[Senate Hearing 106-536]
[From the U.S. Government Publishing Office]
S. Hrg. 106-536
TVA CONSUMER PROTECTION ACT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
ON
S. 1323
A BILL TO AMEND THE FEDERAL POWER ACT TO ENSURE THAT CERTAIN FEDERAL
POWER CUSTOMERS ARE PROVIDED PROTECTION BY THE FEDERAL ENERGY
REGULATORY COMMISSION
__________
OCTOBER 6, 1999
__________
Printed for the use of the Committee on Environment and Public Works
U.S. GOVERNMENT PRINTING OFFICE
63-227 cc WASHINGTON : 2000
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
one hundred sixth congress
JOHN H. CHAFEE, Rhode Island, Chairman
JOHN W. WARNER, Virginia MAX BAUCUS, Montana
ROBERT SMITH, New Hampshire DANIEL PATRICK MOYNIHAN, New York
JAMES M. INHOFE, Oklahoma FRANK R. LAUTENBERG, New Jersey
CRAIG THOMAS, Wyoming HARRY REID, Nevada
CHRISTOPHER S. BOND, Missouri BOB GRAHAM, Florida
GEORGE V. VOINOVICH, Ohio JOSEPH I. LIEBERMAN, Connecticut
MICHAEL D. CRAPO, Idaho BARBARA BOXER, California
ROBERT F. BENNETT, Utah RON WYDEN, Oregon
KAY BAILEY HUTCHISON, Texas
Jimmie Powell, Staff Director
J. Thomas Sliter, Minority Staff Director
(ii)
C O N T E N T S
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Page
OCTOBER 6, 1999
OPENING STATEMENTS
Chafee, Hon. John H., U.S. Senator from the State of Rhode Island 1
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma... 11
WITNESSES
Fuller, Don, general manager, Paducah Power System............... 13
Prepared statement........................................... 30
Responses to additional questions from:
Senator Inhofe........................................... 34
Senator McConnell........................................ 32
Hewett, Robert M., president, Kentucky Utilities Company......... 13
Prepared statement........................................... 35
Responses to additional questions from Senator McConnell..... 42
McConnell, Hon. Mitch, U.S. Senator from the Commonwealth of
Kentucky....................................................... 1
Analysis of S. 1323.......................................... 5
Charts....................................................... 7
Letters:
Several senators......................................... 9
Paducah Power System..................................... 11
Prepared statement........................................... 3
Medford, Mark, executive vice president for customer service and
marketing, Tennessee Valley Authority.......................... 17
Prepared statement........................................... 48
Responses to additional questions from:
Senator Inhofe........................................... 61
Senator McConnell........................................ 52
Munson, Richard, executive director, Northeast-Midwest Coalition. 15
Letter, followup to hearing testimony........................ 48
Prepared statement........................................... 43
ADDITIONAL MATERIAL
Articles:
TVA Anachronism.............................................. 26
TVA Must Prepare for Competition............................. 25
TVA's River of Debt.......................................... 24
Reports:
Tennessee Valley Authority: Assessment of the 10-Year
Business Plan, General Accounting Office................... 80-12
Tennessee Valley Authority: Facts Surrounding the Allegations
Raised Against the Chairman and IG, General Accounting
Office....................................................122-148
Statements:......................................................
Bunning, Hon. Jim, U.S. Senator from the Commonwealth of
Kentucky................................................... 12
TVA Kentucky Managers' Association, Austin Carroll........... 63
Text of S. 1323, TVA Consumer Protection Act..................... 66-79
TVA CONSUMER PROTECTION ACT
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WEDNESDAY, OCTOBER 6, 1999
U.S. Senate,
Committee on Environment and Public Works,
Washington, DC.
The committee met, pursuant to notice, at 4 p.m., in room
406, Dirksen Senate Office Building, Hon. John H. Chafee
(chairman of the committee) presiding.
Present: Senator Chafee.
OPENING STATEMENT OF HON. JOHN H. CHAFEE,
U.S. SENATOR FROM THE STATE OF RHODE ISLAND
Senator Chafee. We are now going to move to the
consideration of S. 1323, introduced by Senator McConnell and
Senator Bunning, called the TVA Customer Protection Act.
This was introduced on July 1, 1999 and referred to this
committee. I will summarize some of the provisions.
It requires TVA to comply with the Federal Energy
Regulatory Commission--FERC--regulations. It prevents TVA from
recovering through power or transmission rates those costs
associated with overseas activities. It prohibits TVA from
competing with certain TVA distributors under long-term
contract, and a series of other provisions.
We are honored to have Senator McConnell with us. Senator,
before the witnesses go on--we have four witnesses here--if you
would like to say a word or two and make an opening statement,
that would be perfectly acceptable.
STATEMENT OF HON. MITCH MCCONNELL,
U.S. SENATOR FROM THE COMMONWEALTH OF KENTUCKY
Senator McConnell. Thank you very much, Mr. Chairman.
I appreciate your giving me the opportunity to be at the
hearing on this bill, in spite of the fact that I am not a
member of your committee. I thank you very much for having the
hearing on S. 1323, which is the TVA Customer Protection Act.
I would also like to thank the witnesses for agreeing to
attend this hearing and provide testimony on relatively short
notice.
I want to recognize Austin Carroll, the manager of
Hopkinsville Electric System, who is here, but due to the time
constraints that we have this afternoon is going to have to
just submit his testimony for the record.
I apologize to you, Austin, that we could not accommodate
everyone.
I have introduced S. 1323, the TVA Customer Protection Act,
to shine the light on the Tennessee Valley Authority. We all
grew up thinking that if you had TVA power you were lucky. In
fact, I was born in North Alabama--something I don't talk about
a whole lot in Kentucky--the heart of TVA country. I remember
from my very earliest days thinking that God had certainly
blessed our area since I had been fortunate to have been born
in and live in the TVA area.
Unfortunately, however, if you are the nearly 212,000
Kentucky families in 30 counties who receive power from TVA
these days, it is not the case. Despite operating as a
monopoly, TVA has racked up $26 billion in debt and provides
power at rates higher than the rates of regulated utilities in
my State.
TVA would like Kentuckians to believe that membership has
its privileges. However, over the next 5 years, TVA's Kentucky
taxpayers will pay a whopping $250 million more for their power
than if they were served by Kentucky Utilities, which is
federally regulated.
We have a bar chart here that represents the $250 million
that my ratepayers would be paying over and above what they
would be paying if they were in a regulated utility in
Kentucky.
Senator Chafee. Is that an annual charge?
Senator McConnell. That is over 5 years, Mr. Chairman.
This chart I think is also particularly revealing. We have
taken a look at the rates over the past 10 years for three
regulated utilities and then for TVA inside my State. If you
were in the LG&E service area over the last 10 years, your
rates would have gone down 5 percent. If you were in the
Kentucky Utilities area over the last 10 years, your rates
would have gone down 8 percent. If you were in the Kentucky
Power area, your rates would have gone down 12 percent. And if
you were in TVA over the last 12 years, your rates would have
gone up 7 percent.
So contrary to the perception one had as a child in North
Alabama and as an adult in Kentucky, these days you are not
particularly blessed to be residing in a TVA service area
because your rates are higher and going higher still.
As a self-regulated monopoly, TVA has not been accountable
to its captive ratepayers. As a result, TVA has accumulated a
mountain of debt that has forced TVA rates upward as I just
demonstrated.
TVA should be accountable to the people they serve and my
bill would provide the relief to those forced to pay TVA's
uncompetitive rates. The bill requires TVA to fully disclose
and justify all rates, charges, and costs as ``just and
necessary'' as required under the Federal Power Act, just as
Kentucky's other regulated utilities must do.
It would also make TVA a public utility subject to the
authority of the Federal Energy Regulatory Commission. This
would result in TVA customers enjoying the same independent
regulatory protections as customers of other large utilities.
For instance, TVA customers could challenge rates rather than
be forced to accept rates as set by the TVA Board.
Finally, Mr. Chairman, it would help customers hold the
line on new deficit spending to ensure that TVA justifies all
new construction of costly new generating facilities. This is
not a cap on generation, but again a requirement that TVA
demonstrate that its customers have a real need for this added
capacity and that it is the most affordable solution for the
valley.
Over the past several years, the General Accounting Office
undertook two studies on TVA's desperate financial situation.
In 1995, GAO concluded that TVA's financial condition
``threatens its long-term viability and places the Federal
Government at risk.'' In 1997, GAO found that TVA's fiscal
situation poses a threat to its future competitiveness as well
as a risk to the taxpayers.
Only through years of unaccountability and fiscal
irresponsibility could a monopoly power with total authority to
set rates ever have reached this level of debt. We need to
shine the light on TVA's power rates. The legislation that we
are having a hearing on today will do that by providing the
ratepayer a clear picture of TVA's rates and for the first time
make the Agency accountable for its charges and costs.
I do not pretend to know all the answers as to why TVA is
an inefficient and costly power provider. However, it is
painfully clear that at least in Kentucky TVA's customers are
getting a raw deal from this new deal program. I hope this
legislation will give customers the tools they need to get a
better deal from TVA.
Thank you very much, Mr. Chairman.
[The statement of Senator McConnell follows:]
Statement of Hon. Mitch McConnell, U.S. Senator from the Commonwealth
of Kentucky
Mr. Chairman, I want to thank you and the rest of the Committee for
accommodating me by holding a hearing on S. 1323, the TVA Customer
Protection Act. I would also like to thank the witnesses for agreeing
to attend this hearing and provide testimony on such short notice.
I would like to recognize Austin Carroll, the Manager of the
Hopkinsville Electric System, who due to time constraints of the
Committee will only be allowed to submit his testimony for the record.
Austin, I look forward to reviewing your testimony and appreciate your
efforts.
I have introduced S. 1323, the TVA Customer Protection Act to shine
the light on the Tennessee Valley Authority. We all grew up thinking if
you had TVA power, you were lucky. Unfortunately, the nearly 212,000
Kentucky families in 30 counties who receive power from TVA are finding
out that's not the case. Despite operating as a monopoly, TVA has
racked up $26 billion in debt and provides power at rates higher than
that of regulated utilities in Kentucky.
TVA would like Kentuckians to believe that membership has its
privileges. However, over the next 5 years, TVA's Kentucky ratepayers
will pay a whopping $250 million more for their power than if they were
served by Kentucky Utilities, which is federally regulated.
As you can see from the bar chart, Kentuckians captured inside the
TVA fence are paying electricity rates which are higher than customers
of Kentucky's regulated utilities. In 1997, TVA raised rates by 7
percent, which sharply contrasts with power rates of regulated
utilities which have decreased by an average of 8 percent.
In short TVA's rates are high and going higher. and its competitors
are low and aging lower.
As a self-regulated monopoly, TVA has not been accountable to its
captive ratepayers. As a result, TVA has accumulated a mountain of debt
that has forced TVA rates upward. TVA should be accountable to the
people they serve, and my bill will provide the relief to those forced
to pay TVA's uncompetitive rates.
The bill requires TVA to fully disclose and justify all rates,
charges and costs as ``just and necessary,'' as required under the
Federal Power Act--just as Kentucky's other regulated utilities must
do.
It would also make TVA a ``public utility'' subject to the
authority of the Federal Energy Regulatory Commission. This would
result in TVA customers enjoying the same independent regulatory
protections as customers of other large utilities. For instance, TVA
customers could challenge rates, rather than be forced to accept rates
set by the TVA board.
Finally, it would help customers hold the line on new deficit
spending to ensure that TVA justifies all new construction of costly
new generating facilities. This is not a cap on generation, but again a
requirement that TVA demonstrate that its customers have a real need
for this added capacity and that it is the most affordable solution for
the valley.
Over the past several years, the General Accounting Office
undertook two studies on TVA's desperate financial situation. In 1995,
GAO concluded that TVA's financial condition ``threatens its long-term
viability and places the Federal Government at risk.''
In 1997, GAO found that TVA's fiscal situation poses a threat to
its future competitiveness as well as a risk to taxpayers.
Only through years of unaccountability and fiscal irresponsibility
could a monopoly power, with total authority to set rates, ever have
reached this level of debt.
We need to shine the light on TVA's power rates. My legislation
will do that by providing the ratepayer with a clear picture of TVA's
rates and for the first time make the agency accountable for its
charges and costs.
I don't pretend to know all the answers as to why TVA is an
inefficient and costly power provider. However, it's painfully clear
that in Kentucky, TVA's customers are getting a raw deal from this New
Deal program. I hope that this legislation will give customers the
tools they need to get a better deal from TVA.
Senator Chafee. Thank you, Senator.
There is a statement here from Senators Inhofe and Bunning
and I will ask that they go into the record and be accepted as
part of the record.
[The prepared statements of Senators Inhofe and Bunning
follows:]
Statement of Hon. James M. Inhofe, U.S. Senator from the State of
Oklahoma
I am pleased we are having this hearing on the Tennessee Valley
Authority. TVA is a subject within my Subcommittee, and unfortunately
due to so many pressing issues we have been unable to hold an oversight
hearing before now.
Like many in Congress, I believe the monopoly of the TVA is a
dinosaur in today's electric power business. Due to actions by State
legislatures and Congress, the electric marketplace is changing at a
rapid pace. While we may not have reached consensus on how best to
proceed, action by the states or Congress is going to lead toward
deregulation of the electric industry. With all other aspects of the
electric industry changing, I believe the time has come for TVA to
change as well.
In light of the deregulation debate, I believe TVA's government
protected monopoly has outlived it's usefulness. For too long, problems
at TVA have been ignored or swept under the carpet--although I am not
sure how it is possible to ignore a $28 billion debt. The debt
refinancing plan which was attached to last year's Omnibus
Appropriations Act was wrong and should not have occurred. In bypassing
the committee of jurisdiction, it is estimated that it cost the
taxpayers over $1 billion. These actions have simply become too large
for Congress or the American people to remain silent. Created during
the New Deal when only 15 percent of rural America enjoyed electricity,
it is time for the reign of this bloated bureaucracy to come to an end.
I believe the legislation before the committee today is a step in the
right direction and long overdue.
______
Statement by Hon. Jim Bunning, U.S. Senator from the Commonwealth of
Kentucky
Mr. Chairman, Thank you for providing me the opportunity to submit
my testimony for the record on S. 1323, the Tennessee Valley Authority
(TVA) Customer Protection Act. As a cosponsor of the bill, I wanted to
share with you and our colleagues some of my thoughts on why and how
this bill will improve the administration of the TVA and benefit
consumers.
For the past fifty years, TVA has been both a competitor and
regulator within the transmission and power-generation industry.
Unfortunately, at times these two roles have clashed, and as a result
the customers of TVA have had to deal with higher rates than the people
living outside of TVA's ``fence line.'' In the past, the TVA Board of
Directors has tried to justify this to the people of the Valley by
blaming their higher rates on the mammoth $26 billion in debt that they
have acquired over years of operation. However, they simply miss the
point that it is the Board's mismanagement and, in fact, the lack of
oversight by the Federal Government that led to the acquisition of this
debt. The TVA Crammer Protection Act will change this and bring some
accountability to the TVA, and provide a layer of oversight by the
Federal Energy Regulatory Commission to prevent further bad business
decision making.
Currently, the TVA is not required to make available to the public
any of its documents and contracts that relate to its power business.
However, under S. 1323, TVA will have to file and disclose the same
documents and information that other public utilities are required to
file under the Federal Power Act. The Tennessee Valley Authority has
stated that they want to be ``America's power company.'' If this is the
case, the TVA should operate under the same regulations as the rest of
America's power utilities.
In addition, our antitrust laws do not currently apply to TVA. This
is wrong, and must be corrected. It is time that TVA be held to the
same standards as the rest of our utilities. This bill will accomplish
this goal, and provide the customers of the TVA some course of legal
action in the future.
I want to make it clear that this is a pro-TVA bill. It is simply
an attempt to bring some reform to the agency, and prepare it for the
future. It is clear that TVA will have to change its ways if it is
going to compete in any future deregulated electricity market. This
bill is a good first step in preparing them for that new market, and
preparing TVA's customers for the future.
For too long, the consumers of TVA's power have had to pay higher
electricity rates then people living outside of the fence line. In the
State of Kentucky, it is estimated that over the next five years that
the customers of TVA will have to pay almost $250 million more for
their electricity than if they had received it from a FERC-regulated
utility. That is a bitter pill for my constituents to have to swallow,
and hopefully this bill will provide them some rate relief.
Again, Mr. Chairman, thank you for allowing me to submit my
testimony. I look forward to working with you on preparing TVA for the
next century.
Senator Chafee. Now our first witness is Mr. Don Fuller,
general manager, Paducah Power System.
We will put each of your full statements in the record.
These lights will go on allowing each witness 5 minutes. If you
could stay within the 5 minutes, that would be helpful. The
green light will go on, then the red at the conclusion of the
period.
Thank you.
STATEMENT OF DON FULLER, GENERAL MANAGER, PADUCAH POWER SYSTEM
Mr. Fuller. Thank you, Mr. Chairman.
My name is Don Fuller and I am the general manager of
Paducah Power System. I appreciate the opportunity to come
before you today.
I represent the position that the Board at Paducah Power
and the city of Paducah has on several of these issues relating
to restructuring of the electric industry and part of the bill
that Senator McConnell has introduced. The main points we want
to present is to remove the barriers to wholesale electric
competition in the Tennessee Valley, subject TVA to the
jurisdiction of the Federal Energy Regulatory Commission,
including the FERC jurisdiction over TVA's transmission system,
wholesale power sales and stranded costs, terminate TVA
regulation of the distributors and revert that to local
control, and apply the Federal anti-trust laws to the same
extent that such laws apply to other Government entities.
Part of that is looking into the future and not so much as
the very present in such things as anti-cherry picking and the
well-known TVA fence. We also think that TVA should be subject
to all of the transmission tariffs that affect other public
utilities or other utilities in the industry.
Wholesale power rates should be subject to review by FERC,
as well as the stranded costs if an entity decides to get out.
We think that FERC order 888 covers that measure of determining
what those stranded costs are.
The retail sales of TVA into our jurisdiction should be
terminated at some point where TVA would become just a
wholesaler and not a retailer, thereby restricting any
competition they would have against the small retailers.
As far as selling outside the Tennessee Valley, S. 1323
does not address that issue. At some point in the restructuring
of the industry I do not believe that TVA should be limited to
selling outside. Surely as the fence comes down, it should come
down in both directions.
Thank you, Mr. Chairman.
Senator Chafee. Mr. Hewett, president, Kentucky Utilities
Company.
STATEMENT OF ROBERT M. HEWETT, PRESIDENT KENTUCKY UTILITIES
COMPANY
Mr. Hewett. Thank you, Mr. Chairman and Senator McConnell.
My name is Robert M. Hewett and I am president of Kentucky
Utilities Company, a subsidiary of LG&E Energy Corporation, a
diversified energy services company with businesses in power
generation and project development, retail gas and electric
utility services, and asset-based energy marketing.
Kentucky Utilities serves 77 counties in Kentucky and 5 in
Virginia. In addition, LG&E Energy also owns Louisville Gas and
Electric Company, which services 16 counties in Kentucky. My
company is also a member of TVA Watch, a coalition of investor-
owned utilities operating in areas adjacent to the Tennessee
Valley Authority, TVA. We appreciate your invitation to share
with this committee the views of TVA Watch about the role the
Tennessee Valley in the changing electric power industry.
