Contents
Executive summary
The Obama administration is considering whether to divest all or part of the federally owned Tennessee Valley Authority (TVA) as a means to pay down the U.S. debt. The selling off of all or part of the TVA to private ownership would have far-reaching consequences, especially for the 9 million people in the 80,000-square-mile region—encompassing parts of Tennessee, northern Alabama, Mississippi, Kentucky, Georgia, North Carolina, and Virginia—to whom the TVA provides electricity and other services.
The proposal has sparked a debate about the benefits and problems that divestiture might bring. Conservatives have long opposed the TVA on the grounds that it is an illegitimate government intrusion into the marketplace. The Obama administration’s fiscal year (FY) 2014, 2015, and 2016 budget proposals have called for reducing or eliminating the federal government’s role in programs such as the TVA “which have achieved their original objectives or no longer require Federal participation.” Worried that the TVA’s bond debt, then at $26 billion, could exceed its $30 billion statutory cap and thus impact the federal debt, the administration has suggested ending federal ties in order to “help mitigate risk to taxpayers” and “put the Nation on a sustainable fiscal path” (OMB 2013, 2014, 2015).
At the same time, the TVA’s major stakeholders have come out against divestiture. Opposition has been broad-based, from conservative congressional lawmakers from states and districts in the TVA service area; to the municipally owned and cooperative local power companies and the Tennessee Valley Public Power Association, which represents these distributors; to labor unions representing TVA employees.
This report presents an overview of the debate. It evaluates the pros and cons; summarizes the agency’s organizational, financial, and economic situation; and examines the potential implications of privatization for ratepayers, communities, and the regional economy.
The TVA is a corporate agency of the United States, governed by a nine-person board appointed by the president and confirmed by the Senate. Its operations have been self-financed since 1999, requiring no taxpayer money. The TVA operates one of the nation’s largest utility systems, accounting for about 3 percent of U.S. electricity capacity (EIA 2013). It had 37 gigawatts (GW) of electric power generation (summer net) capability in 2013, and over 16,000 miles of transmission lines.
Even though electric power generation and transmission is the TVA’s dominant function, it remains integral to and integrated with the TVA’s nonpower responsibilities, including river and land management, environmental stewardship, and economic development.
Opposition to divestiture received a major boost from a government-commissioned study prepared by Lazard Frères & Co. in 2014 (TVA 2014c). Lazard examined a range of options including privatization, public-sector spinoff, and status quo alternatives. It concluded that, although it had “recommended for privatization in other situations in the U.S. Power & Utility Industry,” several factors led it to “recommend against pursuing a divestiture of TVA.”
Lazard addressed the TVA’s financial situation and gave it high marks for putting its operation on a more financially sustainable path. It concluded that the TVA’s financial position had strengthened, and it was poised to cut its long-term debt over the next decade. It also identified several potential downsides; these included potentially higher electricity rates and potentially adverse impacts on the TVA’s power system and its nonpower functions, the management of which is highly integrated under the current TVA.
Building on and extending Lazard’s findings, this report presents the findings of an assessment of two related types of impacts that could result from privatizing the TVA:
The impacts on the TVA’s electric power system, i.e., on the new, restructured system’s ability to provide reliable and affordable electricity to stakeholders in the region.
The impacts on the TVA’s nonpower functions, especially its role in river and land management, environmental stewardship, and economic development.
Several general findings stand out in this analysis:
It is difficult to see how divestiture would provide stakeholders with any greater benefits than the TVA system already provides.
Privatization would sever the connection between most of the TVA’s power and nonpower functions, resulting in dis-synergies and impairing and diminishing the various electric power, river and land management, environmental, and economic benefits that the TVA has delivered since the 1930s.
Privatization could increase electricity rates, reduce system reliability, increase price volatility, and lower the credit rating of local distributors of the TVA’s electric power.
Privatization would inject uncertainty and complexity into the performance of all of the TVA’s power and nonpower functions, both during and after the long, complicated process of carrying out proposed divestiture scenarios.
Instead of a single authority with responsibility for planning, implementing, and governing the various functions, under divestiture there would be many different, sometimes competing responsible entities, including federal agencies, state regulatory bodies, and private utilities. Difficulties coordinating these entitites could inhibit the ability to improve operations, build and rebuild facilities, and provide services with the same effectiveness and smoothness that the TVA offers today.
Specific findings of the assessment of privatization’s impacts on the TVA’s main power and nonpower functional areas are summarized below:
Electric power and transmission impacts
Electricity rates
Evidence strongly suggests that electric power rates, in the short run at least, would likely increase, perhaps significantly, above TVA status quo rates.
Private owners of the TVA’s power assets most likely would include additional costs in their rate structure, such as federal taxes and return on equity, that the TVA does not need to include because of its federal not-for-profit status.
Divestiture is likely to introduce a high degree of uncertainty and volatility into electricity markets that could adversely impact electricity distributors and industrial customers in the TVA service territory.
Divestiture would shift the responsibilities and burden of regulating the new owners of TVA assets to multiple state agencies.
There could be an increase in the vulnerability of a privatized TVA system to price volatility, as it would now be reliant on external power markets.
Electric power reliability
The complexity and uncertainty associated with divestiture could adversely affect the TVA’s reliability record.
Divestiture would divide the TVA’s well-integrated, balanced electric power system into independent and no-longer-accountable component parts, comprising a mix of electric power generation and transmission assets, whose management and operation would now fall under multiple private entities.
Planning, investment, construction, and operation of the TVA’s generation and transmission capacity would no longer be integrated and coordinated across the service area.
The responsibilities for maintaining the system and coordinating with distributors and other utility systems would shift to unknown, multiple entities.
Decisions about expanding, upgrading, managing, and repairing capacity—and other factors that affect the reliability of the electric grid—would shift from a single body, subject to long-term integrated planning, to multiple independent private utilities, overseen by several different state regulatory agencies.
