The Tennessee Valley Authority is a political creation facing its most serious challenge. The nation's largest electric utility suffers an enormous debt, mismanagement, and falling political support at the very time that lawmakers are restructuring the nation's electric utility industry and transforming the way consumers buy electricity. Sixty-five years after it was created, this giant federal agency can no longer justify its existence.
TVA has accumulated a whopping $28 billion debt, largely because of its inaccurate predictions of future electricity demand, its failure to control the costs of constructing nuclear power plants, and its unwillingness to impose rate increases in order to meet those costs. Other signs of mismanagement were revealed in a recent report from TVA's own Inspector General (IG), who criticized the agency's six-figure bonuses and secret retirement funds for top executives, non-competitive consulting contracts to cronies of those officials, and expensive building leases with well-connected developers.
The IG's report highlights perhaps TVA's most serious problem its unaccountability. This federal institution is run by a board of three individuals appointed to staggered nine-year terms by the president, often as a favor to political supporters from the region. Board members are not answerable to the voters. Their decisions are not reviewed by state regulators or federal agencies, and until recently, Congress provided little oversight. TVA also enjoys a monopoly in its service territory, so it's not accountable even to market forces.
TVA has been propped up by enormous taxpayer subsidies which can no longer be justified or countenanced. The giant utility is exempt from hundreds of federal and state laws and regulations, it pays no federal or state taxes, and it obtains low-cost loans because of Washington's "implied" support.
There's little doubt that TVA has become a burden to the nation's taxpayers. What's becoming increasingly apparent is that the status quo also harms the very Tennessee Valley residents that TVA is supposed to serve. Some of the region's politicians, of course, continue to defend the agency and its subsidies, but TVA's functions could be provided more effectively and less expensively by other corporations or agencies.
Subsidies
TVA officials often repeat a mantra about their power operations being supported solely by electricity sales, but in this era when subsidies are suspect the giant utility remains the beneficiary of enormous taxpayer largess. It pays no taxes, enjoys access to low-cost capital, and avoids scores of federal laws and state regulations.
According to the study by Putnum, Hayes & Bartlett, a respected consulting firm hired by investor-owned utilities, TVA's tax and cost-of-capital subsidies in 1993 totaled a whopping $1.2 billion. Included in that figure, TVA avoids more than $570 million annually in federal and state income taxes that would be paid by a comparable-sized private utility. It also escapes more than $450 million annually in state and local ad valorem and other taxes. TVA counters that it contributes more than its share of local taxes through its 5-percent "payments in lieu of taxes," but shareholder-owned utilities pay state and local taxes that amount to 8.3 percent of operating revenues, plus federal taxes that equal 4 percent of operating revenues. In short, for every dollar of revenue collected, TVA pays only 5 cents while investor-owned utilities pay some 12.3 cents in taxes.
Other benefits are substantial but not quantifiable. Unlike other power companies, for instance, TVA avoids ratemaking oversight by the Federal Energy Regulatory Commission and state public utility commissions. It is free from the financial oversight of the Securities and Exchange Commission. It is exempt from federal and state antitrust laws. It doesn't have to worry about strikes by its employees. It benefits from government purchasing programs. It doesn't have to comply with numerous environmental regulations.
TVA is literally above the law. It is exempt from at least 137 federal statutes, ranging from workplace safety and hydroelectric licensing. It is immune from civil liability for its wrongful acts, yet it enjoys far-reaching federal eminent domain authority. TVA also claims immunity from an array of state legislation and regulations, including at least 165 in Alabama alone.
