Federal Energy Regulatory Commission:

Charges for Hydropower Projects' Use of Federal Lands Need to Be Reassessed

GAO-03-383: Published: May 20, 2003. Publicly Released: May 20, 2003.

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Hydropower projects generate power valued at billions of dollars. For projects located on federal lands, FERC is required to assess "reasonable annual charges" to use these lands. FERC agrees that fair market value is the most reasonable basis for assessing these charges. This report examines FERC's annual charge system and the extent to which it reflects the federal lands' contributions to hydropower. GAO described and assessed FERC's annual charge system, estimated the fair market value for the use of federal lands, and discussed the implications of higher charges on consumers and project owners.

Since 1987, FERC's charges for hydropower projects on federal lands have been based on a linear rights-of-way fee schedule that was originally used to determine the annual fees other agencies charged for the rights to locate, among other things, powerlines, pipelines, and communication lines on federal lands--uses that are generally less valuable than hydropower. FERC chose this system primarily because it was simple and predictable and would not subject the commission to appeals from the electricity industry. However, this system has no relationship to the economic benefit of the federal lands used to produce hydropower. In addition, in implementing this system, FERC does not ensure that (1) the charges it collects achieve the hydropower annual charge program objectives, (2) it has accurate information on the amount of federal lands licensees use, or (3) its billing system collects all charges due the federal government for the use of its lands. The annual charges FERC currently collects from hydropower projects for the use of federal lands are significantly less than the annual fair market value of these lands. For this report, GAO defined this value as the value of the annual economic contribution that the use of federal lands makes to the production of hydropower. According to GAO's analysis, FERC is receiving less than 2 percent of the annual fair market value for the use of these lands. In performing its analysis, GAO examined multiple electricity market scenarios, including three that estimated the value of federal lands using actual industry data from three recent years. Under these scenarios, the fair market value for the use of federal lands by GAO's sample of hydropower projects is at least $157 million annually and, under some market conditions, hundreds of millions of dollars more. In comparison, FERC collected about $2.7 million in annual charges from these projects in 2002. GAO reached these conclusions on the basis of its analysis of a stratified random sample of 24 projects that use federal lands. This sample was drawn from 56 projects that collectively account for about 90 percent of the hydropower produced on federal lands. Although this sample of 24 projects was not representative of all hydropower projects on federal lands, these projects produced about 60 percent of all electricity generated by FERC-licensed hydropower projects that use federal land and represent about 35 percent of all federal lands used for hydropower production. If FERC decides to collect annual charges that more closely reflect the fair market value for the use of federal lands, the implications of such a decision for consumers and hydropower project owners would depend on (1) how much of the fair market value FERC chooses to recover and how it decides to implement these higher charges and (2) whether the affected electricity market is still fully regulated or has been restructured.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In conducting this reassessment, FERC should determine methods for assessing or estimating the fair market value of federal lands used for hydropower purposes.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: FERC should develop new strategies and options for assessing annual charges that are proportionate with the benefits conveyed to hydropower licensees.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In the interim, while FERC is developing this strategy, FERC improve its internal control systems to resolve discrepancies among its multiple billing and land databases in order to ensure that each project is properly billed for the annual land use charges it owes the federal government.

    Agency Affected:

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In the interim, while FERC is developing this strategy, FERC should improve its internal control systems to improve the management of its current systems for assessing annual charges through periodically verifying self-reported data on the amount of federal lands licensed hydropower projects use.

    Agency Affected:

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: FERC should reasses its system of annual land use charges in light of the (1) information we are providing concerning the estimated value of the contribution that federal lands make to the production of hydropower, (2) trend toward the restructuring of the nation's electricity markets, and (3) flaws in its present system. Specifically, FERC should develop new strategies and options for assessing annual charges that are proportionate with the benefits conveyed to hydropower licensees. In conducting this reassessment, FERC should (1) determine methods for assessing or estimating the fair market value of federal lands used for hydropower purposes, and (2) determine methods for assessing annual charges, taking into account the federal land's fair market value as well as the competing goals of encouraging hydropower development and avoiding unreasonable increases in electricity rates to consumers.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Not Implemented

    Comments: FERC continues to believe that its current system for collecting annual charges for the use of federal land is reasonable. Therefore, they have no plans to develop new strategies and options for assessing federal land use charges.

    Recommendation: In conducting this reassessment, FERC should determine methods for assessing annual charges, taking into account the federal land's fair market value as well as the competing goals of encouraging hydropower development and avoiding unreasonable increases in electricity rates to consumers.

    Agency Affected:

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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