Electric power distributors
Local power companies (LPCs) would have to make new power purchase arrangements with multiple power providers over time, instead of having to make new long-term power purchase agreements with one wholesaler (i.e., the TVA). This change would add new uncertainty to the LPCs’ power contract terms and prices.
LPCs may be required to purchase some electricity directly from unregulated wholesale markets, from independent power producers and other power providers outside their service areas, subjecting them to further sources of supply and price volatility.
The potential sale of the TVA’s assets could threaten local power distributors’ bond ratings, sending negative signals to financial markets and to potential economic developers.
State and local taxes
Privatizing all or part of the TVA’s capacity would create uncertainty about the sources and size of the new owners’ tax payments.
The tax collection process would become more complex and less certain as to the expected revenues states and local jurisdictions would receive; instead of collecting from one entity based on a straightforward formula and process, the states and municipalities would collect from multiple private power companies.
Clean energy and energy efficiency programs
Privatization would create uncertainty about whether the new owners would make a similar commitment and scale of investment as the TVA in nonhydro renewable generation.
There would be uncertainty about the implications for current contracts with wind farms and other renewable sources provided outside the region; new owners might need to renegotiate these arrangements, based on their own business plans.
The high level of integrated planning and implementation of clean energy facilities throughout the Tennessee Valley would disappear under privatization, though many private investor-owned utilities (IOUs) also are making efforts to expand their renewable portfolio and reduce their carbon footprints.
The fate of the TVA’s renewable energy research initiatives would be very uncertain—i.e., who would pay and take over responsibility for these programs, or would they be terminated?
The TVA’s federal connection may make it more amenable to internal and public pressures to support federal and state clean energy and emissions mitigation efforts; as a federal corporation, the TVA might be more directly compelled to respond to federal regulatory mandates and requirements than are privately owned utilities.
Impacts on the TVA’s nonpower functions
River, land, and resource management
The potential separation of the TVA’s integrated water management approach from its hydro-generation system would hamper both functions, negatively affecting the quality of services and economic costs.
Severing the TVA’s power generation function from river and land management could diminish both functions, as well as the TVA’s economic development initiatives.
Environmental stewardship
The integrated approach that helps to optimize the TVA’s environmental, power, and economic development objectives would no longer be in effect under most divestiture scenarios.
Privatization would weaken if not sever the crucial linkages between the region’s river and land management resources and environmental stewardship mission, which are highly integrated in the TVA’s strategic planning activities.
The direct tie between managing the TVA’s power generation and its environmental mission would be weakened under divestiture.
Economic development
The TVA’s economic development initiatives are closely associated with its river and land management functions, and benefit directly from access to the TVA’s competitively priced, reliable electricity.
Economic development is integral to the TVA’s mission—it works with local power companies and regional, state, and local economic development agencies, providing a variety of incentives and services to attract and retain companies and help communities benefit from economic growth opportunities.
Privatization would leave uncertain which entities would take over and finance this function.
The separation of economic development from generation and transmission, as well as from the TVA’s river and land management activities, could substantially diminish the scale and effectiveness of economic development activities.
The old cliché is fitting here: “If it ain’t broke, don’t fix it.” There is no question that the TVA has needed to address serious financial problems and bring in new leadership to lead a renewal effort. The silver lining of the privatization debate is that it may have helped spur the TVA to make these necessary changes while preserving its overall capabilities as an integrated system. As TVA Chief Executive Officer Bill Johnson has observed, “I just don’t see how, as an economic proposition, this could be done better than it is today” (EIR 2013).
Introduction
The Obama administration is considering whether to divest all or part of the federal government’s ownership of the Tennessee Valley Authority (TVA) as a means to pay down the U.S. debt. The Office of Management and Budget (OMB) has convened an interagency working group to conduct a strategic review of the TVA and examine options for addressing its financial situation. Among these options are selling off the TVA wholly to a single investor-owned utility (IOU) or to multiple IOUs, or maintaining the TVA as a wholly owned federal corporation but selling various TVA assets to IOUs or independent power producers (IPPs).
The prospect of the TVA’s divesture has sparked concern among major stakeholders in the Tennessee Valley. The selling off of all or part of the TVA to private ownership would have far-reaching consequences, especially for the 9 million people in the 80,000 square-mile region—encompassing most of Tennessee, northern Alabama, northeastern Mississippi, southwestern Kentucky, and portions of Georgia, North Carolina, and Virginia—to which it provides electricity and other services. (See Figure A for a map of the TVA’s electric infrastructure and the geographical area it serves.)
Figure A
The TVA operates one of the nation’s largest electric power and transmission systems, and the system is integral to a number of important nonpower functions over which the TVA has responsibility—river and land management, environmental stewardship, and economic development—and that are vital to the economic and environmental well-being of the Tennessee Valley. The TVA’s operations cannot be fully understood without appreciating the multiple linkages among these critical activities.
In short, based on this assessment, it is difficult to see how divestiture would provide stakeholders in the Tennessee Valley, the federal government, or American taxpayers with any greater benefits than the current TVA system already provides.
The TVA story
The Tennessee Valley Authority was one of the most successful and ambitious of President Franklin Roosevelt’s New Deal programs. Created by the Tennessee Valley Authority Act of 1933, the TVA was the fulfillment of the vision of populist Republican U.S. Senator George Norris of Nebraska, who for many years had called for harnessing the power of the Tennessee and other large rivers. Norris saw the enormous impact of periodic floods in large areas of the United States, but also the opportunity that the nation’s streams and rivers presented “to produce great amounts of electricity for homes and factories of the nation.” In his view, the improvements in flood control, navigation, and irrigation, in hand with the generation and development of electricity, were “inseparably linked” (Munzer 1969, 69).
