Mr. Chairman, I want to thank you for this opportunity to update the Committee on a variety of issues relating to TVA's ongoing activities and electric industry restructuring, including S. 1323, which is entitled the "TVA Customer Protection Act of 1999." My name is Mark Medford and I serve as TVA's Executive Vice President for Customer Service and Marketing. My responsibilities include working with the 159 distributors of TVA electric power and 68 direct-served customers within the Tennessee Valley who would be most directly affected by restructuring legislation. I also have been designated as the lead TVA executive on electricity restructuring matters.
I applaud this committee's interest in the issues surrounding TVA's role in the evolving electricity industry. As you well know, other committees in both the House and Senate have been contemplating the intricate issues surrounding industry restructuring at both the state and federal level. TVA has been actively involved in these efforts and, at the risk of stating the obvious, sorting out this legislative effort is not an easy task.
I also appreciate your care in seeking assurance that new laws and regulations pertaining to TVA will not impair TVA's ability to serve the needs of the Tennessee Valley in the restructured industry of the future.
I look forward to responding to the questions this subcommittee may have as you address how TVA fits into this debate.
Background on TVA
The Tennessee Valley Authority is large and complex. TVA is a federal corporation, the nation's largest public power producer, a regional economic development agency, and the steward of the Tennessee River basin. TVA was established by Congress in 1933, primarily to provide flood control, navigation, and electric power in the Tennessee Valley's seven state region. The TVA Act also directs its three-member Board of Directors to set the lowest feasible electric rates for the Valley. TVA is a recognized leader in the Tennessee Valley, certainly for providing low-cost electricity, but also for our economic development initiatives, and our integrated resource management
The Tennessee River is the fifth largest river system in the United States. It stretches 652 miles from Knoxville, Tennessee to Paducah, Kentucky. It encompasses 11,000 miles of shoreline, more than 50 dams and a dozen locks. About 34,000 loaded barges travel the Tennessee River each year—the equivalent of two million trucks traveling the roads. Before TVA, the Tennessee River flooded regularly, causing millions of dollars of damage whenever it left its banks. Under TVA's integrated resource management the Tennessee River is the only major river system in the United States that has not suffered widespread flooding in over 60 years.
TVA's power system has a dependable generating capacity of 28,417 megawatts. TVA's generation consists of approximately 61 percent coal, 28 percent nuclear, and 11 percent hydropower. TVA provides wholesale power to its 159 local municipal and cooperative power distributors through a network of 17,000 miles of transmission lines in the seven state region. TVA also sells power directly to 63 large industrial and federal customers. Ultimately, TVA supplies the energy needs of nearly eight million people every day over a power service area covering 80,000 square miles, including Tennessee, and parts of Mississippi, Alabama, Georgia, North Carolina, Virginia, and Kentucky.
TVA's service area is now limited by law. A "fence" keeps TVA from serving customers outside its region as defined under a 1959 law. Under the 1992 Energy Policy Act, electricity companies are prohibited from "cherry-picking" customers inside the TVA region, the most attractive of which have large, concentrated loads.
TVA's Recent Efforts to Improve
Over the past five years TVA has worked very hard to improve all aspects of its operations. Two years ago, TVA adopted a Ten-Year Business Plan specifically designed to ensure that TVA will be comparable with the evolving electricity industry of the future. The Ten-Year Plan was not developed as a plan to avoid financial failure. On the contrary, TVA is more financially sound today than it has been in many years. We have reversed a pattern of increasing debt that was unbroken for 35 years and have now been on a path of debt reduction for three consecutive years; reducing our total debt by well over $1 billion. We have maintained adequate power supply and transmission capacity to ensure reliable electricity delivery, even during the challenging summers of 1998 and 1999. At the same time, we have reduced our workforce from more than 30,000 ten years ago to little more than 13,000 today. We have established an $800 million dollar fund to fully provide for the future decommissioning of our nuclear plants; we sponsor this country's 110th largest pension plan holding assets well in excess of liabilities. We have done all of this, I might add, with only one modest price increase in the last twelve years and with the refinancing of the Federal Financing Bank debt.
The overriding goal of the Ten-Year Plan was simply to keep TVA's total delivered cost of power at a level consistent with the forecast of the future market price of power in the Southeastern United States. I point out this competitive price goal to distinguish it from the several operating and financial strategies we committed to pursue in order to meet that goal. Among these operating strategies were reducing the labor and material components of our cost and increasing the utilization of our facilities. TVA committed to take all of the cash generated or released by these operating strategies and use that cash for debt refinancing and debt reduction, thereby reducing interest expense _ one of our largest expense categories.
The Ten-Year Plan is now two years old and during that two years, changes have occurred _ some positive and some negative. One obvious, and positive, change, for example, has to do with interest rates which been substantially lower than the seven percent estimate of two years ago. The continued strength of the U.S. economy, coupled with several refinancing strategies TVA pursued, means our average interest rate will be lower than expected.
But let me focus on two more complex assumption changes that have occurred in the past two years.
