Skip Navigation

Should the Federal Government Sell Electricity? November 1997

Federal agencies, including the Tennessee Valley Authority (TVA) and the five power marketing administrations (PMAs) of the Department of Energy, supply about 8 percent of the electricity consumed in the United States. Today, many policymakers question the government's involvement in the business of producing and marketing electric power. A number of proposals advocate transferring responsibility for federal power facilities to private business or local government. Others propose reforming the management of federal programs to make them operate more efficiently.

Two principal motives underlie those proposals. One is deregulation and downsizing government. Taking government out of the power business altogether would be consistent with other steps the Congress has taken toward deregulation--most recently in the Energy Policy Act of 1992--and with many people's desire to eliminate unnecessary activities of government.

The other motive is deficit reduction. The budgetary value to the government of federal facilities that generate and transmit power is substantial. But the value to the private sector might be even greater if it could raise power rates, operate facilities more efficiently, and end some subsidized sales. Opportunities exist for increasing earnings, because the goal of federal power programs has never been to maximize returns to the government. Sales of some or all of the facilities--at prices that exceeded the value to the government--would produce budgetary savings in the long run. Budgetary savings from reforming federal management, although more modest, could also help the Congress meet its goals for reducing the deficit. For example, raising PMA power rates to average market levels could increase federal receipts by $210 million a year.

Many proponents of eliminating or reducing federal production and sale of electric power concede that the original investment by the government was good policy. Noting that times have changed, however, they argue that most of the original reasons for federal involvement no longer apply, and that the production and sale of power should be turned over to the private sector. The economic benefits of developing the nation's water resources have been realized, and problems with poor service to rural areas are gone. Proponents of privatization also claim that the threat of monopolists manipulating the power market should no longer worry policymakers--in part because of the success of regulatory programs, in part because of new competition in those markets.

On the other side of the debate, proponents of keeping a federal role in supplying power are concerned about rate increases that some consumers might face once federal subsidies go away. They are also concerned about the management of public rivers and lakes by nonfederal entities. They feel that nonfederal operators may not have the incentives to protect the environment, manage rivers for flood control, and retain public access to recreational resources.

But even proponents of continued federal ownership acknowledge that some changes are needed in the management, financing, and pricing of public power. Budgetary restrictions on operating and investing decisions by federal managers, inefficiencies inherent in the pricing of public power, and increasing competition from nonfederal suppliers all point to growing problems with the federal power program and the likelihood that taxpayers will bear more of the cost. Furthermore, many of the concerns about the management of the nation's water resources for environmental and recreational purposes apply equally to federal and nonfederal managers. Budgetary problems are most acute for the largest power agencies--the TVA and the Bonneville Power Administration (BPA)--but each of the smaller programs may benefit from some type of change as well.
 

Federal Power Agencies: Who They Are, What They Do

The federal government sells half of the power it produces through its five power marketing administrations and the other half through the Tennessee Valley Authority. The PMAs, in addition to the Bonneville Power Administration, are the Southwestern Power Administration (SWPA), the Southeastern Power Administration (SEPA), the Alaska Power Administration (APA), and the Western Area Power Administration (WAPA). Legislation authorizing the future sale of APA assets and terminating that agency became law in late 1995.

The source for most PMA sales is hydropower from dams that the Bureau of Reclamation (Reclamation) and the Army Corps of Engineers (the Corps) have built over the past 60 years and continue to operate. Power from Reclamation and Corps projects account for about one-half of the nation's total production of hydropower. Additional power that the BPA sells comes from a nuclear plant that the agency has helped finance. The Tennessee Valley Authority produces and markets the electricity it generates from coal, nuclear power, natural gas, and hydropower.

The government sells its power wholesale, principally to electric utilities and government entities. By law, the TVA and the PMAs give preference in their sales to publicly owned utilities, consumer cooperatives, and public agencies in their service regions--granting those organizations first rights to purchase federal power and supplying that power at prices designed to equal, over time, the average costs of production. The TVA and the Bonneville Power Administration also sell some power directly to large businesses (mainly aluminum companies) at preferential rates. So-called nonpreference customers (mainly investor-owned utilities) may purchase federal power that the preferred customers do not need.

The influence of the federal government in supplying power is concentrated and therefore more important in certain parts of the country and in certain segments of the wholesale market than in others. For example, nearly 60 percent of federal sales go to just four states: Tennessee, Alabama, Washington, and Oregon. And more than 70 percent of federal power sales are made to publicly owned distributors and cooperatives. On average, those utilities, which directly sell 20 percent of the nation's electricity, rely on federal production for about 25 percent of their power supply.