TVA's bond rating is a particularly odd but very generous benefit. Despite having a massive debt of some $28 billion, TVA enjoys a AAA bond rating, the highest available. No shareholder-owned utility, despite much better balance sheets, has such a rating. Even though federal legislation specifically declares that taxpayers do not guarantee TVA bonds, the rating agencies assume such backing is implied. According to Moody's Investors Service, "Although TVA's debt is not an obligation of the U.S. government, the company's status as an agency and the fact that the government explicitly is TVA's only shareholder, indicates strong 'implied support' (that) would afford assistance in times of difficulty. This implied support provides important bondholder protection. TVA's extensive nuclear risk, average competitive position, and high level of debt would make it unlikely to maintain its current (AAA) status." TVA's chairman, in fact, promotes the agency's bonds as having "an obvious, implied" guarantee from the federal government. (It should be noted that if the government did guarantee TVA bonds, taxpayers would be left holding the bag if the agency defaulted on any portion of its multi-billion-dollar debt.) Several analysts suggest that TVA's large debt and low cash flow should cause its bonds to be rated as junk. TVA's artificially high credit rating, therefore, allows the giant utility to issue large levels of debt at low cost. According to the Department of Energy, if TVA were to lose its AAA rating, its annual interest cost could increase by some $270 million. This indirect federal subsidy would be even higher if TVA bonds were rated as junk, or below investment grade.
TVA officials like to suggest that the utility can compete in a deregulated electricity market. But the more important question is whether TVA, armed with its subsidies and other competitive advantages, should be allowed to compete.
Environmental Steward or Threat?
One of TVA's orginal missions was to manage the region's natural resources, but he agency long has invoked the ire of environmentalists. TVA, for instance, was the leading promoter of destructive coal strip-mining, ruining vast tracts of land and debilitating Appalachia's underground coal industry. Its reclamation efforts were minimal and only marginally effective. Aubrey Wagner, who directed the agency for almost two and one-half decades, voiced and attitude that sent chills up the spines of conservationists: "but. . . if yo looke at what these mountains were doing before this stripping, they were just growing trees that were not even being harvested."
TVA remains one of the nation's worst violators of the Clean Air Act. The agency, in fact, is the largest emitter among eastern utilities of nitrogen oxide (NOx), which causes smog. It is the third largest emitter of sulfur dioxide (SO2) and carbon dioxide (CO2), which has been identified as the leading cause of global warming.
TVA's nuclear program has been so plagued with safety and economic problems that consumer activist Ralph Nader in 1998 declared: "The TVA is by any measure the worst nuclear project in the country, has the most expensive set of nuclear reactors, has a debt of $29 billion, has the poorest safety record with TVA reactors spending more time on the Nuclear Regulatory Commission's watch list than any other utility."
Like many private utilities, TVA from the mid 1960s through the mid 1980s continually overestimated the future demand for electricity. Unlike most other companies, however, TVA went whole hog for nuclear power to meet that projected demand. The agency in the mid 1970s announced plans to build 17 reactors at seven sites. It completed only six, and one of those was shut down in 1985.
Rather than promote energy efficiency, TVA has used promotional campaigns and subsidized rates to encourage its consumers to be wasteful guzzlers. The average Tennessee resident uses more electricity than consumers in any other state, more than 50 percent above the national average. The other six states partially electrified by TVA also rank among the most energy intensive. Decrying TVA's early promotion of electric heating rather than less-expensive, more-efficient, and less-polluting natural gas, former TVA Director David Freeman observed that TVA customers were "snookered into using so much electricity." If a Tennessee homeowner in the 1950s had installed a natural gas furnace instead of an electric heater, he or she would have saved more than $300 each year in energy bills. TVA, at the same time, would have avoided the need to build expensive and polluting power plants.
Bonuses and Questionable Contracts
TVA's senior officials seem to treat themselves and their colleagues well. So well, in fact, the TVA's Inspector General in early 1998 lambasted agency operations, including secret retirement accounts, six-figure bonuses, and non-competitive consulting contracts. Perhaps the best description of the charges comes from an editorial by the Chattanooga Times, a key Valley newspaper that usually defends TVA. "One of the most egregious abuses is in the area of compensation," commented the paper. "TVA secretly established a Senior Executive Retirement Plan (SERP) in 1996 and funneled almost $5 million in previously undisclosed contributions through it to 24 high-ranking managers over the past two years. Neither the agency's Inspector General, nor congressional leaders, nor the general public, knew about the SERP until the IG discovered it last month."
The Inspector General also attacked TVA's end-of-the-year bonuses to key managers. According to Electricity Daily, "The Tennessee Valley Authority sweetened the holidays for some of its top executives, but the agency's decision to award six-figure bonuses has soured a Tennessee congressman. Rep. John Duncan Jr. (D-TN) said ... he was disgusted that TVA paid out $1.9 million to 84 of its top executives in year-end bonuses. The Knoxville congressman said he believed the agency was using the bonuses to dodge a salary cap imposed by Congress."
