EXAMPLE ILLUSTRATING DETERMINATION OF PAYMENT UNDER

SECTION 10 (F)

Your letter also requested a step-by-step computation of a payment for headwater benefits identical to that in the last five pages of technical memorandum No. 2, except assuming the headwater improvement project to be privately owned and financed instead of federally owned. Such a computation, marked "Exhibit A," is attached to this statement, assuming the same physical structures used in the memorandum No. 2 example. The indicated payment required when the headwater improvement project is assumed to be privately owned is $153,078 compared to $271,037 if the headwater improvement is a Federal project.

As I have previously stated, benefits constitute the vehicle through which we apportion the costs of the headwater improvement. In the cited examples the benefits to the downstream project are the same in both cases, while the benefits at the privately owned headwater improvement are about three times the benefits at the federally owned headwater improvement. On the other hand, the 10 (f) costs to be apportioned for the privately owned project are only about those of the federally owned project. As a result, payments to be made by the downstream beneficiary are lower when the headwater improvement is privately owned.

That concludes my prepared statement, Mr. Chairman.

Senator NEUBERGER. Thank you very much, Mr. Adams. I think we should include in the record at this point before your Exhibit A the Bureau of Power's technical memorandum No. 2 on which that exhibit is based.

(The documents referred to follow :)

GENERAL PROCEDURES FOR STAFF USE IN HEADWATER BENEFITS INVESTIGATIONS Bureau of Power Technical Memorandum No. 2, Federal Power Commission, October 1957

OCTOBER 8, 1957.

Memorandum to the staff, Bureau of Power. Subject: Technical memorandum No. 2, general procedures for staff use in headwater benefits investigations.

Technical memorandum No. 2 has been prepared for the use of the staff of the Bureau of Power. Its purpose is to facilitate making investigations that will provide the basis for Commission determinations of payments to be made for headwater benefits as provided in section 10 (f) of the Federal Power Act and, to the extent possible, to standardize procedures and assure uniformity in the making of such investigations.

Under some circumstances certain of the general procedures outlined in technical memorandum No. 2 may require modification in application. The approval of this office should be obtained where such modification would be required. Also, if special problems not covered in this memorandum are encountered, they should be referred to this office if they involve questions of policy.

FRANCIS L. ADAMS, Chief, Bureau of Power.

TECHNICAL MEMORANDUM No. 2-GENERAL PROCEDURES FOR STAFF USE IN HEADWATER BENEFITS INVESTIGATIONS

INTRODUCTION

This memorandum has been prepared as a technical manual for the use of the Bureau of Power. Its purpose is to facilitate making investigations that will provide the basis for Commission determinations of payments to be made for headwater benefits as provided in section 10 (f) of the Federal Power Act and, to the extent possible, to standardize procedures and assure uniformity in the making of such investigations.

The investigations required in some instances involve many projects of diverse size and ownership. Because of the complexity of such investigations and the special problems which are encountered it has not been possible to cover all details in this memorandum. Furthermore, there is still much pioneering to be done in this activity, so it is expected that new problems will arise as the various studies progress.

The material contained in this memorandum has been prepared solely for the use and convenience of the staff of the Bureau of Power in its work and is not intended in any manner to be an expression or commitment of the Federal Power Commission.

Following the text of this memorandum, there is shown an example which illustrates the procedural steps normally followed in determining the payments to be made for headwater benefits.

STATUTORY PROVISIONS

The Commission's authority for assessing beneficiaries of headwater improvements is contained in section 10 (f) of the Federal Power Act as quoted in full below:

"That whenever any licensee hereunder is directly benefited by the construction work of another licensee, a permittee, or of the United States of a storage reservoir or other headwater improvement, the Commission shall require as a condition of the license that the licensee so benefited shall reimburse the owner of such reservoir or other improvements for such part of the annual charges for interest, maintenance, and depreciation thereon as the Commission may deem equitable. The proportion of such charges to be paid by any licensee shall be determined by the Commission. The licensees or permittees affected shall pay to the United States the cost of making such determination as fixed by the Commission.

"Whenever such reservoir or other improvement is constructed by the United States the Commission shall assess similar charges against any licensee directly benefited thereby, and any amount so assessed shall be paid into the Treasury of the United States, to be reserved and appropriated as a part of the special fund for headwater improvements as provided in section 17 hereof.

"Whenever any power project not under license is benefited by the construction work of a licensee or permittee, the United States or any agency thereof, the Commission, after notice to the owner or owners of such unlicensed project, shall determine and fix a reasonable and equitable annual charge to be paid to the licensee or permittee on account of such benefits, or to the United States if it be the owner of such headwater improvement."

APPLICABILITY OF SECTION 10 (F)

Whenever a storage reservoir or other headwater improvement of a licensee, permittee, or of the United States directly benefits another licensee, the licensee benefited must reimburse the owner of the reservoir or other improvements for such part of the annual charges for interest, maintenance, and depreciation thereon as the Commission may deem equitable.