I would like to emphasize several points that are set forth
in greater detail in my written statement.
First, TVA has many powerful tools, such as exemptions from
Federal and State regulation, as well as tax and antitrust laws
that are not available to other utilities. These powerful tools
led the Congress in 1959 to the fence that contains TVA within
its current region. During the past 4 years, however, TVA has
been carrying out a strategy to undermine the fence. As a
result, my company and others in TVA Watch have had to sue TVA
on more than one occasion to force TVA to comply with the law.
Although we have prevailed in each instance, we believe that it
is necessary to remain vigilant against other potential abuses
of the 1959 law by TVA.
Second, our electric power industry already is becoming
more competitive and will continue to do so whether or not
Congress passes a restructuring bill. The only way this
competition can work for the benefit of consumers is if the
success of any market participant is based on the quality of
its service, the health of its balance sheet, and whether it
competes under the same rules as everyone else.
If its financial health is not up to par, then its
management had better fix it. Unfortunately, TVA's financial
health is not up to par. Even more unfortunate is the fact that
TVA's management appears intent on convincing the public that
TVA has no financial problems and that it is ready for
competition under rules less stringent than those that govern
other utilities. We submit that TVA has it backward. TVA should
fix its financial problems first and then be prepared to
compete under the same rules as everyone else.
Third, Congress also should closely examine TVA's claims
that is a low-cost utility that pays its fair share of taxes.
Neither claim holds up. In Kentucky, TVA is the most expensive
provider of wholesale power. Its rate to wholesale distributors
is $47 per megawatt hour or 4.7 cents per kilowatt hour. In
contrast, the wholesale full requirements rate my company
charges to our municipal customers is $29.4 per megawatt hour
or 2.94 cents per kilowatt hour. In fact, by the year 2003 our
wholesale full requirements rate will be 2.91 cents per
kilowatt hour while TVA projects that its 4.7 cents per
kilowatt hour rate will remain the same.
In the case of taxes, the best way to consider this issue
is on an apples-to-apples basis--total tax obligation as a
percentage of total revenue. In 1998, TVA total payment in lieu
of tax obligation was 3.9 percent of total revenue. Kentucky
Utilities total tax payment accounted for 8.1 percent of total
revenue.
Fourth, we need to consider what TVA believes to be fair
competition. TVA insists that it must retain control over its
prices and sales practices rather than have its prices and
practices subject to review by the Federal Energy Regulatory
Commission. TVA also insists that while it is willing to be
subject to anti-trust laws, it should not be subject to fines
or attorneys fees because it could not afford to pay them. We
find both positions to be without substance. Put another way,
my company pays its full share of taxes, follows all the rules,
protects the environment, makes money for our shareholders, and
still charges lower rates than TVA.
We applaud Senators McConnell and Bunning for introducing
S. 1323, which would go a long way toward ensuring that any
competition between TVA and other utilities will be fair. We
are very pleased that the companion legislation has been
introduced in the House by Congressman Richard Baker.
I thank the committee for the opportunity to present our
views and would be please to respond to any questions.
Senator Chafee. Thank you very much, Mr. Hewett.
Mr. Munson, executive director, Northeast-Midwest
Coalition.
STATEMENT OF RICHARD MUNSON, EXECUTIVE DIRECTOR, NORTHEAST-
MIDWEST COALITION
Mr. Munson. Thank you, Mr. Chairman and Senator McConnell.
Noting that I have a short time, I will attempt to be quite
blunt. Following up on Senator Baucus' comments, I would like
to suggest that TVA is an embarrassing bureaucracy burdened
with debt and mismanagement. You are going to hear in a second
from Mr. Medford that TVA is financially sound and a well-run
company. How can a well-run company accumulate a $28 billion
debt? Such a feat, done at a time when they set their own
rates, and they enjoy monopolistic control over their service
territory--such a feat has to rank among this Nation's most
egregious examples of business mismanagement.
The TVA Board, finally in 1997, could not avoid this
disaster any longer and came up with a 10-year plan to try to
cut that debt in half by the year 2007. Great idea.
Unfortunately, the General Accounting Office finds that the
plan is filled with what it refers to as ``unreasonable
assumptions.''
TVA also, unfortunately, has ignored GAO's suggestions to
update the plan. And most troubling, Agency officials--wanting
now to build more power plants and expand their empire--are
saying that they never really meant to have debt reduction as a
goal in the first place. They have had their high-priced
lobbyists oppose provisions within the VA/HUD bill that would
scale back TVA's $30 billion debt ceiling.
Unfortunately, according to GAO, most of the very small
progress made in the past 2 years on debt reduction has come
because of the subsidies, not because of increased efficiency
at TVA. TVA may be lost in its quest for bureaucratic growth,
but I would suggest that the American taxpayer and this
Congress--which ultimately has oversight of TVA--needs to
ensure that debt reduction is the highest priority for this
debt-laden agency. The American taxpayers should not be saddled
with TVA's debt.
On the mismanagement side, is it a well-run company that in
recent weeks has been the brunt of embarrassing accounts of
mismanagement? Consider the story about the inspector general
we heard about before. About a year ago the inspector general
issued a scathing report about six-figure bonuses, secret
retirement accounts, and noncompetitive consulting contracts
for cronies and senior executives. Did TVA respond to those
charges? How they responded was to launch a retaliatory
investigation against the IG and issue a string of ugly charges
about the IG to the press.
Fortunately, because of Senator Thompson's good oversight,
the General Accounting Office investigated those charges and
just 2 weeks ago issued a report that said that the chairman's
investigation of the IG ``could be viewed as an attempt to
undermine the independence'' of the TVA watch dog. TVA went
further to say that management's charges against the IG were
nothing more than ``unsubstantiated allegations.''
Consider also the embarrassing millions of dollars TVA is
spending on lobbyists and public relations consultants. There
was a recent story that showed that TVA was paying up to $435
an hour for consultants to research TVA critics and to book the
chairman giving speeches outside of the Tennessee Valley.
Consider the $1.6 million that TVA on Friday admitted it
overcharged its industrial customers last year because of some
supposed unintended computer error. Industrial customers are
suggesting the overcharge is closer to $100 million.
Mr. Chairman, TVA is a national problem because it is a
Federal agency that burdens taxpayers with its debt. Yet
Tennessee Valley consumers--I should think--should be outraged
by this giant and arrogant monopoly.
Why should they pay $435 an hour to book the chairman's
speech at Harvard University? Why should they allow TVA
management to stifle independent analysis? But most
importantly, why should they remain subject to TVA's monopoly
control while the rest of the country begins to enjoy the lower
costs and better service that result from competition?
Senator McConnell has noted that his Kentucky constituents
outside the TVA service territory enjoy lower rates than those
within. Other competitors in a restructured market are going to
offer better deals. So why should Tennessee Valley customers be
left behind? Simply because of some Government bureaucracy and
monopoly?
As this committee considers how to restructure TVA in a
competitive market, I encourage you to raise the fundamental
question about whether the Federal Government, in the 21st
century, has any business being in the electricity business. We
wouldn't fathom having the Air Force compete against Delta
Airlines, yet TVA will argue that Washington needs to continue
to own and control the Nation's largest utility.
Why? Is there some failure in the electricity market that
would require the Federal Government's intervention? There
might have been 70 years ago when only 15 percent of rural
Americans enjoyed electricity. But today, there are hundreds of
private sector companies and entrepreneurs out there who are
struggling for the chance to sell electricity in an open and
competitive market.
While Congress will discuss these fundamental questions
during the restructuring debate, I hope this panel more
immediately advances needed reforms. Senator McConnell has
proposed numerous, very logical changes affecting FERC
oversight and anti-trust laws that would help ensure TVA plays
by the same rules as other power generators.
In order to protect U.S. taxpayers, I would hope that you
add to that bill a measure to force TVA to slash its massive
debt by ratcheting down its debt ceiling.
TVA is a troubled bureaucracy, Mr. Chairman. It needs
serious reform and restructuring.
Thank you.
Senator Chafee. Thank you, Mr. Munson.
Mr. Mark Medford, executive vice president, customer
service and marketing, Tennessee Valley Authority.
STATEMENT OF MARK MEDFORD, EXECUTIVE VICE PRESIDENT, CUSTOMER
SERVICE AND MARKETING, TENNESSEE VALLEY AUTHORITY
Mr. Medford. 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.
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 power and 63 directly served customers within the Tennessee
Valley who would be most affected by restructuring legislation.
Mr. Chairman, before I begin my testimony, I would like to
ask permission to submit testimony from Austin Carroll,
representing the TVA Kentucky Managers' Association, and Miles
Manell, representing the Association of Tennessee Valley
Governments, who were not able to appear before the panel.
Senator Chafee. Without objection, those prepared
statements will appear in the record.
Mr. Medford. Thank you.
I applaud this committee's interest in the issues
surrounding TVA's role in the evolving electric power industry.
As you well know, other committees in both the House and Senate
are considering issues related to industry restructuring at
both the State and Federal level. TVA has been actively
involved in these efforts. At the risk of stating the obvious,
I can tell you that sorting out these issues in the context of
Federal legislation is not an easy task.
TVA has begun the difficult process of preparing itself for
the new competitive environment. We have made painful staff
reductions, cut costs, increased productivity, and decreased
debt.
In 1997, TVA unveiled a comprehensive program to guide our
agency for the next 10 years. The overriding goal of this 10-
year business plan is to ensure TVA's electricity will remain
competitive.
In the fall of 1997, the Department of Energy created the
Tennessee Valley Electric System Advisory Committee. The
purpose of this body was to build consensus and make
recommendations for legislation that would shape the future of
TVA. In addition to TVA, the participants included the
Tennessee Valley Public Power Association, representing the
distributors, large industrial customers directly served by
TVA, industrial customers served by the distributors, the
Southern States Energy Board, local environmental interests,
rural consumers, the League of Women Voters, the International
Brotherhood of Electrical Workers, and the Teamsters. As
national energy stakeholders, ENRON, TVA Watch, and the
Electric Clearinghouse also participated.
Relying on the final report of the advisory committee, the
Administration crafted a TVA title for inclusion in its
comprehensive Electricity Competition Act. TVA supports this
proposal. Also, the TVA congressional delegation strongly urged
TVA to work directly with TVPPA to develop a regional solution
for inclusion in a legislative proposal.
I was pleasantly surprised at the amount of agreement
between TVA and its customers. We have since jointly submitted
recommendations to our delegation.
The Administration and the TVPPA/TVA proposals are very
similar. The most important characteristic is that they both
represent regional consensus and regional compromise.
Significantly, they were developed with the input of TVA's
customers. These proposals, above all, affirm TVA's continued
role within the valley to manage the river system and provide
electricity for valley customers.
However, we also note the new responsibilities and
limitations that TVA will have in an emerging marketplace. For
instance: TVA would be required to make its transmission system
available to competitors for customers in the Tennessee Valley
Region; TVA would be subject to anti-trust prohibitions; TVA
transmission rates would be subject to FERC jurisdiction; TVA
would be required--unlike any other utility in the country--to
renegotiate all existing full requirements contracts with
distributors within a year of enactment.
Perhaps the most critical element of the agreement with our
distributors is that changes should only come in the context of
comprehensive legislation. It simply does not make sense to
enact changes to TVA that may not be conform to broader
congressional policies about the future of the industry.
There is also agreement that TVA should have the ability to
build new generation to serve the needs of the valley. Mr.
Chairman, this is where we have big concerns with S. 1323. This
legislation would place significant burdens on our ability to
add new generation. I believe these burdens are insurmountable.
The demand for electricity in our region is growing at about 4
percent annually. Like most of the country, we are pushing the
bounds of our current generation capacity. We have been
fortunate that TVA has never had a capacity-related outage,
period.
The limitations on new generation included in S. 1323 put
electric reliability at risk for our 159 customers and in turn
the 8 million people they serve across the valley.
As the electric power industry changes, its greatest
strength is its diversity. Ranging from rural electric
cooperatives to municipal systems to the largest private
companies, this variety should be embraced and nurtured as we
move forward.
Mr. Chairman, we have made important progress in developing
a regional consensus. I hope that we can continue to work
together to build on this consensus and find a solution that
truly fosters markets and helps customers in the Tennessee
Valley.
Thank you for the opportunity to testify before this
important hearing. I look forward to answering your questions.
Senator Chafee. Thank you very much.
Senator McConnell, would you like to ask some questions
now?
Senator McConnell. Thank you, Mr. Chairman.
Mr. Medford, you said in your prepared statement that the
principal purpose of TVA was to protect customers from prices
that might exceed those charged in a competitive market.
As I discussed in my opening statement, there are three
utilities in Kentucky, which are all federally regulated, that
serve people in my State at rates below TVA.
Why is that?
Mr. Medford. I will make two observations, Senator
McConnell.
First, Kentucky is blessed with having some of the lowest
electricity rates in the country. I will also observe, while
much has been discussed about wholesale rates within Kentucky,
the average retail price of electricity for TVA and its
distributors--in the TVA-served portion of Kentucky--are among
the lowest rates in the State. Only one other major provider
has an average retail rate lower than that in the TVA part of
Kentucky.
Senator McConnell. Do you want to respond to that?
Mr. Hewett. Yes, sir.
As far as the retail rates, Kentucky Utilities for sure
would have retail rates that are lower than TVA's rates. The
average rate for Kentucky Utilities retail residential
customers would be about 4.5 cents per kilowatt hour and for an
industrial customer it would be about 3.2 cents per kilowatt
hour. So we would have lower rates than TVA would.
Senator McConnell. Then you are disputing what Mr. Medford
just said?
Mr. Hewett. That's right.
Mr. Medford. I will tell you how we arrived at this
information.
Senator McConnell. You guys must be using a different
calculator. Is that it?
Mr. Medford. No, I will tell you how we arrived at this
information.
We took the revenues for each of the major providers--I am
talking about the 10 largest providers in the State--we took
the revenues collected at the retail level and divided them by
the kilowatt hours sold. It is a pretty simple process.
Mr. Hewett. Senator, TVA has a comparison of rates as far
as retail customers. It is a survey that my company has
participated in. That survey itself would document what I said.
Senator McConnell. So you're saying, Mr. Medford, that
contrary to my chart and my belief, that in fact the retail
rates of TVA inside Kentucky are lower than the investor-owned
utilities?
Mr. Medford. The first thing I will observe, Senator
McConnell, is that your charts are based on wholesale rates. My
response was based on retail rates.
And I don't want to miss the first point that I made--and I
will stress it again. Kentucky, as a State, enjoys some of the
lowest costs in the country. TVA's rates are competitive.
Senator McConnell. I understand that. We are sitting on a
lot of coal.
The only issue I am probing here is the one we are
debating, which is who has the lower rates. And you are saying
that the retail rates of TVA are lower inside Kentucky----
Mr. Medford. Than all but one of the other nine or ten
major providers.
Senator McConnell. Which is the one?
Mr. Medford. Big Rivers.
Senator McConnell. And you dispute that, Mr. Hewett?
Mr. Hewett. Yes, sir, most definitely.
Senator McConnell. I do not think we can resolve this this
afternoon, but somebody is obviously wrong here and we will
need to look at that further--unless somebody has some great
idea about how to resolve this dispute.
Mr. Hewett. Senator, we could obviously get the tariffs of
both companies and build them out. That would be very easy to
do.
Senator McConnell. If it is all right with Chairman Chafee,
I would like to leave the record open for some further
submissions on this point from the witnesses. I don't think
there is anyway to resolve this this afternoon, but I would be
interested in hearing further from all of you about that issue.
Senator Chafee. That's fine. Do they know exactly know what
they are responding to?
Senator McConnell. Well, Mr. Medford is saying that my
chart may have been right with regard to wholesale rates but
are not right with regard to retail.
Is that correct?
Mr. Medford. That is correct.
Senator McConnell. And Mr. Hewett is disagreeing with him.
It seems to me there is no way to resolve it this
afternoon. I would like to have further submissions if that is
OK with you.
Mr. Medford, you noted that it is unacceptable to have FERC
oversight over TVA with regard to wholesale electricity rates,
yet you are willing to submit to FERC oversight on transmission
and stranded costs.
Why is it OK for one and not OK not OK for the other?
Mr. Medford. The primary reason is that the TVA Board is
charged with providing electricity in the valley at the lowest
possible cost. That is a directive, by the way, which is not
entirely consistent with the directive given by FERC.
I see no purpose for one set of Presidential appointees
overseeing another set of Presidential appointees in the
determination of wholesale electricity prices. When you get
into the area of transmission, the transmission network is not
purely a regional issue. The transmission network--basically
you are talking about three major components of transmission
for the country, those being the western part, the eastern
part, and Texas.
With regard to stranded costs, stranded cost--FERC is the
expert on stranded cost. FERC laid out the methodology for
determining stranded costs and therefore I think it is entirely
appropriate that they adjudicate stranded costs.
Senator McConnell. Would any of the three other witnesses
like to respond to that?
Mr. Hewett. Senator, what the FERC is attempting to do
through open access on the transmission tariffs and
deregulation of transmission tariffs is to make sure that every
customer has the opportunity to compete in an unregulated
fashion when competition does prevail. So what FERC is trying
to accomplish is to make sure that comparisons are achieved in
an equal fashion to make sure that we do establish rates and
that it is done in a fashion that is the same for everyone so
that there is that equal access.
My response would be that it is important to make sure that
comparisons are done on the same basis. I think deregulation of
transmission tariffs by the FERC is a way to accomplish that.
Senator McConnell. Any comments from Mr. Fuller or Mr.
Munson?
Mr. Fuller. I would agree with that.
Mr. Munson. I would just followup on Senator Thompson's
comment about the unaccountability of TVA. The decisions of the
Board are not reviewed by State regulators, FERC, other Federal
agencies. Congress has not provided a lot of oversight
recently. Because they have monopoly control over their service
territory, they are not even accountable to market forces. I
think FERC oversight makes perfectly logical sense to bring a
little bit of accountability to this unaccountable agency.
Senator McConnell. Mr. Medford, at some point, I think we
would all agree that fence is likely to come down and TVA will
be allowed to compete in an open market. Under the legislation
you support, what FERC regulatory requirements would TVA be
required to fulfill outside the fence that it is not required
to meet inside the valley?
Mr. Medford. We are aware that some legislative proposals
have included provision for FERC regulation of TVA sales
outside the fence and TVA does not oppose that.
Senator McConnell. Why doesn't TVA think that the stranded
cost formula that FERC applies to public utilities should apply
to its own stranded costs?
Mr. Medford. It is not quite as simple as that, Senator
McConnell.
Let me talk about the scope of application of stranded
costs in TVA as opposed to other utilities.
I served for 14 years with a private utility. Our sales
structure was about 94 percent at retail and 6 percent at
wholesale. TVA's sales structure is quite different from that.
Approximately 85 percent of our sales are at wholesale and 15
percent are at retail.
So when you talk about stranded costs of losing wholesale
customers, the issue is much more substantial for TVA than it
is for the typical private utility. We are not saying that the
standard FERC formula will be found to be inappropriate by FERC
or TVA. It may be. We want to allow the FERC the latitude--
after hearing from TVA, TVA's customers, and others--to use
some approach other than the standard methodology they have
laid out for others.
Senator McConnell. In March, Standard and Poor's rating
service put out a notice regarding problems that might be
created for TVA as a result of competition. S&P noted that the
Administration's legislative reforms could have implications
for TVA's rating and that TVA's future operation and financial
profile could be impaired.