The first is in the area of spending for environmental compliance. TVA is committed to environmental leadership. With regard to Clean Air, last summer TVA announced that it would commit to early compliance with regard to NOx reductions—at a cost of approximately $500 million. In addition, TVA was one of the first and largest participants in the Climate Challenge. However, TVA must also strive to balance its environmental leadership commitment with its responsibility to ensure a sound financial future. We are following closely developments which would assist in that regard. For example, Mr. Chairman, we have been very interested in developments such as your Credit for Early Action bill (S. 547). Unfortunately, there are significant financial uncertainties associated with the possible outcomes of proposals relating to Clean Air Act compliance and climate change.
Two years ago, we noted in our Ten-Year Plan that we could not foresee the exact timing or magnitude of expenditures that might be required. But, we reassured our stakeholders that such costs, when they occurred, should not render TVA non-competitive, because such costs would be imposed on almost all industry participants to a greater or lesser degree. When that happens, then the market price of power must rise, so that all industry participants can recoup their investments.
The second major change has been in expected needs for power supply in our service territory. Demand is now expected to exceed our 1997 estimate of two percent annual growth and perhaps be closer to the near-four percent rate of the past decade. We intend to accommodate this growth without an increase in the levels of overhead and if we do, it will drive our average costs still lower. But we know this growth comes at a price. It will impose higher demand for capital investment for generating capacity, taking money previously earmarked for debt reduction.
But something else is affecting TVA in terms of power supply and that has to do with the availability and reliability of purchased power. All industry participants are now well aware of the risks of relying on purchased power during times of peak power demand. Just this past summer, several power marketing organizations failed to meet power supply contracts. This has forced all utilities to question the reliability of short-term power contracts to meet peak power demands. Some, like TVA, have refused to gamble with reliability and instead have committed to the addition of physical plants to ensure an adequate and reliable source of electricity. While these plants promise to drive down our average cost of power, they will, like the generating facilities discussed above, impose higher demand for capital investment, taking money previously earmarked for debt reduction.
TVA's Future Role
It is an understatement to say policy-makers in Washington and the states have spent a substantial amount of time and effort on the future of the electricity industry. I can assure you that we in the Valley have also dedicated a great deal of time and resources on this important issue. We look forward to continuing to participate in this debate as Congress moves forward.
We are pleased that most of the debate affirms TVA's continued role within the Valley to manage the river system and to be a provider of electricity for Valley residents. In this regard, we want to emphasize that TVA supports the TVA Title in the Administration's Comprehensive Electricity Competition bill, released on April 15 of this year, and greatly appreciates DOE's impressive effort that was undertaken to integrate the interests of a wide variety of stakeholders.
Almost at the same time the Administration was drafting its bill, some members of Congress from the TVA region urged TVA to sit down with its distributors and work directly with the Tennessee Valley Public Power Association, which represents TVA's 159 distributors, in order to develop a regional solution for inclusion in the restructuring legislation before Congress. I was pleasantly surprised at the number of areas we agreed upon. Of course, there are some outstanding differences, just as one would expect when a seller and his customers sit down to discuss their relationship in an emerging marketplace. In fact, the diversity of the TVA customer base has resulted in some differences even among our customers. Nevertheless, we are committed to continuing our discussions with TVPPA and all stakeholders in the Valley.
Of course, the Administration's bill is not the only proposal on the table. There are many with a variety of provisions. As we move forward, we note with an element of caution that there are some proposals being actively considered that risk compromising the low-cost, reliable electricity available for the people of our region. We believe that some aspects of the TVA Customer Protection Act of 1999 may inadvertently have such effects and it is for that reason that we welcome the opportunity to discuss the potential implications of the bill today.
TVA Customer Protection Act of 1999
First, it is essential that TVA's future role in a restructured electric power industry should be addressed in the context of comprehensive national electric power industry restructuring legislation. To seek to address TVA independently of those national policy decisions presents significant risks of fashioning a future for TVA that is ill-suited for how the regional electric power markets will be operating.
The TVA Customer Protection Act of 1999 is limited in its coverage to only TVA--changing the way TVA provides power within the Valley by placing a number of new restrictions on TVA, as well as by expanding regulation of the activities of TVA.
These proposals are, of themselves, somewhat unusual in the context of a discussion of "deregulation" because they would impose far more outside regulation of a governmental entity like TVA at the same time that the trend is to reduce the regulation of private utilities. In addition, some proposals, such as subjecting TVA to monetary penalties for violations of the antitrust laws, are very unfair to TVA ratepayers and can only unnecessarily drive their power rates up. When a private utility violates the antitrust laws, its stockholders bear that cost. However, governmental entities like TVA have no stockholders, and the financial costs of such penalties have to be borne by the people who are supposed to be served. Other governmental entities are not liable for such monetary penalties under the antitrust laws, and there is no reason why TVA should be singled out to be treated differently.