Congressional support for the regulation and control of rivers feeding the Mississippi, including tributaries such as the Tennessee River, received impetus from the floods of 1927, which devastated huge areas of the Mississippi River valley. FDR, who had a lively interest in regional resource planning, had publicly promised that the development of the Tennessee Valley, through the harnessing of its river, would be a priority in his administration (Munzer 1969). As stated in the Tennessee Valley Authority Act of 1933, the TVA was created:
…to improve the navigability and provide for the flood control of the Tennessee River; to provide for reforestation and the proper use of marginal lands in the Tennessee Valley; to provide for the agricultural and industrial development of said valley; to provide for the national defense by the creation of a corporation of Government properties at and near Muscle Shoals in the State of Alabama and for other purposes.
The TVA was also given the power “to construct dams, reservoirs, power houses, power structures, transmission lines, navigation projects, and unite the various power installations into one or more systems by transmission lines.”
By all accounts, the TVA has fulfilled its mission well, and it can claim significant accomplishments over its 80-year history (Munzer 1969; Encyclopedia 2004). For example:
Aside from taming the river and enabling navigation, the TVA and the system of local power distributors (municipally owned and rural electric cooperatives) that it helped create brought electricity to the least-electrified region of the country. The TVA’s success in rural electrification was a model for the Rural Electrification Administration, later reorganized into the Rural Utilities Service under the U.S. Department of Agriculture.
Along with stopping devastating floods, the TVA’s control of the river helped to end malaria in the United States. Up until this point, malaria was a common, debilitating disease that afflicted many people in the South.
It was a great spur to economic development—its reliable and affordable electric power and navigable water systems have attracted businesses and stimulated industrial growth, including a strong recreational industry, throughout the region (Encyclopedia 2004).1
In short, as noted in one history of the agency, the TVA became “[a]n important symbol of constructive government action and the idea that the public weal should vigorously challenge a negligent private will” (Encyclopedia 2004).
The TVA system
The TVA is a corporate agency of the United States, governed by a nine-person board appointed by the president and confirmed by the Senate. However, its operations have been self-financing since 1999, requiring no taxpayer money. The TVA operates one of the nation’s largest utility systems, accounting for about 3 percent of U.S. electricity capacity (EIA 2013), and in 2013 it had 37 GW of electric power generation (summer net) capability and over 16,000 miles of transmission lines.
Even though electric power generation and transmission have become the TVA’s dominant function, they remain integral to its nonpower responsibilities, including river and land management, environmental stewardship, and economic development. The operation of the TVA system as a whole cannot be understood without appreciating the multiple linkages among these various functions (schematically illustrated in Figure B).
Figure B
For example, the TVA’s revenues, which derive almost solely from electric power generation, provide for flood control, navigation, and land management for the Tennessee River System and assist local power companies and state and local governments with economic development. The provision of low-cost power facilitates economic development in the region, and water stewardship is jointly managed with the TVA’s hydro operations (States News Service 2014). Water-quality management and the operation of the TVA’s nuclear and thermal electric power plants, which draw upon and release water effluents into the region’s rivers and waterways, are also tightly linked.
While the TVA has accomplished its original mission to bring electricity to poor rural areas, tame and manage the region’s rivers, and foster economic growth, it continues to carry out most of its original functions, to the benefit of the residents of its service area and to the nation as well. The integration of the TVA’s power and nonpower functions was central in its original conception and continues to guide its strategic planning process today (summarized in Appendix A).
The TVA’s electric power system
Electric power generation accounts for approximately 90 percent of the net power-related operations of the TVA, and transmission accounts for the remaining 10 percent (TVA 2014c). As summarized in Table 1, coal-fired and nuclear plants account for the largest share of power supplied from TVA-operated facilities, followed by hydroelectric, natural gas/oil fired, and a very small amount of nonhydro renewable energy resources (TVA 2013, 2014b).2
Table 1
TVA power transmission
The TVA owns and operates one of the largest and most reliable transmission systems in North America. It comprises 16,200 circuit miles of transmission line, 103,485 transmission line structures, 511 power stations and switchyards, 69 interconnections with 12 neighboring electric systems, and 237,000 acres of transmission right-of-way, and it delivered 161 billion kilowatt hours (kWh) of electricity to TVA customers in 2014. Since 2000, the TVA transmission system has delivered 99.999 percent reliability to power distributors (its primary customers) and to industrial and federal customers across the region (TVA 2014b, 24; TVA 2015a).
TVA power distribution
The TVA is primarily a wholesaler of electricity. It sells power to 155 local power companies (LPCs), which then resell power to their customers at retail rates. LPCs include 105 municipalities and other local governments and 50 customer-owned cooperatives, which operate not-for-profit public power electric systems. LPCs purchase power from the TVA under five-, 10-, or 15-year agreements. The two largest LPCs are the Memphis Light, Gas, and Water Division and the Nashville Electric Service.
The TVA Act defines the TVA’s service area for selling power. The TVA and its LPC distributors cannot, without congressional authorization, provide power outside the “fence,” or TVA’s service area. Moreover, the TVA cannot be ordered to allow non-TVA entities to access its transmission lines to sell power within its service area. This arrangement reduces exposure by the TVA and its distributors to loss of customers to outside power companies.
The TVA’s total operating revenues were $11.1 billion in fiscal year (FY) 2014. Four states—Tennessee (65 percent), Alabama (14 percent), Mississippi (9 percent), and Kentucky (6 percent)—account for the largest shares of power sold in the TVA service area (TVA 2014b, 9). Sales to LPCs accounted for 90 percent ($10.1 billion) of revenues in 2014. The TVA also sells directly to industry and customers with large or unusual loads (about 7 percent, or $780 million of its revenues) and to federal agencies and other customers (about 3 percent, or $157 million) (TVA 2014b, 10).3 The TVA can sell power that exceeds system needs to other electric systems with which it interconnects, such as Southern Company (southeast of the TVA service area), Entergy (to the west); MISO (to the northwest), and PJM (to the northeast) (TVA 2014b, 12).
