in net tax receipts to a sale of TVA assets; based on existing generating capacity, CBO assumes that under continued federal operation, the TVA would raise output by the same amount as a new owner.

For the sake of comparison, the present value of federal taxes that nonexempt private purchasers of federal assets would pay directly, based on the low and high market valuations, would be between $8 billion and $12 billion, respectively. Those figures assume tax savings from interest deductions by the new owners on the basis of 50 percent debt financing. However, such interest deductions would be offset by new interest earnings by lenders. Similarly, increased power rates and taxable income for the new owners would reduce taxable income in the sectors of the economy that consume power.

CBO presents estimates of revenue changes for information purposes only and does not suggest that cost estimates of Congressional legislation would include any such effects for scoring purposes. Congressional estimates typically cover a period of five to 10 years into the future, and the assumptions underlying CBO's illustrative estimates may not hold over that period. Also, legislation privatizing certain federal power programs could require the private sector to incur various transaction costs in the short term that could cause total taxable income and tax revenues to decline, not increase, as in the illustrative CBO estimate. The Joint Committee on Taxation is responsible for estimating the expected change in revenues, if any, that CBO would include in its legislative cost estimate.
 

The Prospects for Long-Term Budgetary Savings

Long-term budgetary savings from selling power assets, in present-value terms, require that the sales proceeds, plus any increase in tax receipts after the sale, exceed the present value of the net receipts that the government gives up. In this analysis, CBO considers the potential budgetary savings from the unrestricted sale of all power assets (including the power-related assets of Reclamation and the Corps) to the highest bidder under alternative assumptions about the future course of power rates. On that basis, the potential budgetary savings could be worth as much as $16 billion in current dollars if all assets sold for high market values (see Table 14). If market value was low, however, a small budgetary cost of $0.2 billion could result because losses from selling TVA assets just offset the combined savings from selling the PMA programs.
 

In general, the prospects for budgetary savings increase for agencies when the new owner can boost cash flow by selling power at higher rates or lower costs than the government. The prospects for savings diminish when the government must collect large sums to repay past investments and when market conditions permit that collection. That view largely explains this study's basic findings about budgetary effects.

Budgetary Savings from Selling TVA Assets Require a High Market Value

Selling the Tennessee Valley Authority's assets would yield long-term budgetary savings worth $2.5 billion in today's dollars if they were sold at the high market value of about $30 billion. But a sale at the low market value of about $22 billion would yield budgetary costs, not savings, of $5.6 billion.

The general pattern of small budgetary savings or even costs from selling TVA assets has as much to do with the TVA's financial problems as with its successes. The value to the government of future net receipts from TVA power sales is great because the agency has large debt obligations. By contrast, the market value to potential purchasers of TVA assets would be limited by the fact that market circumstances would probably restrict the buyers' ability to increase the earnings potential of TVA assets significantly, either by raising rates or increasing production. In 1995, the TVA's rates for wholesale power sales were only about 0.5 cents per kilowatt-hour, or 10 percent, below the average rate that investor-owned utilities in the Southeast charged municipal utilities and cooperatives. And the TVA is already operating its on-line coal and nuclear units at utilization rates close to industry norms.

General Budgetary Savings Accrue from Selling PMA Assets and Related Assets of Reclamation and the Corps

Selling the power assets of the Bonneville Power Administration, including the power-related assets of the Bureau of Reclamation and the Corps of Engineers, would produce long-term budgetary savings under a range of assumptions about market value. Savings could be as high as $6.7 billion for a sale at the high market value, or as low as $1.4 billion at the low market value. The opportunity for budgetary savings from selling the power assets supporting the BPA results in part because the historical costs of federal hydropower projects in the Northwest--largely completed by the early 1950s--are so low. Even when the canceled nuclear projects of the Washington Public Power Supply System are added in, the obligations of the BPA for capital repayment are small in relation to the current earnings potential of those early hydropower projects.

The market valuations also contribute to the prospect of budgetary savings from the BPA. Both valuations reflect the earnings potential implicit in the difference between BPA power rates and average market rates in the Northwest and the opportunity to raise the efficiency of production. It is difficult to know just how much a new owner could actually raise rates, because rates for incremental sales by private suppliers are currently about one-half of the average cost for power in the region. Certain BPA customers would be able to purchase some power--for interruptible service or peak load--at those lower incremental rates. A sale of BPA assets, however, could still be close to deficit neutral if power rates rose by only 0.5 cents per kWh--or less than half the increase of 1.3 cents per kWh that this analysis assumes. (A rise of 0.5 cents per kWh would represent a 20 percent increase over current rates to preferred utilities.)