That doesn't exactly sound like a ringing endorsement from
Wall Street.
What is your reaction to that?
Mr. Medford. Given that we have endorsed the
Administration's title and the TVA/TVPPA proposal--which is
very similar to the Administration's title--obviously we
disagree with them. We think both of those documents represent
a fair treatment of TVA in a competitive environment and will
not have any untold adverse effect on TVA's financial
condition.
Senator McConnell. Finally, Mr. Medford, once the fence
comes down, what will TVA's mission be with regard to its
current service area?
Mr. Medford. We see TVA as primarily a regional provider.
We certainly are almost exclusively a regional provider today.
Our roots are in the Tennessee Valley. We see ourselves being
primarily a regional provider as we go into the future.
I would also take note that most of the legislative
proposals that have been discussed in terms of bringing down
the fence, bring down the fence in a rather limited manner.
True, we would be able to sell outside the fence, but with
substantial restrictions, one of them being that we would not
be allowed to sell at retail outside the region.
Senator McConnell. Mr. Fuller, Paducah Power is uniquely
located with other power suppliers right nearby.
Mr. Fuller. Yes, we are, and that perhaps represents some
of the differences we have with some of the proposals from
TVPPA.
Senator McConnell. Let me just say in that regard--I am
curious. These neighboring suppliers really offer more
competitive rates than TVA, do they not?
Mr. Fuller. Some of their wholesale rates are, yes. Paducah
Power System is located basically on an island surrounded by
providers of non-TVA power. You have to go some 20 miles in
three directions to get to the closest other TVA distributor.
Senator McConnell. What opportunity do you have or do your
customers have to challenge the rates imposed by the TVA Board?
Do you have any opportunity for review or challenge of any of
these charges TVA has incurred?
Mr. Fuller. Typically not. We are allowed to enter into
conversation, but I do not think it gets real serious. We have
no negotiating power to speak of.
Senator McConnell. You are in the middle of a 10-year
contract?
Mr. Fuller. We have signed what is called the five plus
five contract, and 2 years of that have passed.
Senator McConnell. What do you plan to do at the end of the
contract? Or is that something you are not prepared to say yet?
Mr. Fuller. I am not prepared to say at this point. Our
board, several years ago, voted to terminate what was in the
full tenure contract--or to give notice to TVA. And when the
opportunity came up, and with the provisions of the five plus
five, they voted to not go ahead and give that notice but to go
ahead and sign the five plus five contract.
Senator McConnell. Memphis and Knoxville have been
outspoken in their differences with TVA. How does your position
compare with these two larger utilities? And are you aware of
distributors who support these views but are fearful of
speaking out against TVA?
Mr. Fuller. Having read the position by KUB and also
Memphis, our views--which really pertain to our uniqueness and
location with respect to the rest of the Tennessee Valley--our
views are pretty much the same as Knoxville and Memphis.
I know perhaps two or three others that hold the same view,
but their location within the valley is not as particularly
unique as Paducah's.
Senator McConnell. Mr. Fuller and Mr. Hewett, TVA has said
that FERC oversight would impose a cost burden which may
require them to raise their rates.
Does your experience support that statement?
Mr. Hewett. No, sir, it does not.
What the FERC would do is look at what the costs are and
identifying whether or not there is investment you have made
that is appropriate investment. So there is a real possibility
that some investment might be found to be not supported by the
customers' needs. I would think the possibility would be to the
contrary.
Senator McConnell. I gather TVA argues that it cannot be
FERC-regulated and be able to satisfy Wall Street. How is it
that LG&E Energy is able to accomplish this while maintaining
some of the lowest rates in the Nation?
Mr. Hewett. Sir, we have always felt that the ability for
us to maintain some of the lowest rates is the fact that there
has been very sound regulation, as exists within the FERC as
well as within our home State of Kentucky. We feel that the
regulation that has been provided as well as management's
ability to work with our regulation has allowed us to maintain
the low rate levels we have accomplished.
Senator McConnell. Mr. Chairman, I have a bunch of
questions I would like to have these folks answer in writing,
if that is permissible.
Senator Chafee. We want to give them some time. Why don't
we give them 2 weeks.
How complicated are the questions?
Senator McConnell. We have 30 or 40--much more detailed,
Mr. Chairman, than we have the time to go into today, but I do
think it would help complete the record.
Senator Chafee. Who are they submitted to?
Senator McConnell. To all four.
Senator Chafee. Gentlemen, that is quite a challenge for
you. Can you meet that challenge in 2 weeks? You have not seen
them, so you are in the dark a little bit.
Senator McConnell. We will give them to you today and that
will start the process.
Senator Chafee. Well, do what you can and get the questions
back in to the committee here.
Mr. Medford, I would just like to ask you a quick question.
Your seat mate has some pretty tough statements. TVA has
accumulated a whopping $28 billion debt largely because of
inaccurate predictions of future electricity demands. I must
say that I was stunned to hear that you had a debt of $28
billion.
What do you say to that?
Mr. Medford. First of all, that is a slight overstatement
because it is less than $27 billion.
Senator Chafee. OK, we won't argue over a billion. Make it
$27 billion.
Mr. Medford. First, one needs to remember that the debt
market is basically the only form of capitalization TVA has. We
do not have stockholders, we do not issue stock. So the debt
from that perspective seems larger than it otherwise would.
I will also acknowledge--if you look at TVA as an
operation, we are a very well-run, very efficient, and very
low-cost operation. We have a large challenge and that is that
we are somewhat over-capitalized. That indeed was and is one of
the purposes of the 10-year plan, to reduce that
capitalization.
I do not think of it as a whopping $27 billion. I think
that was a challenge to this management and we intend to meet
it.
Senator Chafee. And then he goes on to say that TVA is
exempt from hundreds of Federal and State laws and regulations,
pays no Federal estate taxes, obtains low-cost loans because of
this implied support--all that is true, isn't it?
Mr. Medford. As I mentioned in my testimony----
Senator Chafee. I think Mr. Hewett was talking about what
percentage of his revenue he pays in taxes--what was it again?
Mr. Hewett. Mr. Chairman, 8.1 percent.
Mr. Medford. According to my understanding, he also
dramatically understated our in lieu of taxes. Our in lieu of
taxes are about 5 percent of our revenues. If you look at TVA's
and TVA's power distributors' together, our total percentage at
a retail level is something in excess of 6 percent.
Having said that, I will acknowledge that public power
entities enjoy some benefits relative to private power
entities. Private power entities--and again, I have worked more
in the private power industry than I have in the public power--
enjoy many advantages which we do not enjoy.
Senator Chafee. You point out somewhere in here that you
have reduced your employment very, very substantially--over the
past 5 years, I believe--from 30,000 to 13,000. That is an
extraordinary figure. Is that accurate?
Mr. Medford. It is indeed.
Senator Chafee. Are you all finished, Senator?
Senator McConnell. Thank you, Mr. Chairman.
Senator Chafee. This is quite a burden we are asking you to
comply with, but we will get you those questions right away. If
you could answer them and send them in, we would appreciate it.
Thank you all very much for coming.
That concludes the hearing.
[Whereupon, at 4:55 p.m., the committee was adjourned, to
reconvene at the call of the Chair.]
[Additional statements submitted for the record follow:]
[From the Lexington (KY) Herald-Leader, Wednesday, July 28, 1999]
TVA's River of Debt
regulate tva but don't make it vulnerable to takeover
While this blistering summer brings brownouts and power outages to
the Northeast, the Tennessee Valley wallows in megawatts. All that
generating capacity comes at a price.
Customers of the Tennessee Valley Authority in Kentucky and six
nearby States are stuck paying off the federally owned utility's debt--
$26 billion.
This swamp of red ink is the product of a nuclear building binge
launched 30 years ago. TVA's all-powerful, three-person board grossly
miscalculated the region's needs and the difficulties of bringing
nuclear plants on line. Consumers are paying for those mistakes.
U.S. Senator Mitch McConnell of Kentucky has introduced legislation
providing some protection from such ill-advised decisions in the
future.
McConnell's bill would subject TVA's rates to the same scrutiny as
those of other electrical wholesalers. The Federal Energy Regulatory
Commission would have to approve TVA's rates.
McConnell's legislation also gives the public and the 159 local
utilities that are TVA's captive customers access to information about
the basis of TVA's rates and the right to challenge those rates.
Surprisingly, privately owned utilities are required to reveal
financial information that the taxpayer-owned TVA can keep secret.
McConnell would end that absurdity.
Compared with most of the country, TVA's rates are cheap. But
McConnell estimates that over the next 5 years, TVA's 212,000
residential customers in Kentucky will pay $250 million more than if
they were getting their power from Kentucky Utilities Co.
You can see why McConnell is demanding stronger oversight and
accountability. TVA has enjoyed government subsidies, a monopoly and
complete autonomy since its creation 66 years ago. McConnell would
require TVA to behave more like a privately owned, would require TVA to
behave more like a privately owned, government-regulated utility. And
that's fine.
But we worry that another provision in McConnell's bill could tilt
the playing field against TVA in the deregulated market of the future.
McConnell would prohibit TVA from adding generating capacity beyond
what's needed in the region, protecting TVA ratepayers from subsidizing
off-system sales.
This makes sense as long as TVA has no competition and, as a
practical matter, should have no effect in the near future because TVA
isn't likely to take on more debt by expanding.
But if deregulation reaches the region, TVA's ability to compete--
and perhaps survive--could be jeopardized by such a limitation. Also,
TVA's ability to import power during its peak winter demands could be
impeded.
TVA's detractors would love to see TVA sell itself off piece by
piece to investor-owned utilities. Like the tobacco program that
McConnell and other Republicans were ready to dismantle last year, TVA
is one of the New Deal's enduring legacies.
Protecting consumers from future TVA excesses is a fine idea.
Preparing TVA to be plucked by Wall Street is not.
______
[From the Paducah (KY) Sun, July 7, 1999]
Change Needed
tva must prepare for competition
During the 1930's and 1940's, the Tennessee Valley Authority made
its considerable reputation by delivering low-cost power and an array
of other services to people living in the economically depressed
Tennessee Valley. Now that paternalistic reputation is receding into
history as the 6-year-old government corporation struggles with a heavy
debt burden the possible end of Federal subsidies for its non-power
programs and looming competition from private utilities in a
deregulated power market.
In effect, the shoe is on the other foot: Instead of providing
special benefits for residents of the Tennessee Valley, the New Deal-
era agency is relying on its customers to cushion it against the impact
of declining Federal funding and other financial challenges. President
Clinton said the era of big government was over; TVA is a big-
government dinosaur battling to survive in an environment that's
increasingly hostile to its original mission.
TYA has done a great deal for this region, but the authority's
management must justify its continued existence as a government-owned
utility. The authority cannot expect to protect its far-flung empire by
asking its customers to pay higher electric rates than those charged by
private utilities. After all, TVA is supposed to serve the public.
U.S. Senator Mitch McConnell recently suggested that the reverse is
true--that TVA ratepayers are propping up the agency. McConnell noted
that while several leading private utilities in Kentucky have cut their
power rates in the past 2 years, TVA has increased rates by 7 percent.
We grew up thinking if you had TVA power, you were lucky, McConnell
said. ``Unfortunately, the nearly 212,000 Kentucky families in more
than 30 counties who receive power from TVA are finding out that's not
the case.
The senator wants to subject TVA to the same regulations that apply
to private utilities. Last week he introduced a bill that would forge
TVA to justify its current rates and any proposed future rate
increases.
McConnell's frustration with TVA is understandable. The authority
is failing to live up to its original mandate to provide low-cost power
in the Tennessee Valley. However, the agency's plight is largely the
result of factors beyond its control, including, most notably, the
precipitous decline in congressional appropriations fur TVA non-power
programs.
Two numbers stand out: $222 million and $7 million. The first is
the amount TVA received from Congress in 1980 for navigation flood
control, recreation and other non-power functions The second is the
total of non-power funding President Clinton included for TVA in his
budget proposal this year.
The Clinton budget eliminates Federal funding for all of TVA's non-
power programs, with the exception of operations in the Land Between
the Lakes recreation area. Most members of the Republican majority in
Congress will be more than happy to honor the president's proposal to
zero out funding for TVA's flood control, dam safety and river
management duties.
If congressional funding for the non-power programs dries up, TVA
ratepayers will have to cover the cost of managing an inland waterway.
In every other area of the country, the U S Army Corps of Engineers
handles this basic Federal responsibility.
Again, this would turn TVA's mission on its head by requiring the
authority's ratepayers to help the Federal Government.
It's clear that TVA officials can't turn back the clock to the days
when the authority commanded unshakable support in Congress. The
obvious reason is that the generally prosperous Tennessee Vailey no
longer depends on the Federal Government for economic support.
As the 21st century dawns, TVA must prepare for a future in which
it will have to compete to survive The authority can't compete if it
continues to carry the burden of non-power programs, in addition to a
$26 billion dent and a hefty bill for compliance with Federal clean air
regulations affecting coal-fired power plants.
TVA officials and congressional leaders should begin planning now
for a breakup of the agency. The corps of engineers should assume TVA's
river management and flood control duties. McConnell and U.S.
Representative Ed Whitfield already have tabled the U.S. Forest Service
as a possible choice to take over management of the LBL.
These changes would allow TVA officials to concentrate on serving
their power customers. A streamlined TVA may be able to survive and
even thrive in the future--not as a benevolent government provider but
as clean, efficient power company.
The fence that has long separated the Tennessee Valley Authority
from the private power producers won't stand much longer. What then for
this New Deal dinosaur?
______
[From Forbes Magazine, May 19, 1997]
The Tennessee Valley Anachronism
(By Bruce Upbin)
The Tennessee River traces a blue curve through downtown Knoxville
as it flows gently west to the Ohio. From Craven Crowell's wood-paneled
office on the twelfth floor of the Tennessee Valley Authority's
headquarters building, the bucolic view stretches northeast across the
river valley and away to the hazy outline of the Great Smoky Mountains.
About 500 miles away, in Washington, forces are building that
threaten to shatter the TVA's peaceful world. A growing number of
Congressmen want to privatize this vestige of New Deal collectivism.
The $215 billion electric power business is racing toward deregulation.
The $5.7 billion (annual revenues) TVA is the country's largest single
power generator, but in a world of deregulated power, there is no way
it can continue to do business as usual.
Craven Crowell, 54, is a former Nashville, TN newspaperman who
became TVA'S top flack and lobbyist during the 1980s and in 1989 chief
of staff to U.S. Senator James Sasser (D-TN). He is determined to keep
the TVA firmly in the hands of government. His allies in this quest
include his good friend and Tennessee's favorite son, Albert Gore Jr.
``I sort of see TVA as America's Power Company,'' drawls Crowell. A
memorable sound bite, but not a particularly truthful one. Although all
Americans subsidize the TVA, to the tune of nearly $4 billion a year,
only a handful of Americans--the 8 million people who live inside the
80,000-square-mile area where the TVA is by law the sole supplier--
enjoy the cheap power the subsidies buy.
Nor is the TVA's power as cheap, relatively speaking, as it used to
be. As the power industry is deregulated, efficient producers can
ship--``wheel''--their juice to markets around the country. Example:
Nashville residents could purchase electricity from nearby Kentucky
Utilities Corp. for about one cent per-kilowatt-hour less than the
nickel an hour they must now pay for TVA power. Why don't they? Because
current law in effect prevents power from being wheeled into TVA's
territory.
The TVA'S Depression-era rationale--developing a backward part of
America--no longer exists. The region has developed. Yet the TVA
continues to enjoy its enormous advantages over investor-owned
utilities. As a Federal authority TVA only has to cover its costs. It
pairs no Federal or State income or property taxes although it is
required to pay 5 percent of revenues ($976 million this year) to
Tennessee and six surrounding States in place of taxes.
Best of all, the TVA can borrow money much more cheaply than
investor-owned utilities can. This is not because its balance sheet is
strong--in fact its finances are feeble--but rather because creditors
believe the U.S. Treasury stands implicitly behind the TVA's debt.
One recent study put the value of all the indirect subsidies to the
TVA at $3.7 billion for 1993. Without these gifts from the Nation
America's Power Company would have to charge its customers 3 cents more
per kilowatt-hour. That would make its juice almost as expensive as in
some of the high-cost northeastern States. Yet the subsidies are now
boxing the TVA in. Over the years the authority has abused its access
to cheap credit. Thanks primarily to a disastrous nuclear plant
construction binge in the 1970's, the TVA now owes $27 billion. While
the typical investor-owned utility pays 16 cents on the revenue dollar
to service its debt, TVA pays 35 percent of revenue and 97 percent of
operating income. That leaves little room for error and no room to cut
rates in a competitive marketplace.
Crowell knows he has to start paying down principal on TVA's
Everest of debt. But how? And at what political cost?
Ratepayers in the valley know that Crowell is now mulling a rate
increase as high as 10 percent. But raising rates will weaken Crowell's
case that only as a government-owned utility can the TVA carry on the
job of providing cheap power to an area that needs to attract
investment and jobs.
Crowell also wants to attack the debt problem by selling some of
TVA's power to other markets. But the cost of going down that road is
to reopen the hoary question of how far the subsidized TVA should be
allowed to compete against investor-owned utilities.
In 1959 the TVA wanted to expand its power program without the
bother of asking Congress for appropriations every time. The TVA won
permission from Congress to issue bonds. But for the privilege it had
to agree not to sell power outside its existing operating area. A fence
went up that exists to this day.
The fence was originally meant to protect private utilities from
competing against the VA's federally subsidized power. But in the last
few years, as private producers have grown more efficient, the fence
has been left up to protect the TVA from the most efficient of the
private producers. The Energy Policy Act of 1992 forced all utilities
to open up their transmission lines and wheel wholesale power into
their areas from competitors. One utility was explicitly exempted from
this provision of the 1992 law: the TVA.
In effect, that exemption makes it impossible for customers inside
the fence--the city of Nashville, say--to drop the TVA and buy its
power from nearby Kentucky Utilities Corp., even though KU's customers
pay about 20 percent less for their juice. The only way a competitor
can market electricity in TVA's territory is to build in its own
transmission lines. The cost of doing that would, of course, eliminate
the cost differential.
But the fence is rickety and Crowell knows it. ``The fence no
longer makes sense,'' he told a gathering of public power executives 2
years ago. `'And when it does come down, competition will be a two-way
street, and TVA will once again have the freedom to compete anywhere in
the country.''
The fence is developing holes. Last year TVA started selling some
cheap power to a marketing unit of Louisville Gas & Electric. Southern
Company promptly sued to stop TVA from selling the discount juice to a
competitor. Southern won--for a time the fence held. But last April
Southern caught TVA outside the fence again and is now back in court.
The TVA has been only partially successful in using the fence to
keep competitors out. It recently suffered what may prove a very
significant defeat in the little city of Bristol, in the southwest
corner of Virginia, on the edge of TVA's territory. Worried about the
fence coming down and its customers escaping, in 1989 TVA began forcing
its 160 distributors to sign 10-year contracts locking them into the
TVA grid. Bristol refused to sign and later, in 1995 when its original
20-year contract was up, agreed instead to a 30-month extension.
Figuring that TVA'S debt load could only push up rates, Bristol
began shopping around and found 18 investor-owned utilities that would
match or beat TVA rates: The city informed TVA that starting in January
1998, it will buy its power from Cincinnati-based Cinergy, Corp., one
of the country's most efficient utilities. Cinergy plans to wheel in
the power over lines owned by American Electric Corp. if it cannot
reach an agreement with TVA by June. With Cinergy, Bristol expects to
shave its $22 million a year bill by $7 million per year for the next 7
years.