Move to cleaner energy
The TVA has committed to making significant investments in a balanced energy portfolio, with a goal of producing ever-cleaner energy (low or zero carbon) over time. This effort includes investing in emissions-control equipment (targeting nitric oxide, nitrogen dioxide, and sulfur dioxide) at existing power plants (TVA 2014b, 32–33).4 In response to the EPA’s proposed rules for reducing carbon at existing power plants, the TVA said that its 2013 carbon emissions were 30 percent below 2005 levels and would be 40 percent below by 2020. It further noted that it achieved these reductions by a combination of changing its generation mix away from coal and toward noncarbon sources and focusing on energy efficiency and demand-side management (TVA 2014d).
For example, the TVA has agreed to retire 18 of its 59 coal-fired units by the end of 2017. It has added new natural gas–fired generation and is poised to bring an additional nuclear unit online in 2015 at its Watts Bar site. It also is investing in a broad portfolio of energy efficiency, demand response, and system load enhancement programs through its EnergyRight Solutions programs (TVA 2014b, 20–21; TVA 2013, 20).5 The TVA has also initiated several programs to increase the amount of renewable energy sources in its power generation mix.6
The TVA’s nonpower functions
The TVA’s nonpower functions include river and land management, environmental stewardship, and economic development, which are closely linked to its electric power functions.
River and land management
In operating the Tennessee River and reservoir system, the TVA applies integrated river system management to carry out navigation, flood control, and land management. Its systemwide flow requirements ensure that enough water flows through the river system to allow year-round navigation, enhance recreational opportunities, protect water quality and aquatic resources, and support power production. Closely linked is the TVA’s land policy, designed to protect and preserve undeveloped public lands managed by the TVA along reservoirs throughout the Tennessee Valley (U.S. Fed News 2006).
Environmental stewardship
An integral element in the TVA’s strategic plan (see Appendix A) is its environmental policy, which “identifies areas that will allow TVA to produce cleaner and still affordable electricity and provide environmental leadership” in partnership with its stakeholders. The main elements of the policy include climate change mitigation, air quality improvement, water resource protection and improvement, waste minimization, sustainable land use, and natural resources management. These principles help guide the TVA’s power, land and resource management, and economic development activities (TVA 2008).
Economic development
The TVA’s competitive electricity prices are key to business attraction and job creation in the region. The TVA also serves as a catalyst for sustainable economic development in the region, consistent with its environmental stewardship mission. It works with local utilities and other strategic partners to recruit new companies and investments, provide economic development services, retain and support existing companies, and prepare communities for economic growth. Strategic partners include state agencies; local utility officials; regional, state, and local economic development associations; chambers of commerce; and community groups (TVA 2013).7
The TVA’s economic and financial situation
The Obama administration’s call for consideration of divestiture of the TVA in its federal budget proposals was in part driven by concerns that the TVA has had a history of cost overruns, poor financial management, and accountability problems, and that it was on track to exceed its statutory debt limit of $30 billion over the next decade. Moreover, public perception of the TVA had been harmed by the Kingston coal ash spill in December 2008.
Over the past few years, however, the TVA has undergone organizational and management changes that appear to have improved its financial and economic prognosis. Since Bill Johnson, former chairman, president, and CEO of Progress Energy Inc., took over as president and CEO in January 2013, the TVA appears to be on a more sustainable financial path—it has cut costs and is providing more competitive rates to its residential and industrial customers. The principal characteristics of the TVA’s finances and economics, which are important considerations for divestiture scenarios, are summarized below (greater detail is available in Appendix B) (TVA 2014b, 2013; EPB 2014, 2012).
TVA financing
The TVA’s operations were initially funded by federal appropriations, but direct congressional appropriations for its power generation system ended in 1959. Since 1999, Congress has not appropriated any funds for the TVA’s operations; they are supported solely by sales of electric power to LPCs and industrial and federal clients. For example, in 2000 the TVA started paying for essential stewardship activities with power revenues primarily, and it funds the remainder with user fees and other revenues derived in connection with its activities (TVA 2013).8 In short, all of the TVA’s functions, both power and nonpower, are today funded almost entirely through the sale of electricity and other earned revenues.
TVA expenditures, assets, and financial obligations
The TVA’s principal operating expenses include fuel and purchased power expenditures (about 29 percent and 11 percent, respectively, of total expenses in 2014), operations and maintenance (35 percent), depreciation and amortization (19 percent), and payments in lieu of taxes (PILOT, 6 percent). Because of its tax-exempt status, the TVA makes PILOT or “tax equivalent” payments annually to state and local governments in the eight states where it sells electricity or owns power production assets and properties (generating plants, transmission, lines, substations, etc.) to make up for tax revenues that might have been collected if the TVA were operating as a private firm. The TVA’s PILOT totaled $540 million to all jurisdictions in 2014 (TVA 2014b).
The TVA’s total assets (including cash, property, plant equipment, and other assets) totaled $46 billion in 2014. Its obligations include capital expenditures and long-term debt, employment and pension obligations, and proprietary capital (see Appendix B, Table B-1). Its long-term debt of $23 billion in 2014 is somewhat below its $30 billion statutory debt limit (TVA 2014b, 47).
Electric power rates
The TVA Act gives the TVA board sole authority for setting rates; no judicial review or state or federal regulatory approval is required. The TVA is required to charge rates that will produce gross revenues sufficient to cover operational and maintenance expenses, fuel cost recovery, PILOT, debt service, repayments to the U.S. Treasury for prior federal investments in the TVA, and any additional amounts the TVA board considers desirable for investment in new power assets, paying off other indebtedness, and other purposes.