Whenever the construction work of a licensee, permittee, or of the United States benefits a power project not under license, the Commission is required to determine and fix a reasonable and equitable annual charge to be paid by the owner of the unlicensed project to the owner of the headwater improvement. The Commission has interpreted "project not under license" as used in the third paragraph of section 10 (f) as referring only to non-Federal projects. Thus, a Federal project receiving benefits from a headwater improvement would not be assessed charges on account of such benefits. An order based on that interpretation was issued by the Commission on October 15 1956 in the matter of Grand

River Dam Authority, Docket No. E-6607. This order was contested by the Grand River Dam Authority but the Commission's position was sustained on July 12, 1957, by the United States Court of Appeals.

Also, if a non-Federal headwater improvement is not operated under a Federal license or permit, the Commission is not authorized under section 10 (f) to make assessments for benefits provided by the said improvement to downstream projects. However, the effects of such headwater improvements, as well as Federal projects receiving benefits from a headwater improvement, must be taken into account in headwater benefits investigations. Therefore, insofar as the headwater benefits investigation is concerned, all projects are treated the same but payments for benefits received are assessed only as provided in section 10 (f).

INITIATION OF INVESTIGATIONS

Whenever the Bureau of Power considers that a formal investigation should be initiated by the Commission the staff in the Washington office will prepare a memorandum to the Commission setting forth the necessary facts on the projects involved, with a recommendation that the Commission institute by order a headwater benefits investigation under the provisions of section 10 (f) of the Federal Power Act. This memorandum will be submitted to the Commission through the Office of the General Counsel where a draft of Commission order will be prepared.

Studies of headwater benefits in the regional offices will be performed pursuant to work assignments issued by the Chief, Bureau of Power. When it will facilitate the collection and assembly of needed basic data, or the making of preliminary studies, work assignments will be issued in advance of the Commission order initiating the formal investigation. Otherwise, a work assignment will be made immediately following issuance of the Commission order. It is intended that such work assignment will also cover future recurring investigations involving the same river basin or group of projects.

STAFF RESPONSIBILITIES

The Division of River Basins has the responsibility for headwater benefits work in the Washington Office, including coordination of the work in the regional offices. The Division of Licensed Projects is to be kept informed on all investigations involving licensed projects.

The detailed engineering studies of headwater benefits investigations will be conducted in the regional offices. It is expected that the regional office will seek the cooperation of all parties involved in an investigation and that the results of its investigation will be made known to such parties. However, members of the staff have no authority to enter into agreements or understandings which might in any way be binding on the Commission.

The Washington office is to be kept fully informed of the progress of studies. This will require, as a minimum, the submission of periodic memorandum reports showing the status of work performed and of work scheduled. If new problems which go to questions of policy are encountered during the course of an investigation, the Washington office should be informed as soon as possible. In this manner such problems can be resolved as the investigation progresses, and uniform treatment of the problems in the various regions can be obtained. Upon conclusion of the investigation the regional office will submit its report to the Chief, Bureau of Power. This report should be in sufficient detail to permit a clear understanding of methods used, and it should show the complete derivation of the recommended payment for each year of the study.

Upon receipt and review of a report and recommendations from a regional office, the Washington staff of the Bureau of Power will prepare a memorandum to the Commission. This memorandum will present the results of the investigation and will make recommendations for Commission action. The memorandum will be routed through the Office of the General Counsel where a draft of Commission order will be prepared.

Section 10 (f) specifies that licensees or permittees affected shall pay to the United States the cost of making determinations of payments for headwater benefits, this cost to be fixed by the Commission. Therefore, the staff both in the field and Washington must keep accurate records of the time charges and other costs on each investigation. A summary of the time charges and costs incurred by the regional office staff should be included in the regional office report to the Chief, Bureau of Power. The memorandum to the Commission will recommend assessments for the costs of making the investigation.

Since headwater benefits investigations are of a continuing nature, the determination by the Commission of payments for a particular year or number of years will terminate the investigation only for the period covered by the determination. The investigation for the next period of payments will be undertaken without the issuance of a new Commission order or a new work assignment. Payments will be determined on a calendar-year basis unless there is a good reason for using a different annual period. This does not mean that the investigations will be completed for submission to the Commission on an annual basis, however, since it will usually be more efficient in terms of manpower and other costs to have each phase or period of an investigation cover 2 or more years. The merits of each case will determine the period to be covered.

GENERAL PROCEDURE FOR DETERMINATION OF PAYMENTS

The procedures to be used in determining payments are relatively simple if only two projects are involved, namely, the headwater improvement project and a project benefited downstream. On the other hand, determinations of payment may be very complex if several projects are involved, particularly if they are of diverse ownership. However, the engineering approach as explained hereinafter is fundamental to the problem in general. Deviations from regular procedures must at times be made to take into account special operating or other conditions.

