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89–115 PDF 2003

S. HRG. 107–980

THE TENNESSEE VALLEY AUTHORITY

AND FINANCIAL DISCLOSURE

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

THE TENNESSEE VALLEY AUTHORITY AND THE FINANCIAL DISCLOSURES THE AUTHORITY MAKES FOR THE BENEFIT OF BONDHOLDERS

AND POTENTIAL INVESTORS

SEPTEMBER 17, 2002

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

DEAN V. SHAHINIAN, Counsel

STEVE R. PATTERSON, Republican Subcommittee Staff Director

MICHELLE R. JACKSON, Republican Counsel

DARIS MEEKS, Republican Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, SEPTEMBER 17, 2002

Page

Opening statement of Chairman Sarbanes ........................................................... 1

Opening statements, comments, or prepared statements of:

Senator Bunning ............................................................................................... 2

Senator Enzi ..................................................................................................... 3

WITNESSES

Skila Harris, Director, Tennessee Valley Authority ............................................. 5

Prepared statement .......................................................................................... 35

Alan L. Beller, Esq., Director, Division of Corporate Finance, U.S. Securities

and Exchange Commission .................................................................................. 7

Prepared statement .......................................................................................... 39

Craven Crowell, Chairman, GCW Consulting; former Chairman, Tennessee

Valley Authority ................................................................................................... 22

Prepared statement .......................................................................................... 42

Allan G. Pulsipher, Executive Director, Center for Energy Studies, Marathon

Oil Company Professor of Energy Policy, Louisiana State University ............ 25

Prepared statement .......................................................................................... 44

Daniel Gates, Managing Director, Moody’s Investors Service ............................. 28

Prepared statement .......................................................................................... 46

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Chairman Paul S. Sarbanes, from Mitchell E. Daniels, Jr., Director,

OMB, dated September 16, 2002 ........................................................................ 49

Revised letter to Chairman Paul S. Sarbanes, from Mitchell E. Daniels,

Jr., Director, OMB, dated September 16, 2002 ................................................. 50

(III)

(1)

THE TENNESSEE VALLEY AUTHORITY

AND FINANCIAL DISCLOSURE

TUESDAY, SEPTEMBER 17, 2002

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10:37 a.m. in room SD–538 of the Dirksen

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The hearing will come to order.

This morning, the Committee meets to hold a hearing with

respect to the Tennessee Valley Authority and the financial disclosures the Authority makes for the benefit of bondholders and

potential investors.

During the Committee’s markup of the accounting and investor

protection legislation, Senator Bunning offered a proposal to make

the TVA subject to the Securities Act and the Exchange Act.

At the time, and since we were really focusing in a different direction, I indicated to Senator Bunning that I would be happy to

hold a hearing on this issue. Therefore, we did not address it in the

course of that markup. Other Members of the Committee have also

expressed an interest in this issue, including Senator Miller, and

others.

The TVA, of course, is a Federal corporation created by Congress

in 1933, pursuant to the Tennessee Valley Authority Act. Today,

TVA is the Nation’s largest public power company and has oper- ating revenues of over $7 billion. Its power service area covers

80,000 square miles in the southeastern United States, including

almost all of Tennessee and parts of Kentucky, Georgia, Alabama,

Mississippi, North Carolina, and Virginia. I hope I have them all.

Ms. HARRIS. Yes, you do.

Chairman SARBANES. Unlike public corporations, the TVA is

owned entirely by the U.S. Government. In other words, it has no

public shareholders. It is governed by a three-member Board of Directors, each of whom is appointed by the President and confirmed

by the Senate. TVA funds itself by selling electricity to customers,

as well as by selling bonds and raising capital through other nonequity financing. It has approximately $25 billion of debt outstanding and securities are held by over 200,000 individuals and

institutions.

The TVA published annual and quarterly reports, information

statements, offering circulars, of course, press releases, and other

2

data for the benefit of investors. Its financial statements are certified by a major accounting firm and it is, of course, subject to the

oversight of the Congress, the Comptroller General, and an internal Inspector General.

TVA is not required, however, by Federal law to make specific

disclosures for investors or file prospectuses or periodic reports

with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934.

The Committee looks forward this morning to hearing testimony

about the extent of the disclosures that TVA provides for the benefit of investors, to look at the question of whether TVA should provide additional disclosures, and the further question of the pros

and cons of requiring by Federal law that the TVA should provide

specific disclosures, such as those that would be required if they

were subject to the Securities Act of 1933 and the Securities Act

of 1934.

We have a number of, we think, distinguished witnesses with us

this morning. It is our intention to proceed with two panels.

The first panel will be Ms. Skila Harris, a Member of the TVA

Board of Directors. She was confirmed by the Senate in November

of 1999, for a term that extends to May of 2008. Previously, Ms.

Harris worked at private engineering and management consulting

firms, held positions with the U.S. Synthetic Fuels Corporation and

the U.S. Department of Energy. She serves on the boards of the

Knoxville Area Chamber Partnership and the East Tennessee

Foundation.

I will defer introducing the second panel until they come to the

table, but our other witness on this panel is Alan Beller, Director

of the Division of Corporate Finance of the SEC. Mr. Beller has increased the frequency of the Division’s review of disclosure filings,

implemented regulatory initiatives that improve the filings of public companies. Of course, the SEC is very much in the spotlight

nowadays, including, amongst the other Divisions, the one that Mr.

Beller directs. Mr. Beller is an expert on corporate and securities

law and previously was a partner of the law firm of Clary, Gottlieb,

Steen, and Hamilton.

We had invited the Office of Management and Budget to testify.

But they apparently found themselves unable to send a witness, so

we will not hear directly from the OMB this morning.

Before I turn to the witnesses, I will yield to my colleagues.

Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman. I would like to

thank you for holding this very important hearing.

I hope Members remember that back during the markup of the

Sarbanes-Oxley Accounting Standards bill, I had an amendment to

place the Tennessee Valley Authority under the jurisdiction of the

SEC. The Chairman was kind enough to agree to hold a hearing

on this matter and I appreciate his doing so so quickly. He and his

staff—and there are a bunch of them, so, I want to thank them for

their hard work for setting this up—have done their usual professional job. I also appreciate the witnesses coming today very much.

3

Although it is called the Tennessee Valley Authority, it means a

lot more to many of my constituents in Kentucky. I know some

here may be wondering what in the world does the Banking Committee have to do with the TVA? The fact of the matter is that the

TVA has no regulatory body oversight of any kind by anyone, except the Congress of the United States. So it is up to us to keep

an eye on what is going on with the TVA.

In the context of the Banking Committee, TVA has a tremendous amount of publicly-traded debt, about $20 billion worth. And it has

a Aaa rating. But this rating is largely due to the fact that TVA

is owned by the Federal Government and can unilaterally raise its

electricity rates. There are investors all over the country that have

bought TVA bonds because it is owned by the Government. But nobody really oversees TVA.

In light of all the recent problems we have seen in financing of

private-sector companies, it only seems fitting that Congress makes

sure that someone is watching out for the TVA investors. Right

now, they do not have all of the same consumer protections that

most other bondholders enjoy. We do not need an Enron in the

middle of the Tennessee Valley.

To help protect against any problems at TVA, I proposed extending the SEC’s oversight to TVA. If it is good enough for the private

sector, I think we need to closely look at imposing the same accountability to quasi-government groups like TVA.

I would like to see more disclosure. I would like to see more accountability. For all we know, everything might be going just fine

at TVA, but we do not know right now.

Mr. Chairman, to be fair, I do not think we should ask TVA to

do anything more than private-sector companies do. But I do not

think we should ask them to do less, either. Too many investors

have too much money invested here for us not to be sure and not

to exercise fair and thorough oversight.

At the very least, I would like to see the TVA follow Fannie Mae

and Freddie Mac’s lead and voluntarily register with the SEC. I

cannot understand why that would be an unnecessary burden. For

instance, if they trade securities on the New York Stock Exchange,

which they do, they should have to follow the same rules as others

who trade on the Exchange.

Mr. Chairman, I am not here to bash TVA. Everybody knows

what they have done for the southeastern United States and appreciate the long legacy of their service to our part of the country. But

given some of the problems that they have had in running up debt,

and given the disputes that they have had with OMB over some

of their financing, I am concerned that we have not been keeping

a close enough watch on TVA. I think it is time to change that, and

today’s hearing is a good start.

Thank you again, Mr. Chairman, for holding this hearing. I am

looking forward to hearing from our witnesses.

Chairman SARBANES. Good. Thank you, Senator Bunning.

Senator Enzi.

STATEMENT OF SENATOR MICHAEL B. ENZI

Senator ENZI. Thank you, Mr. Chairman. And I thank you for

your willingness to hold this hearing today.

4

I would like to thank the witnesses for agreeing to testify and

to Senator Bunning, who has raised this important issue several

times and recognized the need for this Committee to evaluate the

status of the Tennessee Valley Authority.

In looking at some of the statistics on the Tennessee Valley Authority, it was kind of a surprise to me to find out that their service

area is 20 percent less than the size of the State of Wyoming. However, it serves six times as many people and has an incredible

amount of more water, as Senator Bunning knows from having visited my State just recently.

But it provides a tremendous service, and I would like to begin

by commenting that I believe this hearing is very timely, with the

problems in corporate America. It also coincides with the focus of

the Congress, Federal and State regulators, and the Exchanges

have placed on the need for greater transparency.

This Committee, for one, has led the way in working to provide

assurances to investors that we will work to assure them that they

are given the information they need and deserve to make appropriate investor decisions.

Recent passage of the Sarbanes-Oxley Act has transformed the

disclosure and independence requirements of corporate America.

No longer will corporate insiders have the information to make informed decisions, while average investors are left in the dark. I am

proud that Congress acted as expeditiously as possible and the bill

is being implemented by the appropriate regulators as we speak.

I would also like to commend the TVA for agreeing to adopt many

of the requirements imposed by the Act and being adopted by the

Commission.