``Bristol only buys 140 megawatts, but it's a stalking horse for
other distributors,'' says Robert Gross, the energy consultant who
helped Bristol with its bidding process.
The TVA wins some battles, too. In December 1993, 4-County Electric
Power Association, a co-operative in Columbus, Miss., told TVA it
wanted to end its contract to buy TVA power. 4-County got 30 bids, the
best of which would have cut its TVA bill by $63 million over 7 years.
But at the time TVA was negotiating a long-term power purchasing
contract for a new coal-burning plant that would provide hundreds of
$12-an-hour jobs for impoverished Choctaw County, right in 4-County's
backyard. TVA told 4-County that if the town went elsewhere for power,
the TVA would reconsider building the plant. Today 4 County is back
inside the TVA fence, paying more than it has to for power.
Grouses Earl Weeks, chief executive officer of 4-County Electric
Power, ``When TVA gets through a 10 percent rate increase this year,
there's no question they're going to incur the wrath of Congress.''
Crowell already has. In March he appeared before a congressional
subcommittee to do some appropriations horse-trading. ``Keep your hands
off my river!'' Representative Harold Rogers, a Republican from
Kentucky, bellowed at Crowell when the TVA chairman proposed that TVA
hydroelectric engineers could do a better job than the Army Corps of
Engineers managing nine hydroelectric dams on the Cumberland River.
Other Congressmen piled on. New Jersey Republican Rodney
Frelinghuysen's aides had discovered TVA ads running in New Jersey
newspapers, using cheap power to lure New Jersey businesses to the
Tennessee Valley. Frelinghuysen didn't think New Jerseyans should be
subsidizing an attack on the State's job base. He introduced a bill
(H.R. 677) that would end over $100 million of TVA appropriations
immediately.
Momentum to sell the TVA is building. The small Alaska Power
Administration will be sold near the end of the year to State and city
agencies for an estimated $80 million. Bill Clinton's 1996 budget
included the sale of four more of the government's six Power Marketing
Administrations, for $4.4 billion--excluded was the Pacific Northwest's
Bonneville Power Authority, which Congressman Scott Klug (R-Wis.)
figures would bring $7 billion. The plan died, but this year Arizona
Republican Congressman John Shadegg reintroduced legislation to sell
the PMAs.
The TVA is a power generator, not a power marketing agency, but
Crowell is nevertheless fighting the privatization pressures on several
fronts. Appealing to the Al Gore Jr. political left he asks: ``If you
drive to the bottom line and all you're interested in is making money,
who's going to worry about the environment and universal access [to
power]?''
To which House Republican Dan Schaefer scoffs: ``Reliability is a
red herring used by monopoly utilities to stall the inevitable approach
of true competition.'' Crowell also conveniently ignores the fact that
some of the TVA's harshest critics over the years have been the
environmentalists. On another tack to save the TVA as he knows it,
Crowell is trying to make the authority look more like a private
business. He and his predecessor, Marvin (Carvin') Runyon, now head of
the U.S. Postal Service, deserve credit for cutting $800 million from
the TVA's annual operating budget since 1988, mainly by slashing
payrolls from 34,000 to 16,000.
Making a virtue of necessity, Crowell in 1995 imposed a debt limit
on the TVA of $28 billion. Next year still be the first in 35 years TVA
won't increase its debt.
At the end of the day, however Crowell knows that his best defense
against privatization is the TVA's $27 billion mountain of debt, nearly
all of it held by institutions and individuals. His threat: If TVA were
privatized--and absent a U.S. Treasury guarantee of some kind--its
paper would collapse in price. Its cost of capital would nearly double,
probably bankrupting the TVA.
Glowers Crowell, shrewdly playing up the implicit, but not binding,
U.S. backing of TVA's debt: ``If you did anything legislatively that
put TVA in a position where it would not succeed, then you end up
putting it in a bailout position in which the taxpayers would then have
to pick up the debt.''
In fact, privatizing the TVA would not be nearly as painful as
Cromwell would have one believe. Against its liabilities, and $6.3
billion worth of idle nuclear power plants, it also has some very
valuable assets. The crown jewels are TVA's mostly written-off coal-
fired and hydroplants, worth roughly $8.5 billion on the open market.
There is also $5 billion in so-called proprietary capital, similar to a
private company's retained earnings account.
Craven Crowell doesn't buy this. He thinks the TVA is too deeply
embedded in American politics and economics for it to be ripped out and
told to stand on its own. He concludes his case with a broad smile on
his face: ``You can't ignore us, you can't leave us behind, you can't
break us up, and you can't sell us.''
On the other hand, hasn't the past decade taught that when change
starts to blow through countries and industries, not even the toughest
old dinosaurs can find shelter
Our bet: The TVA'S days are numbered.
__________
______
Responses by Don Fuller to Additional Questions from Senator McConnell
Question 1. Do you support FERC jurisdiction over TVA's wholesale
sales of electricity? Would it make any sense for Congress to give FERC
jurisdiction over TVA's wholesale sales outside, but not inside, the
Tennessee Valley?
Response. I support FERC jurisdiction over TVA's wholesale sales of
electricity. For TVA to be both a supplier and regulator is not sound
public policy and very much like the ``fox guarding the hen house.'' It
only makes good sense for FERC to have jurisdiction over TVA's
wholesale sales both inside and outside the Tennessee Valley.
Question 2. Do you think that mandatory arbitration of disputes
over TVA rate increases is a good idea? If not, why not?
Mandatory arbitration of disputes over TVA rate increases is not a
good idea. Arbitration would be a very lengthy and costly process. FERC
is an established entity that is best suited to reviewing and approving
TVA's wholesale rates.
Question 3. Isn't alternative dispute resolution at FERC an option
for those distributors who would prefer to arbitrate rate disputes?
Response. Alternative dispute resolution under FERC oversight is a
viable method for distributors preferring to arbitrate rate disputes.
Other arbitration or methods of resolution could be subject to persons
or entities that may not fully understand all the issues in rate
structures.
Question 4. Do you think that the statutory barriers to wholesale
competition in the Tennessee Valley should be repealed?
Response. Statutory barriers to wholesale competition in the
Tennessee Valley should be repealed. This would give distributors in
the valley access to competitive wholesale markets that exist in most
of the country.
Question 5. When will your existing TVA contract terminate? Do you
support legislation that would permit you to terminate before then?
Response. Paducah Power System is signatory to a ``5 plus 5'' all
requirements contract with TVA. This contract became effective October
1, 1997. Under the terms of the contract, notice of intent to cancel
can be given at the end of the fifth year, with a 5-year notice. If
this is done, our contract will terminate September 30, 2007. At this
time, no stranded costs will be owed. We do support legislation that
would permit earlier termination.
Question 6. Should Congress restrict TVA's ability to construct or
acquire new generation facilities? If so, what kind of restrictions
would be appropriate? Should Congress require that the customer on
whose behalf the facilities are constructed or acquired commit to bear
the costs of such construction? Should it be left to TVA to determine
when new generation facilities are ``necessary'' to serve distributors?
Response. TVA should have the ability to function like and under
the same terms and conditions as any other utility. (i.e.--Under FERC
jurisdiction.) This should be part of the final restructuring bills.
As an interim measure, customers on whose behalf the facilities are
constructed or acquired should bear the costs. The decision to add new
generation or facilities should be based on good engineering and
business practices. Under FERC jurisdiction those ``reasons'' would
have to be shown. Prior to action placing TVA under FERC jurisdiction,
if TVA adds generation or facilities to serve Bowling Green, for
example, Paducah should not have to help pay for that expenditure.
Question 7. Should TVA be permitted to expand any further into the
retail business than it already has? Doesn't permitting TVA to compete
for retail customers with distributors that purchase more than 50
percent of their power from wholesale suppliers other than TVA penalize
distributors who take advantage of the competitive market to obtain a
majority of their requirements?
Response. TVA should not be permitted to expand any further into
retail business. Permitting TVA to compete for retail customers with
distributors that purchase less than 50 percent of their power from TVA
would indeed penalize those distributors taking advantage of the
competitive market. An exception to this would be where a distributor
could not or did not want to serve a particular large retail load then
permission could be granted by the distributor for that load to be
served directly.
Question 8. Paducah Power System is uniquely located with other
power suppliers nearby. Do these neighboring suppliers offer more
competitive rates than TVA?
Response. Paducah Power System is located in an area surrounded by
an electric cooperative not served by TVA. Additionally there are two
power suppliers besides TVA with transmission lines routed through the
area that Paducah Power System currently serves. The wholesale rates of
both these suppliers are presently less than TVA' s.
Question 9. Currently, what opportunity do you have, or do your
customers have, to challenge the rates imposed by the TVA Board? Do you
have any opportunity to review or challenge any of the charges TVA has
incurred?
Response. The only method to challenge rates imposed by the TVA
Board is through the Tennessee Valley Public Power Association. This is
an association made up of distributors of TVA power. The Rates and
Contracts Committee of this association typically negotiates or
discusses rates with TVA and then brings their recommendations to the
membership for a vote. I am not sure what the next move would be if the
membership did not approve a rate increase.
Question 10. Memphis and Knoxville have been outspoken in their
differences with TVA. How does your position compare with these two
larger utilities? Are you aware of distributors who support these views
but are fearful of speaking out against TVA?
Response. I was not aware of the position taken by Memphis and
Knoxville until the week of October 3, 1999. After reading their
position papers I find Paducah Power System's position to be very
similar. Yes I am aware of distributors that hold most of the same
views as Paducah but are fearful of speaking out against TVA.
Question 11. Do you have a clear understanding of how TVA intends
to calculate stranded costs? Are you aware of any independent review of
what TVA intends to collect through stranded costs? Could TVA's
allocation of stranded cost adversely affect your ability to seek the
purchase of lower cost power from another generator, like Kentucky
Utilities?
Response. Paducah Power System does not have any understanding of
how TVA intends to calculate stranded costs. I am not aware of any
independent review of what TVA intends to collect through stranded
costs. TVA's allocation of stranded cost could adversely affect our
ability to seek the purchase of lower cost power.
Question 12. What type of notice has TVA provided to you about its
plans to recover stranded costs if you attempt to leave TVA? Are you
confident that you will only be billed for charges incurred by Paducah
Power System?
Response. Paducah Power System's only notice from TVA concerning
stranded costs is that associated with our current contract. (i.e.--
There will be no stranded costs if we stay the term of the contract
that expires September 30, 2007.) If the decision were to leave
earlier, I am not confident Paducah would only be billed for charges
incurred by us.
Question 13. Some TVA distributors have advocated for a third party
arbitrator. Are you aware of individual customers who would be party to
this arbitration? Do you know if this arbitration would require TVA to
open up its books so that customers could view all of TVA's rates and
charges?
Response. I can only guess who some of the individual distributors
might be that would be party to arbitration. I have no knowledge as to
requirements for TVA to open up its books so that customers could view
all of TVA's rates and charges.
Question 14. Does TVA seek your input on the construction of new
generation facilities?
Response. TVA has never sought my input on the construction of new
generation facilities.
Question 15. Over the next 5 years, TVA's 211,427 Kentucky rate
payers will pay $250 million more than if they were customers of
Kentucky Utilities, which is FERC regulated. Please tell the committee
what impact FERC regulation of TVA would have on your utility.
Response. Regulation of TVA by FERC would not have an immediate
effect on Paducah Power System. The longer term impact will be, in my
opinion, to help keep wholesale rates down by controlling unnecessary
additions and expenses not directly related to serving energy to the
distributors.
______
Responses by Don Fuller to Additional Questions from Senator Inhofe
Question 1. Please detail on a kilowatt/hour basis how rates of
Paducah Power compare with rates of TVA.
Response TVA is the supplier of power to Paducah Power System. For
the billing period August 24, 1999 through September 23, 1999, Paducah
Power paid TVA 5.017 cents/KWH. This, for example, compares to a
Kentucky Utilities wholesale rate of 2.9 cents/KWH.
Question 2. Do you or any of your customers have any opportunities
to challenge the rates imposed by the TVA Board?
Response. The only method to challenge rates imposed by the TVA
Board is through the Tennessee Valley Public Power Association. This is
an association made up of distributors of TVA power. The Rates and
Contracts Committee of this association typically negotiates or
discusses rates with TVA and then brings their recommendations to the
membership for a vote. I am not sure what the next move would be if the
membership did not approve a rate increase.
Question 3. Utilities in Memphis and Knoxville have been extremely
vocal in their criticism of TVA. Is their position unique to these
larger utilities? Do you agree with their view of TVA?
Response. I was not aware of the position taken by Memphis and
Knoxville until the week of October 3, 1999. After reading their
position papers, I find Paducah Power System's position to be very
similar. I don't think their position is unique to larger utilities.
Question 4. Has TVA provided you any type of notice or information
about its plans to recover stranded costs should you attempt to leave
TVA? Please provide any information which you will use to verify.
Response. Paducah Power System does not have any understanding of
how TVA intends to calculate stranded costs. I am not aware of any
independent review of what TVA intends to collect through stranded
costs. TVA's allocation of stranded cost could adversely affect our
ability to seek the purchase of lower cost power.
Paducah Power System's only notice from TVA concerning stranded
costs is that associated with our current contract. (i.e.--There will
be no stranded costs if we stay the term of the contract that expires
September 30, 2007.) If the decision were to leave earlier, I am not
confident Paducah would only be billed for charges incurred by us.
Question 5. In disputes with TVA, some distributors have advocated
a third party arbitrator. Have you been approached by customers who
would participate in such a system? If arbitration should occur, should
TVA be required to open up its books so that customers could verify
rates?
Response. I can only guess who some of the individual distributors
might be that would be party to arbitration. TVA should be required to
open up its books so that customers could view all of TVA's rates and
charges.
Question 6. Does TVA seek comments from other suppliers on the
construction of new generation facilities?
Response. As a distributor, TVA has never sought my input on the
construction of new generation facilities. I have no knowledge if TVA
seeks comments from other suppliers.
Question 7. Please detail what effects FERC regulation of TVA would
have on your utility.
Response. Regulation of TVA by FERC would not have an immediate
effect on Paducah Power System. The longer-term impact will be, in my
opinion, to help keep wholesale rates down by controlling unnecessary
additions and expenses not directly related to serving energy to the
distributors.
__________
Statement of Robert M. Hewett, President, Kentucky Utilities Company,
on Behalf of TVA Watch
Summary
The debate over TVA's future in an increasingly competitive
electric power market is a difficult one. However, it is one that must
be confronted and dealt with fairly. TVA Watch believes Congress must
remain alert to the problem that led to the creation of the TVA
``fence'' in 1959. The problem was, and remains, unfair competition by
the Federal Government.
Without the ``fence,'' TVA would be able to gain market share not
by virtue of its being the most efficient supplier, but because it
could undercut the market based upon its governmentally-granted
benefits. TVA has the ability to set its own wholesale and retail
rates, is exempt from anti-trust laws and makes only ``token'' payments
in lieu of taxes to local governments. No other entity in the country
even comes close to having this type of authority or license. Yet, TVA
has amassed a $27 billion long-term debt, far in excess of any
comparably sized private sector utility. Moreover, TVA's progress in
dealing with this enormous debt has been inadequate and has resulted in
a sizeable potential liability for U.S. taxpayers.
The fact that TVA has such powerful tools while other utilities do
not is the very reason Congress created the ``fence'' in 1959. The fact
that TVA's financial health is impaired because of its long-term debt
is another reason Congress should not increase the risk to U.S.
taxpayers by lowering the ``fence'' without first bringing about
fundamental reform to TVA. These concerns are especially valid today
because, during the past 4 years, TVA has been carrying out a strategy
to undermine and eliminate the ``fence.'' As a result, several
companies in TVA Watch have had to sue TVA to enforce the 1959 law that
keeps TVA inside the ``fence.''
TVA Watch believes the following ground rules that apply to TVA's
potential competitors must apply to TVA itself if the ``fence'' is to
be removed:
1. Anti-trust laws that apply to private-sector utilities must
apply with the same force and effect to TVA.
2. TVA must come under the jurisdiction of the Federal Energy
Regulatory Commission (FERC) to the same degree as other utilities.
This includes regulation not only of TVA's transmission system, but its
power sales practices.
3. TVA must not be allowed to build new or expanded generation
resources with the wide range of subsidies that are denied other
utilities.
4. TVA must bear the same Federal, State and local tax burdens as
other utilities.
5. TVA should not have preferential access to power from other
Federal facilities at rates below fair market value.
6. TVA's exemption from open access transmission system
requirements should be repealed.
Introduction
Mr. Chairman and Members of the Committee: my name is Robert M.
Hewett. I am President of Kentucky Utilities Company of Lexington,
Kentucky. Kentucky Utilities is a subsidiary of LG&E Energy
Corporation, a diversified energy services company with businesses in
power generation and project development; retail gas and electric
utility services; and asset-based energy marketing. In addition to
Kentucky Utilities Company, which serves 77 Kentucky counties and five
counties in Virginia, LG&E also owns and operates Louisville Gas and
Electric Company, which serves 16 Kentucky counties.
LG&E also is a member of TVA Watch, a coalition of investor-owned
utilities operating in areas adjacent to the Tennessee Valley Authority
(TVA). TVA Watch is a political and judicial coalition of shareholder-
owned utilities that was formed to serve two public policy functions:
First, to ensure that TVA complies with the TVA Act. Second, to promote
policy discussion regarding the proper role of TVA in a competitive
marketplace. In addition, TVA Watch supports efforts to bring
meaningful reform to TVA as America's electric power industry evolves
into a more competitive market.
We appreciate your invitation to share with this committee the
views of TVA Watch about the role of the Tennessee Valley Authority in
a changing electric power industry.
In considering the future of TVA, there are three issues facing
Congress. First, should TVA be allowed to compete against other
utilities outside the fence that has limited the scope of its electric
power operations since 1959? Second, if the answer to the first is
affirmative, then under what terms and conditions should TVA be allowed
to compete? Third--and we consider this to be an especially important
one regardless of whether TVA is allowed to compete outside its fence--
is TVA doing enough to address its poor financial condition resulting
from its massive $27 billion debt?
These issues are difficult and must be approached with great care.
But, before sharing the views of TVA Watch with this Committee, I want
to emphasize at the outset that my company and others in TVA Watch have
worked well with TVA under a provision of the 1959 law that allows our
power grids to be interconnected for purposes of maintaining
reliability and exchanging surplus power. Recent evidence of this
positive working relationship came during this summer's heat wave when
all of us worked to exchange power that kept our systems running.
However, when we disagree with TVA, as we do in the case of how TVA
should be allowed to compete with other utilities, we do so in the
spirit of constructive debate.
To assist this Committee in evaluating TVA's future role, we should
be mindful of where TVA came from and what it has become. As originally
enacted in 1933, the TVA Act did not authorize TVA to build power
plants or to sell power. This authority was added a few years later.
TVA is merely ``authorized,'' rather than instructed, to build power
plants and maintain a power function. However, what began as merely a
side function has become TVA's core business--a $30 billion power
utility enterprise that has become, by far, the biggest part of its
business.