The generous consulting contracts also were lambasted by the Inspector General. Again in the words of the Chattanooga Times: "TVA's free-flowing millions on consulting contracts (631 consulting and training contracts with 350 different vendors totaling $145.1 million, with an average of $29 million per year over five years) are equally disturbing. Excessively generous contracts are given to cronies or friends of top managers without bids or acceptable oversight. The practice suggests responsible fiscal management is not being applied and undermines TVA's integrity and its pending request for federal appropriations."
Playing Hard Ball
While TVA is quite generous to its managers and their friends, it maintains a rather domineering relationship with its own customers. TVA consumers, in fact, are burdened with long-term, all-requirements contracts which they can terminate only by providing a ten-year notice. These are not ten-year contracts that expire; they are rolling provisions that after each new day cannot be terminated for another ten years. The municipal utilities and rural electric cooperatives that buy power from TVA, as a result, are restricted from the benefits of competition; they cannot even obtain realistic price quotations for power to be supplied in ten years. The Federal Energy Regulatory Commission does not allow private utilities to use similar anti-competitive provisions.
The 4-County Electric Power Association, wanting lower rates, notified TVA in December 1993 that it would be seeking another power supplier. Earl Weeks, the Mississippi association's general manager, subsequently received some 30 bids from other electric generators, several of which would have saved the association more than $7 million annually in wholesale power costs. TVA, unwilling to lose a customer, responded aggressively. According to Weeks, TVA lobbied 4-County's biggest customers "to put pressure on us to rescind that notice." More troubling to the association manager, TVA representatives "questioned my integrity" by suggesting to customers that perhaps Earl Weeks didn't know what he was doing. But TVA's most effective tactic was to threaten cancellation of a lignite-burning power plant and elimination of the associated construction jobs and economic development in that employment-hungry region. Not surprisingly, 4-County Electric buckled under the pressure.
The Bristol Utility Board in southwest Virginia met similar resistance when it notified TVA that it, too, wanted to leave. Angry about high industrial electricity rates, the municipal utility gave TVA "years of forewarning" that it wanted to end its 52-year relationship and to seek bids from other suppliers. TVA's price offer turned out to be the very highest of 20 bids. Therefore, Bristol in 1997 signed a contract to purchase electricity for its 15,000 residents from Cinergy of Cincinnati, Ohio, saving the local government $70 million over seven years, double the city's annual budget. TVA responded by secretly trying to sell power directly to Bristol's industrial customers for 2 percent less than the best bid (and well below what TVA had previously been charging, and well below the agency's recent bid). TVA also promptly charged Bristol $54 million for "stranded costs" investments the federal agency claimed it made with the expectation that it would continue to supply power to Bristol. Rep. Rick Boucher (D-VA), the local congressman, reacted with angry letters and volatile hearings. He complained that TVA was using tactics "to punish a former customer for exercising its legal right to obtain power from a less expensive supplier. TVA is seeking to make an example of the city of Bristol so as to discourage any other community presently served by TVA from considering the purchase of power from a TVA competitor." After a Boucher-inspired hearing before the House Judiciary Committee, at which die-hard liberals such as Reps. Barney Frank (D-MA) and John Conyers (D-MI) asserted that TVA's arrogant ways and monopolistic practices would make "FDR turn over in his grave," and after it appeared that the Federal Energy Regulatory Commission would not allow the agency to recover these costs, TVA backed down, announcing that it would no longer seek stranded cost recovery from Bristol.
TVA's other customers took hope from Bristol's victory. Representatives of the "Big Five" (municipal utilities in Nashville, Chattanooga, Huntsville, Memphis, and Knoxville), which constitute 30 percent of TVA's market, began meeting to discuss strategies. Larry Fleming, general manager of the Knoxville Utilities Board, which is about ten times larger than Bristol, said other distributors want a deregulated industry in which they can purchase less expensive power in a competitive market without having to pay TVA for "stranded investment costs."