While companies who list securities must be registered with the

Securities and Exchange Commission, the TVA is left entirely unregulated by the SEC because they are a Government-owned corporation. I find this very troubling and hard to believe that they

exist without direct supervision by a specific Federal regulator. The

primary mission of the SEC is to protect investors. Investors in

TVA are left without this Government watchdog protecting their

investments. The SEC has the background and experience to evaluate the disclosures of companies and should be able to watch these

books as well.

I know that, historically, other companies have enjoyed exemptions from registration with the SEC. However, these companies

have recognized the need for their investors to have the same information as other companies.

I was very pleased when Fannie Mae and Freddie Mac voluntarily registered with the SEC a few months ago, and they are to

be commended for their actions. I believe this initiative may need

to be imposed on the TVA. We must work to retain integrity in the

debt markets to protect investors and to provide uniformity in disclosure statements so that they can be interpreted accurately.

Again, Mr. Chairman, I thank you for holding this hearing. I appreciate your diligence with this issue and I look forward to hearing from our witnesses.

Chairman SARBANES. Well, thank you very much, Senator Enzi.

We will now turn to our panel. We will hear from both of our distinguished witnesses before we turn to questions.

5

Ms. Harris, why don’t we start with you, please.

STATEMENT OF SKILA HARRIS

DIRECTOR, TENNESSEE VALLEY AUTHORITY

Ms. HARRIS. Thank you, Chairman Sarbanes, Senator Bunning.

Chairman SARBANES. If you pull that microphone closer to you

and speak directly into it, it will be helpful to us.

Ms. HARRIS. Thank you, Chairman Sarbanes, Senator Bunning,

and Senator Enzi. It is a pleasure to be here.

My name is Skila Harris and I am one of the three Directors of

the Tennessee Valley Authority. On behalf of my colleagues, Chairman Glenn McCullough and Director Bill Baxter, and the employees of TVA, I thank you for this opportunity to speak with you

about TVA’s financial disclosure and oversight. I would also like to

tell you, as Senator Enzi mentioned, about plans that TVA has to

uphold the spirit of the landmark Sarbanes-Oxley Act of 2002.

TVA exists to serve the public good. The standard that we hold

ourselves to for leadership is to achieve excellence in business performance and in public service, for the good of the people throughout the Tennessee Valley. TVA improves the quality of life of the

citizens of the Tennessee Valley in several different ways—through

integrated management of the Tennessee River system, through

environmental stewardship, and by supporting sustainable economic development throughout the area.

Through its local power distributors, TVA supplies power to 8.3

million people, as Senator Sarbanes mentioned, over an 80,000-

mile square area. TVA accomplishes all of this with no Federalappropriated funds and finances 100 percent of its programs with

power revenues.

As a corporation of the Federal Government, TVA does not issue

stock, and therefore, its business goals are not oriented toward

earnings. Instead, our decisionmaking is focused on adding value

to the customers and to the communities across the Tennessee Valley. And that value is defined in the TVA Act.

Recognizing this difference, the oversight Congress put in place

for TVA is different from the oversight provided for publicly-traded

companies. But make no mistake—as a Government agency, TVA

is subject to oversight.

TVA is managed by a three-person Board, as I mentioned. That

Board is nominated by the President and confirmed by this body,

the U.S. Senate. It can also be removed by the President.

Like many other Government agencies, TVA has an independent

Inspector General. And I have with me today, Mr. Don Hickman,

who is TVA’s Acting Inspector General. TVA’s Inspector General

conducts audits of the TVA’s financial systems, its business decisions, its operations, and its contracts. The Office of the Inspector

General reports to Congress and to the public on a regular basis

the results of its audits and its investigations.

TVA’s Inspector General performs many of the functions that

have been identified in the Sarbanes-Oxley Act as functions of the

internal audit committee. But it does so with much more authority

and many more professional resources.

For example, the Inspector General’s staff that reviews and audits TVA’s financing statements includes 19 certified public acVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 89115.TXT SBANK4 PsN: SBANK4
6

countants. The Inspector General can investigate not only financial

matters, but also any matter which might relate to criminal or ethical violations at TVA. Also, by Federal statute, the Office of Inspector General is independent of the TVA Board. TVA also has an

external independent auditor—PricewaterhouseCoopers. The TVA

Office of Inspector General provides oversight of that firm’s work

and maintains the budget for PWC’s annual audit of TVA.

PricewaterhouseCoopers audits TVA’s financial statements in accordance with Government auditing standards and provides an

opinion on whether those statements are presented in conformity

with generally accepted accounting principles. TVA’s financial results are also included in the Federal Government’s consolidated financial statements, which are audited by the General Accounting

Office.

In addition, Congress, as we see today, functions in an important

oversight role for the Tennessee Valley Authority. The General Accounting Office frequently performs audits of TVA, and its activities, and its programs often at the request of Members of Congress.

GAO is authorized to audit TVA’s financial statements.

TVA also files reports with the President, the Congress, the U.S.

Treasury, and included in these annual reports contains financial

statements and a complete record and report on TVA’s business activities. And TVA submits an annual budget to the President.

Furthermore, before TVA can issue bonds with maturities of 1

year or more, the Secretary of the Treasury must approve the time

of issuance, as well as the maximum interest rate to be charged.

And since most of TVA’s bonds are traded either on the New York

Stock Exchange or bond exchange, and they must meet all of the

New York Stock Exchange’s through its listing requirements.

By law, all TVA employees must adhere to the standards of ethical conduct for Federal employees. This requires all officers of the

Tennessee Valley Authority to complete ethics training and file

very detailed financial disclosure statements annually. In addition

to these requirements, and consistent with the Sarbanes-Oxley Act,

TVA will develop a special code of financial standards of conduct

for all officers and business managers, and will provide associated

training with those new standards.

Also beginning in 2003, which is only weeks away, TVA’s Annual

Report will be certified by the TVA’s Board of Directors and CFO

(the financial statements and the related information for the previous years.) In addition, the Information Statement, which is

TVA’s primary disclosure report to the public financial markets,

will also be certified.

Because TVA is wholly owned by the U.S. Government and does

not issue stock, there are no stock options to provide to TVA Directors and Officers. In addition, TVA does not presently provide loans

to its officers or Board of Directors and plans to make this its practice in the future.

In terms of auditor independence, beginning next fiscal year,

TVA will not enter into any new contracts with its external auditor

and TVA will phase out all of its existing consulting and actuarial

services currently performed by PWC.

TVA is taking several other steps to ensure auditor independence

comparable to those in the Sarbanes-Oxley Act. TVA will require

7

rotation of the leading audit partners and TVA also will prohibit

the hiring of the CFO, Controller, or Chief Accounting Officer, from

an independent auditor within a year after working on the TVA

contract.

As I mentioned, TVA issues quarterly financial reports and an

Annual Report that include audited financial statements. These are

similar in content and in timing to the SEC’s 10(k) and 10(q)

forms. We also provide information statements and offering circulars similar to those prospectuses for publicly-traded corporations.

TVA also issues news releases and we have a system for automatic

notification by e-mail of any material events that take place relative to our financial conditions. This is similar to, I believe, the

SEC form 8(k).

Also, I must say that uniquely among companies that I know,

TVA board meetings and all of our decisions are made in a public

setting where even the media is present.

To further comply with the Sarbanes-Oxley Act, TVA is forming

a Disclosure Committee to document procedures for reporting

material events and occurrences on a more timely basis and to

improve the information flow to the public and specifically our

investors.

TVA meets regularly with its largest investors. We also hold an

annual investor and financial analyst meeting where we provide

substantial information, and we are there to respond to their questions. I brought with me to submit to the Committee a sampling

of the reporting that TVA provides to not only the public, but also

to our investors, in addition to the Congress and to the President.

In conclusion, as I have described, TVA has in place a number

of mechanisms that ensure that we conduct business in an open

and forthright manner. And we are committed to doing even more

to ensure that we earn your confidence, your support, and the continuing trust and commitment of our investors, our customers, and

the citizens of the Tennessee Valley.

I look forward to addressing your questions later.

Chairman SARBANES. Good. Thank you very much.

Mr. Beller.

STATEMENT OF ALAN L. BELLER, ESQ.

DIRECTOR, DIVISION OF CORPORATE FINANCE

U.S. SECURITIES AND EXCHANGE COMMISSION

Mr. BELLER. Thank you, Chairman Sarbanes, Senator Bunning,

and Senator Enzi.

I am Alan Beller, the Director of the Division of Corporate Finance at the U.S. Securities and Exchange Commission. I am

pleased to have this opportunity to testify before you on behalf of

the Commission regarding the application of disclosure and reporting requirements of the Federal securities laws to the Tennessee

Valley Authority. From its creation in 1933, incidentally, the same

year that the first of the Federal securities laws was enacted, TVA

has been wholly owned by the U.S. Government and is considered

an agency and instrumentality of the United States.

TVA is currently authorized to issue only debt and to borrow up

to $30 billion. Until 1959, any indebtedness incurred by TVA was

8

backed by the full faith and credit of the United States. In 1959,

Congress eliminated this full faith and credit backing.

TVA has stated that it issues bonds in a variety of structures

and sells its bonds to institutional and individual investors on a

global basis. Many of TVA’s debt securities are listed and traded

on the New York Stock Exchange.

Since TVA is an agency and instrumentality of the United

States, the offer and sale by TVA of its debt securities are exempt

from the registration requirements of the Securities Act, and its securities are within the definition of exempted securities and Government securities under the Exchange Act. In addition, as part of

the 1959 legislation, Congress explicitly exempted the issuance and

sale of TVA bonds from the requirements or limitations of any

other law, including the Federal securities laws. Therefore, TVA

does not register the offerings of its debt securities under the Securities Act, and its debt, including debt that is listed on the New

York Stock Exchange, is not subject to registration under the Exchange Act. TVA is also not subject to the provisions of the recently-enacted Sarbanes-Oxley Act, although they have indicated

this morning, that they intend to comply voluntarily with a number

of those provisions.