Until 1959, TVA was required to come to Congress for direct
appropriations to pay for the growth of its power business. In 1959,
Congress agreed to grant TVA the ability to issue revenue bonds to
finance the growth of its generation business. In so doing, however,
Congress erected the fence around TVA so that TVA could not use its
unique powers in direct competition with other utilities in its region.
Senator Jennings Randolph, the dean of the West Virginia Congressional
delegation and a veteran of the New Deal Congress that created TVA,
predicted in 1959 that ``when memories have dimmed and new faces have
come upon the scene'' the purposes of the TVA Fence law might be lost.
As Senator Randolph stated in 1959, ``it would be inadvisable to
permit excessive competition by TVA to encroach on the areas served by.
. . investor-owned public utilities, to siphon off their customers and
to destroy the value of their properties.''
Until recently, TVA continually reassured Congress about the value
and importance of the fence. In 1979, for example, Congress amended the
TVA Act to raise TVA's debt ceiling from $15 billion to $30 billion.
(In 1959, TVA's debt limit was less than $1 billion!) The increase was
actively championed by TVA. However, in response to concerns that it
had aspirations to expand the scope of its service territory, TVA
repeatedly stated it had no desire to compete in bulk power markets
outside its territory, as demarcated by the 1959 Bond Act. Congress
took TVA at its word. The Senate Report accompanying Public Law 96-97,
stated:
``In reporting (the debt ceiling increase bill), the committee
(Senate Environment and Public Works) is mindful of the repeated
assurances of the present Board of Directors of TVA that the
Corporation has no intention of acting in any manner, directly or
indirectly, to expand its service area outside the boundary as fixed by
the TVA Self-Financing Act of 1959. The utilities whose service areas
adjoin the service area of TVA continue to need to be entitled to the
protection of the provisions of the 1959 Act. In now acting to increase
TVA's debt authority from $15 billion to $30 billion, the committee
reaffirms the provisions of the 1959 Act and accepts the assurances of
TVA that it will continue to abide by those provisions.''
Congress believed that because the rules for government and private
utilities were different, TVA should only be allowed to sell or deliver
power to two broad classes of recipients, and under limited
circumstances:
``to local wholesale distributors within the area for which TVA was
the primary source of electric power supply in July of 1957, and to
certain end-users to whom it sold power at that time; and to electric
utilities with which it was interconnected in July of 1957 for the
continued cooperative 'exchange' of power between neighboring utility
systems.''
TVA's Departure from Its Agreement Not to Compete
In 1995, however, TVA departed from its previous pledge that it had
no intention to compete outside the fence. TVA began pursuing a
strategy to undermine the 1959 law so that it could compete against
other utilities beyond the fence. For example:
In April 1995, TVA released a study stating that TVA is ready for
competition.
In 1995, TVA began to advertise outside its service territory.
In 1996, TVA undertook steps to sell power outside the fence in
violation of the 1959 Bond Act. This prompted the creation of TVA Watch
and forced members of TVA Watch to initiate three lawsuits against TVA
to force compliance with the law. TVA Watch member companies have
prevailed in each action. This recent experience convinces us that
continued vigilance over TVA is necessary to assure that the interests
of consumers and taxpayers are protected.
If the Fence is to Come Down, There Must be a Level Playing Field
TVA Watch is mindful that some of TVA's distributors want Congress
to bring more competition into the electricity industry and that
removing the fence should be part of legislation to accomplish that
goal. TVA Watch believes the desire on the part of TVA's customers
should be taken seriously, but offers two observations: First, current
law gives TVA the right to permit wholesale competition in the Valley
and allows TVA means to adequately mitigate potential stranded costs by
selling surplus power on a limited basis to neighboring utilities.
Second, as Congress considers electricity restructuring legislation,
issues surrounding the TVA--its huge debt, substantial subsidies,
exemption from basic laws, artificial competitive advantages, and its
lack of accountability--must be addressed before the fence can come
down. Failure to do so will simply undermine the primary goal of fair
and efficient competition.
In setting the ground rules by which TVA could be allowed to
compete, TVA Watch believes the following rules that apply to TVA's
competitors must apply to TVA itself:
1. Anti-trust laws that apply to private-sector utilities must
apply with the same force and effect to TVA.
2. TVA must come under the jurisdiction of the Federal Energy
Regulatory Commission (FERC) to the same degree as other utilities.
This includes regulation not only of TVA's transmission system, but its
power sales practices.
3. TVA must not be allowed to build new or expanded generation
resources with the wide range of subsidies that are denied other
utilities.
4. TVA must bear the same Federal, State and local tax burdens as
other utilities.
5. TVA should not have preferential access to power from other
Federal facilities at rates below fair market value.
6. TVA's exemption from open access transmission system
requirements should be repealed.
We urge Congress to resist the temptation to pick and choose from
among this list. The issue is whether or not we are going to have
competition where TVA competes under the same rules as its potential
competitors. It is not good enough to pick a few rules and conclude
it's ``close enough.'' Our position is that if TVA doesn't want to play
ball under the same rules as everyone else, they should not be allowed
into the competitive supply game. Close enough is not good enough.
TVA Wants Its Own Rules
TVA, however, strenuously disagrees that it must play by the same
rules as other utilities. TVA argues it can compete fairly under a
special set of rules, especially when it comes to setting its own
electricity prices. TVA wants to retain its ability to set its own
prices. In a December 31, 1998 letter to the Department of Energy the
Chairman of TVA argues the TVA Board should retain sole control over
setting its power rates rather than having its decisions reviewed by
the Federal Energy Regulatory Commission (FERC). The letter said in
part:
``We see no reason why another set of presidential appointees
should be designated to do the job we were appointed to do. . . . The
ability of the TVA Board to raise and lower rates as necessary is vital
to TVA's financial health and its ability to keep the region's power
supply costs as low as feasible. The reversal of a TVA Board decision
by FERC could mean that TVA does not collect enough revenue to meet its
financial obligations to bondholders, operate the power system
economically, or ensure the safe operation of its nuclear plants. . . .
TVA is not a private power company, and one cannot ascribe to it the
same motivations that drive private power companies--to increase market
share and profits.''
We would point out that the investor-owned utilities in our
coalition have been subject to Federal and State regulation for years
and have always met their financial obligations.
Numerous ``electricity restructuring'' bills with provisions
dealing with TVA have been introduced. TVA Watch commends Senators
McConnell and Bunning for introducing S. 1323, the ``TVA Customer
Protection Act of 1999,'' along with Representative Baker's House
companion bill, which both would go a long way toward assuring that any
competition between TVA and other utilities would be conducted fairly
and equitably.
TVA, however, has endorsed electricity restructuring legislation
proposed earlier this year by the Clinton Administration (H.R. 1828/S.
1047). The Administration's bill would permit TVA to issue more debt to
build and operate facilities anywhere in the country with only
superficial changes in the rules that currently govern TVA. U.S.
taxpayers would be placed at greater risk for any TVA business activity
and consumers would be denied the benefits of fair competition.
The provisions in the Administration's bill dealing with TVA are
largely derived from a 1998 report prepared by the U.S. Department of
Energy following the completion of a special task force, the Tennessee
Valley Electric System Advisory Committee (TVESAC). This advisory
committee consisted of several interests, including TVA, TVA Watch,
labor, environmental and consumer groups. While TVA Watch was pleased
to participate in the TVESAC process, we emphatically disagree with
assertions by TVA that the report (Report of the Tennessee Valley
Electric System Advisory Committee, U.S. Department of Energy, March
31, 1998) represents a ``consensus'' among the various interests. If
anything, the report points out the fundamental disagreements over how
TVA should be regulated in an increasingly competitive market.
TVA Watch also wishes to state its deep concern about a legislative
draft currently under consideration before the House Energy and Power
Subcommittee. While the TVA title in that draft appears to create a
more level playing, it really does not. The draft calls for certain
regulation of TVA by the FERC and application of some antitrust laws.
However, the draft contains a ``savings clause'' that none of these
provisions could be implemented in a way that would undermine TVA's
ability to pay its bondholders. This clause, in effect, ``swallows''
the other provisions and renders them useless.
We would point out that even though TVA supports the
Administration's bill to remove the fence and allow TVA to compete with
these lenient rules, TVA itself recently has stated it intends only to
serve the electricity needs inside the Tennessee Valley. As we have
stated above, the experience of the past means we should continue to
monitor TVA's activities closely. We also should be frank to say that
if TVA is permitted to compete outside the fence under terms such as
those in the Administration's bill, the result would be to allow a
financially impaired agency of the Federal Government to compete
against other utilities under one set of rules while those other
utilities would have to operate under more stringent rules. Not only
would consumers be denied the economic benefits of fair competition,
taxpayers would be at risk for even more debt.
TVA Is In Poor Financial Shape to Compete
Frankly, we believe TVA should concentrate on getting its financial
house in order before--not after--it worries about whether it will be
able to compete under its own set of lenient rules.
Since 1959, TVA has used its free reign to grow rapidly,
particularly in the late 1960's and 1970's, obtaining congressional
approval to increase its debt cap a number of times, from the original
$750 million to the $30 billion authorization that exists today. TVA's
financial performance has not been impressive. In a 1995 Report to
Congress (GAO/AIMD/RCED-95), the GAO discussed TVA's lack of financial
stability:
``TVA is $26 billion in debt and has invested $14 billion in
nonproductive nuclear assets (called 'deferred assets') that are not
included in its electricity rates. As a result, TVA has far more
financing costs and deferred assets than its likely competitors have,
which gives TVA little flexibility to meet competitive challenges. To
the extent that TVA cannot compete effectively and improve its
financial condition, the Federal Government is at risk for some portion
of TVA's debt. . . . While no cash-flow crisis exists today, GAO
believes that TVA's financial condition threatens its long-term
viability and places the Federal Government at risk. Resolving TVA's
financial problems will be costly and require painful decisions.''
TVA issued a ``10-year plan'' in July of 1997. The 10-year plan
called for lowering TVA's fixed costs by reducing its outstanding debt
by about one-half, to about $14 billion by 2007--about $1.4 billion per
year. The plan also provided for rate increases whereby TVA could start
recovering from its customers nearly all of its $8.5 billion in
deferred, nonproductive, assets. (These assets consist of nonproducing
nuclear plants and other unamortized regulatory assets. As reported by
GAO, ``the balances of these items were $6.3 billion and $2.2 billion,
respectively.'').
TVA Watch was pleased that TVA issued this 10-year plan because it
reflected an admission by TVA that it really has no use for its $8.5
billion nonproductive assets, and that it will have to amortize the
debt associated with those assets at some point. It also reflected an
acknowledgment by TVA that it can't sit on its mountain of debt
forever, and that it will have to pay down that debt if it wants to be
able to compete in the future.
TVA's Debt Reduction Plan Going in Wrong Direction
But it was too good to be true. The GAO (GAO/AIMD-99-142) recently
reported that TVA is unlikely to meet the plan's objectives and needs
to update its assumptions. Now, what was originally a ten-year plan
seems more like a 20 or 40 year plan. TVA expects to end the current
fiscal year paying down its debt by $306 million. This is far short of
TVA's needed debt retirement projected to be near the 10-year plan. At
the rate of $300 million per year in debt retirement, it will take TVA
over 40 years to reach their stated goal of cutting TVA debt in half.
Moreover, TVA already is already backtracking on its plan to cut
its long-term debt in half. In recent weeks, TVA's leadership has
issued press statements that they may need to issue up to $3 billion in
additional debt to fund the construction of more power plants. This
would run TVA's long-term debt right up to its $30 billion limit. We
submit this is going in the wrong direction.
TVA issues its massive debt in the form of various types of bonds.
These bonds are sold to private investors not just in the United
States, but around the world, at rates just barely above the U.S.
Treasury rate. TVA is able to borrow money at government rates because
the investment community is convinced that the Federal Government will
bail out TVA, whenever push comes to shove. In an April 28, 1999,
statement, Standard & Poor's said:
``The (AAA) rating reflects the U.S. government's implicit support
of TVA and Standard & Poor's view that, without a binding legal
obligation, the Federal Government will support principal and interest
payments on certain debt issued by entities created by Congress. The
rating does not reflect TVA's underlying business or financial
condition.''
TVA does little to dispels the perception held by investors that
placing their money in TVA's hands is tantamount to giving it to Uncle
Sam himself. In a classic understatement, TVA's Chairman testified
before Congress (House Public Works and Transportation Committee, March
9, 1994), ``. . . when you start looking at selling bonds, the fact
that we're a government agency obviously is a big help.''
The faith of the investors in TVA also is founded on the
unrestrained ability of the TVA Board to raise electric rates if needed
to pay the bondholders. Thus, the financial markets have afforded TVA
an investment status equivalent to a government entity with authority
to levy taxes. Even though its bonds are not expressly guaranteed by,
or obligations of, the Federal Government, TVA's debt obligations
nonetheless are viewed as ``risk-free.''
What If TVA Were Rated As Other Utilities?
What would happen to TVA's debt rating if the Standard & Poor's
benchmarks that are applied to investor-owned utilities were applied to
TVA? TVA's rating would be lower than that assigned to junk bonds. For
example, with a debt to capital ratio of more than 80 percent, TVA's
rating would be lower than ``B'' while most investor-owned utilities
have ratings of ``A'' or ``BBB'' with debt to capital ratios of about
50 percent. Also, with a pre-tax interest coverage ratio of 1x, TVA's
rating would be lower than that assigned to a typical investor-owned
utility. Still, because of its ``AAA'' rating resulting from its status
as an agency of the Federal Government, TVA has a significant cost of
capital advantage over its investor-owned neighboring utilities. TVA,
therefore, is able to borrow funds at lower interest rates than other
utilities because of that higher credit rating.
It is not surprising that TVA, whose capital structure is otherwise
exceedingly risky (87 percent debt), can obtain such a low cost of
capital relative to most investor-owned electric utilities. TVA's
average cost of money is lower than the average for all IOUs, even
though the financial conditions of private utilities are generally
healthier. TVA also has enjoyed the financial advantages of avoiding
writing-off certain nonperforming assets.
If TVA were regulated as an investor-owned utility, it is likely
that under conditions of the Financial Accounting Standards Board
(FASB) Statement No. 90 (Accounting for Abandonment and Disallowance of
Plant Costs), TVA would have already dealt with the $5 billion in
deferred and currently useless assets. Thus, once again, TVA's
financial competitiveness is founded upon practices that would not be
acceptable for any of its potential competitors.
Power Rates, Taxes, and Anti-Trust Laws
Let me focus briefly on three other important advantages that TVA
wants to retain. First, TVA's desire to retain control over its power
rates. Second, TVA's ability to make only token payments in lieu of
taxes. Third, TVA's ability to escape penalties if it runs afoul of
anti-trust laws.
Let's start with the rates paid by TVA's customers and those paid
by the customers of other utilities. In defending its position that it
should retain its ability to set its own rates, TVA maintains that it
is a low-cost utility and that subjecting it to regulation by the
Federal Energy Regulatory Commission (FERC) would force its rates up.
But, let's consider the rate picture in Kentucky. Currently, TVA's rate
to its wholesale distributors is $47.0/MWH. In contrast, the wholesale
full requirements rate my company charges to our municipal customers is
$29.4/MWH. In fact, by the year 2003, our wholesale full requirement
municipal rate will be $29.1/MWH while TVA's will remain unchanged at
$47.0/MWH.
If TVA is to be allowed to compete outside the fence, then Congress
should ensure that it is required to follow the same rate regulations
that all shareholder-owned utilities are required to follow. This not
only would include wholesale power rates, but also open access
transmission tariffs at FERC as are all shareholder-owned utilities.
The purpose of those tariffs is to guarantee that any power market
participant can gain non-discriminatory access easily and quickly to
transmission services from jurisdictional utilities. Currently, TVA is
not required to make such filings because the Commission does not
regulate them.
Although FERC has attempted to impose reciprocity requirements on
TVA, if a power seller seeks to move power across TVA, TVA's compliance
is frequently obtained only by the seller requesting an order from
FERC, which can slow a transaction by months, or even eliminate it.
TVA's voluntary transmission ``guidelines,'' for example, are, for the
most part, ``window dressing'' which appear to be intended as much to
persuade policymakers and the public that TVA will play by the same
competitive rules that other utilities must obey, as to provide
transmission access.
In addition to not being subject to FERC rate rules, TVA avoids
payments to FERC and the costs of securing FERC licenses for its
hydroelectric projects. Shareholder-owned utilities, on the other hand,
pay FERC millions of dollars for the privilege of being regulated. In
addition, shareholder-owned utilities spend millions of dollars--not to
mention upwards of 7 years of regulatory proceedings--to obtain FERC
licenses for hydro projects.
Second, let us turn to taxes. TVA claims that it has no subsidy
there because it has no income (so it would not have to pay income
taxes anyway) and that it makes ``payments in lieu'' of taxes to local
and State governments. However, with all respect to TVA, they miss the
point. TVA's ``payments in lieu'' of taxes do not even begin to reach
the amounts of taxes paid each year by shareholder-owned utilities.
The best way to consider this is on an ``apples to apples'' basis,
total tax obligation as a percentage of total revenue. In 1998, TVA's
total payment in lieu of tax obligation was 3.9 percent of its total
revenue. In 1998, Kentucky Utilities' total tax payments accounted for
8.1 percent of total revenue. This disparity between TVA's payments in
lieu of taxes and the tax burdens of investor-owned utilities is should
be closely reviewed not only by this Congress, but by State and local
authorities as well.
TVA Must Play By Same Rules As Its Potential Competitors
Finally, another key area that Congress must deal with is anti-
trust laws. I cannot emphasize strongly enough that if TVA is not
subject to basic rules that govern all other competitors, that
exemption, coupled with its total discretion in rate-making, give TVA
the power to ``control the market'' by engaging in predatory pricing or
other anti-competitive activities.
TVA is clearly engaged in a commercial enterprise, the supply of
electric power. There is no doubt that the activities of private sector
companies in the commercial business of supplying electric power are
subject to antitrust laws. This means that power suppliers, including
members of TVA Watch, all are subject to lawsuits by private parties
and by the government for violations of antitrust laws such as the
Sherman Act, the Clayton Act and the Federal Trade Commission Act. For
example, if a public utility were to supply power to somebody on the
condition that the customer agree not to compete with that utility, the
Department of Justice would probably file an antitrust lawsuit against
that utility seeking treble damages and other penalties.
TVA insists the reason it should be allowed to compete either
inside or outside the fence under a separate set of rules is that it
lacks the ``motivation'' to engage in anti-competitive behavior because
it is a ``not-for-profit'' agency. However, TVA Watch offers another
reason for TVA's position: We believe the real reason TVA seeks to
compete under a relaxed set of rules is because of its financial
weakness. In other words, TVA very likely believes it could not succeed
in a competitive market unless its financial weakness is compensated by
a relaxed set of rules.
In response to calls that it be made subject to the antitrust laws
and to treble damages for violations of those laws, TVA offers two
general responses, both of which are inadequate. First, TVA claims that
it is incapable of competing on an unfair basis because it was created
solely to promote ``governmental'' and ``public'' purposes. Second, TVA
claims that the antitrust laws are directed to eliminating the
concentration of economic power in the hands of those who serve only
their own profit-making interests, and because TVA is not operated on a
``for profit'' basis, it should remain exempt from the antitrust laws.
Both of these arguments are easily dismissed.
TVA's power program--its sale and transmission of power at retail
and at wholesale--is a commercial enterprise. What this means is that
TVA, in reality, is in the commercial business of selling electricity.