Our major concerns are those provisions of the bill that would require FERC and State regulation of TVA prices and for FERC's determination of the need for new TVA generation. The fundamental purpose of TVA, as far as power production is concerned, is to deliver power at the lowest feasible cost to the people of the Tennessee Valley. Responsibility for fulfilling that mission is placed on the three member TVA Board, nominated by the President of the United States and confirmed by the Senate. To superimpose a higher regulatory body, FERC, to pass judgment on the decisions of the TVA Board in these areas seems both duplicative and inappropriate.
An examination of the social goal of rate regulation (by FERC or state PUCs) in contrast to the mission of the TVA supports the inappropriateness of the proposal to subject TVA to FERC rate regulation.
When any corporate entity like a private utility, created for the principal purpose of enhancing the wealth of its owners, is granted by a government a legally incontestable right to serve a group of customers, government has historically seen a need to protect those customers from price abuse. It is in this spirit that regulations of private utilities were created - to protect customers from prices that might exceed those charged in a competitive market. Contrast this to the purpose of public power. Public power entities, like TVA, are not created to "enhance the shareholder wealth." Quite the contrary, they are usually mandated (as TVA is in the TVA Act) to provide power at the lowest feasible rate.
Congress wisely foresaw the need to charge the TVA Board with the responsibility to provide for the power needs of the people of the Tennessee Valley. Giving FERC and seven separate States (which might go seven separate directions—thereby undermining TVA's highly successful regional nature), the authority to reverse decisions of the Presidentially-appointed TVA Board would have no apparent purpose, but would unnecessarily risk TVA's remaining ability to continue to provide reliable, low cost power for the Valley.
You don't need to look much further than this summer to see how important this capability is to people in the Valley. Throughout our history, TVA has never had the type of outages that other regions of the country have experienced in recent years. Just a few weeks ago when electric power systems that neighbor TVA and systems across the Eastern interconnection were experiencing substantial problems associated with record demand, TVA provided the electricity necessary to keep businesses running, as well as homeowners' lights and air conditioners on in the Valley.
TVA is now facing a record demand. During a 10-day period in July, TVA surpassed our previous all-time peak demand on eight of those days, including a Saturday. Clearly, we are at the margins in the Valley and need to maintain the flexibility to respond to this growing Valley demand in the future. This is a reason we are particularly conerned by that would hinder TVA's ability to compete to serve the growing demand for electricity in the Valley. For instance, the provision that would impose a requirement that TVA secure all future generation facilities—for the life of those facilities—through contractual arrangements with customers. In practice, that means TVA would be forced to find customers willing to sign long-term (20 to 30 years) contracts tied to specific power plants—not a likely prospect in a competitive marketplace. Effectively, this would prevent TVA from ever pursuing new generation resources to meet the anticipated demand in the Valley. And recent date suggest that this need may arise sooner rather than later.
The TVA service territory has recently experienced about four-percent demand growth for electricity per year. This trend is projected to continue well into the foreseeable future. We do not think their future access to cost competitive power from TVA should be contingent on such a restrictive contractual obligation.
A final consideration is the interpretation that the financial markets might place on Congressional actions taken. Investors now hold all of TVA's debt that finances the power program. Except for the pledge of TVA's power revenues, this is unsecured debt. TVA debt is not backed by the U.S. Government, nor is it supported by mortgages on TVA plant property and equipment _ all of which is owned by the U.S. Government. It is secured solely by the sound financial operation of TVA as well as the Bond Covenants and the provisions of the TVA Act.
TVA bondholders place considerable reliance on the fact that the TVA Board not only has the right to set rates, but also has the affirmative obligation to raise rates to the extent necessary to provide the funds for debt service. What this means, to a TVA investor, is that if current operations do not provide sufficient funds for debt service, the ratepayers of the Tennessee Valley will be assessed an increased rate sufficient to do so. If the TVA Board's authority and responsibility to set final rates were subordinated to authority of FERC and State regulatory authorities, there is little question that TVA's financing costs and financial vitality would be unnecessarily placed at risk.
TVA's current low-cost, reliable power in the Valley can be threatened by attempts to make TVA look and behave exactly like an investor-owned utility—which it was never intended to be. Mr. Chairman, I for one think the greatest strength in our electricity industry, particularly as we move to a new marketplace, is its diversity. We have a very broad spectrum of providers, from rural electric cooperatives to the biggest private companies, and from municipal systems to regional federal power providers. I believe this variety should be embraced and nurtured, not discarded as we move forward. Public power and investor-owned utilities make different, but very important contributions to the strength of our Nation's electric power supply networks. The continued, viable presence of both in a future restructured marketplace will help ensure a reliable power supply for all on an affordable basis.
Conclusion
Mr. Chairman, TVA is working hard to prepare for a restructured future competition by reducing our debt, keeping our electric rates low, and efficiently managing the Tennessee Valley's integrated resource system.
TVA remains committed to work with the Administration, the Congress and TVA stakeholders to determine the nature of the future role that TVA will play in this changing industry.
Thank you for the opportunity to testify before this important hearing.