Congressional action would be required to eliminate the various

statutory exemptions. TVA is subject to general antifraud restrictions prohibiting false or misleading statements of material facts.

In 1992, the Commission participated with the Department of

the Treasury and the Board of Governors of the Federal Reserve

System in a joint report on the Government securities market. As

a Government agency, TVA was excluded from the recommendations of that report regarding Government-Sponsored Enterprises,

or GSE’s. The Commission has not considered the status of TVA

since that time.

Our area of interest as an agency involves disclosure to investors

in TVA debt and not other aspects of Federal regulation. TVA,

while a unique Federally-owned corporation, has many of the same

disclosure issues as publicly-held utilities. We believe that investors in TVA’s debt securities deserve the same type of information

as that provided by other issuers of public debt. We further believe

that the Commission’s detailed disclosure rules and filing requirements and the staff review and comment process provide the best

framework for disclosing information which investors deserve.

Disclosure regarding TVA itself is, of course, more relevant because TVA bonds are not legally backed by the full faith and credit

of the United States. Disclosure should give the holders of TVA’s

debt a materially complete and accurate picture of TVA’s financial

and operational situation to permit them to evaluate their investments and their investment decisions.

In preparation for this testimony, the staff of the Commission

has considered certain recent disclosures by TVA available on its

website. This overview does not represent a full review of those

documents, has not involved a typical comment process with TVA,

and does not attempt to cover all of the comments that the staff

might issue in a full review. TVA’s disclosures in its most recent

information statement and annual report, in its quarterly reports,

offering circulars, and other materials generally include most of the

9

same disclosures as companies that file reports with the Commission, and these disclosures appear on their face to be responsive to

our important disclosure areas and concerns. There are certain

areas where we believe TVA’s disclosures would be enhanced if the

Commission’s line item disclosure requirements and staff review

and comment applied.

Based on the work done, we would identify possible enhancements in the areas of management’s discussion and analysis of

financial condition and results of operations and in an area of

market risk disclosure. Our rules would also require disclosure in

the areas of executive compensation and, to the extent they exist,

related party transactions.

There are other areas relating to the descriptions of TVA’s business and property where we might, depending on the comment

process, seek additional disclosure.

Finally, under our rules, TVA would be required to file and make

public specified exhibits, including certain material contracts made

outside the ordinary course of business.

There is a tension between TVA’s status as a Government agency

and instrumentality and the resulting statutory exemptions, on the

one hand, and the desire for disclosure that meets Commission

standards on the other hand. Unlike the GSE’s addressed in the

1992 report discussed previously, including the Federal National

Mortgage Association, Fannie Mae, and the Federal Home Loan

Mortgage Corporation, also known as Freddie Mac, TVA is not a

profit-making corporation and does not have private shareholders

or publicly-held equity securities. As such, a different statutory regime may be appropriate.

There are a number of ways that a disclosure system could be

applied to TVA. One way would be to change the statutory scheme

to eliminate the Securities Act and/or the Exchange Act exemptions. Removing either of these exemptions would result in TVA becoming subject to the reporting requirements of the Exchange Act.

Its disclosures would then have to comply with the Commission’s

detailed line item disclosure requirements and would be subject to

the staff review and comment process.

Because TVA is a Government agency and instrumentality and

does not share many of the characteristics of the GSE’s previously

mentioned, and because the Commission has not considered TVA

since the 1992 report, where it was excluded from our GSE recommendations, we are not advocating a change in TVA’s statutorily-exempt status.

In particular, we believe that the Commission’s objective—disclosure that meets Commission requirements and standards—can be

achieved by alternative means. One possibility would be voluntary

compliance or registration under the Exchange Act, a course of action recently taken by Fannie Mae and Freddie Mac and which

achieves effectively the same results insofar as disclosure is concerned as eliminating the statutory exemptions.

In conclusion, the individual and institutional investors who hold

TVA’s debt securities depend for repayment on TVA’s net power

proceeds and refundings and not a Government guarantee. We believe that applying the Commission’s disclosure requirements and

processes is the preferred method of ensuring that these investors

10

receive the disclosure they deserve. TVA’s status and exemptions

from the registration and reporting requirements of the Federal

securities laws are not necessarily an obstacle to that result. As

previously indicated, there are a number of courses of action, including voluntary action by TVA, to achieve the desired standard

of disclosure.

Thank you very much for the opportunity to testify before you

this morning and I would be pleased to answer any questions that

Members of the Committee may have.

Chairman SARBANES. Well, thank you very much, Mr. Beller. I

have just a couple of questions, then I will yield to my colleagues.

Just so I am clear in my own mind, does the Tennessee Valley

Authority Act define the geographical jurisdiction in which the

TVA may function?

Ms. HARRIS. Yes, sir. A 1959 amendment to the TVA Act defined

what we generally call the fence. It is the area in which we can

sell power and the area that is excluded from other suppliers providing power in that region.

Chairman SARBANES. And how is that defined in the statute? By

river basin or by actually setting out States and counties?

Ms. HARRIS. It is a geographical description—the river basin does

not necessarily mirror our service territory. So there are two different areas—we have the area of the watershed of the Tennessee

River, which is actually larger than our service territory.

Chairman SARBANES. Now, second, I understand that you are a

not-for-profit organization. Is that correct?

Ms. HARRIS. We are not in the classic definition of 501(c)(3). That

is not what renders us a not-for-profit. As a Federal Government

corporation, and as specified in our Act, our motivation is not to

create a profit. What we do is basically generate revenues to fulfill

our business functions, and obviously, includes paying down debt,

operations and maintenance. And then, any left over, we simply reinvest back into the corporation.

Chairman SARBANES. So any, what in the private sector would

be considered to be profits, you in effect put back into the operations of the TVA.

Ms. HARRIS. Yes.

Chairman SARBANES. Is that correct?

Ms. HARRIS. It is a closed loop.

Chairman SARBANES. Now did I understand you to say that all

of your meetings of the three-member Board of Directors are open

to the public?

Ms. HARRIS. Any decisionmaking meetings are open to the public.

The public attends, the media attends.

Chairman SARBANES. Is that required by statute, or is that a voluntary policy of the TVA?

Ms. HARRIS. Yes, sir, by statute.

Chairman SARBANES. Your own statute or broader, Freedom of

Information, Federal statutes?

Ms. HARRIS. You are testing my memory here. But my memory

tells me that the TVA Act requires us to conduct our meetings in

public. I could be corrected on that, possibly.

Chairman SARBANES. I think some people behind you——

Ms. HARRIS. That is correct. I got it right.

11

Chairman SARBANES. Mr. Beller, you, of course, hear from investors. I do not know whether you hear from investors in TVA debt

securities. But as a matter of information, have you received complaints at the SEC about the information available and the disclosures from investors, or would-be investors, in TVA bonds?

Mr. BELLER. I cannot say that we have a completely scientifically

perfect way of knowing that.

We did check in connection with preparing for this testimony

with our investor education office, and, going back several years,

we do not appear to have had any such complaints relating to TVA

disclosure.

Chairman SARBANES. Okay.

Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

The main reason that they wouldn’t have any complaints, Mr.

Chairman, is the fact that they are Aaa-rated bond and the Federal

Government owns the company.

So there wouldn’t be—unless you know the intricacies of how

TVA works, like the fact that their money is reinvested in the company, and the fact that they have X-amount of debt, generally

speaking, the more sophisticated investor looks at the rating of the

bond and who owns the company. There wouldn’t be any complaints at all because the Federal Government owns the bond.

Chairman SARBANES. Well, that may well be. But I get complaints all the time from people about things that the mayor or the

governor are doing——

Senator BUNNING. Me, too.

[Laughter.]

Chairman SARBANES. And I do not need jurisdiction over that.

So, I am just trying to inquire because, presumably, if there is a

lot of discontent, the SEC might well have heard about it.

If I were an investor and wanted to complain, the first place I

would think of going to would be the SEC. I think the SEC likes

to think that that is the case.

Senator BUNNING. That is certainly correct. I will get to my

questions, then.

Ms. Harris, do you know any other entity other than TVA that

does not have a Federal regulator?

Ms. HARRIS. Well, sir, I might disagree with your premise that

we do not have any regulator at all. Certainly, the Nuclear Regulatory Commission is very much a part of TVA’s——

Senator BUNNING. Only in regards to your nuclear power plants.

Ms. HARRIS. Yes, sir. That is a very important part of our business. The Environmental Protection——

Senator BUNNING. I am talking about the conducting of your

business, not just an entity within the TVA. Is there any overall

Federal regulator for the Tennessee Valley Authority? Every Government agency that I know has an Inspector General.

Ms. HARRIS. Yes, sir.

Senator BUNNING. So the fact that TVA has an Inspector General

is to be expected.

Ms. HARRIS. Yes, sir.

Senator BUNNING. So can you answer my question?

12

Ms. HARRIS. To say that there is an entity that has the scope and

the authority to regulate overall business activities of TVA, I would

say, no.

Senator BUNNING. Thank you.

You correctly stated that the Environmental and Public Works

Subcommittee on Clean Air, Wetlands, and Climate Change has

jurisdiction over TVA, in your written statement.

Ms. HARRIS. Yes, sir.

Senator BUNNING. My guess is that they have as much expertise

on financial disclosure as has this Committee on the power generation. Why not disclose with the financial disclosure experts at SEC?

Ms. HARRIS. As we heard today, I think that there are some real

opportunities through collaboration with the SEC to develop

some—Mr. Beller, I think you used the term, alternative means, for

TVA to enhance the information that it does provide.

I was also pleased to hear that you generally find that the information that we are providing now to investors is more or less like

what everyone else provides to investors.

I think that investor relations and the confidence that our investors have, and possibly new investors in TVA, their level of confidence in TVA is very important to us. And we certainly, it is in

our business interest to improve our disclosure. And I think that

we have shown our commitment to do that, sir.

SENATOR BUNNING. Well, if you are going to change your cooperation governance to bring it more in line with Sarbanes-Oxley, why

not take the next step and voluntarily register your bonds with the

SEC, as other GSE’s are doing?