Moreover, the absence of a ``profit motive'' is hardly grounds for
immunity from antitrust laws. The antitrust laws contain no such ``non-
profit'' exemption and the instinct of a drowning enterprise to survive
gives it a more intense motive to suppress competition.
The Supreme Court has also recognized that the instinct of
government to survive and thrive in a competitive environmental can
lead to anti-competitive behavior. In the landmark case of City of
Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 408 (1978), the
Supreme Court noted that public corporations, such as TVA, are fully
capable of competitive mischief:
``. . . the economic choices made by public corporations in the
conduct of their business affairs, designed as they are to assure
maximum benefits for the community constituency, are not inherently
more likely to comport with the broader interests of national economic
well-being than are those of private corporations acting in furtherance
of the interests of the organization and its shareholders. . . When
(government) acts as owners and providers of services, they are fully
capable of aggrandizing other economic units with which they
interrelate, with the potential of serious distortion of the rational
and efficient allocation of resources, and the efficiency of free
markets which the regime of competition embodied in the antitrust laws
is thought to engender.''
TVA's position that it can compete fairly under only certain
antitrust laws simply does not serve the public interest because there
will be no deterrent. If the remedy at the end of the proceeding is a
slap on the hand, then no rational person would ever initiate the
process. There must be a deterrent to keep TVA from committing anti-
competitive acts in the first place. That deterrent can only come in
the form of making TVA pay damages for the competitive injuries that
result from violations of the antitrust laws. If TVA claims that it, a
billion dollar commercial enterprise, can't afford to pay antitrust
damages, we have one simple response: If you can't do the time, don't
do the crime.
Conclusion
TVA Watch encourages this Committee, and indeed all of Congress, to
consider carefully the ramifications on TVA's original mission, and the
significant effects on the nation's debt and taxpayer's pockets, of
enacting legislation allowing such competition from a taxpayer-
supported Federal utility.
TVA Watch supports efficient competition that is not skewed by
allowing TVA to escape legal or regulatory burdens shareholder-owned
utilities must bear. This disparate treatment distorts competition.
We at TVA Watch are committed to working not only with this
Committee, but with all others who are genuinely interested in
reforming TVA. The plain language of the TVA Bond Act remains and its
purpose has not been lost. TVA Watch hopes that this Committee, and
Congress as a whole, will assure that the objective of encouraging more
competition in America's electric power industry will be supported by
making the right decisions about the future of TVA.
______
Responses of Robert Hewett to Additional Questions from Senator
McConnell
Question 1. TVA has said that FERC oversight would impose a cost
burden which may require them to raise their rates. Does your
experience support that statement?
Response. No. The cost of FERC regulation is not material in
relation to the scope of a utility's business. My company is
considerably smaller than TVA and does not raise its rates as a result
of the costs of FERC regulation. In fact, FERC regulation would provide
an economic costing discipline that would benefit customers in the
decisionmaking process on capital expansion and expense control.
Question 2. Mr. Hewett, TVA argues that it can't be FERC regulated
and be able to appease Wall Street. How is it that LG&E Energy is able
to accomplish this (walk and chew gum at the same time), while
maintaining some of the lowest rates in the nation?
Response. We have found that FERC regulation is a key source of
discipline in measuring the soundness of our balance sheet. Other
sources of discipline include competition, State regulation, debt
ratings and, of course, the price of our stock. The extent to which our
company is able to measure up to the standards set by these various
disciplines is directly related to the confidence expressed in our
performance by Wall Street.
Question 3. Mr. Hewett, how does FERC regulation impact your
decisionmaking in setting a course for your company, and has FERC
regulation inhibited your ability to adequately serve your customers?
Response. As a result of FERC regulation we must provide non-
discriminatory open access to our transmission system and must charge
our wholesale requirements customers just and reasonable rates. These
regulatory requirements affect how we make business decisions. Such
requirements reflect FERC's implementation of the Congress ' public
policy decision to limit regulated utilities' ability to leverage
essential facilities and market position at the expense of consumers.
We accept these as legitimate constraints on our business. Such
constraints, however, do not limit our ability to serve our customers.
Indeed, we have found that, in addition to normal rate proceedings,
FERC provides useful data that enables us to monitor the activities of
other utilities and market-related developments. In addition, FERC
requires utilities under its jurisdiction to operate under a consistent
set of requirements which accomplishes customer pricing benefits.
Question 4. Mr. Hewett, have you been able to meet your customers'
demand during the peak demand periods of the past two summers? Will you
be able to meet the rising demands of the region in the foreseeable
future? What role does FERC play in this planning?
Response. While events of the past two summers presented our system
with significant challenges, we were able to meet the needs of our
customers. We attribute this success to To factors. First, the
employees of our company performed their functions in an exemplary
fashion. Second, we were able to work with our neighboring utilities,
including TVA, to ensure that all of us had access to other supplies of
electricity on the spot market. We expect to meet the rising demands of
our customers. FERC plays a useful role by making available data that
we utilize in formulating our business plans. Additionally, it is
noteworthy that, as a general matter, FERC's open access transmission
policies increase the efficiency of the electric power market in its
ability to meet peak demands and our ability to access the market for
purposes of purchasing peaking options and, if necessary, energy on the
hourly market.
Question 5. LG&E Energy Corp., which owns KU, made an announcement
earlier this year that they will reduce electricity bills by $52
million over 5 years. This was excellent news for LG&E and KU
customers. How do you explain why TVA's rates are higher and going
higher, while the rates of your company and other utilities in Kentucky
are lower and headed lower?
Response. We believe a key reason for this disparity is the level
of long-term debt between TVA and other utilities. TVA's long-term debt
of nearly $27 billion is more than four times the level of a comparably
sized utility. Moreover, nearly $8 billion of TVA's long-term debt is
not currently being recovered in rates. In contrast, LO&E, which is
roughly one-quarter the size of TVA, has a long-term debt of
approximately $1.6 billion. As I mentioned in my written testimony, the
General Accounting Office (GAO) has said that as competition evolves in
the electric power industry, TVA's flexibility to respond to market
signals will be impaired if it does not successfully implement its goal
of cutting its long-term debt in half by 2007.
Question 6. On average, how many cents of every dollar in KU rates
go toward paying interest charges?
Response. Approximately four cents.
Question 7. Please discuss how you see the TVA Customer Protection
Act benefiting TVA customers.
Response. We believe the most important elements of Senator
McConnell's bill are (1) requiring TVA to comply with the same anti-
trust laws and wholesale price and transmission regulations that govern
other utilities and (2) imposing limits on TVA's construction of new
generation facilities without the expressed agreement of its customers
that they will bear the costs of such facilities. TVA Watch believes it
is imperative that as the electric power industry evolves to a more
competitive structure TVA plays by the same rules as other utilities.
TVA's customers will benefit because they will enjoy that same
competitive opportunities as other utilities' customers and will enjoy
the same protections from discrimination and the exercise of market
power that are available to others' customers.
__________
Statement of Richard Munson, Executive Director, Northeast-Midwest
Institute
Testimony on the Tennessee Valley Authority
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 1960's through the
mid 1980's 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 1970's
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 1950's 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 2 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 5 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 10
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 10 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 7
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 5 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 5 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.
______
Northeast Midwest Institute,
Washington, DC 20003, October 14, 1999
The Honorable John H. Chafee,
Committee on Environment and Public Works,
U.S. Senate,
Washington, D.C. 20510.
Re: Tennessee Valley Authority
Dear Mr. Chairman: Your 7 October letter did not include questions
submitted by Senator Mitch McConnell, and subsequent conversations
with his staff suggest that the Senator's questions were not
directed to me. However, I'd like to add two thoughts to the
hearing record, responding to points advanced at the hearing.
First, Senator Fred Thompson complained that Congress had
eliminated appropriations for TVA's non-power programs. It needs to be
made clear that the original suggestion for such action came from TVA's
own chairman. It also needs to be stated that the $1.2 billion subsidy
provided to TVA in last year's omnibus appropriation cannot be viewed
as compensation for the relatively small $50 million that might be
appropriated for non-power operations.
Second, Mark Medford stated that TVA had no interest in selling
power outside of the Tennessee Valley. I would caution the committee
about TVA's history of shifting its positions. Just a year ago, TVA's
chairman was suggesting that. the agency would become ``America's power
company,'' providing electricity (subsidized by taxpayers, I should
note) throughout the nation.
Thank you for the opportunity to testify before your committee
about needed reforms for the Tennessee Valley Authority.
Sincerely,
Dick Munson, Executive Director.
__________
Statement of Mark Medford, Executive Vice President, Customer Service
and Marketing, Tennessee Valley Authority
Introduction
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 5 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 10 years ago to little more than
13,000 today. We have established an $800 million 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 12 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 2 years old and during that 2 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 7 percent estimate of 2 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 2 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 2 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.
______
Responses by Mark Medford to Additional Questions from Senator
McConnell
Note. In responding to these questions, TVA is expressing its own
views and is not speaking on behalf of the Administration.
Question 1. What is the current level of TVA debt?
Response. As of September 30, 1999, TVA's debt was $26.4 billion.
Question 2. How much of that total debt is owed to the Federal
Government?
Response. None of this debt is owed to the Federal Government.
Question 3. How much does TVA pay the Federal Government annually
in debt payments? At that rate, how long would it take TVA to fully
satisfy its obligations to the U.S. government? What interest rate is
attached to this Federal debt?
Response. None of TVA's outstanding debt is owed to the U.S.
Government. Sometimes the U.S. Government's proprietary capital
(referred to in the TVA Act as ``appropriation investment'') in TVA is
incorrectly thought to be debt.
As part of the 1959 Self-Financing Amendment to the TVA Act and the
cessation of congressional appropriations to fund the TVA power
program, the amount of appropriations invested by the U.S. Government
was calculated. To provide for the systematic reduction of that
appropriations investment ($ 1.4 billion) over a multi-year period, the
TVA Act requires TVA to make annual payments to the U.S. Treasury from
net power proceeds of $20 million, plus an annual ``dividend'' payment
(referred to in the TVA Act as a ``return on the appropriation
investment'') which is calculated by multiplying the outstanding
balance of the appropriation investment by the computed average
interest rate payable by the U.S. Treasury on its total marketable
public obligations as of the same date. As of September 30, 1999, the
outstanding balance was $548 million. Through the combination of these
two annual payments to date, TVA has paid to the U.S. Treasury a total
of about $3 billion.
Question 4. What percentage of TVA bonds are in foreign ownership?
Response. TVA began actively marketing its bonds in the
international market in 1995. Since that date, 38 percent of globally
marketed bonds have been purchased by foreign investors at the time of
issuance. However, TVA has no way of knowing whether ownership of these
bonds has changed in the secondary market since that time.
Question 5. Of TVA bond issuances, how many issues and how many
dollars of bonds were issued abroad?
Response. TVA global bonds are registered on both United States and
foreign exchanges, supported in the international secondary market by
investment bankers, and marketed to both international and domestic
investors to broaden demand and improve pricing.
Since TVA began marketing global bonds in 1995, TVA has issued 8
original global bonds and reopened 2, which has raised more than $ 10
billion to refinance expiring or callable debt. This represents about
half of TVA's total debt issued since 1995.
Question 6. Will TVA increase or decrease its debt level this year?
If TVA increases its debt, why will that occur? If TVA decreases its
debt level this year, how will it do so? In other words, will it pay
off more of the debt it owes the Federal Government or others?
Response. TVA reduced its debt in fiscal year 1999 by $308 million
by generating more cash-flow from operating activities than it
reinvested in capital.
Question 7. Every prospectus for TVA bond offerings States that
payment of interest or principal of these bonds is not guaranteed by
the U.S. Government, however, in a Forbes article on TVA, Chairman
Crowell states that if Congress ``did anything legislatively that put
TVA in a position where it would not succeed, then you end up putting
it in a bailout position in which the taxpayers would then have to pick
up the debt.'' If the bonds are not backed by the Federal Government
and therefore, the taxpayers of this country, then do TVA's ratepayers
have to pay off that debt?
Response. Section 29 of the TVA Act expressly states that no
amendment or repeal of provisions of the TVA Act ``shall operate to
impair the obligation of any contract made by'' TVA. However, to the
extent that Congress were to enact legislation which would preclude TVA
from being capable of paying its debt obligations, some investors may
feel that they have a claim against the U.S. Government for any
financial damages that they incurred.
Question 8. Assuming, as does the General Accounting Office, that
the U.S. Government may ultimately be liable for TVA's debt
obligations, does TVA have a REALISTIC, believable idea of how to
attack and hopefully decrease its $27 billion in debt? If TVA does have
an updated plan to better manage its debt, please share that plan with
the Committee.
Response. As stated in the GAO report, TVA's revised timeframe for
reducing the debt by one-half is now 2009. TVA plans to formally update
the plan during fiscal year 2000.
Question 9. Some estimates of TVA's waiver from pre-payment
penalties of bonds issued to the FFB have put the cost to the Federal
taxpayer at $1 billion. Now that TVA has been allowed this waiver, has
TVA reviewed the impact of this waiver on the Federal deficit and U.S.
taxpayers against the benefit to TVA? Were the benefits of this waiver
passed directly on TVA ratepayers? If so, how and in what form will the
benefits accrue to ratepayers in the Valley? If not, why not?
Response. From the time of the enactment of the Self-Financing
Amendment to the TVA Act in 1959 until 1974, TVA sold its bonds to the
public. When the FFB was established in late 1973, Congress expressly
stated its intent in section 2 of the Federal Financing Bank Act that
one of the FFB's central purposes was ``to reduce the costs of Federal
and federally assisted borrowings.'' Initially, TVA was hesitant to
rely on financing through the FFB because it questioned whether those
financings could be more economical than financing in the public debt
markets. Eventually, TVA began selling all of its bonds to the FFB.
The FFB had always earned a ``margin'' on its financing
arrangements with borrowers, including TVA, in the form of a one-eighth
of 1 percent adder above the U.S. Treasury's comparable cost of money.
However, as interest rates rose dramatically in the early 1980's, the
FFB became unwilling to agree to provisions which would allow TVA and
other borrowers to refinance the FFB debt at face value in exchange for
the payment of a ``call premium.'' As interest rates began their
dramatic decline in the late 1980's, the FFB's focus turned away from
its original mission to reduce Federal agency financing costs and
instead became a revenue generator for the Federal Government,
receiving interest payments from TVA that over the years were far in
excess of the U.S. Treasury's own cost of money. As a result, TVA
discontinued any future borrowings from the FFB in 1991.
Beginning in the late 1980's and continuing throughout the 1990's,
TVA and various Members of Congress requested the FFB to provide TVA
with the right to redeem this debt at its principal value. However, all
such requests to the FFB were refused until Congress granted permission
to TVA in October 1998 to refinance its FFB debt at its principal
value. Significantly, this action by Congress with respect to the FFB's
policies was not something unprecedented. It was consistent with
earlier actions taken by Congress to provide relief to rural electric
cooperatives and various foreign governments from having to continue to
pay excessive interest to the FFB.
With regard to the impacts of this legislation on the Federal
deficit and the U.S. Treasury, the Federal Government had, of course,
benefited from the additional revenues it received over a number of
years due to TVA's payment of interest well in excess of market rates.
The FFB transferred these TVA bonds several years ago to the Civil
Service Retirement and Disability Fund and presumably received the
appropriate financial value of those bonds in exchange at the time of
the transfer. Due to the enactment of this legislation, the FFB
received the full $3.2 billion principal value of those TVA bonds from
TVA and an appropriation of $1.2 billion to compensate for the
calculated amount of premium that TVA would have otherwise had to have
paid to be allowed to refinance these bonds early. The total amount was
then transferred to the Civil Service Retirement and Disability Fund to
make it whole because of the transfer of the TVA bonds out of its
investment portfolio. We also note, as commented by Senator Thompson at
this Committee's October 6 hearing on TVA, that Congress had decided to
discontinue providing appropriations to TVA to carry out the same
navigation, flood control, and resource management missions in the
Tennessee Valley that continue to be funded with appropriations
elsewhere in the Nation and that one purpose of this refinancing
proposal was to help mitigate the financial impacts of the
approximately $50 million in added annual expense that the electric
power customers in the Tennessee Valley will have to bear in the future
due to Congress's decision to stop further appropriations to TVA for
these essential stewardship activities under the TVA Act.
Under the provisions of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999, which authorized TVA to
refinance the FFB debt, TVA is obligated to use the savings it realizes
from this refinancing, as calculated using a statutory formula, to
reduce TVA's debt. The lower total annual interest expense that TVA
incurs as a result of this refinanced and reduced debt benefits TVA's
ratepayers.
Question 10. Recently, the Department of Justice initiated an
antitrust action against Rochester Gas & Electric for requiring the
University of Rochester to buy power from it or lose certain research
and development grants. This sounds a lot like what TVA did to 4-County
Electric Cooperative and has threatened to do to other distributors who
give notice of termination of TVA's contracts. How, if at all, are
TVA's activities in this regard different from activities of Rochester
Gas & Electric?
Response. The two situations are fundamentally different. There are
significant differences between: (1) threatening to withdraw certain
things or services of value that were being provided under agreements
entered into separately from a proposed agreement ``not to compete''
and (2) only offering certain things or services of value prospectively
to those customers who agree to purchase power in the future under
certain terms and conditions which do not involve an agreement ``not to
compete.''
The Rochester situation involved the former. The utility had
threatened to cutoff certain research grants unless the university
signed a new agreement not to compete against the utility for the
utility's customers. The university had otherwise planned to replace an
old generating facility, that was meeting part of the university's
needs, with a new plant from which the university would also sell
surplus power in competition with the utility.
On the other hand, the 4-County situation involved no such
agreement ``not to compete.'' At issue was the TVA Growth Credit
Program, which was offered up-front to TVA distributors as a benefit in
exchange for continuing to be long-term TVA customers. The long-term
commitment on the part of the distributor was and continues to be
necessary for TVA to derive the corresponding benefits of this program
(increased power sales to that distributor over a period of time due to
the new or increased loads) to justify the expense of providing such
additional benefits to those distributors who elected to participate in
that program. When 4-County sued TVA to be allowed to continue
participation even though it might discontinue being a long-term TVA
customer by giving its termination notice, the court determined that
there was no basis for 4-County to claim a right to continue in a
program for which it no longer met the program's eligibility criteria.
Question 11. Has TVA ever evaluated its generation market dominance
in the wholesale and retail markets in the Tennessee Valley region?
Assuming for the purposes of your response, that TVA had generation
market dominance, how would TVA propose to mitigate that dominance? If
by compliance with open access requirements, how does TVA address the
exemption it has under the Energy Policy Act from having to wheel power
to distributors located in its service territory. Is that true open
access?
Response. For decades, TVA has been the sole source of power supply
for the 159 municipal and cooperative distributors which serve the
Tennessee Valley, as well as for dozens of industrial and governmental
retail customers with large or unusual loads. It is no surprise,
therefore, that a substantial majority of total generating capacity in
the Valley presently belongs to TVA, although that has begun to change
this decade as independent power producers are constructing new power
plants to seek to capture the more lucrative sales opportunities in the
Eastern United States. TVA does not view its continued ownership of its
generating resources and its construction of new generation capacity as
in any way impairing wholesale competition in a future restructured
marketplace.