The Valley's municipal utilities and rural cooperatives are making progress, albeit slowly. TVA recently said these distributors can avoid paying stranded costs if they sign new ten-year service contracts that include a five-year cancellation notice (reducing by five years the current notice requirement).
Yet TVA is not welcoming competition. It defends vehemently its right to restrict other power suppliers from moving or "wheeling" electricity over TVA's grid to customers inside the fence. That effectively leaves Valley residents with just one option: Pay what TVA charges or go dark.
Facing Economic Realities?
To accumulate a $28 billion debt while enjoying monopolistic control over its service territory must rank among the most egregious examples of business mismanagement. During the many years when the agency's debt skyrocketed, politically-motivated officials refused to raise revenue by increasing electric rates. In fact, they boasted that rates had not risen for a full decade. Yet in July 1997, TVA officials could no longer avoid reality they increased rates by 5.5 percent and announced an ambitious ten-year plan to cut the agency's debt in half (from $28 billion to $14 billion by 2007) and subsequently to reduce its prices by 16 percent (from 4.11 cents per kilowatt-hour to 3.5 cents by 2007).
The much-needed proposal demonstrates a new commitment to get TVA's financial house in order. Unfortunately, the plan, according to the General Accounting Office, is based on "unreasonable assumptions." For instance, for TVA to argue that it will reduce its capital expenditures from $732 million in 1997 to $500 million in 2000 it must exclude the $1 to $3 billion it must spend to meet clean air requirements. TVA also fails to account for replacing or upgrading its aging coal, nuclear, and hydro units, and it assumes that it need not build any new generators to meet its own projected increased demand for electricity.
TVA, moreover, does not specify how it will achieve $2 billion in cost cuts. Although the electricity market throughout the country is becoming competitive and most utility restructuring bills before Congress eliminate electric monopolies, TVA assumes that it will retain monopoly control of its customers. Although TVA's total operating revenues since 1989 have declined more than 10 percent in real terms even while kilowatt-hour sales increased by about 35 percent, TVA unrealistically assumes that a rate increase in 1997 will result in increased revenues of $345 million in 1998, or more than 6 percent on average. And although TVA's operating expenses have increased in recent years, the agency projects that its operating expenses (less depreciation) will decline over the next four to five years and rise only by small amounts thereafter.
Moreover, TVA assumes that the energy market will not change, that it will maintain monopoly control over its distributors, despite the billion-dollar-deals and aggressive competition engendered by new state restructuring programs. Consider just the potential competition from privately-owned generators fired by natural gas. Although pipelines have tended to avoid the Tennessee Valley, in part because of TVA's dominance, three natural gas firms showed up recently to compete for new markets in Clairborn County, Tennessee. Since innovative natural-gas-fired turbines can generate electricity cheaper than can TVA, industrial customers within the Valley may soon be able to generate their own less-expensive power. New microturbines are making this option available even for commercial firms like a McDonald's restaurant, and engineers envision refrigerator-sized turbines supplying individual homes with electricity and heat. As new pipelines offer natural gas throughout the Valley, independent power producers also will soon compete for markets with TVA, throwing the giant utility's growth projections into serious question.
Restructuring, Reform, and Privatization
A growing number of states have restructured their utility industry, replacing monopolies with competition. Federal lawmakers are advancing similar proposals, and TVA, just like every smaller utility throughout the nation, faces change.
TVA bureaucrats may like the status quo, but the current monopoly structure complete with its arrogance, unaccountability, and mismanagement simply is too expensive for both the nation's taxpayers and the Valley's ratepayers. Senator Mitch McConnell (R-KY), a senior senator from within the Tennessee Valley, introduced legislation in April 1998 to make TVA accountable to its customers. The Tennessee Valley Customer Protection Act, according to McConnell, "will require TVA to justify its rates." To have TVA play in a competitive marketplace without unfair advantages, McConnell proposes to have agency become a "public utility" subject to the authority of the Federal Energy Regulatory Commission. He would force TVA to disclose publicly its tariffs and schedules, to abide by antitrust laws, and to restrain from competing against private-sector businesses for equipment leasing and engineering services.
McConnell's reforms move significantly toward accountability and fairness. Other possible steps include the removal of TVA's exemption from nuclear decommissioning rules, a requirement that TVA abide by all relevant environmental laws and regulations, and an equalization of labor laws and civil liability laws among all power suppliers.