Ms. HARRIS. And this probably exhibits my own misunderstanding here. But my understanding was that the agreement that

Fannie Mae and Freddie Mac had entered into really went to the

question of their equities, not their debt securities. And I would appreciate it if anybody could expound on that because if it could be

clarified, I would appreciate it. But my understanding was that

they had only agreed to register their equity securities.

Chairman SARBANES. I think that is correct.

Senator BUNNING. That is accurate, but insignificant, because

everything is reflected in the disclosures that they are now voluntarily disclosing as far as their equity is concerned.

Ms. HARRIS. I think that the same is very true for us, but I am

looking forward to working with the SEC to get their response to

how we can improve and enhance our disclosures to the point that

we would be able to elevate the confidence of investors.

It is my understanding that you already have said that the SEC

said that you should voluntarily register. That is one of the conclusions, I think that that is one of the alternatives.

Senator BUNNING. That he came to.

Ms. HARRIS. Right. I think it was, and my understanding, I certainly do not want to misstate your testimony, but I thought that

the door was open for some discussions of alternative means for

TVA to increase and enhance the kinds of disclosures that it now

provides to the public and to our investors.

Senator BUNNING. Well, if you want me to read it word for word,

I refer you to the conclusion in the SEC’s testimony about voluntary disclosure of TVA’s securities to the SEC. And it is pretty

13

clear that that is one of their highly recommended alternatives to

changing all of the legalese that we have in the laws now. Given

the SEC’s testimony, is TVA willing to go and take a look? Do you

have any flexibility as far as voluntarily registering with the SEC?

Ms. HARRIS. What I am looking forward to is pursuing the various alternatives that were raised today. And I think that, as we

sit down, there are certain aspects of our governance structure— I certainly find the role of oversight, the watchdog role that our Inspector General plays for TVA, to be a very powerful protective

mechanism for us.

So there are some other types of structural differences that I

think that I would look forward to working with the SEC to find

out how we can better disclose and build the confidence, not only

of this Committee, but also of investors.

Senator BUNNING. Let me just finish up by asking you two more

questions.

Ms. HARRIS. Sure.

Senator BUNNING. Why is it more costly inside the fence for electricity than it is outside the fence?

Ms. HARRIS. It depends on where you are near the fence, sir.

Senator BUNNING. I understand that. But why is it if your mission is to provide the lowest cost electricity possible, why are investor-owned and rural electric co-ops producing electric cost less

outside the fence than inside?

Ms. HARRIS. As you well know, I was raised in the region of Kentucky that TVA serves. So, I am very familiar with the situation

that you are talking about.

One of the things is that TVA has a different fuel mix than most

of the utilities. If we are specifically speaking to Kentucky utilities

and how they generate their electricity, they are very fortunate.

They have mine-mouth coal plans. That is a very efficient way to

generate electricity. We have one located in Paradise, Kentucky.

That is a very efficient, low-cost plant.

We think that TVA has value because we do have a fuel mix. We

have coal. We have solar. We have geothermal. We have nuclear.

We have gas combustion turbines. So, we believe that mix, it does

mean that, in part, our costs are higher because of past investments TVA has made. But we believe, and one of our six objectives

is to continue to reduce the delivered cost of power. And we are

committed to being competitive with those other utilities in the

Commonwealth of Kentucky.

Senator BUNNING. Well, Ms. Harris, I am not going to get into

a dispute with you on TVA’s ability to sell outside the fence because I happen to agree that they should have the ability. But I

also agree that it should be a two-way street.

Ms. HARRIS. I agree, sir.

Senator BUNNING. That the people should be able to come within

the fence and sell and be competitive with TVA inside the fence.

Ms. HARRIS. We are certainly in agreement on that, sir.

Senator BUNNING. Last, but not least, you mentioned the fact

that you are complying now with the separation of function.

Ms. HARRIS. Yes, sir.

Senator BUNNING. Even though you are not covered by the law.

In other words, you are exempt from Sarbanes-Oxley.

14

Ms. HARRIS. Yes.

Senator BUNNING. Do you think if you did not comply with the

law, that somebody would be coming down and descending on you

rather rapidly if you weren’t doing it voluntarily?

In other words, you have decided to separate the two functions,

the auditing function and the advising function, as the law states.

Ms. HARRIS. Let me just say, in 1995, our Inspector General

identified as an issue the fact that our independent auditor was

also doing consulting work with TVA.

So, I must say, this is a perfect example how our Inspector General—at that time, in 1995, when that was identified as a potential

issue, long before it was an issue in the minds of anybody else

across the United States, that was identified and the decision was

made because that was the common practice throughout the private sector.

Senator BUNNING. The private sector.

Ms. HARRIS. Right.

Senator BUNNING. Not the public.

Ms. HARRIS. Absolutely. Private sector, that we would continue

to do that.

This has been an issue that TVA has been aware of for quite a

while. And so, we believe it is the right thing to do. I do not think

that we made this decision because we thought somebody was

going to come down and get us. I think we did it because we think

it is the right thing to do.

Senator BUNNING. One question for Mr. Beller. Do you believe

that voluntary registration of the SEC, such as Fannie Mae and

Freddie Mac, would be undue, costly, or burdensome to TVA?

Mr. BELLER. I think, Senator Bunning, that the one-word answer

to that question is, no, I expect it probably would not, based on a

couple of assumptions that we are not 100 percent sure of.

The principal cost of compliance with our registration and reporting requirements is generally the expense of an external audit in

accordance with GAAP and generally accepted auditing standards.

TVA already incurs that cost, I expect in full. I do not believe

that there would be much, if anything, additional that they would

have to do there. There would probably be some additional advisory

expenses. But I do not think, given the amount of disclosure they

currently provide, there would be, I expect, some incremental costs.

I would be surprised if it were significant in comparison to what

they incur now in terms of disclosure and reporting.

Senator BUNNING. Thank you.

I have some additional questions, but go ahead, Mike.

Chairman SARBANES. Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman. I did not know that

this was going to be such an opportunity for Wyoming today.

[Laughter.]

The county that I come from in Wyoming is the largest producer

of coal in the United States. We produce a third of the Nation’s coal

there. One of the things our State has been looking at from an economic development standpoint is having some power plants at the

mine mouth.

Ms. HARRIS. Yes.

15

Senator ENZI. We would invite you to take a look at having one

of your power plants in Wyoming and you wouldn’t have to ship all

that coal clear out there.

Ms. HARRIS. I will let you and Senator Bunning resolve that.

[Laughter.]

Senator BUNNING. We will work on that together.

[Laughter.]

Senator ENZI. I am hoping that you just use some good accounting, look at the numbers, and of course, I know what the result will

be then.

[Laughter.]

Chairman SARBANES. Well, mine mouthing, you produce the electricity right at the mine mouth, don’t you, and then transit it?

Ms. HARRIS. Yes.

Chairman SARBANES. That would be pretty costly. How much of

it would be left if you tried to transmit it from Wyoming?

[Laughter.]

Senator ENZI. Plenty. What we do is we put it in at the grid and

that moves some electricity over a little ways. This electrical stuff

is fascinating.

[Laughter.]

When I was mayor, our municipality owned their own electrical

generating and power system.

But getting back to the main issue here, Congress is supposed

to provide the oversight over TVA, as well as all of the Government

agencies. In looking at it, I have to tell you, we are not very good

at oversight over accounting or oversight over disclosure.

I have a lot of confidence that TVA is doing better than the Government agencies because we have had the opportunity to audit

some Government agencies. And in the audits that I saw, I think

that the Forest Service did the best job. They were $200 million out

of balance.

So, I am not sure that the TVA wants to associate themselves

with the oversight and the accounting that we provide. It may well

want to take a look at kind of separating it as Fannie Mae and

Freddie Mac did by going under some SEC jurisdiction. And of

course, the easy way to do that is the voluntary method because,

as Mr. Beller explained, we would have to do quite a bit of legislating in order to be able to change the system. I am not sure that

changing the system is at all necessary.

I did hear your comments about the Inspector General. But I

think the Inspector General, from the perspective of people who are

now paying a bit more attention in the financial markets, would be

more of a relationship to a chief legal counsel within a corporation,

that the ties are a little bit closer there. Whereas, the SEC is

looked at as more of absolutely outside oversight with different capabilities than there might be by an Inspector General. And in a

moment I will ask you for your reflection on that. But a couple

more specific questions before I get to that. Does the TVA follow

already all the rules on GAAP consistent with other utilities?

Ms. HARRIS. Yes, sir.

Senator ENZI. I thought that was the case. Now does the TVA

have any additional off-balance sheet or off-budget arrangements of

which we might not be aware?

16

Ms. HARRIS. No, sir. The TVA Act limits the business activities

that we can engage in. We cannot have subcorporations that are

separate. A lot of the things that have raised suspicions over the

last few months, TVA, by its own statute, is prohibited from engaging in those activities.

Senator ENZI. And so, you do not have off-balance sheet transactions or off-budget arrangements.

Ms. HARRIS. No.

Senator ENZI. In your testimony, you spoke extensively about the

disclosure requirements you currently perform. And of course, in

your testimony, which will be part of the record, your complete testimony, it is even more extensive that you go into that.

Ms. HARRIS. Right.

Senator ENZI. So that gets back to this original question—why

wouldn’t you just adopt the SEC registration requirements, such as

Fannie Mae and Freddie Mac, on a voluntary basis?

Ms. HARRIS. What I want to do, and I think that we are going

to be able to benefit from this, is to work with the SEC to see exactly how we can improve and in whatever form, whichever one of

the alternatives that was listed, which one that we feel most comfortable with and that we feel like that will bring about, instill the

most investor confidence. That is what I would like to do as a result of this hearing and I appreciate the fact that this has brought

TVA and the SEC together.

I was not around in 1992 when the last report was done, so, I

think that this is an opportunity for us to work together to get to

whatever is best, given the circumstances of TVA. And I think as

we talk, we are going to be able to identify what scenario is best

to get to what you are talking about, that full disclosure.