As part of the Administration's electric power industry
restructuring bill, while the TVA ``fence' would be removed, TVA would
only sell power that is excess to the needs of the Valley outside the
``fence'' and only at wholesale. In addition, TVA's wheeling exemption
under the Energy Policy Act of 1992 would be repealed at the same time
that the ``fence'' is removed, thereby enabling other suppliers to use
the TVA transmission system to compete for loads as wholesale
competition comes to the Valley. Moreover, unlike any other utility in
the country, TVA would be required to renegotiate its wholesale power
supply contracts with all 159 distributors, with regard to the contract
term, length of termination notice, ability to purchase from other
suppliers on a partial requirements basis, and stranded cost recovery.
At present, no distributor in the Valley could purchase power from
another supplier earlier than September 30, 2007--and TVA would give
distributors opportunities to do that earlier in exchange for
satisfactorily providing for stranded cost recovery.
With regard to retail markets, TVA would be prohibited from selling
power at retail outside the Valley and to sell power at retail within
the Valley only to existing customers or under circumstances within the
control of the local distributors.
Question 12. Standard & Poor's credit rating agency recently stated
that ``were Congress to enact the (Administration's) bill, it may be
construed as indicative of diminished Congressional support of TVA debt
and could have implications for TVA's rating.'' This tells me that if
Congress were to let you outside the fence today, without a truckload
of Congressionally mandated protections and artificial competitive
advantages, TVA would swim like a rock and sink rapidly. The S&P
statement combined with what GAO recently said, that: ``TVA could fully
achieve all of the goals and objectives outlined in (its Ten Year
Business Plan) plan and still not be positioned to offer competitively
priced power in 2007 and beyond.'' This makes me wonder who is going to
ultimately pay for TVA's lack of accountability and lack of
responsibility. How do we legislate around a $27 billion black hole? If
we leave the fence up, the ratepayers in the valley will not be happy
without customer choice. If we remove the fence and allow TVA to
compete, but on a level playing field, TVA will certainly not be able
to offer competitively priced power. And we simply cannot remove the
fence and allow TVA to compete with all its unnatural and artificial
competitive advantages and without any oversight, accountability or
responsibility--that would be like allowing the U.S. Air Force to open
up terminals and new routes to compete with Continental, US Airways,
United, American, and all other airlines across the country.
Response. With all due respect to Standard & Poor's, TVA fully
supports the provisions of the Administration's electric power industry
restructuring bill that address TVA's future role in a restructured
marketplace and believes that TVA would continue to be a viable market
participant in that new marketplace. TVA is equally confident that it
is taking the steps necessary to enable TVA to continue to offer
competitively priced power in 2007 and beyond. TVA further believes
that, given that it is a part of the Federal Government, the
appropriate forum for oversight is Congress itself--more specifically
this Committee and the House Transportation and Infrastructure
Committee--and that such oversight should not focus on how to make TVA
look and act like an IOU, but on whether TVA's performance in carrying
out its responsibilities under the TVA Act is serving and advancing the
public interest.
Allegations of TVA's ``unnatural and artificial competitive
advantages'' (1) are not supportable, (2) are actually directed toward
public power suppliers generally (TVA is not unique), (3) ignore that
IOUs and public power suppliers each have their own different
advantages and disadvantages, and (4) ignore that a diversity of
suppliers has made, and will continue to make, the reliability and
affordability of electric power supply in the Nation among the very
best in the world.
In a restructured marketplace, it is important to stress that,
under all major restructuring proposals being considered by Congress,
TVA would only be free to sell power outside the ``fence'' if that
power were in excess of the Valley's needs and only at wholesale--
primarily for the purpose of mitigating any stranded costs that might
result as wholesale competition was introduced in the Valley. The
amount of any such excess power, of course, would depend upon the
future power supply decisions made by Valley distributors--since TVA
cannot unilaterally revise its contractual obligation to meet all of
their demands until they exercise whatever rights may be available to
them to purchase power from other suppliers. And TVA strongly opposes
any legislative proposal that would effectively force any distributors
wishing to continue to purchase power from TVA to have to purchase
power from other suppliers.
In addition, if comprehensive electric power industry restructuring
legislation is enacted which enables TVA to sell excess energy outside
the current ``fence,'' TVA has agreed with the Tennessee Valley Public
Power Association (TVPPA) to give distributors ``Most Favored Nation''
status with regard to the terms and conditions of contracts with new
wholesale customers for the supply of firm power for a term of 3 years
or longer. By doing so, TVA would hardly be free to engage in the type
of competitively unfair pricing of wholesale power outside the Valley
that some suggest it might attempt in a restructured market. It is
significant that a provision to this effect has been included in H.R.
2944, the comprehensive electric power industry restructuring bill
introduced by Chairman Barton of the House Commerce Committee's Energy
and Power Subcommittee.
Question 13. In TVA's forecasts for future consumption among its
customers, how much electricity does it project will be needed to
satisfy its customers for the next 5, 10, 20 years?
Response. The consumption of electricity in the existing TVA
service territory is projected to reach approximately 162,800 GWh in 5
years, 177,500 GWh in 10 years and 189,300 GWh in 20 years.
Question 14. In TVA's forecasts, how does it anticipate meeting
this future load growth?
Response. This future load growth will be met by a number of
sources of supply to include greater utilization of existing TVA
generation assets, new TVA generation, generation from Independent
Power Producers and power distributors, co-generation by large power
users, generation by other utilities sold into the region, bulk power
marketers, etc.
Question 15. How much of your current capacity do you sell outside
the fence, for exchange power or for other reasons?
Response. The only power that TVA sells outside the fence is sold
to the 14 utilities that were grandfathered under the 1959 Self-
Financing Amendment. Those ``grandfathered'' utilities have since
merged into 12 companies. The vast majority of TVA's off-system sales
to these utilities are intermittent sales of exchange energy from TVA
generation and other resources that is surplus to the needs of the
Valley at any given time. At different times, depending upon the needs
of the Valley and the availability of TVA generation and other
resources, TVA either has surplus energy to sell to the
``grandfathered'' utilities or needs to purchase power from other
suppliers.
TVA's off-system energy sales in Fiscal Year 1999 totaled about 8.3
billion kilowatt hours or 5.3 percent of TVA' total energy sales.
However, during Fiscal Year 1999, TVA purchased about 9.3 billion
kilowatt hours of energy, making it a net importer of energy during the
year.
Question 16. If the valley needs more generating capacity and TVA
cannot afford any more debt, would TVA be amenable to allowing
distributors to own any new generation that may be required? If so, how
much?
Response. As TVA renegotiates its existing power contracts to
provide for partial requirements, then it follows that TVA would be
amenable to distributors owning new generation in order to meet that
portion of their requirements that they acquire from sources other than
TVA. However, because under partial requirements distributors could
choose to supply a portion of their load from a variety of sources,
including other wholesalers as well as their own generation, there is
not necessarily a one to one correlation between the amount of power
not supplied by TVA and distributor-owned capacity. The important
consideration is for TVA and distributors to reach agreement on partial
requirements in order for TVA to be able to plan properly for the power
that distributors will purchase from TVA in the future. In any case,
TVA will always focus on working with distributors for the good of the
ultimate consumers of TVA power.
Question 17. How would TVA's potential stranded investment be
determined? By whom? How would it be calculated?
Response. TVA supports the provisions of the Administration's
electric power industry restructuring bill that provide for FERC's
approval of an appropriate stranded cost recovery plan for TVA that
does not unfairly shift costs among customers. FERC would and should
have the flexibility to make decisions on TVA stranded cost recovery
that reflect the unique nature of wholesale power supply by TVA to the
159 distributors who serve the Tennessee Valley. One possibility is
that FERC may elect to apply its current ``lost revenues'' calculation
formula in TVA's case. That formula is based upon the price at which a
utility is able to market capacity ``freed up'' by customer decisions
to purchase from other suppliers. Under FERC's approach, no particular
``investment'' is stranded per se. TVA stranded ``costs'' would only
come into existence under FERC's ``lost revenues'' formula if
distributors discontinued purchasing certain amounts of power from TVA
prior to October 1, 2007, and TVA were unable to obtain an equal or
higher price for such power from new wholesale purchasers in sales of
such power prior to October 1, 2007.
While the final judgment should be FERC's, it appears at this point
in time that fairness to all customers would dictate that TVA's
stranded cost recovery be addressed on a system-wide basis by making
the ``lost revenues'' calculation on the basis of the total revenues
lost by TVA as a result of the cumulative decisions by distributors to
purchase power from others within the same general period of time
(recognizing that individual distributors may be making their decisions
months apart). Under such an approach, each distributor deciding to
purchase power from a source other than TVA would bear its
proportionate share of that total amount as its own stranded cost
liability.
Question 18. Will the formula that determines that amount be the
same for all distributors who leave the TVA system in the future?
Response. That, of course, is a decision that FERC would make under
the provisions of the Administration's electric power industry
restructuring bill--which TVA supports. TVA believes that the stranded
cost recovery plan approved by FERC should not unfairly shift costs
among customers. In addition, TVA and TVPPA have expressed interest in
the possibility of a ``true up mechanism'' that would help avoid the
creation of ``winners'' and ``losers'' in this process. TVA also
supports the Administration bill's provision that TVA could not recover
stranded costs from any distributor after September 30, 2007, without
that distributor's approval.
Question 19. What type of notice has TVA provided to each of its
distributors about its plans to seek stranded cost recovery if a
distributor attempts to leave the TVA system?
Response. TVA has had informal discussions with some distributors
individually as well as with various TVPPA committees such as the
Restructuring and Rates & Contracts Committees regarding stranded
costs. Beginning in 1997, distributors have had the option to move to
the ``five and five'' contract in lieu of the 10-year rolling term
contract. The ``five and five'' contract contains language which States
that stranded cost obligations will be fulfilled as long as the terms
of the contract are fulfilled. TVA has also agreed that it would not
seek any stranded cost recovery from those distributors who moved to
the ``five and five'' contract beyond September 30, 2007, unless
otherwise agreed to between TVA and the distributors.
Question 20. Are distributors going to be freed of stranded costs
if they provide TVA with early notice of intent to terminate their
contract (i.e. Bristol)? How far in advance would notice have to be
given and what kind of charges would TVA impose on distributors that
give notice five, seven, or 10 years in advance?
Response. For the 97 distributors who agreed to a modified
wholesale power supply contract in 1997 (the ``five and five''), there
will be no stranded cost liability as long as they fulfill their
current contractual obligations to continue to purchase all of their
requirements from TVA through September 30, 2007. Under present law,
TVA would have the right to seek appropriate stranded cost recovery
from any other distributor to the extent permitted under FERC's rules
for recovery of stranded costs. Under the Administration's electric
power industry restructuring bill, TVA has agreed that, under the terms
of a FERC-approved stranded cost recovery plan, it will have no right
to recover stranded costs from a distributor after September 30, 2007,
unless that distributor approves of such recovery.
Question 21. Would a Congressionally mandated sale of some or all
of TVA's assets trigger a right for TVA's distributors to immediately
cancel or terminate their power purchase obligations without liability
for payment of TVA's stranded investment? If TVA's position is that its
distributors would not be liable, please provide a detailed explanation
of TVA's legal rationale for this position (referencing contract
provisions and related law/statute language).
Response. In such a circumstance, presumably the proceeds from the
mandated sale of TVA assets would be applied to reduce TVA's
outstanding debt.
However, given that--(1) TVA has binding contractual obligations to
supply all-requirements of the 159 municipal and cooperative
distributors which purchase TVA power and (2) those distributors have
the legal right to expect TVA to continue to fulfill those
obligations--we find it difficult to imagine that Congress would
mandate the sale of any TVA assets that are essential to enabling TVA
to meet those supply obligations without also accommodating the
distributors' contractual rights. In that regard, Section 29 of the TVA
Act expressly states that no amendment or repeal of provisions of the
TVA Act ``shall operate to impair the obligation of any contract made
by'' TVA. While Section 29 would not preclude Congress from mandating
the sale of TVA assets, it does seem to provide a basis for
distributors to rely on the premise that Congress would take no action
that would impair TVA's contractual obligations to provide power to
them.
To the extent that a congressionally mandated asset sale would make
TVA unable to meet its contractual obligations to distributors,
aggrieved distributors might have a claim against the U.S. Government
for any financial damages that they incurred by having relied on TVA
for their power supply and having instead to try to secure sufficient
alternative suppliers of electricity due to that action by Congress.
Question 22. If TVA's assets are sold to a third party and TVA's
distributors are released from any obligation to take their
requirements from that third Party and are not liable for TVA's
stranded investment, who would bear the stranded investment? Would it
be TVA's bondholders or the Federal taxpayers?
Response. In such a circumstance, presumably the proceeds from the
mandated sale of TVA assets would be applied to reduce TVA's
outstanding debt. What is not clear from the question is whether TVA
would be forced to try to meet all of its contractual supply
obligations with power purchased from others or whether it is presumed
that Congress would also discontinue TVA's role as a power supplier.
In this regard, it is important to stress that: (1) all
distributors currently have a contractual right for TVA to supply all
of their power requirements; (2) a distributor's wholesale power
contract with TVA can only be assigned to another supplier with that
distributor's consent (another contractual right); and (3) the largest
municipal distributors which have indicated the greatest interest in
purchasing power from other suppliers recently testified before the
House Energy and Power Subcommittee that, even if they have the ability
to purchase power from other suppliers, they envision purchasing at
least some of their total requirements from TVA for the foreseeable
future.
As such, at least some distributors might view such congressional
action as an impairment of their contractual rights and might file
claims against the U.S. Government for any financial damages that they
incurred in obtaining the necessary power to meet their needs from
other suppliers.
Since all TVA capacity would have been sold in this circumstance,
there would be no ``freed up'' capacity to trigger distributor stranded
cost liability under FERC's ``lost revenues'' formula. To the extent
that the proceeds from asset sales were insufficient to retire all TVA
debt, the remaining bondholders might file claims against the U.S.
Government for losses incurred due to an alleged impairment of their
contractual rights.
In the absence of any action by Congress, the U.S. Government has
no legal obligations to either distributors or bondholders if TVA is
unsuccessful in meeting its contractual obligations to those parties.
However, by affirmatively taking actions which remove TVA's capability
to meet those contractual obligations, Congress might be determined by
the courts to have obligated the Nation's taxpayers to assume the
financial consequences of any impairment of the contractual rights of
those distributors and bondholders.
Question 23. What is the status of current or ongoing contract
negotiations between TVA and its distributors? What has been agreed to
and on what issues are there disagreements?
Response. In 1997, TVA began working directly with TVPPA,
representing distributors, to develop a joint position for inclusion in
a legislative proposal. TVA and TVPPA have now submitted a joint
recommendation to Members of Congress from the Tennessee Valley region
which represents a regional consensus and compromise on what TVA's
future role would be in a restructured electric power industry. As part
of that regional consensus and compromise, TVA has agreed with TVPPA,
within 1 year of the enactment of comprehensive restructuring
legislation, to renegotiate the following provisions of all wholesale
power supply contracts with distributors: (1) remaining term of the
contract; (2) length of the termination notice; (3) amounts and timing
of partial requirements, and (4) stranded cost recovery. For stranded
cost recovery by TVA from distributors, FERC would make the final
decision. In the case of disagreement on one or more of the other three
issues, distributors would have the right to terminate their contract
with TVA upon 3 years' notice.
Question 24. TVA has 10 year full requirement contracts with its
distributors, complete with 10 year notice of termination provisions,
does it not? What is the purpose of the 10 year notice provision? Can
private utilities regulated by antitrust laws have similar long-term
notice of termination provisions in their contracts?
Response. TVA currently has full requirements contracts with all of
its distributors. Beginning in 1989, all distributors, with the
exception of Bristol, Virginia, opted for contracts with 10-year notice
of termination provisions. The purpose of the 1 0-year notice provision
was to provide TVA with the appropriate lead time to make decisions
regarding base load capacity because, at that time, the planning
horizon for new base load plants was approximately 10 years. Beginning
in 1997, distributors can opt for ``five and five'' contracts in lieu
of the 10-year rolling term contracts. 97 distributors have opted for
the ``five and five'' which, beginning in October, 2002, provides for a
5-year termination notice. Private utilities have wholesale power
supply contracts with termination provisions with similar or longer
advance notice requirements.
Question 25. What sort of non-power resources, such as economic
development assistance, does TVA make available to its distributors?
Are these the sort of resources that TVA declines to provide if a
distributor gives notice of cancellation or termination of their
contract with TVA? If TVA's broader mission is to help develop the
economy of the Tennessee Valley and to help develop all natural
resources of the Tennessee Valley, why does TVA tie availability of
such assistance to the purchase of power? Has TVA effectively abandoned
its original mission?
Response. TVA provides a variety of resources to power distributors
and their customers including community development assistance,
financing assistance, incentive rates and credits, technical assistance
and marketing programs. It is important to stress that all of these
resources are currently paid for with TVA power funds and, hence, there
must be a commensurate benefit to the power system to warrant such
expenditures of power funds.
Certain of these programs constitute investments in economic
development of distributors' service territory that take years in order
to provide the level of benefits (in the form of increased distributor
loads which would be supplied by TVA) necessary to justify the amount
of power funds expended. Only if distributors agree to remain long-term
customers of TVA does the TVA power system have the ability to recoup
its investment, and distributors electing to participate in such
economic development programs understand up front that that is what is
necessary for them to qualify. Therefore, under the provisions of these
programs, if a participating distributor chooses to give notice of
contract termination, that distributor becomes ineligible to continue
to participate in the program.
The application of program benefits in this fashion in no way
minimizes or contradicts the original mission of TVA, which includes
the economic development of the Valley. Congress's decision several
years ago to discontinue providing appropriations for TVA economic
development programs has required that TVA limit itself to funding
those economic development activities that are of value to the TVA
power system, as well as to the Valley in general. The reliance on
power funds to finance the economic development programs makes it
necessary for TVA's power customers, who are paying for these costs in
their electric power rates, to receive sufficient benefits in return.
Expending funds for economic development that would only benefit non-
TVA customers would not meet this test and would be unfair to TVA
ratepayers.
Question 26. During all of your discussions about the future of
TVA,is there ever any discussion or attempt at valuation of the TVA
assets? What is the current book value of all of TVA's assets, both
generating and transmission, and what, approximately, would those
assets yield if they were sold in today's market? Please include the
assumptions used to derive this market value.
Response. The value of generation assets is primarily dependent on
the projection of the future market price of power. There is currently
no consensus or market-transparent long-range projection upon which to
base such a valuation. Therefore, any projection of market prices would
be speculative at best. For example, a 1998 study by the Congressional
Budget Office (CBO) stated that the ``market value'' of TVA's assets is
highly uncertain. The CBO estimated that selling TVA's assets would
produce a value that could range from a gain of $2 billion to a loss of
$6 billion.
TVA's net book value of property, plant and equipment as of
September 30, 1999 was $28.4 billion and total assets were $33.4
billion.
Question 27. Has any independent regulatory authority ever found
that TVA's $8.5 billion investment in non-producing power production
capacity was prudent or was (or is) used and useful for the public's
service? If not, then should not TVA undergo an initial fact-finding by
FERC to establish a baseline of prudent investment by which FERC could
then apply stranded cost principles? Would an investor-owned utility
that has wasted $8.5 billion in a never-used or useful plant, that has
never been recovered in rates, be allowed to recover that amount as
stranded costs? If not, why should TVA be given special treatment?