Noting the increased calls for reform, even TVA officials have begun to admit that some changes are probably needed, but their proposed "reforms" are rather cute ... and suspect. Noting criticism that it alone in the utility industry doesn't face oversight by the Federal Energy Regulatory Commission, TVA recently offered to follow FERC rules voluntarily. But such a move differs substantially from submitting to the same rigors of regulation as the rest of electricity industry. TVA's proposal, for instance, would exempt it from paying penalties for failing to comply with FERC regulation.
Noting criticism that it alone avoids antitrust oversight, the government-owned monopoly also recently offered to allow courts to review its actions. But TVA cleverly notes that it would not subject itself to the same level of enforcement and penalties as others in the power industry. TVA may not want treble damages, but the threat of such penalties influences behavior and is needed as a check on all unfair competitors.
The most direct reform, of course, would be privatization getting the federal government out of the electricity business. At least two dozen other countries over the past decade have launched electricity privatization programs, including highly developed countries such as Australia and Britain, as well as emerging economies such as Argentina and Taiwan, as well as former communist countries such as Hungary and Poland. This global move from government control to the free market is described well in Daniel Yergin's recent The Commanding Heights. Senator Frank Murkowski (R-AK), who knows first hand about the privatization of the Alaska Power Administration, stated the issue succinctly: "When the rest of the world is trying to get government out of business, so should we."
The privatization debate offers some fascinating rhetorical inconsistencies. Some TVA beneficiaries argue vehemently that the government should get out of business and let the free enterprise system work its wonders. Although they wouldn't fathom having the Air Force compete with Delta Air Lines, some maintain that Washington should continue to own and control the nation's largest utility.
Is there some failure in the electricity market that requires government intervention? There was 70 years ago when only 15 percent of rural Americans enjoyed electricity. But strong private-sector electricity companies exist throughout this country. One could argue that there's far more justification for the Air Force to provide rural airplane service than there is for the federal government to generate electricity.
A long list of suitors _ power brokers, independent power producers, shareholder-owned utilities, and investment bankers _ have expressed an interest in TVA assets, assuming the agency reduces its enormous debt. Peter Lynch, the famous former manager of the giant Fidelity Magellan mutual fund, stated, "There has never been a serious effort to privatize the TVA but if there was I would be the first in line to get a copy of the prospectus."
Privatization advocates have even come from within the agency. William Malec, who retired in 1995 as TVA's executive vice president and chief financial officer, argued that selling the "New Deal dinosaur" could reduce the federal deficit and add $600 million a year in taxes to the federal till. Privatization, said Malec, "would move one of the largest electric companies in America out from under the burden of federal bureaucracy into the private sector, where I believe it could compete effectively, without excuses or alibis." Noting that a sale would generate big savings for the U.S. taxpayer, Malec called TVA's hydropower and coal-fired plants "dramatically undervalued" and added: "If TVA's physical generating capacity were valued at only half of what it would cost to replace it, TVA's net asset value would be $50 billion, rather than its current book value of $32 billion."
Options for selling TVA's assets are numerous and varied, according to Should the Federal Government Sell Electricity, a November 1997 study by the Congressional Budget Office (CBO). The British privatized their electric utilities and other industries, selling common stock in the enterprises to the general public. The U.S. government already has sold numerous assets, including the Alaska Power Administration, Conrail, the U.S. Enrichment Corporation, the naval petroleum reserve at Elk Hills, and radio spectrum rights. According to CBO, "There are strong similarities between the sale of spectrum licenses and power facilities: many different combinations of asset types and locations may be offered, each having a different value for different buyers."
Federal restructuring legislation must address TVA, if for no other reason than TVA is the nation's largest utility. The government simply must get its own house (or businesses) to participate fairly in a competitive electricity market as it orders others to do the same. Any such legislation must recognize that in this era when hundreds of private-sector firms want to generate and sell electricity, the federal government should no longer do so. It's time for politicians to declare victoriously that TVA served its purpose. Yet since situations have changed in the past 65 years since TVA was created, it's also time for politicians to restructure this outmoded government agency that has become too expensive for both taxpayers and ratepayers.