Senator ENZI. What is the downside to doing this voluntary registration?

Ms. HARRIS. I do not think that we fully understand what that

all entails. It is hard for me to define right now what the downside

is because I do not know exactly what that would fully entail. And

until we go through that exercise, I do not think I can say, this is

why we would not want to do it because I do not know the full extent of that.

Senator ENZI. Okay. And I would rather talk to you about coal

sales, anyway.

[Laughter.]

Thank you, Mr. Chairman.

Chairman SARBANES. I wanted to ask a couple of questions here.

First of all, I want to commend the TVA for moving to put in

place various provisions in the recently enacted corporate accountability and accounting responsibility legislation. There was an effort there, of course, to define some best standards, or at least best

minimum standards, so to speak. And I think your report on the

steps that TVA is taking are important in that regard.

Ms. HARRIS. Thank you.

Chairman SARBANES. Second, this is a very informative hearing,

at least for me. I never realized until I came here this morning and

we got into this, that there was this problem about electricity rates

inside the fence and outside the fence, which seems, I gather, to

17

be a pressing issue, particularly in the Commonwealth of Kentucky.

Ms. HARRIS. That is right.

Chairman SARBANES. So, I am gaining some additional knowledge, which I heretofore had not had.

Now, Mr. Beller, I want to be sure I understand your position.

As I understand it, if the TVA were to move in various ways to

additional disclosures, and you mentioned some areas where you

thought attention could be paid—market risk disclosure, executive

compensation, material contracts, and so forth—that would meet

the disclosure question. The disclosure question is separate from

the registration question. It is not necessarily encompassed within

it. Isn’t that correct?

You could come in here today and say, well, the TVA is disclosing

everything we can think of that they ought to disclose. Now that

is not your position. You think that there are some additional

things that they could do. But that could be done without reaching

to the issue of whether they should be required to register with the

SEC. Isn’t that correct?

Mr. BELLER. Senator Sarbanes, that is a very interesting question. There are two separate issues. Disclosure and registration do

not necessarily go hand in hand.

We could not, on the face of TVA’s documents, because we would

not have had the benefit of a review and comment process, reach

definitive conclusions about their disclosure. But we could go

through a review, or the equivalent of a review and comment process with them on a voluntary basis.

Chairman SARBANES. I am not sure we should be so quick this

morning to simply cross over the threshold of the unique institution which the Tennessee Valley Authority is, and the basis on

which these decisions have been made in the past. In other words,

in 1992, they did not bring TVA under when they were doing this

review.

How many companies do you have that have to register with the

SEC where the directors of the company are appointed by the

President of the United States and are then confirmed by the U.S.

Senate?

Mr. BELLER. I know that when we moved to voluntary registration of Freddie Mac and Fannie Mae, a portion of their boards

are appointed by the President. But entire boards, I am not aware

of any.

Chairman SARBANES. Of course, they are profit-making organizations, aren’t they, and they issue equities?

In fact, I thought we established here that the agreement they

have entered into with the SEC involves their equity and not their

debt. Is that correct?

Mr. BELLER. It is true that what they are registering is their

equity securities. The consequence of registration, as I believe

Senator Bunning pointed out, is basically full disclosure that is

for the benefit of all, the holders of both their equity and their

debt and other fixed-income securities. Whether they were to register equity or whether the TVA were to register debt, would result

in the same disclosure requirements with very few exceptions

applying.

18

Chairman SARBANES. You say you are going to get full disclosure

from Fannie Mae and Freddie Mac of their debt? Is that right?

Mr. BELLER. That is correct.

Chairman SARBANES. But not by it being registered with the

SEC. Is that correct?

Mr. BELLER. No. By virtue of their registering any securities with

us, they have to disclose information that is material to all of their

security-holders.

Chairman SARBANES. Of course, not all of their directors are appointed by the President. In fact, I think only a minority.

Mr. BELLER. I think it is a third.

Ms. HARRIS. A third, yes.

Chairman SARBANES. Yes.

Mr. BELLER. To my knowledge——

Chairman SARBANES. This is a rather unique institution isn’t it,

the Tennessee Valley Authority?

Mr. BELLER. It is, indeed. I hope we are cognizant of that. In our

testimony, we would not propose the same recommendation that

was proposed in 1992 with regards to Fannie and Freddie, which

was registration. I think we are looking for an alternative solution.

Whether that solution is voluntary disclosure or voluntary registration, is something that I believe we would need more of an interaction to know.

Chairman SARBANES. Well, if the purpose of the registration,

whether compulsory or voluntary, would be to get disclosure, and

if you get the disclosure without either the compulsory registration

or the voluntary registration, then the objective has been accomplished, has it not?

Mr. BELLER. Yes, it has, sir.

Chairman SARBANES. Senator Bunning.

Senator BUNNING. Yes, thank you, Mr. Chairman.

Ms. Harris, I believe you, in answering Senator Enzi’s question,

misstated some positions as far as TVA is concerned, and I want

to bring up a couple of them.

Ms. HARRIS. Sure. Go right ahead.

Senator BUNNING. TVA and OMB, in a highly-publicized disagreement about whether or not TVA’s lease-back—lease/leaseback arrangements—— Ms. HARRIS. Right.

Senator BUNNING. —Should be counted toward TVA’s debt cap.

It is my understanding that TVA has continued to lobby OMB to

reverse the decision that it made. Is this an attempt by TVA to

continue to do these types of lease transactions, and have these

and future lease transactions off budget, rather than to treat these

lease transactions properly as part of its debt or part of TVA’s Congressionally-mandated debt cap?

Ms. HARRIS. With regard to the lease/lease-backs which we are

using for combustion turbine units, we address those lease/leasebacks on our financial statement according to GAAP. How we treat

those, we are driven, how we put them on our financial statement,

by generally accepted accounting practices.

There is a line that says what our debt is and then below that,

it says, other financial obligations. And then, based on GAAP, we

list those on our financial statements as other financial obligations.

19

First of all, I am not sure if I agree with the characterization

that we were in some hotly contested battle with OMB.

Senator BUNNING. It seems that you are because you continue to

lobby OMB to change their decision that they made.

Ms. HARRIS. I haven’t been aware of that. It doesn’t fee—— Senator BUNNING. That is why we needed our gentleman from

OMB here today that did not show up.

Ms. HARRIS. The requirement that OMB has for categorizing for

the purposes of the Federal budget, how it characterizes how we

do our financings, what our debt is, is a totally different function

than how we report our financial statements.

For us to be inconsistent with GAAP in this particular situation

I think would be the basis for us to be criticized to be out of sync

with the GAAP only on that particular item.

Basically, where I think TVA and OMB ended up is OMB feels

like it needs to list that on the Federal budget, and the way it

does—and my understanding is that it is not listed as part of our

debt. There is a separate line that says something like, other financial obligations. So, they even separate it from the overall debt.

Now, the cumulative total adds to the Federal debt ceiling. And

TVA certainly does not have a quarrel with how OMB characterizes for its own purposes the cumulative total toward the Federal

debt ceiling. That is not part of our business. That is OMB’s responsibility.

Senator BUNNING. Well, there is a disagreement between you

and OMB because if there weren’t, you would have accepted the

fact that they are using those transactions and that that debt is

being counted toward the Congressionally-mandated debt cap that

you have.

Ms. HARRIS. I certainly do not feel that we have a disagreement

with them.

Senator BUNNING. Okay.

Is any maintenance or scheduled repairs or replacements of the

facilities being or will be deferred as a result of the obligation it

has taken to restart Brown’s Ferry?

Ms. HARRIS. Are you asking if other things are being delayed to

finance—— Senator BUNNING. Is any maintenance or scheduled repairs or replacements of the facilities being or will be deferred as a result of

your trying to restart Brown’s Ferry?

Ms. HARRIS. And I assume you are talking about our overall fleet

of generation.

Senator BUNNING. Absolutely.

Ms. HARRIS. Okay. All of our units. As a matter of fact, we are

spending just about the same for maintenance and repairs——

Senator BUNNING. You are not deferring anything because you

are trying to restart Brown’s Ferry?

Ms. HARRIS. Let me say, in the upcoming budget, 2003 budget,

the largest expenditure that we have is $528 million that we are

spending on pollution control equipment. If anything, that so overshadows what we are spending on Brown’s Ferry 1 restart, that we

are on a track so that we can burn more good Kentucky coal in

compliance with environmental standards. What we are doing is

balancing our business. Next year’s expenditure, the bulk of it is

20

going to be for environmental pollution control equipment. Brown’s

Ferry 1 does not dominate the budget next year.

Senator BUNNING. I am not asking if it dominates it.

Ms. HARRIS. Okay.

Senator BUNNING. I am just asking you the simple question of

whether you are deferring or changing your maintenance schedules

on other plants because of the restart of Brown’s Ferry?

Ms. HARRIS. I think that what we are doing is we are maintaining our plants as they need to be maintained. We are not changing

the practices of our maintenance and—— Senator BUNNING. So, you say that you are spending the extra

money to restart Brown’s Ferry.

Ms. HARRIS. Yes.

Senator BUNNING. As part of your overall expenditure. Nothing

else is going to be changed. That is what you are saying.

Ms. HARRIS. Right. But I guess I am a little confused by isolating

out an expenditure for Brown’s Ferry 1 when——

Senator BUNNING. I want to know if anything else is suffering

because of the restart.

Ms. HARRIS. Okay. We are not failing to invest in the infrastructure of TVA for any expenditures this year, whether it is Brown’s

Ferry 1 or pollution control equipment.

Senator BUNNING. Okay. If we could pass an energy bill, there would be $2 billion extra for clean coal burning technology. So

maybe you should get some of your lobbyists up here to help us

pass the energy bill that we have before the Congress of the United

States right now.

Ms. HARRIS. Sir, by law, we are prohibited from lobbying.

Senator BUNNING. I am kidding.

[Laughter.]