Federal power rates are far below market rates for the Southwestern and Western Area Power Administrations, both on average and for incremental sales. As a result, a new owner could easily increase cash flow by raising rates. Moreover, the budgetary value to the government of keeping those programs is relatively small. One reason is that each agency has made significant progress in repaying its capital costs. Another is that nearly one-half of the generating capacity for each of those agencies is at projects that came on line before 1960. Thus, the current earnings potential of those facilities is much greater than their original costs. The budgetary savings from selling those two programs and the associated power assets of Reclamation and the Corps total $6.7 billion for a sale at a high market value and $4.1 billion at a low market value. With low repayment obligations, market valuations would support a deficit-neutral sale of SWPA assets if power rates rose by only 15 percent, or 0.2 cents per kWh (in contrast to the increase of 1.9 cents per kWh assumed here). A sale of WAPA assets would be deficit neutral if power rates rose by only 25 percent, or 0.5 cents per kWh (in contrast to the increase of 1.9 cents per kWh assumed here).

For the Southeastern Power Administration, the budgetary effects range from small savings ($0.4 billion) for a sale at the high market value to a negligible budgetary cost (less than $50 million) for a sale at the low price. That is, such a sale would be close to deficit neutral. Both market valuations of SEPA assets reflect limited opportunities for bidders to raise rates and the relatively low productivity of SEPA projects. After the TVA and the BPA, the Southeastern Power Administration charges the highest rates for federal power (2.8 cents per kWh).

As with the BPA, the SEPA's power rates are already close to those charged by private generators for incremental supplies, so it is not clear how much a new owner might actually be able to raise rates. The market valuations for the SEPA, however, are buoyed by the low generating levels from Corps hydropower projects--and the potential for gains in efficiency. For example, the SEPA had access to about 50 percent more generating capacity in 1995 than did the SWPA but sold about 10 percent less power--indicating that it had the lowest generating efficiency of all the federal programs. The prospects for long-term budgetary savings from the sale of SEPA assets may be higher than those indicated here if efficiency gains from private operation turn out to be greater than the 5 percent that the market valuations assume.
 

Other Considerations Enhance Prospects for Budgetary Savings

If debate over what to do about the TVA and the PMAs goes on for several years, the market valuations and budgetary impact that ultimately determine the level of budgetary savings from privatization could look very different than this study assumes. For several agencies, the present value of budgetary savings is small in relation to the value of program assets. In those cases, small changes in the assumptions could easily suggest the possibility of budgetary costs, not savings, as a result of their sale (see Appendix B). In particular, if increased competition causes power rates to decline in the future, rather than hold steady or rise, market values will be lower than assumed. But in general, a number of considerations make it more likely that the actual budgetary savings from the sale of power assets will be greater than shown here.

First, the budgetary impact omits certain costs that are not currently a part of the federal rate base. Second, the budgetary impact does not include the prospect of new subsidies, new capital expenditures that will not be fully repaid, or new obligations that the power agencies may incur through third-party financing. And third, the market assessments do not include the value of associated nonpower assets that could be a part of the sale. Nor do they consider the prospect that new owners may find new uses for or combinations of power assets that can increase their earnings potential. The combined value of the individual pieces of the federal power program, sold separately, may be greater than the value of the program as a whole.

Current Budgetary Outlays Not Covered by Power Receipts

The General Accounting Office (GAO) has recently identified a number of current budgetary costs that are not passed on to PMA customers.⁽³⁾ Among those costs are subsidies to rate payers that include retirement benefits and postretirement health benefits for federal employees, capital costs misallocated to incomplete irrigation projects, and certain environmental expenses. CBO's analysis omits those costs under the assumption that the government would retain those liabilities whether or not the power programs were sold. (According to the President's most recent budget submission, the PMAs will begin to recover the full cost of retirement benefits and postretirement health benefits through power rates in fiscal year 1998.)⁽⁴⁾ A second category of subsidy addressed by the GAO and of direct concern here is related to the possibility that the power agencies may not recoup certain capital costs for incomplete projects.

Future Budgetary Costs of Program Operation

Policymakers may also want to consider the potential budgetary impact of continued government ownership in the near term. Future costs may come from several directions. For existing projects, any action by the Congress or federal agencies to hold down federal power rates by stretching out capital repayment schedules, allowing agencies to repay certain high-cost loans from the Treasury early, or forgiving repayment altogether will diminish the present value of forgone net receipts and, hence, enhance the budgetary case for selling federal assets.

For new projects that would benefit from government support (for example, in the form of below-market interest rates or, for multiple-use projects, favorable cost allocations), selling the power agencies could yield additional savings from subsidies that were avoided. New spending on capital projects is probable. One reason is that to operate efficiently, each of the power agencies will have to invest continually in projects to replace or upgrade their generating and transmission systems. Indeed, the need for significant capital improvements to the nation's aging dams may be just around the corner--as evidenced, for example, by the failure of a spillway gate at California's Folsom Dam in 1995 and the consequent draining of the reservoir.