According to several benchmarking analyses and comparisons—by Lazard Frères, the Electric Power Board of Chattanooga (EPB), the TVA, and the U.S. Energy Information Administration (EIA)—the TVA’s electric power rates are competitive with those of other utilities nationally and regionally (see Appendix C for a summary of these analyses). For example, in FY 2014, the TVA’s 12-month average retail rate (c/kwh) was the 35th lowest of the top 100 U.S. utilities, and its 12-month average industrial rate was the 16th lowest of the top 100 U.S. utilities (TVA 2014b).
To divest or not to divest
Despite TVA’s impressive record—it arguably is one of the most successful public policy initiatives in the nation’s history—the Obama administration has awakened a debate over whether the agency should remain under federal control. The responses do not divide along predictable partisan lines. The pros and cons are summarized here, and reviewed in greater detail in Appendix D.
Support for divestiture
Challenges to the TVA’s existence as a federal entity have a long history. From its beginning in 1933, Republican lawmakers and conservatives opposed the TVA as an illegitimate government intrusion into the marketplace. More recently, conservative journals and think tanks—notably the Reason Foundation in 1996 and the Heritage Foundation in 2014—have criticized the TVA’s performance, claimed that it no longer provides low-cost electricity, and warned of a bailout if TVA exceeds its $30 billion statutory debt limit. They call for the TVA to sell its assets in a competitive auction to bring it “under the rigors of market forces” (Canan 1996; Glozer 2014).
A series of federal government documents since the 1990s have echoed these proposals. A 1997 Congressional Budget Office (CBO) report, Should the Federal Government Sell Electricity?, and several “budget options” reports suggest transferring much of the TVA’s electric power assets to private or perhaps local governments (CBO 2007).9 A 2011 Government Accountability Office study, while not explicitly calling for divestiture, reported on the TVA’s history of overruns and construction delays and expressed concerns about whether the TVA could address these issues, without pushing its debt over the statutory limit.
In a similar vein, the Obama administration’s FY 2014 and 2015 federal budget proposals called for “[r]educing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation.” Worried that the TVA’s bond debt, then at $26 billion, could exceed its $30 billion statutory cap and impact the federal deficit, the administration called for exploring an end to federal ties, which could “help mitigate risk to taxpayers,” and “put the Nation on a sustainable fiscal path.” To evaluate this prospect, the OMB undertook a “strategic review for addressing TVA’s financial situation, including the possible divestiture of TVA, in part or as a whole” (OMB 2014, 40; 2013, 51). This review, now completed, and supplemented by the commissioned study by Lazard Frères, informed the administration’s FY 2016 budget proposal, which said that the TVA has taken “significant steps to improve its operating and financial performance and is committed to resolve its capital financing constraints.” Nevertheless, cutting or reducing the federal role in “programs such as TVA” remain on the table (OMB 2015, 81).10
Opposition to divestiture
At the same time, the TVA’s major stakeholders have come out against the federal government’s various divestiture propositions and pronouncements. The opposition has been broad-based, and includes conservative congressional lawmakers from states and districts in the TVA service area; the municipally owned and cooperative local power companies; the Tennessee Valley Public Power Association, representing these distributors; and labor unions representing TVA employees, notably the International Federation of Professional and Technical Engineers (IFPTE), the International Brotherhood of Electrical Workers (IBEW), and the International Association of Machinists (IAM). Nationally, the Building and Construction Trades Department of the AFL-CIO and the AFL itself also have stated their opposition to privatizing the TVA (see Appendix D).
The congresspersons have raised doubts about the impact of divestiture on electricity rates and argue that, because the TVA is self-financing, its debt does not contribute to the federal deficit. At least one representative says he doubts that Congress would go along with it in any case (Collins 2014). LPC representatives raise similar points, calling the TVA a model of self-sufficiency and “an engine for economic growth” (Sigo 2014a, 2014b). They also raise concerns that uncertainty about the future of the TVA is sending a negative signal to financial markets as well as to potential economic developers in the region. In short, as one LPC executive concludes, severing the TVA’s ties to the federal government “would serve no useful purpose to TVA’s customers throughout the Tennessee Valley” (Sigo 2014a). The labor union reactions echo these arguments. For example, an AFL-CIO resolution in 2013 calls the logic used to support the privatization proposal in Obama’s budget fundamentally flawed, and argues that privatization would diminish the TVA’s critical role as a provider of inexpensive electricity and economic development, as well as an environmental steward of the Tennessee Valley watershed (AFL-CIO 2013).
Lazard Frères study
Opposition to divestiture received a major boost from the commissioned study prepared by Lazard Frères & Co., released on June 4, 2014, as part of a mandatory Form 8-K filing with the Securities and Exchange Commission (SEC). Lazard Frères, a premier global financial advisory and asset management firm, was engaged to assist in analyzing financial data for the Obama administration’s strategic review, to address the authority’s financial situation, and to assess the implications of a possible divestiture of the utility. Lazard examined a range of options including privatization, public-sector spinoff, and status quo alternatives. It found that although it had “recommended for privatization in other situations in the U.S. Power & Utility Industry,” several factors led it to “recommend against pursuing a divestiture of TVA” (TVA 2014c). Its principal conclusions include the following:
The TVA is in much better shape than it had been a year-and-a-half previously (as of the writing of the report) and exhibiting better discipline and behavior in its spending. The utility has cut its capital spending plans by $13 billion and annual operating costs by $500 million. To help achieve this, the TVA scrapped aging coal plants and suspended work on the Bellefonte Nuclear Power Plant. The TVA is expected to pay down its debt from a peak of $26.5 billion to only $20.8 billion by 2023 (Flessner 2013b).
Given the TVA’s current strong financial position, its ability to self-fund its construction program, and anticipated improvements in cost structure, environmental profile, and asset mix as a result of long-term initiatives, “there is no impetus for the federal government to change course” (Flessner 2013b). (See Appendix E for a more detailed summary of Lazard’s financial assessment.)