You said in 1995, your IG decided to split your auditing and your

consulting.

Ms. HARRIS. That recommendation was made.

Senator BUNNING. Then why did it take 7 years for you to do it?

Ms. HARRIS. Well, I wasn’t here. But if I could defer to Don, Don

was here.

But, basically, what happened is, when the recommendation, my

understanding is, came out, everyone said, well, this is not how

they do it in the private sector. Do you want to comment on that?

Senator BUNNING. You can step right up. Don’t be bashful.

Mr. HICKMAN. Senator Bunning, I am the Acting Inspector General. In 1995, my office did report that the TVA should split its

nonaudit services from its financial audit services, in view of the

fact that the same firm was performing those same duties.

We reported that to TVA. And management’s response to us at

that time was that this practice is in keeping with the normal business practices in the private sector, and at that time, they did not

see it as a problem.

We contended that there was the possibility of a perception that

there was an inappropriate amount of independence by the audit

firm performing those same duties.

We did report that to the Congress as a part of our semiannual

report.

Senator BUNNING. It just took us 7 years to get to it.

21

Thank you.

Thank you, Mr. Chairman.

Chairman SARBANES. Senator Enzi.

Senator ENZI. I have no further questions.

Chairman SARBANES. We did receive a letter this morning from—

in fact, just a little while ago—from the OMB, who did not come

in to testify, which just very briefly touches on some of these

issues. Actually, they say something in that letter, though, that

concerns me. I would call this to the attention of my colleagues.

‘‘TVA is similar to the GSE’s in that both TVA and the GSE’s

issue debt securities, although TVA’s are backed by the Federal

Government and those of the GSE’s are not.’’

I did not think that was the case. The TVA Act, I thought, said

that the Federal Government does not guarantee the bonds. Don’t

you put a no-guarantee language in your bonds, the TVA? Isn’t

that correct? I ask our panel.

Ms. HARRIS. First of all, that would differ from everything in my

understanding because since 1959, the decision was made by the

Federal Government no longer to back TVA bonds and we became

self-financing in 1959.

Mr. BELLER. That is our understanding from a review of the legislation.

Chairman SARBANES. I am quoting the letter that has the Director of OMB’s signature on it, Mitchell E. Daniels, Jr.: ‘‘TVA is similar to the GSE’s in that both TVA and the GSE’s issue debt securities, although TVA’s are backed by the Federal Government and

those of the GSE’s are not.’’

Mr. Beller.

Mr. BELLER. I do not want to speak for the TVA with respect to

what its Government backing is.

I can tell you that the offering circulars that we reviewed in connection with preparing for this testimony are very explicit and it

is very prominent that there is no full faith and credit backing.

Chairman SARBANES. I know that the bond-rating agencies are

influenced by the fact that they think that there may be some implicit guarantee since TVA is a wholly-owned Government corporation and therefore, the Government would support them if their

solvency were seriously impaired. Of course, the same argument is

made to some extent about the GSE’s. But there has been a big

effort to get away from the idea that there is a Government guarantee, behind these bonds. It is hard enough to sell the idea because everyone assumes there is an implicit guarantee.

Ms. HARRIS. Right.

Chairman SARBANES. But at least there is an effort to get away

from that.

For the OMB then to come in here with this letter and lend considerable credence to this notion that there is a guarantee, it seems

to me is completely counter to what, previously, OMB and others

have been trying to do. But so much for the OMB letter, if I may

say so.

[Laughter.]

I do not have any further questions.

22

Senator BUNNING. I believe if you have a prospectus of your

bonds, that there will be a significant bold print that it is not guaranteed by the Federal Government.

Ms. HARRIS. Absolutely.

Chairman SARBANES. I see it right here on the face of it.

Senator BUNNING. That is correct.

Chairman SARBANES. Well, maybe we should send this down to

OMB in response to their letter.

Senator BUNNING. We will do that.

Chairman SARBANES. We thank the witnesses very much for

coming.

Senator BUNNING. Thank you very much.

Ms. HARRIS. Thank you very much.

Chairman SARBANES. And now we will go to our next panel, if

they will come forward.

[Pause.]

Our second panel this morning consists of Craven Crowell, who

is Chairman of GCW Consulting. Mr. Crowell served as Chairman

of the Tennessee Valley Authority, subsequent of course to his

nomination by the President and confirmation by the Senate, from

1993 to 2001. He is the former Chairman of the Electric Power Research Institute, has served on the Board of the Nuclear Energy Institute, and prior to becoming Chairman of the TVA, worked closely

with our former colleague, Senator Jim Sasser of Tennessee.

Mr. CROWELL. Right.

Chairman SARBANES. Dr. Allan Pulsipher—have I pronounced it

correctly, Doctor?

Mr. PULSIPHER. You have.

Chairman SARBANES. Executive Director and Professor of Energy

Policy in the Center for Energy Studies at Louisiana State University. Dr. Pulsipher actually was a Chief Economist at the TVA in

the 1980’s. He has also worked with the President’s Council of Economic Advisers, and has also been at the Southern Illinois University and Texas A&M.

And then the concluding panelist is Daniel Gates, the Managing

Director of Moody’s Investors Service. He leads there the analyst

team that follows issues in the power, energy, and infrastructure

sectors, and has been the global coordinator for syndicated loan

ratings for Moody’s.

We are very pleased to have all three of you here with us this

morning. Your full statements will be included in the record. We

would obviously appreciate it if you could summarize it.

Mr. Crowell, we will begin with you and then we will just move

right across the panel.

STATEMENT OF CRAVEN CROWELL

CHAIRMAN, GCW CONSULTING

FORMER CHAIRMAN, TENNESSEE VALLEY AUTHORITY

Mr. CROWELL. Thank you very much, Chairman Sarbanes. And

Senator Bunning, it is good to see you again, and for the Committee to invite me here.

I was going to say good morning, but I think it is already afternoon. So, I will say, good afternoon to all of you. My name is Craven Crowell and I served for 8 years——

23

Chairman SARBANES. That only underscores the point that we

are going to include your full statements in the record.

[Laughter.]

Mr. CROWELL. Thank you. I served 8 years as Chairman of the

Tennessee Valley Authority, and I had the distinct pleasure of

serving at TVA for a total of 17 years, first as a member of the

Senior Management Team and then, as I have said, as Chairman

of the Board of Directors. I retired last year after 25 years of Federal service, and as you mentioned, Mr. Chairman, I served part

of that with Senator Jim Sasser in the U.S. Senate. I now serve

as Chairman of GCW Consulting, which is an energy and aviation

consulting firm located in Arlington, Virginia.

TVA has played a vital role in creating prosperity for people of

the Tennessee Valley since its creation in 1933. It brought opportunity and hope to thousands of people who lived mostly in rural

areas and who had few prospects for enriching their lives and the

lives of their children.

I can remember as a small child when TVA electricity first came

to the farmhouse where my grandparents lived and the excitement

electric lighting created in the rural community of Fairview, Tennessee, where they lived. There is no doubt that TVA contributed

greatly to the quality of life in the Tennessee Valley and it is my

fervent hope it will continue to play a vital role in creating opportunity for many generations to come. I can say with certainty, of

course, that the TVA has played an important role in my life and

career and I shall always be grateful for having had the opportunity to serve the people of the Tennessee Valley.

Mr. Chairman, the Committee has asked me to address two

questions: whether the TVA should be required by Federal law to

disclose financial and operational information to debt-holders and

prospective investors, and, if so, whether the TVA should be made

subject to the requirements of the Securities Act of 1933 and the

Securities and Exchange Act of 1934. I want to express my appreciation to the Committee for its interests in my views on this important matter. I would, however, like to make a few preliminary

comments about TVA’s debt that I believe are relevant to our discussion this morning.

In 1959, Congress gave TVA the authority to issue bonds to raise

capital for expansion and other related activities and subsequently

set a debt limit of $30 billion. For the next 38 years, TVA continued to increase its debt until it reached $27.7 billion. In 1997, TVA

realized that not only was the size of the debt coming dangerously

close to its borrowing limit, but also the interest expense as a percent of revenue at 34 percent was having a negative impact on

TVA’s competitiveness.

As a result of concerns about the size of the debt, TVA developed

a 10-year plan in 1997 to reduce the debt and create a stronger financial position in preparation for deregulation of the electric

power industry. Since 1997, TVA has reduced its indebtedness by

almost $2.5 billion and has reduced the interest expense as a percent of revenue to 21 percent—producing a savings of nearly $500

million per year in interest expense.

I might say, Mr. Chairman, that I am pleased that the current

TVA Board of Directors has continued to focus on reducing the

24

debt. In all likelihood, TVA’s debt is greater than the market value

of its total assets in today’s market, although the agency’s book

value remains higher than its indebtedness. It is my hope that the

TVA board will continue to reduce the debt in the years ahead.

Now, if I may, let me speak to the issue you invited me here to

address.

During my tenure as Chairman, TVA undertook a significant expansion of its finance program in order to lower interest costs. The

collective result of those efforts over the last few years has resulted

in TVA being recognized for its innovation and responsiveness to

investors.

TVA entered the global bond market for the first time in 1995

and the same year issued its first bonds targeted to retail, or individual, investors. The retail bonds were enormously successful and

resulted in a large increase in the number of TVA investors. With

this came the recognition that TVA would need to increase the opportunities to further disclose and communicate information about

the agency that was of significance and importance to the investment community.

So in 1996, TVA created a staff of investor relations professionals

to ensure that investors in TVA bonds had information they needed

to make informed investment decisions. The broad responsibilities

of this group were to ensure the adequacy and accuracy of disclosures in TVA’s annual report, quarterly reports, information statements, and periodic offering circulars.

Additionally, the investor relations department routinely handled

hundreds of inquiries from investors. The TVA Board also became

more active with the investment community and began hosting

meetings in New York with major investors and began meeting

with investors in other countries.

In every meeting I attended, the TVA was viewed as a stable,

well-run Government corporation that offered a sound investment

opportunity. In no instance did any investor ever express to me

the slightest concern about the business standards of the TVA,

the soundness of the business or the adequacy or timeliness of our

disclosures.