A headwater improvement project is usually one of the following: (1) a multiple-purpose storage reservoir, (2) a multiple-purpose storage reservoir and powerplant, or (3) a single-purpose storage reservoir and powerplant. For (1) and (2) the cost of the headwater improvement upon which annual charges are computed for apportionment to beneficiaries is that portion of the cost of the storage reservoir which is allocated to power, and for (3) such cost is the entire cost of the storage reservoir. Essentially the procedure is first to determine the net monetary value of power production, attributable to the headwater improvement, at each of the powerplants downstream and at the powerplant, if any, at the site of the headwater improvement. The annual charges on the headwater improvement for interest, maintenance, and depreciation are then apportioned to the at-site and downstream beneficiaries in proportion to the respective net monetary values credited to the headwater improvement.

The annual charges thus apportioned to a downstream beneficiary become the annual payment for that beneficiary subject to the limitation that such payment shall not exceed the net monetary value of the power gains resulting from the headwater improvement.

ALLOCATION OF COSTS OF THE HEADWATER IMPROVEMENT PROJECT

Federal projects

A Federal headwater improvement project is in nearly all cases a multiplepurpose development, and an allocation of costs is required to determine the investment and other costs chargeable to power. The separable costs-remaining benefits method should be used in allocating the costs unless there is already an accepted allocation of costs for the project, or the history of the project indicates another method of cost allocation should be used. In each case the necessary cost and cost allocation data will be obtained from the construction agency. The total costs of a multiple-purpose project are comprised of specific costs and joint costs. A specific cost is the cost of a facility provided to serve a single purpose only. For example, the cost of a powerhouse and the electric generating equipment associated therewith would represent a specific power cost. A joint cost is the cost of a facility which serves more than one of the purposes of a multiple-purpose development. An example is the cost of a dam which provides storage capacity for both flood-control and power purposes.

After having determined the investment costs allocated to power, the next step is to deduct from this figure the investment cost of specific power facilities. The remainder thus derived is the investment cost of joint facilities allocated to power and is, in effect, the investment cost of the headwater improvement upon which annual charges are computed for apportionment to beneficiaries. The annual charges for interest, maintenance, and depreciation on this portion of the investment in joint facilities represent the total cost to be apportioned among all beneficiaries, including any powerplant at the site of the headwater improvement.

Non-Federal projects

Normally, the non-Federal headwater improvement project will be a singlepurpose power development providing storage which benefits an at-site powerplant and one or more power developments downstream. For such a project an allocation of costs is not required, but the investment cost must be segregated into the cost of facilities which are useful solely for the production of at-site power and the cost of facilities which are beneficial to the production of power both at the at-site plant and at downstream projects. In comparison to a multiple-purpose project the former cost would correspond to the cost of specific power facilities, and the latter cost would correspond to the cost of joint facilities allocated to power and would represent the investment cost of the headwater improvement upon which annual charges are computed for apportionment to beneficiaries.

ANNUAL CHARGES ON HEADWATER IMPROVEMENT TO BE APPORTIONED

The annual charges on the headwater improvement which are to be apportioned consist of interest, maintenance, and depreciation.

Federal headwater improvement

In computing the annual charges to be apportioned, the interest rate, unless specifically prescribed by law, should be based upon the Federal long-term borrowing rate applicable at the time the headwater improvement project was constructed. The annual charge for interest is obtained by applying the interest rate to the investment cost of joint facilities allocated to power.

The annual charge for maintenance to be apportioned should be the portion of the actual maintenance cost on joint facilities which is allocated to power. The cost allocation should show the percentage of maintenance costs of joint facilities allocated to power. This percentage figure remains constant throughout the life of the project unless the project is modified in a manner which requires a revision of the basic cost allocation. Usually a single percentage figure is derived for allocating operation and maintenance costs of joint facilities to power. This percentage figure may be applied to operation and maintenance costs considered collectively or to either of those costs if considered individually. The charges for maintenance should include an appropriate amount for administrative overheads.

The annual depreciation charge to be apportioned is computed on the investment in joint facilities allocated to power. The sinking fund method and a period of 50 years should be used in determining this charge. Such a charge is the same as amortization and is, therefore, consistent with annual charges used in determining the rates required for repayment of investments in Federal power projects.

NON-FEDERAL HEADWATER IMPROVEMENT

In computing the annual charges to be apportioned, the rate to be used for interest should be based on the actual or estimated cost of money which, in the case of a privately owned project, should include a reasonable return or allowance on the equity capital. The annual charge for interest is computed on the investment in those facilities of the headwater improvement project which are beneficial to the production of power at site, if developed, and at downstream projects.

Actual annual costs of maintenance on the headwater improvement project should be obtained and used. The portion of these costs to be apportioned is limited to the maintenance cost on those facilities which provide the benefits to downstream projects. The charges for maintenance should include an appropriate amount for administrative overheads.

The annual charge for depreciation should be computed using the sinking fund method, the rate used for interest (cost of money), and a period corresponding to the service life of the headwater improvement, but not to exceed 100 years. The depreciation charge to be apportioned is computed on the investment in facilities which provide the benefits to downstream projects, usually the investment costs of the dam and reservoir.

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