The TVA’s financing is not a “true draw on the government balance sheet, as TVA receives no current appropriations, and its debt is not guaranteed by the Federal Government.” Plus, “TVA is not expected to exceed its $30 billion statutory limit by 2023, and deleveraging contemplated by TVA’s financial forecast would appear to help the federal budget over the next decade” (TVA 2014c).
Selling the TVA wouldn’t yield much for American taxpayers, but it could prove costly for Tennessee Valley residents and the region’s economy and environment. If the TVA had to earn the financial returns of private utilities, electricity rates would jump 13 percent (Flessner 2013b).
If the TVA were privatized, “it is unclear how TVA’s non-power mission and activities would logically fit” with other federal agencies or a revamped utility. Dismantling the TVA’s power and nonpower programs could threaten water quality programs, economic development initiatives, recreational facilities, and land management activities (Flessner 2013b).
The high level of complexity associated with the divestiture “would likely lead to a costly, multi-year process to execute any such strategy, during which time TVA would experience organizational disruption and which would result in an uncertain outcome.” In addition, the complex network of TVA stakeholders would add to the difficulty of divesting the TVA “in a manner that creates value for all parties” (Varela 2014).
Evaluating the potential impacts of divestiture
Although the Lazard study undoubtedly dampened concerns that the TVA would be privatized, the White House responded with a statement noting that the study “identifies several important risks” for the utility and federal taxpayers if the TVA fails effectively to manage its costs or its projected power needs. This response and the mention of the TVA in its budget proposals, including for FY 2016, suggest that some in the administration still believe that reducing or cutting the federal government’s role “in programs such as TVA, which have achieved their goals, may help mitigate the risk to taxpayers” (Flessner 2013b). Thus, with ongoing concerns about the federal debt, there will likely continue to be pressure to consider severing federal ties to the TVA.
Key factors in the TVA’s divestiture
In a 2013 policy brief that examined the question, “Should the Federal Government Sell TVA?” Mary English Ph.D., a senior researcher at the Howard H. Baker Center for Public Policy at the University of Tennessee, identified eight factors that need to be taken into consideration in any effort to sell the TVA (English 2013). Her list provides a useful, broad framework for guiding effective analysis into this issue:
Corporate governance—Would a private-sector governance structure (e.g., an investor-owned utility, or IOU) be better than the TVA’s current structure?
External regulation of rates and other utility decisions—If the TVA were privatized, who would be responsible for regulating the power functions of the new owner?
The TVA power system and its components—If parts of the TVA were divested, would the system still operate effectively? To what extent would the system’s functionality be impaired? If the new entity were now reliant on external power markets, would the TVA’s system vulnerability to price volatility increase?
Power-related functions of the TVA—How would privatization affect the TVA’s energy efficiency, demand response, and other programs, and the quality of its service to residents in the region?
Long-term power system planning—How would divestiture affect the TVA’s integrated, long-term system planning process? Would such planning become more difficult if the TVA had to contend with uncertainties created by the sale of parts of the power system?
Nonpower functions of the TVA—Who would be responsible for the management and upkeep of the nonpower responsibilities in the TVA’s mandate if the TVA is privatized? How would privatization affect the private investments in water-based recreation and retirement communities?
Ownership and value of the TVA’s assets—Who would get the proceeds of the sale of TVA’s assets, since TVA ratepayers, not federal appropriations, have paid for maintaining and improving these assets?
The TVA’s debt—How would it be managed?
In a policy brief, University of Tennessee researcher Mary English identified eight of the most important factors that would need to be considered in any divestiture effort (see box, “Key factors in the TVA’s divestiture”). Although the Lazard study sheds light on several of these issues, it primarily focused on assessing the TVA’s financial condition, which it concluded was now strong and that the TVA appeared poised to cut its long-term debt over the next decade. Lazard also touched on the potential implications for the TVA’s power and nonpower functions, making estimates, for example, that privatization could drive up electricity rates, and suggested that “any reductions in the scope of the non-power mission and activities could potentially have a negative impact on the region” (TVA 2014c, 16).
However, Lazard did not address these issues in any depth. Although a comprehensive examination is also beyond the scope of the current study, the discussion below builds on Lazard’s findings to take a closer look at two sets of issues that are of particular concern to the stakeholders in the TVA’s service area: the impacts of divestiture on the TVA’s power system, and the implications for the system’s nonpower functions, which are critical to the economic and environmental well-being of the region. This analysis hopefully will provide insight into some of the more important implications of a divestiture of the TVA, the consequences of unraveling the TVA’s unique integrated approach to managing multiple missions and activities that comprise the services and benefits it provides, and the importance of maintaining an economically and environmentally sustainable publicly owned TVA.
Defining divestiture options and scenarios
There are numerous possible scenarios for selling all or parts of the TVA to other owners. English suggested three different types of divestiture:
The TVA is acquired by a single IOU;
The TVA is divided up among regional IOUs in the South;
The TVA remains a wholly owned federal corporation, but some assets are sold to IOUs or IPPs.
She points out that though the Federal Energy Regulatory Commission (FERC) is more likely to object to the first option for competitiveness reasons, it is more likely to accept the second. In reality, there are many different permutations possible for how the TVA’s assets could be divided up and who would assume ownership of them. The CBO budget option report suggested a potential scenario in which a much smaller TVA maintains control over the hydro-generation, river and land management, and other nonpower functions, while the remaining assets are sold off to private buyers.
Lazard chose to evaluate a wider range of ownership scenarios, including several public-sector spinoff scenarios such as selling the TVA’s assets to its power distributors. The privatization scenarios include variations of a sale of 100 percent of TVA power functions to private utilities, sale of 100 percent of power functions and integration (via acquisition) of the TVA’s LPCs, privatization only of the TVA’s nonhydro assets, the sale of all its generation assets to an IOU or an IPP (TVA retains transmission assets), and other possibilities (e.g., the TVA divesting its transmission functions).