I might add that stable rates are a very important signal to investors of TVA’s business stability. But there are other significant

signals as well. Investors have taken note of the outstanding operating performance of TVA’s power system. Capacity and efficiency

are continuing to increase and, during my tenure, TVA’s nuclear

program was recognized by the industry for its high level of performance.

In this discussion, we also should recognize that the TVA’s operations and bond indebtedness are already subject to significant

oversight to guarantee proper and complete disclosure. Two examples which have already been mentioned this morning include an

independent auditor in the form of an Inspector General who will

be appointed by the President with Senate confirmation, and the

General Accounting Office that has full and complete access to all

documents and information in TVA’s possession.

TVA routinely provides information about its finances and operations in many other ways. TVA board meetings are conducted in

public with opportunities for the public and news media to ask

25

questions on any subject; press releases are issued anytime an

event occurs of interest to the citizens of the Tennessee Valley or

members of the investment community; public meetings on a variety of subjects are conducted throughout the TVA area; and, perhaps of most significance, TVA’s operations and activities come

under the jurisdiction of Oversight Committees in both the Senate

and the House.

It is my opinion, Mr. Chairman, that the TVA already exceeds

the reporting requirements that would be expected of any other

corporation in similar circumstances. But let us not forget a key

element in this discussion. TVA is a Government corporation—100

percent owned by the U.S. Government. It exists for the sole purpose of serving the citizens of the Tennessee Valley. Its mandate

is to provide services at the lowest possible cost and it does not

seek to enrich shareholders or corporate executives, since it has

only one shareholder—the U.S. Government. In other words, TVA

is a unique and vastly different organization than you will find

anywhere else in the United States.

Now, we are all aware that bonds act differently in the marketplace than equity ownership through stocks. Stock prices can

change depending on the vagaries of the marketplace and, therefore, are subject to manipulation as all of us with 401(k)’s have

painfully experienced in the past few months. Bonds, on the other

hand, are priced at the time of issue, and, while liquidity and interest rates can contribute to some changes in value, they are a stable

and predictable investment. TVA does not issue stock.

In response to the Committee’s question about whether the TVA

should be made subject to the requirements of the Securities Acts,

I would hope the Committee would review carefully the disclosures

TVA already makes before acting on legislation that, in my view,

would simply add another layer of bureaucracy to TVA’s operations

and result in additional cost and a decrease in flexibility. In managing its debt, TVA needs the ability to move quickly and take full

advantage of refinancing opportunities without being encumbered

by another layer of process.

I wish to thank you, Mr. Chairman, and the other Members of

the Committee for permitting me to appear here today and I would

be happy to answer questions.

Chairman SARBANES. Thank you very much, sir.

We will hear from the other two panelists before we go to the

questions. Dr. Pulsipher, we would be happy to hear from you.

STATEMENT OF ALLAN G. PULSIPHER

EXECUTIVE DIRECTOR, CENTER FOR ENERGY STUDIES

MARATHON OIL COMPANY PROFESSOR OF ENERGY POLICY

LOUISIANA STATE UNIVERSITY

Mr. PULSIPHER. Thank you, Mr. Chairman, for the invitation to

testify before the Committee. I have a short statement with four

main points that I will just summarize.

First, TVA is a large electric power system. It is not a regional

development agency that executes Government functions. Operationally, technologically, functionally, and financially it is the

same thing as the other large power systems that operate in the

26

Southeastern United States. And it has worked hard to transform

itself into that type of an organization over the last two decades.

The exemption of TVA’s securities from provisions of the Securities Act of 1933 and the Exchange Act of 1934, to the extent that

it is derived from the exclusion of the registration requirements

given to securities of municipal, State, and Federal Governments,

has no cogent rationale with respect to TVA today.

Second, as other people have said, the accounting and investor

protection issues that this Committee has spent so much time on

this past year are as relevant to TVA as they are to its competitors.

To illustrate, TVA’s unfinished nuclear plants are likely to go on

to the accounting hall of fame’s top 10 list of most write-off-resistant, unproductive assets, probably ranking just below the Empire

State Building’s mooring tower for dirigibles.

TVA’s current outside auditor has been retained by the agency

for at least over two decades, and I think it probably goes back further than that, and that firm has been the principal consultant to

the agency on its accounting, informational technology and financial systems, as well as many other managerial issues. I am glad

to hear that the TVA is going to change that arrangement and I

think it is time that it did come to an end.

I share Senator Bunning’s skepticism that anything would have

been done had it not been for the concern that the Committee has

expressed and acted on.

The lease/lease-back arrangements for the peaking turbines have

been discussed, I think that most people would look at them as an

effort to keep the financing for the turbine from showing up on

TVA’s books as debt and being subject to the Congressional limit.

And there are other issues of this sort that you can easily find.

Third, these accounting and investor protection issues are more

serious for TVA than for its competitors or other corporations because the agency lacks these even minimal mechanisms for corporate oversight, disclosure and control, whose adequacy is under

consideration by the Committee. As we have heard, TVA is run by

a unique but widely un-imitated, full-time, three-person board appointed by the President for 9 year terms.

Many of those who have been appointed during the past have

had no experience or specialized knowledge of the electricity business before their appointment. A few board members have been

very effective leaders and strategists, but these have been the

exceptions.

It is useful to keep in mind that TVA ‘‘backed into’’ the electric

power business. The three-person board arrangement was specified

at its inception, well before the time that TVA transformed itself

into a large regional power system.

The rationale for the initial arrangement was that TVA needed

to be protected from hostile political and economic interests in the

region that would be threatened by this, frankly, experimental initiative of the Federal Government. There were no arrangements in

the initial organization at TVA and none have been inserted since

that time to allow for regional participation or regional review or

oversight of TVA’s activities.

My fourth and final point is that every independent study of TVA

has concluded that this three-member board is an antiquated, conVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 89115.TXT SBANK4 PsN: SBANK4
27

tradictory, paternalistic arrangement that should be replaced by an

independent, expanded, regionally-based, part-time board. Regardless of politics, every study has made this recommendation and,

just as consistently, and also regardless of politics, every TVA

board has dismissed the recommendation out of hand.

The relevance of this unique arrangement to the problems of accounting accuracy and auditing that this Committee is concerned

with can be made clear by considering some of the solutions to the

problems that have been identified.

For example, requiring more independence of audit committees,

making audit committees responsible for the audit, and other proposals like that. Of course, in TVA’s case, TVA has no external

board members. It has no audit committee. Sometimes in its history, it has been lucky to have somebody on its board that had accounting experience.

The relevance of TVA’s outdated double-duty board to its problems of inadequate disclosure is well illustrated by the dialogue

between the Office of Management and Budget and the TVA

board over the board’s reticence to provide a basic business plan

to explain its decision to resuscitate a nuclear unit at its Brown’s

Ferry site. The unit was licensed to operate in the 1970’s but has

been closed because of safety concerns since 1985. This effort will

add eventually somewhere around $1.7 billion to TVA’s debt. The

effort seems inconsistent with the movement toward the use of

smaller, more decentralized generating technologies which entrepreneurs and large industrial energy users are willing to build on

their tab in many other parts of the country.

While I commend OMB for asking these questions. During my

experience at TVA no one, including OMB, asked these sorts of

questions. Under the regulatory arrangements, TVA’s competing

power systems operated with, such a request would come from a

public utility staff. It would be open for additional comment and

analysis by other interested parties and there would be no question

about the need for or desirability of responding to it.

In summary, should the Tennessee Valley Authority provide

timely, accurate, and objective information about its operations,

finances, and performance to its investors and customers and the

public? Should the information be provided in the same format, use

the same definitions, terminology, and conventions, cover the same

time period, provide the same degree of detail, meet the same

standards for auditing and timely disclosure, as is required of its

competitors in its primary line of business? Would using SEC

standards and procedures help progress toward those goals?

My answer to these questions is, of course. Why doesn’t TVA do

this? I have heard the answer to this question several times this

morning but I am still not certain I understand it.

However, TVA and its customers and its investors have a more

serious problem of corporate governance and control that is the result of an obsolete and inherently contradictory organizational

structure that is long overdue for a fundamental redesign.

I want to thank you again for the opportunity to state my views

and will be happy to answer any questions you may have.

Chairman SARBANES. Thank you very much, sir.

Mr. Gates.

28

STATEMENT OF DANIEL GATES

MANAGING DIRECTOR

MOODY’S INVESTORS SERVICE

Mr. GATES. Good morning, Mr. Chairman, and Senator Bunning.

My name is Daniel Gates and I am a Managing Director with

Moody’s Investors Service. I am pleased to be here to discuss the

credit ratings process, and the role of disclosure requirements in

that process, particularly for the Tennessee Valley Authority. I

hope that Moody’s views add to the consideration of this issue,

though I also appreciate that our views represent only one perspective on this matter. To begin, I will give a brief overview of what

we do.

Although Moody’s rates a wide range of debt obligations, the

heart of our service lies in rating long-term bonds, for which we

have nine primary debt rating categories. Investment-grade ratings

range from a high of Aaa, down to a low of Baa. Overall, Moody’s

ratings are designed to provide a relative measure of risk, with the

likelihood of credit loss increasing as the rating decreases. The lowest probability of default is expected at the Aaa level, with a higher

expected default rate at the Aa level, and so on down through the

rating scale.

It is equally important to note what our work at Moody’s does

not include. A rating is neither a buy nor a sell recommendation,

nor is it a seal of approval; rather, our ratings reflect Moody’s opinion of the relative creditworthiness of a fixed-income security. Furthermore, just as we do not insure the bonds we rate, we do not

audit the financial information provided to us. Accordingly, our ratings rely heavily on the completeness and veracity of both the public financial statements and any proprietary information that may

be provided to us by issuers.

