U.S. GOVERNMENT PRINTING OFFICE

63–227 CC WASHINGTON : 2000

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

(

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

ROBERT SMITH, New Hampshire

JAMES M. INHOFE, Oklahoma

CRAIG THOMAS, Wyoming

CHRISTOPHER S. BOND, Missouri

GEORGE V. VOINOVICH, Ohio

MICHAEL D. CRAPO, Idaho

ROBERT F. BENNETT, Utah

KAY BAILEY HUTCHISON, Texas

MAX BAUCUS, Montana

DANIEL PATRICK MOYNIHAN, New York

FRANK R. LAUTENBERG, New Jersey

HARRY REID, Nevada

BOB GRAHAM, Florida

JOSEPH I. LIEBERMAN, Connecticut

BARBARA BOXER, California

RON WYDEN, Oregon

JIMMIE POWELL, Staff Director

J. THOMAS SLITER, Minority Staff Director

(II)
(III)

CONTENTS

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
(1)

TVA CONSUMER PROTECTION ACT

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.
2

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 construc-
3

tion 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 un- dertook 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
4

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.
5
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7
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9
10
11

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 fol- lows:]

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 to-
12

ward 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.
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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 wellknown 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 investorowned utilities operating in areas adjacent to the Tennessee Valley

Authority, TVA. We appreciate your invitation to share with this
14

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.
15

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
16

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.
17

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
18

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.
19

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 TVAserved 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.
20

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
21

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
22

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 loca-
23

tion 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.
24

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.
25

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 investorowned 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.
26

We grew up thinking if you had TVA power, you were lucky, McConnell said. ‘‘Un- fortunately, 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 gov-
27

ernment. 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
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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 As- sociation, 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 (RWis.) 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. Treas-
29

ury 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.
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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.
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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.
34

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
35

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 Pa- ducah 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 com- petitors 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 Com- mission (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.
36

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:
37

‘‘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 Com- mission (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 des- ignated 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
38

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 cashflow 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.’’
39

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.
40

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 cus-
41

tomer 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.
42

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.
43

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 investorowned 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 Regu-
44

latory 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
45

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 sixfigure 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 anticompetitive 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 hear-
46

ings. 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
47

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, shareholderowned 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
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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 appro- priations 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 re- forms 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
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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
50

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 oc- curred—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 commit- ted 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 relation-
51

ship 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.
52

TVA is now facing a record demand. During a 10-day period in July, TVA sur- passed 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 at- tempts 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?
53

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 multiyear 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
54

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 bor- rowers, 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 var- ious 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 com-
55

pete 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
56

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 pro- visions 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.
57

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.
58

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 allrequirements 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.
59

In the absence of any action by Congress, the U.S. Government has no legal obli- gations 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 be- tween 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 dis- tributors, 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
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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 markettransparent 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
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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-thanexpected 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 ap- plies 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 caseby-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.
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• 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 sub- jecting 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
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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.
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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;
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• 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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