In short, there are a large number of possible acquisition and ownership scenarios. For the current study’s limited purposes, it is assumed that 100 percent of the TVA’s generation and transmission assets would be sold to multiple private utilities—most likely to a combination of investor-owned utilities and independent power producers or other buyers (e.g., as identified in the Lazard study: a traditional private equity consortium, or an infrastructure consortium). It should be noted that since IPPs typically do not own and operate transmission and distribution facilities, all transmission assets would be sold to IOUs or other buyers. At the same time, the great uncertainty—and large number of possible variations—associated with the resulting ownership structure in an actual divestiture will in itself be a factor that needs to be considered in evaluating whether the TVA’s privatization is in the public interest.
Impact on the TVA’s electric power system
A central concern of stakeholders in the TVA’s service area—including power distributors, state and local governments, residents, commercial businesses, industry, TVA employees, unions, and officials from federal facilities served by the TVA—is that the power system, whether under the TVA or private or other public management, would continue to provide reliable and affordable electricity. Key issues concerning the impacts of divestiture options on the region’s electric power system include the implications for electricity rates, the mix and reliability of generation and transmission resources, the electric power distributors, state and local tax revenues, and the utility’s clean energy and energy efficiency initiatives.
Ideally, an in-depth analysis of TVA costs and rates would be based on a review of actual revenue requirements and costs of service used to determine existing rates. The impacts of alternative ownership scenarios could then be developed using reasonable equity return and capital structures. The analysis would look at the TVA’s actual depreciation rates and state and federal income tax rates, rather than assuming tax rates, to determine the impact on rates of alternative TVA restructuring proposals.11 While applying such a systematic, empirically based analytical model and methodology would be preferable, the current study can provide only a preliminary, limited analysis of ownership scenarios and their impacts on the TVA’s electric power system, referencing the work of existing studies, such as Lazard and other sources (e.g., English 2013).
Electricity rates
The available evidence strongly suggests that, even though a transfer of ownership of the TVA’s power assets to private entities theoretically might produce efficiencies and reduced costs in some scenarios, electric power rates, in the short run at least, would likely increase, perhaps significantly, above TVA status quo rates. Divestiture also is likely to introduce a high degree of uncertainty and volatility into electricity markets that could adversely impact electricity distributors and consumers in the TVA service territory.
The results of electricity price benchmarking or comparisons conducted by Lazard, EPB, EIA, and the TVA (see Appendix C) show that the TVA’s rates are highly competitive with those of private utilities (IOUs and IPPs), including those operating in Southeastern states. However, if the TVA’s electric power assets are sold to private utilities, would ratepayers in the TVA’s service area find themselves paying higher or lower prices, or would the rates remain about the same? The answer depends on how electricity rates would be calculated under different ownership scenarios, comparing the status quo TVA scenario with scenarios in which ownership of TVA power assets is shifted to private utilities, i.e., IOUs or IPPs, or a combination of the two.
The TVA’s cost advantages. Table 2 compares factors that would affect electricity rates set by the TVA, IOUs, and IPPs, based largely on the Lazard assessment of potential rate impacts from divestiture scenarios. It shows that the TVA’s federal ownership and not-for-profit status provide cost advantages that prospective private utility owners do not enjoy, notwithstanding other factors that may or may not advantage the latter under divestiture scenarios.
For example, the TVA is allowed to set its rates to cover its operation and maintenance, fuel recovery costs, payments to states and counties in lieu of taxes, debt service, repayment of the federal investments in the TVA’s power facilities, and any additional margin the TVA considers desirable for investment in power system assets and for other purposes. A privatized TVA most likely would include many of these expenses in its rate calculations, though depending on assumptions about divestiture options it might also be required to add in a rate of return on equity and payments to cover federal, state, and local taxes, which the federally owned TVA is not required to pay.
The TVA does make tax-equivalent payments, which make up for tax revenues forgone by state and local jurisdictions due to the TVA’s tax-exempt status. Even assuming, though, that these payments are comparable to what private owners of the TVA’s power assets would have to pay, private utilities would still incur additional costs from federal taxes, which they would presumably pass on to customers in the form of higher rates.
Similarly, because of the TVA’s federally backed status—i.e., an implicit federal guarantee for its debt—it enjoys a relatively higher credit rating than IOUs and IPPs typically are given, which is reflected in its greater access to and lower costs for debt capital. Unlike the TVA, private-sector utilities require a more balanced income structure—closer to a 50-50 debt-to-equity ratio—to support their credit ratings. IOU shareholders, in addition, require a return on the equity component of a publicly traded utility’s capital structure.
These factors led Lazard to estimate in an illustrative model that the TVA’s annual revenue could be as much as $1.8 billion lower than an illustrative equivalent IOU structure (TVA 2014c, 46). Lazard then concludes that while TVA divestiture would not yield much for American taxpayers, it could be costly for Tennessee Valley residents and the region’s economy and environment. More specifically, as previously noted, it estimated that if the TVA had to earn the financial returns of private utilities, electricity rates would rise by 13 percent (Flessner 2013b).
Table 2
Uncertainty and volatility. Lazard cautions that there are a number of nonrevenue factors that could affect relative electricity rates and tip the scales back toward private utilities (TVA 2014c, 47). On the other hand, given the complexity associated with the implementation of a potential TVA divestiture, likely to involve a costly, multiyear process with an unknown outcome, Lazard observes that the “uncertainty regarding a prolonged strategic review process may also impact TVA’s ability to operate effectively” (TVA 2014c, 12).