Other likely reasons for new capital spending are easy to identify. Proposals have already been made to fund the new Auburn Dam in California. The TVA has kept incomplete nuclear projects in a "deferred" status--rather than canceling them outright--in anticipation of finding some new way to make them economic.

The appropriation process and, for the TVA and the BPA, limits on borrowing, may not be able to constrain those future costs because the power agencies use third-party financing. Appropriations generally limit the capital spending of the SWPA, the SEPA, the WAPA, the Bureau of Reclamation, and the Corps of Engineers. Caps on public borrowing by the TVA and Treasury borrowing by the BPA (for transmission projects) limit the capital spending of those agencies. But third-party financing of projects can remove those limits on agency spending. For example, through such accounting devices as net billing, an agency can make a long-term arrangement with a nonfederal entity that will supply power or build, maintain, or operate facilities to supply power for federal sale. The agency can "pay" for those services by selling federal power at a discount to the nonfederal entity or buying nonfederal power at a high cost.
 

Policy Concerns Other Than the Budget

Balancing the budget may not be the only or even the paramount concern facing the Congress in its decisions about the future of federal power. If nonbudgetary concerns are important, reliance on budgetary assessments--such as those outlined here--can send the wrong signals to decisionmakers. In particular, using the federal cost of borrowing to discount future government income tilts the decision to sell away from what might be economically most efficient. Budgetary assessments may also say little about whether a sale of assets supports or hinders other social goals that federal power was intended to remedy, such as promoting rural development or competition.

Budgetary Savings Do Not Reflect Gains in Economic Efficiency

In general, the government attaches greater value to a given income stream for budgetary purposes than would a private entity for the purpose of earning a profit. Government and private operators may value future income differently because of differences in discount rates and tax liabilities. Those considerations are not related to differences in their assessments of future cash flow based on outlooks for market conditions.

The federal government can realize long-term budgetary savings from any investment it makes (including retaining ownership of power assets) that yields a return greater than the federal cost of borrowing--currently about 7 percent a year. That is, the appropriate discount rate on government income for budgetary purposes is 7 percent. By contrast, the yield that private firms require from investments is generally higher, reflecting the after-tax return they can earn elsewhere. For a partially debt-financed acquisition of power assets, this study assumes a private-sector discount rate of 10 percent.

The liability for federal taxes drives an additional wedge between market valuations and estimates of budgetary impact. Taxes diminish the cash flow on which a business would base a bid for federal assets. But unless the change in ownership would also enhance efficiency throughout the economy and raise national income, no net increase in federal taxes would offset the loss of budgetary income from program operations after the sale.

Therefore, as long as the basis for decisions about selling power assets rests on budgetary savings alone, the difference in discount rates and tax liabilities will bias government decisions against a sale. As this study has noted, however, budgetary considerations need not--or perhaps should not--be the only reason for keeping or disposing of federal assets. If the criterion for a sale is economic efficiency for the nation as a whole, it would be appropriate to discount the government's net receipts from the operation of power programs by the higher private-sector rate. That way, basing the choice of owners--government or private--on present-value calculations would yield the most economic use of the nation's resources. More direct yet, the analysis could simply focus on available estimates of potential efficiency gains.

To illustrate the effect of efficiency gains on market valuations, CBO has evaluated a 5 percent increase in power output for the PMAs over current levels--a figure well within the range suggested by past differences between the productivity of federal and nonfederal hydropower operations. But, as summarized in Chapter 3, efficiency gains from private ownership may also result from improving the current management structure and imposing economic constraints on financing decisions and price setting.

The Continuing Relevance of Past Social Concerns

The Congress has invested in power facilities over the years, not only to supply power but as a way to fund nonpower activities such as irrigation and flood control, promote rural economic development through low power rates, and correct certain market failures. Meeting some of those nonpower objectives may be easily manageable with the private operation of power facilities; private ownership may complicate meeting others. Because federal operation of power facilities is necessary to meet certain nonpower objectives, estimates of budgetary savings may overestimate the net benefits of ending that federal role. Indeed, the ultimate savings from a sale of assets will depend on the extent to which the government continues to support those goals in the future.

1. Current dollars of income have greater value to the government than future dollars for two reasons: they can yield additional income in the future by enabling the government to reduce its borrowing (or increase its investment spending), and their purchasing power has not yet been eroded by inflation.

2. Cost estimate of a reconciliation proposal to sell the Southeastern Power Administration, in a letter from the Congressional Budget Office to the House Committee on Resources, October 10, 1995.

3. General Accounting Office, Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities, GAO/AIMD-96-145 (September 1996).

4. Budget of the United States Government, Fiscal Year 1998: Appendix.

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