The northeast and central regions of the country do not benefit from sales of federal power. And on net, investor-owned utilities--which sell most of the electricity in the country--receive almost no federal power.
 

Policy Rationale for a Federal Power Program: Then and Now

Compared with other major industries, the federal presence in what is primarily a private and local function is in many ways an anomaly, having changed little since the New Deal era of the 1930s. The direct federal role in supplying electricity emerged with the national policy to harness the nation's rivers for economic development in poor rural areas of the East and in sparsely populated or arid parts of the West. Political leadership for that policy came from the conservation movement of the late 1800s. At that time, conservation simply meant not letting water flow unused to the sea. Additional incentive for direct government intervention in electricity markets came from the populist distrust of big business at the turn of the century. Generating power was initially an incidental goal of federal projects that were intended to control floods, promote river transportation, and supply water for farms and rural communities.

Over the past 60 years, many of the concerns that gave rise to the current federal role in supplying power have greatly diminished. The disparity between the quality of life in rural and urban areas is much smaller, if not reversed. Federal and local regulation and, increasingly, competition within the industry effectively check the market power of investor-owned utilities. And the conservation philosophy of not wasting water has given way to environmental concerns about preserving the nation's waterways and protecting threatened and endangered species.

Moreover, in the intervening years, a growing recognition of the full costs of government solutions has emerged. The federal power agencies could satisfy their early social agenda, such as supporting public works and rural development, without producing electricity at minimum cost or supplying it to the consumers who would put that power to the best use. But today the social imperative for such costly practices is no longer as strong. Even if certain problems with the market remain, the high costs of government production indicate that other public solutions--such as regulation or local control--might now be preferable.
 

The High Costs of Relying on Government Production

The nation's hydropower resources, which enable the government to sell electricity at relatively low prices, could support more power output at today's costs (or the same power at lower cost) than is now the case. At the heart of problems with the high costs of federal production are governmental failures: behavioral impediments to socially efficient power operations. The managerial structure of the federal power program, for example, makes it hard to operate efficiently. Sources of problems include the divided responsibilities of different agencies and branches of government, the constraints of the Congressional budgeting process, and the lack of independent oversight or significant financial constraints on pricing and investing decisions. Specific evidence of the high costs of federal involvement comes from the inadequate maintenance of power assets--a problem that applies to all of the federal power agencies--and low utilization rates of hydropower-generating capacity.

Competition in power markets may contribute further to problems arising from governmental failures. In particular, adhering to the current pricing rules, which set power rates equal to average costs, and to the debt burdens of some of the federal agencies mean that those agencies will face great difficulties in meeting new competition from low-cost, independent power producers.

In general, the trend toward more open competition in electricity markets reveals the high costs of power supplied by the government. At the same time, growing competition weakens one argument for direct government ownership of production and transmission facilities: it reduces any market power that nonfederal utilities may hold. The problems of high debt burdens and competition are most pressing for the Tennessee Valley Authority and the Bonneville Power Administration.
 

Options for Altering the Federal Role

Diminishing benefits and rising costs of government production point to a need to reform the federal power program. Taking the government out of the power business would square with other steps the Congress has taken toward deregulating energy markets and reducing government interference in market operations. Selling the federal facilities--for the right price--could also contribute to long-term budgetary savings. But the Congressional Budget Office's (CBO's) analysis of the sources of government failures also points to changes in the management of power agencies that could help to control the costs of government production.

Three general options are available to the Congress to improve the performance of federal power agencies and enhance the efficiency of U.S. power markets:

• Legislative Remedies to Improve Government Management. The Congress may retain federal ownership but legislate specific remedies to correct some of the failures arising from the management system, pricing practices, and uncompetitive market structure that characterize the federal power program. Those changes would allow federal agencies to be more efficient and compete more effectively. Such improvements could increase the net returns to the Treasury from federal power operations.
  
  
• Transfer Ownership to Local Governments. The Congress may decide that current market and governmental failures argue against continuing the federal role in production but, for some facilities, may call for reforms short of privatization. If that was the case, the Congress could devolve, or transfer, the ownership of federal power assets to local governments. If subject to the independent oversight of public utility commissions and the limits that borrowing or raising taxes would impose on spending, those facilities might operate more efficiently under local than federal control.
  
  
• Privatization. As an alternative to devolution, the Congress could privatize federal power assets. Privatization would place control for their operation and upkeep in the hands of nongovernment entities, either by selling them or granting long-term leases for their operation and upkeep.