The TVA currently is protected from competition and its rates are kept low by its regulatory power, which allows it to set rates based on its not-for-profit status. Divestiture would shift the regulatory responsibility and setting of IOU rates to multiple state regulatory agencies, based on cost-of-service and well-established rate-setting processes. The TVA’s distributors (municipals and cooperatives) would in turn face greater uncertainties about the reliability and prices of electricity supplied by multiple private utilities rather than from a single source overseeing an integrated system of generation and transmission assets. Meanwhile, state agencies in the Tennessee Valley region would have to take on new regulatory responsibilities and financial and resource burdens that they did not have before.
There would also be added uncertainty and volatility in the supply and prices of electricity if one or more of the purchasers of TVA generation are IPPs, as wholesale prices of electricity supplied by these sources would be subject to the vagaries of unregulated wholesale electricity markets. That is, as English’s review of divestiture factors notes, there could be an increase in the vulnerability of a privatized TVA system to price volatility, as it would now be reliant on external power markets (English 2013).
Electric power system reliability
The complexity and uncertainty that would be associated with a divestiture could also have an adverse impact on the TVA’s sterling reliability record. The TVA is responsible for guaranteeing the reliability of one of the nation’s largest electric power systems, which includes one of the largest single-owner transmission systems in the United States. This responsibility includes planning, investment, construction, maintenance, and operation of power plants to maintain a balanced mix of power generation capacity—coal, nuclear, natural gas, fuel oil, hydropower, and a small amount of renewables—to meet electric power demands across its seven-state, 80,000-square-mile service territory. The TVA is also responsible for planning, construction, maintenance, vegetation management (keeping transmission rights of way clear of trees and plants), security, and operation of the 16,000-mile transmission system that links the TVA’s power generation facilities to the local power distributors and interconnections with utility systems outside its service area.
The TVA conducts a long-term strategic planning process to guide its efforts to achieve its operational goals, which include maintaining a balanced generation portfolio and the reliability of its transmission assets, not to mention coordinating its power and nonpower functions. For example, the TVA is updating its Integrated Resource Plan (“IRP”), which called for a planning direction consistent with its environmental policy, along with a goal of meeting its customers’ power needs while addressing the substantial challenges facing the electric utility industry. In the new IRP, to be published in 2015, the TVA’s resource recommendations are expected to balance costs, energy efficiency, system reliability, and environmental responsibility for the TVA’s stakeholders (TVA 2014b).
System functionality impacts. However, as English asks, to what extent would shifting all or most of the TVA’s electric power facilities to private ownership impair this system’s functionality? Divestiture would divide TVA’s well-integrated, balanced electric power system into independent and no longer accountable component parts, comprising a mix of electric power generation and transmission assets, whose management and operation would now fall under multiple private entities. Planning, investment, construction, and operation of TVA’s generation and transmission capacity would no longer be integrated and coordinated across the service region. Instead, decisions about expanding, upgrading, managing, and repairing capacity would fall to several independent private utilities, overseen by several different state regulatory agencies.
Depending on the divestiture option, the responsibilities for maintaining the system and coordinating with distributors and other utility systems also would change. If linkages between TVA generation facilities are split up or severed from transmission, and if LPCs would have to cut separate power purchase contracts with different utilities, uncertainty would arise regarding who would have the responsibility for ensuring there would be sufficient capacity growth, adequate maintenance and repair of facilities, and other factors that affect the reliability of the newly structured electric power grid in the Tennessee Valley. The complex and time-consuming nature of the divestiture process itself would create additional uncertainty in the planning and implementation of the system enhancement and maintenance required to ensure reliability over this period.
Electric power distributors
The TVA is both a wholesaler of electricity to and regulator of the local power companies that distribute retail electricity to almost all the residents and businesses in the Tennessee Valley service territory. A privatized TVA system would have major implications for the TVA’s LPCs, including potential impacts on their financial position, rate structure, and services. In addition, as Lazard observes, “The highly complex and well-established stakeholder ecosystem in which TVA operates is likely to present a daunting challenge for divestiture in respect of the numerous entities with varying interests in TVA which must cooperate to make a divestiture successful.” LPCs, all of which are public power entities, are the most important of these relationships, and, as Lazard further notes, the continuity of the TVA’s contractual arrangements with LPCs would be “an important aspect of any divestiture with significant implications for TVA’s credit profile, earnings, and for valuation” (TVA 2014c, 73).
Uncertain power arrangements. Although existing power purchasing agreements made between LPCs and the TVA prior to a divestiture are likely to remain in effect over the short run, new arrangements between the distributors and the new owners of the TVA’s power would have to be made over time. Instead of having to make new long-term power purchase agreements with one wholesaler (i.e., the TVA), LPCs would now have to cut new deals with multiple power providers (i.e., IOUs), adding new uncertainty about the LPCs’ power contract terms and prices. LPCs may also be required to purchase electricity directly from unregulated wholesale markets, from IPPs, and from other power providers outside their service areas, subjecting them to further sources of supply and price volatility. In short, this would create uncertainty for the ability of the power distributors to provide electricity to their customers reliably and at affordable rates, as well as other adverse impacts.
Credit rating threat. It was for these reasons that the local power distributors strongly opposed the Obama administration’s consideration of possible divestiture of the TVA. As already noted, the potential selling of the TVA’s assets sends a negative signal to financial markets. This was evidenced by Moody’s Investors Service’s warning that even just the possibility of divestiture in the Obama budget proposals could result in downgrading of the local power distributors’ bond ratings. As Moody’s notes, the TVA holds down its costs in part because it generates power from diverse sources, shielding it from supply constraints and cost spikes. As a result, TVA distributors pay less for power than the national average. Removing that advantage, LPCs would likely lose some of their customer base to large, publicly traded power companies (Sigo 2014b).
State and local tax revenues
Another important issue is how divestiture would affect the revenues the TVA provides to states and local governments in its service area as payments in lieu of taxes (PILOT), which have consistently amounted to over a half billion dollars a year in recent years. The TVA is exempt from federal income taxation, and the TVA’s property, franchises, and income are not subject to taxation by state