Response. While no independent regulatory authority per se
evaluated the prudency of TVA's power facility construction decisions,
it should be stressed that, in enacting legislation to increase TVA's
bond ceiling by $15 billion in 1979, both the Administration (which
proposed the bond ceiling increase) and Congress reviewed TVA's power
supply and demand forecasts for the Valley and the proposals for all of
those new generating facilities required to meet the Valley's projected
needs for power. Included among those facilities were all of those
which were later either canceled or placed in deferred status.
Under FERC's ``lost revenues'' formula, there would have to be
``freed up'' capacity which TVA would have to market elsewhere as a
consequence of a distributor's decision to purchase power from others
before that distributor could have stranded cost liability. To the
extent that certain investments were not being recovered in TVA's rates
for the sale of the electricity from that ``freed up'' capacity at the
time stranded cost liability was determined, those investments already
would not have an impact on a distributor's stranded cost liability.
However, to the extent that the costs of such investments were being
recovered in TVA's rates, there is no fair or rational basis for
artificially excluding that cost recovery from the TVA rate to be used
in the ``lost revenues'' formula.
Unlike IOUs, TVA has no stockholders to whom regulatory authorities
typically allocate the financial burdens of uneconomic investments.
Therefore, all costs incurred by TVA must be borne by TVA ratepayers.
Using any hindsight-based prudency review of certain TVA
investment decisions for the purpose of artificially excluding some
costs from the determination of the stranded cost liability of
departing customers would inappropriately and unfairly transfer those
costs to TVA's remaining customers.
Question 28. Does TVA follow ``least-cost planning'' when it
evaluates the need to build or buy when planning to meet growth in
demand?
Response. Yes, in accordance with the requirements of section 113
of the Energy Policy Act of 1992.
Question 29. What redress, if any is available for retail and
wholesale customers of TVA for alleged breaches of power sale
commitments? Can TVA be take to court for breach of power sale
contracts? Can customers complain to FERC? If there is no means for
judicial or regulatory redress, what would be a good solution to give
these customers certainty that TVA will stand by its contractual
commitments?
Response. While it is true that the TVA Board's determinations of
wholesale power rates are not reviewable, there is no doubt that TVA
retail and wholesale customers can take TVA to court for any alleged
breach of a power sale contract and obtain appropriate remedies if the
court determined that TVA had in fact breached its contractual
obligations. FERC does not have jurisdiction over TVA power sales
contracts, and--given the availability of judicial redress--no such
jurisdiction is necessary or appropriate.
Question 30. In an article September 17, 1999, in the Chattanooga
Times/Free Press, it was reported that ``TVA expects to end the current
fiscal year with a net income of $119 million and pay down its debt by
$306 million.'' Is $306 million debt retirement for this fiscal year
correct? Is this not way short of what is needed to be near the TVA Ten
Year Plan or even GAO's suggested 10 now 12-Year Plan? What is TVA's
revised plan to reduce its' debt in a timely manner, and is this plan
sufficient for TVA to be competitive in the future?
Response. TVA reduced its debt by $308 million for fiscal year
1999. While this amount was below what TVA originally anticipated in
its Ten Year Plan, the plan was designed to ensure that TVA would be in
a position to deliver electricity to its customers at prices that would
remain competitive in the future deregulated utility industry. Reducing
the debt by half was a strategy to attain the goal, not the goal
itself.
As stated in the Chattanooga Times/Free Press article which is
referred, ``. . . the debt will remain higher than forecast in the 1 O-
year plan because of bigger-than-expected increases in spending for new
generation and air pollution controls. Those expenditures should not
hurt TVA's competitiveness, however. The extra generation reflects
TVA's robust 4 percent growth in annual sales--a pace that is nearly
twice the national average. Air pollution control measures are being
required of all utilities under recent Federal amendments to the Clean
Air Act.''
The GAO report also stated that ``. . .since it is not possible to
accurately predict what the market price of power will be in 2007, TVA
could still achieve its objective of offering competitively priced
power, even if it does not fully achieve the plan's other goals and
objectives.''
TVA remains on track in meeting the goal of providing competitively
priced power in the future restructured electric power industry.
______
Responses by Mark Medford to Additional Questions from Senator Inhofe
Note. In responding to these questions, TVA is expressing its own
views and is not speaking on behalf of the Administration.
Question 1. Why doesn't TVA think that the stranded cost formula
that FERC applies to public utilities should apply to its own stranded
costs?
Response. TVA's position, consistent with the Administration's
comprehensive electric power industry restructuring bill, is that FERC
should have the flexibility to consider the unique nature of wholesale
power supply in the Valley when deciding the appropriate approach to
awarding stranded costs to TVA. At present, FERC's rules are designed
to address, on a case-by-case basis, the very discrete impacts of a
decision by one wholesale customer to discontinue purchasing power at
the end of a contract with a supplier.
Because TVA would be required under the Administration's Bill to
renegotiate, within a one-year period, all wholesale supply contracts
with 159 separate distributors (none of which may otherwise purchase
power from any other supplier earlier than September 30, 2007), there
are several reasons why FERC should retain the flexibility to exercise
its own judgment in this regard and why that flexibility is important
to ensure fairness to all customers in the Tennessee Valley.
Unlike in other regions of the country, the vast portion
of power supplied in the Tennessee Valley is at wholesale, exclusively
by TVA. Consequently, the financial impacts caused by numerous separate
distributor decisions, potentially creating large amounts of ``freed
up'' capacity on a cumulative basis, are far more profound for TVA's
overall operations, and for those customers who continue to purchase
power from TVA (who are likely to be small or rural customers), than
they are for IOUs (which are substantially retailers and less impacted
by wholesale customer decisions).
Most TVA stranded cost issues would likely be presented
to FERC in the context of partial requirements decisions made by 159
different municipal and cooperative distributors of TVA over a period
of time. FERC's consideration of the entirety of stranded cost recovery
in the context of a plan--as opposed to numerous case-by-case
determinations made at the time of individual decisions--would be the
best approach for ensuring that all TVA customers are treated fairly,
as well as being more administratively workable for all parties
concerned. The rules FERC applies to IOUs do not make provision for
such a system-wide plan approach--largely because no IOUs share TVA's
overwhelming wholesale nature. For example, many IOUs sell less than 10
percent of their power at wholesale, while TVA sells approximately 85
percent of its power at wholesale.
TVA and distributors have expressed interest in the
possible implementation of a stranded cost recovery plan with a ``true
up'' mechanism that would help prevent creating ``winners'' and
``losers'' as markets change during the stranded cost recovery period.
There is no provision for such a ``true up'' mechanism in the rules
FERC applies to IOUs. FERC should retain the flexibility to consider
and approve such a plan if it deems it fair and appropriate.
Question 2. Why don't you think that FERC should have jurisdiction
over TVA's wholesale sales? TVA has argued that it makes no sense for
one group of Presidential appointees to review the rates set by
another, but isn't TVA the only Federal electric utility that is
completely self-regulated? Why should TVA be subject to any less
oversight than the Bonneville Power Administration? Isn't TVA already
subject to Federal environmental regulations pursuant to the
jurisdiction of the Environmental Protection Agency?
Response. There is no obvious benefit for TVA's customers to be
achieved by subjecting TVA's wholesale rates to FERC. It is TVA's
perspective that such FERC jurisdiction risks higher electric power
rates for the citizens and businesses of the Tennessee Valley Region,
and TVA steadfastly opposes any proposal that would so unnecessarily
increase Valley power rates.
Unlike IOUs, TVA is a public entity dedicated to meeting the public
good, rather than increasing the wealth of stockholders. Unlike BPA and
the PMAs, TVA is not only headed by one Presidential appointee
confirmed by the Senate, but by a Board comprised of three such
Presidential appointees. The members of the TVA Board are expressly
charged under the TVA Act to use their collective personal judgment to
set power rates ``as low as are feasible''--a different standard from
that which FERC is required to use in its review of wholesale power
rates.
It makes no sense, at a time when the industry is moving to less
regulation, to subject the single most important decision to be made by
one group of Presidential appointees to review by another--let alone
one which is obligated to use a different standard from that which the
TVA Board is obligated to use.
Question 3. The Bonneville Power Administration has successfully
renegotiated long-term power contracts with a majority of its existing
preference customers. Why hasn't TVA been able to achieve similar
results? Is there any real difference between a contract that requires
10 years' notice of termination and a contract terminable on 5 years'
notice only after a 5-year waiting period? Is this the kind of
flexibility that TVA had in mind when TVA pledged, in its Ten-Year
Plan, to work with customers that were seeking ``more flexible''
contracts?
Response. We are not familiar with the details of BPA's contract
renegotiation efforts or the issues involved.
In 1997, TVA offered an alternative contract arrangement to power
distributors whereby they could elect to enter into a contract which,
effective 5 years after the date of execution, could thereafter be
terminated upon giving a 5-year notice (the ``five and five''). And 97
of the total of 159 distributors of TVA power elected this option and
are currently 2 years into the initial 5 year period.
Additionally, under the Administration's bill, TVA would begin
negotiating certain key features of all of its wholesale power
contracts with distributors on the date of enactment of comprehensive
electric power industry restructuring legislation. If TVA and a
distributor failed to reach agreement on a contract within 1 year
following enactment, that distributor would thereafter have the right
to terminate its existing power supply contract with TVA by giving a 3-
year notice.
Most distributors who did not agree to the ``five and five''
contract continue to purchase power from TVA under the 10-year
contract, which is substantially different from the ``five and five''
contract. The 10-year contract has a rolling 10-year term and,
therefore, may only be terminated by giving a 10-year notice.
The ``five and five'' contract was one of the efforts planned in
1997 to accommodate customers seeking more flexible contracts. TVA has
continued negotiations with TVPPA and its members over the last 2 years
to address further contract options.
Question 4. Can the cost of facilities not being used to serve
TVA's customers truly be considered ``stranded costs''? Doesn't the
term ``stranded costs,'' as used by FERC, refer specifically to costs
stranded as a result of the transition to wholesale electric
competition, and not simply to utilities' uneconomic assets and/or
investments?
Response. Under the present terms of TVA's wholesale power supply
contracts with distributors, the earliest any distributor may
discontinue purchasing all of its requirements from TVA is September
30,2007. When TVA offered distributors shorter termination notice
contract terms (the ``five and five'') in 1997, it was agreed that, for
those distributors who signed the ``five and five,'' there would be no
stranded cost liability after September 30,2007. This agreement
presumed that each distributor would continue to purchase all of its
power requirements from TVA through that date. TVA has also agreed, as
part of the Administration's electric power industry restructuring
bill, that distributors would not be liable for stranded costs after
September 30,2007.
In determining stranded costs, FERC does not examine the power
supplier's assets. Under FERC's ``lost revenues'' approach to
calculating stranded costs, TVA would only be entitled to recover
additional amounts from a distributor as stranded costs if: (1) that
distributor purchased some or all of its requirements from another
supplier prior to September 30,2007, and (2) TV A were unable to market
the capacity ``freed up'' by that distributor's decision at a price at
least as high as the price that would otherwise be paid by that
distributor.
Consequently, irrespective of the quality or nature of TVA's power
assets, if the two above factors are met, the distributor should be
liable for stranded costs. If that distributor is not liable for
stranded costs in such a case, those costs (in the form of lost
revenues) would unfairly have to be borne by TVA's remaining customers.
Question 5. Should TVA's wholesale customers and their retail
ratepayers be required to finance TVA's activities overseas? If so,
why?
Response. TVA's overseas activities are either: (1) activities
which benefit the power program (and, hence, benefit ratepayers); or
(2) activities for which TVA's costs are reimbursed, at no expense to
ratepayers, by others who benefit from such activities. The major
example of an activity that benefits the power program and ratepayers
are TVA's global financing activities--which reduce TVA's overall
financing costs.
Question 6. TVA's Ten-Year Plan called for reduced capital
expenditures, including a self-imposed ban on capital expenditures for
new generation. Last month, David Smith, TVA's Chief Financial Officer,
told Congress that TVA would need to build new generation in order to
meet its distributors' needs in the future. Given that capital
expenditures reduce TVA's available cash and therefore reduce the funds
available to pay down TVA's enormous debt, aren't there other ways of
meeting distributors' power needs? Why couldn't TVA permit distributors
to self-generate some of the power necessary to meet their native load
growth? Further, if the statutory barriers to a competitive wholesale
electric market in the Tennessee Valley were removed, couldn't the
distributors maintain adequate power supplies by purchasing some of
their needs, if it were necessary and economical to do so, from
suppliers other than TVA?
Response. TVA's Ten-Year Plan did not include a self-imposed ban on
capital expenditures for new generation. On page 8, the Plan states ``.
. . TVA will need additional power to meet the demand resulting from
growth in the Valley over the next 10 years. The decision whether to
purchase the power or increase existing capacity will be made at the
appropriate time, based on the economics of the projects and the level
of certainty surrounding the load forecasts.''
TVA's Plan recognized that there would be economic choices to make
along the way which could require additional capital investment to
achieve a lower cost of power or to increase system reliability. The
recent decision to add certain amounts of peaking capacity was one such
example.
TVA believes that the experience of the past two summers, where
utilities reached all-time peaks and transmission constraints affected
the ability of utilities to move power across the grid, which resulted
in rolling blackouts in some areas, further supports the decision to
place additional generating resources inside the Valley.
__________
Statement of Austin Carroll, on Behalf of the TVA Kentucky Managers'
Association
Mr. Chairman, members of the Committee, my name is Austin Carroll
and I am General Manager of the Hopkinsville, KY Electric System. I am
here today on behalf of the Kentucky Managers' Association, which is
the group of 18 not-for-profit municipal and rural electric cooperative
utilities in Kentucky that buy 100 percent of their power supply from
the Tennessee Valley Authority. On behalf of the Kentucky TVA
distributors I appreciate the opportunity to present our views on S.
1323 as introduced by Senator McConnell and Senator Bunning.
Let me begin by thanking Senator McConnell for the effort he has
made to try to protect the interests of consumers in Kentucky and the
Tennessee Valley. As consumer-owned utilities, our primary mission is
to keep electric rates as low as possible for our consumer-owners and
we appreciate the senator's openness to our views and concerns.
The Kentucky Managers Association supports the intent of some of
the provisions of S. 1323, but disagrees with others. We have discussed
this thoroughly with Senator McConnell's office and he is aware of
these concerns, which I will discuss in more detail in a moment.
Fundamentally, however, we believe that many of the issues raised
in S. 1323 are directly related to the question of the role of TVA in a
``restructured'' or more competitive electric utility industry and are
best addressed in a comprehensive TVA title to a Federal restructuring
bill. Therefore, we cannot endorse S. 1323 as it is presently drafted.
The KY Managers, acting through the Government Relations Committee
and the Board of Directors of our regional trade association, the
Tennessee Valley Public Power Association (TVPPA), has been working for
the last 3 years to develop a comprehensive set of policy
recommendations on TVA restructuring. Those recommendations have been
turned into a draft ``TVA title'' that could be incorporated into a
Federal restructuring bill. A copy of that draft title is attached to
my written testimony.
In the process of developing that draft, TVPPA worked with TVA and
with all distributors to try to reach consensus on a single draft
title. While we still have a few areas of disagreement on policy and
wording, we are in substantial agreement that changes are needed in the
contractual relationship between TVA and the distributors and in the
wholesale electric market in the region. We think this is a significant
achievement.
Specifically, we agree with provisions that:
Take down the ``fence'' to allow TVA to sell excess power
at wholesale outside the region. At the same time, the ``anti-cherry
picking'' provisions of the Energy Policy Act of 1992 should be
repealed to allow outside suppliers to sell power at wholesale inside
the Valley;
Allow current restrictive, long-term wholesale contracts
between TVA and the distributors to be shortened and modified to give
distributors the right to purchase all or portions of their wholesale
power and energy from other suppliers;
Subject the rates, terms and conditions relating to use
of TVA's transmission system to regulation by FERC to ensure open, non-
discriminatory access by distributors and others;
Allow FERC to determine TVA's stranded costs, if any,
resulting from shortened or canceled contracts prior to October 1, 2007
using the same standards and rules that apply to other utilities but
ensuring that costs are not shifted among customer groups;
Eliminate TVA's retail ratesetting authority over
distributors and allow those not-for-profit municipal and cooperative
utilities to be regulated at the local level by local citizen boards,
as they are in most States; and
Apply Federal anti-trust laws to the TVA power program as
they are applied to local governmental entities, without the financial
penalties that would burden our consumers.
Limit TVA sales outside the Valley to wholesale excess
energy transactions; and
Limit TVA retail sales inside the Valley to existing
customers. Any new retail sales would be allowed only under
restrictions agreed upon with distributors and if those sales would not
bypass local distribution facilities.
We hope it is clear from this description that TVPPA and the
distributors are not burying our heads in the sand and pretending that
utility restructuring will ``just go away.''
We recognize that the utility industry is moving toward greater
competition and that all utilities must adapt to the changing
environment. We also know that Congress has the authority to require
changes in TVA and hope that those in the Valley will be allowed to
help shape the changes.
At the same time, we believe that significant changes to TVA's
operations or mission must be dealt with comprehensively, in the
context of an overall Federal restructuring bill.
Overall, we believe that TVA has been good for the Valley. For more
than 60 years, TVA has provided reliable, reasonably priced power for
consumers and has promoted the economic development of the Valley. We
don't want to make piecemeal changes to TVA that result in higher costs
for consumers or that undermine its ability to be a competitive source
of power for the future.
Let me turn now to the specifics of S. 1323:
We think that the ``lynchpin'' of any TVA restructuring
bill must be opening the Valley to wholesale competition through repeal
of the ``fence'' and ``anti-cherry picking'' provisions of current law.
S. 1323 is silent on these issues;
We believe that for consumers to benefit from opening the
Valley to wholesale competition, TVA must be allowed to develop new
resources to meet electric demand in the Valley without restrictions
that do not apply to other potential suppliers. Section 5 of S. 1323
effectively makes TVA the power supplier of last resort, rather than a
viable and reliable source of power for Valley. Further, it would
require the distributors to sign long-term contracts for TVA power at a
time when we are seeking more flexibility through short-term contracts.
We think these limitations are incompatible with today's market and we
cannot support them.
We agree that TVA's transmission system should be subject
to FERC jurisdiction but do not support FERC jurisdiction over TVA's
wholesale rates. We support a position which would require TVA and any
distributor that is unhappy with a proposed rate to participate in an
alternative dispute mechanism in the Valley to try to resolve the
dispute.
We support application of Federal antitrust laws to TVA
in the same way they apply to State and local governments and do not
support assessing monetary damages against TVA. Those costs would be
passed directly on to consumers and it is unfair to shift these costs
to consumers who would ultimately have to pay for them in the TVA rate
base.
We support directing FERC to determine TVA's stranded
costs, if any but do not think requiring ``Monday morning
quarterbacking'' of past investments serves any useful purpose.
We agree with the limitations proposed on future TVA
retail sales inside the Valley and appreciate the inclusion of TVPPA's
language on this issue.
We agree that TVA should not be allowed to recover in
rates any of those costs associated with off-shore ventures or that are
not activities that benefit the distributor. The language needs to be
clarified to make sure it does not apply to TVA's economic development
activities inside the Valley.
We support requiring full disclosure by TVA of
information that other publicly owned power suppliers are required to
provide.
Mr. Chairman, Senator McConnell, I believe my statement covers the
major provisions of S. 1323. I would be happy to answer any questions
the Committee may have.
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