Among those options, privatization may offer the greatest opportunity for enhancing the efficiency of power production. Lingering governmental failures may erode any special advantages of retaining federal management, despite the government's pursuit of social objectives that private operators may not value. And local governments may fall prey to the same administrative failures that hamper federal management.

Similarly, privatization could provide the greatest budgetary savings, depending on the terms of the sale. The budget would not be significantly affected, however, if privatization meant that private contractors operated government-owned facilities but that current operating and pricing subsidies (such as pension costs for federal employees that are not in the rate base) would continue. The greatest return to the Treasury from privatization would result from a competitive sale to the highest bidder with no restrictions on who may bid, no limits on subsequent power rates, and no guarantees of continuing federal support.

The Congressional Budget Office does not attempt to predict how much power rates may change after reform or privatization of a federal program. Except for a few states, however, the federal share of total power supply--and hence the potential for influencing average wholesale rates--is generally small. Any improved efficiency in regional markets as a result of new management or ownership would diminish cost pressures on regional wholesale rates. And with the structural changes under way in power markets, it is not clear how much of any rise in wholesale power rates could be passed on to retail customers by local power distributors.
 

What Are Federal Power Assets Worth to Buyers?

This study presents illustrative estimates of what federal power facilities might be worth to the private sector and the federal government. Such estimates can indicate the potential, long-term budgetary savings from privatization. But sales can vary in ways that would affect the market value of the assets. What is to be sold? When? To whom? How is the sale to be conducted? What restrictions are to be placed on operations by private owners? Because of those variables, the estimates of market value provided in this study may differ from those that buyers actually offer. Changes in the market valuations of federal power assets would alter the budgetary savings from their sale, dollar for dollar.

CBO estimated three figures for the sale of each federal power agency--the TVA and the power marketing administrations. The first figure was the maximum value to the private sector for all of the power assets of each agency. (The PMA sales included the power-related facilities of Reclamation and the Corps.) The second was the present value of additional tax receipts that the government would realize from a change of ownership. The third was the present (or capitalized) value of the net income stream to the government that would be lost if those assets were sold. The difference between the combined value to the market and additional tax receipts on the one hand, and the budgetary value to the government of continued program operation on the other, indicates the long-term budgetary savings (or cost) that would result from selling power assets to the private sector.

In addition to the uncertainties of those estimates, the government may not realize the maximum value from a sale for many reasons. The maximum value of power assets to the private sector could be established in an open competitive sale unburdened with no special conditions that might diminish future earnings or restrict who may bid. Economic theory suggests that the amount businesses would offer in such a competition would reflect their assessment of the present value of the net cash flow they would expect to earn from operating the assets in the future.

For such a valuation, CBO estimates that private businesses may be willing to pay between $45 billion and $62 billion for all of the power assets of the federal government. The range of market values for assets of the Tennessee Valley Authority may be $22 billion to $30 billion. And the Bonneville Power Administration (including the power-generating assets of Reclamation and the Corps) may be worth between $15 billion and $20 billion. The combined assets of the smaller PMAs--the Southwestern, the Southeastern, and the Western Area Power Administrations--may be worth between $8 billion and $11 billion.

Those estimates represent only the value of power-generating, transmission, and marketing assets. They do not consider the possibility of turning power assets to new and possibly more profitable endeavors that would increase their value. Similarly, the estimates do not consider the sale of nonpower assets related to the nation's multiple-purpose water projects. Offering navigation locks, recreation resources, or property surrounding a reservoir could increase the market values, too.

CBO made the following additional assumptions when preparing estimates of the maximum value of the federal power entities to the private sector:

• The new owners would be able to raise power rates to competitive levels.
  
  
• Private operators of hydropower facilities would generally produce electricity at a lower cost than the federal operators currently do (or, equivalently, more power at the same cost).
  
  
• The new owners would receive no special operating restrictions or privileges. For example, they would be subject to the same regulations that apply to other privately operated facilities. The current requirements for securing federal licensing of hydropower projects would not impede power operations or delay the sale.
  
  
• The debt owed directly to the public by the TVA and the BPA would remain an obligation of the federal government if those entities were sold to the private sector. Whether or not those liabilities could be passed on to a private owner, however, would have little or no net effect on estimates of budgetary savings. (The market value of federal assets would be higher if the government retained debt liabilities, but the budgetary benefits from transferring ownership would be lower.)

Critics may regard those assumptions as extreme. Some sales might be authorized under different conditions. For example, new owners might be restricted as to how rapidly they could raise rates to consumers. Environmental concerns in an area might require operational constraints to be written into the sales contract. Or the TVA and BPA public debt might be dealt with differently. Nevertheless, estimates generated on the basis of those assumptions offer a useful benchmark.
 

The Budgetary Value of Power Assets and the Budgetary Savings from Their Sale

Selling assets is not the same as reducing the deficit. By selling an income-producing asset, the government is trading the future income that asset will generate for a lump-sum payment today. A sale of federal power assets would yield long-term budgetary savings only if the sales proceeds plus the present value of additional tax receipts was greater than the present value of the income that the government would forgo.

This study presents estimates of the budgetary value to the government of retaining ownership, the tax effects of changing ownership, and the long-term budgetary savings or costs that would result from selling power assets to the highest bidders. Those estimates of long-term budgetary effects differ from any CBO estimates of the cost of legislation authorizing specific sales. Legislative cost estimates, which CBO prepares for budget enforcement purposes, reflect annual cash changes in budgetary flows (that is, undiscounted) for a limited period of only five or 10 years. Such estimates would not include any future savings in discretionary spending for operations or construction. And the Joint Committee on Taxation, not CBO, would be responsible for estimating any changes in tax receipts.

The budgetary value to the government of retaining ownership is based on the difference between future revenues from power customers and the sum of the program's operating and capital costs. Under existing policies for setting power rates, current revenues pay for all costs of operation. Therefore, it is possible to estimate the net budgetary impact of power programs in terms of the amount of revenues to be collected for the repayment of past capital investments. (Those estimates exclude future expenditures for new capital projects under the assumption that those projects would also generate a balance of new revenues and repayment obligations.) The present value of capital repayment obligations for all the power agencies, discounted at the cost of federal borrowing, totals about $46 billion. The net addition to federal tax receipts--a consequence of increased productivity--would be worth about $0.5 billion in current dollars.

On that basis, CBO considered the potential budgetary savings from an 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. For asset prices reflecting high market values (power rates grow with inflation after first rising to current market levels), selling all of the power programs would yield budgetary savings totaling $16 billion. But for asset prices based on low market values (power rates remain constant after first rising to current market levels), the result could be a small budgetary cost of $0.2 billion, not savings, because losses from a sale of TVA assets just exceed the combined savings from sales of the PMA programs.

In general, the prospects for budgetary savings from selling power assets are strongest when the new owner can boost cash flow by selling electricity at higher rates or lower costs than the government. The prospects for budgetary savings are weakest when the government must collect large sums to repay past investments.

The budgetary savings from privatization appear greatest for the BPA, the SWPA, and the WAPA. The long-term savings from selling those three agencies would be worth between $5 billion and $13 billion in present-value terms. For the SEPA, the range of budgetary savings would be from almost none (that is, deficit neutral) to about $400 million.

Selling the Tennessee Valley Authority's assets would produce budgetary savings of more than $2 billion with a sale at the high market value--a relatively small amount compared with the overall value of the TVA program. A sale at the low market value would produce a budgetary cost amounting to about $6 billion. In both cases, the prospects for budgetary savings from a sale are undermined by the agency's large outstanding capital debts. The range of sale prices for the TVA also reflects the limited opportunity for new owners to raise power rates in the southeast region; TVA rates are already near the market levels.

The actual budgetary savings from the sale of power assets are likely to be greater than those shown here, for several reasons. First, the estimates omit costs that are not currently part of the federal rate base. Second, they exclude the prospect of new subsidies, new capital expenditures that will not be fully repaid, and new obligations that the power agencies may incur through third-party financing. Third, the market assessments neither include the value of associated nonpower assets that could be part of the sale nor consider the prospect that new owners may find new uses for or combinations of power assets that could 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.
 

Conclusions

The government could save money over the long term by selling many of the facilities that it now uses to supply electric power. Under some circumstances, it could lose money. But budgetary considerations may not dominate the decision to sell power assets. The government entered the business of producing and marketing electricity for reasons other than making money, and it may decide to stay in the business for similar reasons. Many of the early rationales for direct federal involvement, however, are gone, thus weakening the arguments for continued government ownership. Nevertheless, the prospect of selling federal power assets continues to raise concerns about future electricity prices, the environment, and access to recreational resources. Some power consumers would be likely to face increases in rates under new ownership.

Estimates of the value to private businesses of taking over federal facilities and the value to the government of keeping those facilities point to circumstances that support the prospect of budgetary savings, or costs, from privatization. The estimates presented in this study are only illustrative, however. Actual sales would probably not meet the precise conditions assumed here, and an analysis of any individual sale would have to be more exhaustive than the one conducted for this study.

---