In order to analyze a company’s ability to meet its debt obligations, Moody’s analysts rely on a variety of information sources, including publicly-available information that is filed with regulatory

authorities or is otherwise available, audited financial statements,

third-party analyses of the company and the industry sector, and

information provided by the company directly to our analysts.

In an ideal world, the rating agencies always would have access

to complete and accurate financial and operational information. We

strongly believe that in the United States, the Federal securities

laws add to the reliability of that information because they carry

with them civil and criminal penalties for inaccurate reporting.

However, outside the United States, and for some issuers like

TVA, within the United States, Moody’s and the other rating agencies for many years have rated companies not subject to SEC reporting requirements. For these entities, Moody’s relies on the completeness and veracity of issuers’ public and private disclosure of

information, along with industry-specific knowledge and macroeconomic analysis.

We believe that the TVA has operated in good faith in providing

accurate and reliable financial information to facilitate our rating

analysis, though we do prefer that all financial reporting, including

by TVA, be subject to the disclosure standards set forth in the 1933

and 1934 Acts. Moody’s analysts have a constructive working relaVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 89115.TXT SBANK4 PsN: SBANK4
29

tionship with multiple contacts at TVA, which provides additional

background on operational developments, industry news, or Government proposals. We receive annual and quarterly reports from

TVA and regular briefing material.

As with any issuer, Moody’s analyzes multiple factors when rating TVA. Thus, we have considered TVA’s protected service territory, power costs, ability to set rates, and at the macro level, the

growth rate of the region it serves. We also consider financial

measures, including cash flow, balance sheet, capital structure, and

prospects for raising or lowering debt in the near future. We have

obtained all of this information directly from the company or from

third-party sources. Finally, as a general rating approach to Government Sponsored Enterprises such as TVA, Moody’s uses an integrated analysis of both the fundamental creditworthiness of the enterprise as a business, and the enterprise’s relationship with the

U.S. Government.

To conclude, Moody’s supports steps to improve the quality and

reliability of the information that market participants, including

investors and our analysts, receive. This support for higher quality

information, however, should not be interpreted as reflecting any

particular concerns over the reliability of the financial information

we have received from TVA. Rather, as a major consumer of financial data and SEC filings, Moody’s supports efforts to enhance

financial disclosure because these efforts improve the overall reliability of financial information in the marketplace, and thus contribute to more efficient capital markets. For that reason, we commend the SEC for setting forth disclosure alternatives and are glad

to hear that TVA is willing to work with the SEC to pursue those

alternatives. We look forward to the results of those discussions.

Thank you, Mr. Chairman. I would be very happy to answer any

questions.

Chairman SARBANES. Thank you very much, Mr. Gates.

Mr. Crowell, I wanted to ask you, do I understand that the TVA

is paying out of its power revenues for nonpower activities, and

particularly for its river flood control projects? You used to get a

Federal appropriation. Is that correct?

Mr. CROWELL. Correct, right.

Chairman SARBANES. Now that Federal appropriation has been

done away with. Is that right?

Mr. CROWELL. That is right.

Chairman SARBANES. As a conscious decision or simply because

of the workings of the budget process?

Mr. CROWELL. Really, due to the workings of the budget process.

At the time, we undertook an effort to get away from using tax

funds to support projects in the Tennessee Valley. It was a joint effort between the TVA Board and the Office of Management and

Budget. It was a proposal to do that that was in the President’s

budget, the year before we did it.

Chairman SARBANES. But you are now carrying burdens that are

not in any sense part and parcel of the power business. Is that

right?

Mr. CROWELL. That is correct. These duties are public responsibilities—river management, economic development. Operations on

30

navigation flood control, which normally would be funded by taxpayers, are now being funded by the TVA out of power revenues.

Chairman SARBANES. You used to receive a Federal appropriation for that. Is that right?

Mr. CROWELL. That is correct.

Chairman SARBANES. And did you also get a Federal appropriation to do your power work, or did that all stop in 1959, when you

were given the authority to issue bonds?

Mr. CROWELL. It all stopped in 1959. You are correct, Mr. Chairman. The change was made in 1959. Prior to 1959, the U.S. Treasury financed TVA’s operations, the power operations. After that,

TVA financed them independently.

Chairman SARBANES. Right. But the nonpower operations, the

so-called stewardship activities, were still funded by the Government. Correct?

Mr. CROWELL. That is right. That is correct.

Chairman SARBANES. What is the order of magnitude of those activities, at least in recent years, if you know?

Mr. CROWELL. In recent years, I would say that the cost of doing

them adequately would be somewhere around $80 to $90 million a

year. I think the last year TVA received an appropriation, it was

in the 1970’s, $70 million.

Chairman SARBANES. Now, Dr. Pulsipher, I think I may have

misunderstood you. But I took something that you said to suggest

that providing electricity was not part of TVA’s original mandate.

Is that correct?

Mr. PULSIPHER. That is right. It was set up for flood control navigation in a fairly broad, unspecified mandate. As a consequence of

those activities, it started to produce power when it built dams.

That grew under the leadership of David Lillienthal into the power

system.

Chairman SARBANES. But I always thought it was part of the

original thinking of the Tennessee Valley Authority legislation. Do

you recall that?

Mr. CROWELL. I think what Allan is trying to say—and I might

mention, the Committee probably does not know that Professor

Pulsipher and I worked together at TVA. We reported to the same

manager and I have always found him to be a very bright and

thoughtful person, although I do not agree with him very often.

[Laughter.]

Chairman SARBANES. That happens around here sometimes, too.

[Laughter.]

And we make exactly the same statement.

[Laughter.]

Mr. CROWELL. But, anyway, rural electrification was part of

Franklin Roosevelt’s campaign I think in 1932, to not only do it for

the United States, but also to do it for the area of the Tennessee

Valley. So electrification was a part of TVA’s mandate from the

start. Allan is correct that, originally, more of the effort went into

navigation, flood control of the Tennessee River because it flooded

on an annual basis and caused great economic damage and loss of

life. But power was always part of that. Electricity was to be sold

to the people in the Tennessee Valley.

31

Over time, with the recognition in 1959 in the Eisenhower Administration that the electrification needed to continue, there was

a major change made and TVA was then permitted to issue bonds

in order to finance expansion.

Chairman SARBANES. Senator Bunning.

Senator BUNNING. Thank you very much.

Mr. Crowell, you talked about, and in your statement, you reduced it down a bit, TVA’s aggressively reducing debt.

Mr. CROWELL. Yes.

Senator BUNNING. If TVA continues to pay back debt at the rate of $50 million, which is this last year’s annual debt which was repaid, it would take 250 years to do it. How does TVA plan to restructure a debt repayment plan that would eliminate its statutory

debt of $26 billion? In other words, it is supposed to be a 10-year

plan that would end in 2007 to reduce it in half. I wonder how we

are going to do that if we are going to do it at $50 million a year.

Mr. CROWELL. Well, we are obviously not going to do it based on

$50 million a year.

The last budget I approved, the debt was reduced by $600 million. Now, the 10-year plan was always viewed as something that

would be revised on a yearly basis and make changes as a result

of market conditions and whatever.

But the reason I made that point in the statement is that we are

here discussing today before this Committee disclosure issues,

when personally, I think that the more serious subject should be

the size of the debt and the need to produce a plan that will reduce

it in the future, because I think that, as competition occurs, the

real threat to TVA’s survival is going to be the size of its debt. And

that is the reason I made that point. I think it is a very important

issue and I know that you have——

Senator BUNNING. Well, that is my reason for examining the debt

and figuring out the best way to either register it or let everybody

know exactly what is going on with the debt, because it jumps out

at you when you look at TVA.

Mr. CROWELL. Absolutely, it does. I would agree with you on

that. I guess the point I think I am trying to make, Senator, is that

I do not know that registration is going to get to the heart of the

problem that you just mentioned and your concern is.

Senator BUNNING. It may not. But something has to. And so, I

am having the hearing here to get ideas.

Mr. CROWELL. Of course.

Senator BUNNING. We had some on the first panel, the exchange

between the SEC and Ms. Harris, that may be a way to work out

something that we have not even talked about.

Mr. CROWELL. Sure.

Senator BUNNING. Mr. Gates, in your triple A rating of TVA’s

financial statement and corporate governance policies, do you believe that they will be able to pay back their bonds because they

have the implicit backing of the Federal Government and they can

unilaterally raise rates without worrying about approval of State

regulators?

Mr. GATES. As discussed before, the prospectuses and other materials make clear that there is not an explicit guarantee. We also

do not view there being an implicit guarantee. However, GovernVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 89115.TXT SBANK4 PsN: SBANK4
32

ment ownership does have certain things that go with it, and those

statutory factors together are the most essential factors in the triple A rating, and that includes the protected service territory, the

ability to raise rates without regulatory review, and the Government ownership.

Senator BUNNING. So all the things I mentioned are a real basis

of fact for your triple A rating.

Mr. GATES. Those are the three most important factors in the triple A rating.

Chairman SARBANES. What do you make of the OMB letter we

received here this morning?

Senator BUNNING. Wait a minute. I have someone here from

OMB that I am going to ask that question.

Is Jim Meatus here? Would you try to explain to us the inconsistency of Mitch Daniels’ letter, where the TVA’s bonds are guaranteed by the Federal Government? Or maybe I misread it or the

Chairman misread it.

Chairman SARBANES. Here it is.

[Indicating.]

Senator BUNNING. I have it, too.

Chairman SARBANES. Okay.

Senator BUNNING. I did not misread it. Could you explain that

to me?

Chairman SARBANES. Sir, I think it would help if you took a

microphone and identified yourself for the record.

Senator BUNNING. Identify yourself.

Chairman SARBANES. We are happy to have you come forward to

the table at Senator Bunning’s request.

Mr. MEATUS. Thank you very much. My name is Jim Meatus. I

am a Budget Examiner for TVA at the Office of Management and

Budget. I am honored and pleased to be here today.

I think, if I were smart, I would go back to the office, say little

today, and check with the boss to be sure, 100 percent sure, exactly

what he had in mind.

Senator BUNNING. Did you see the letter?

Mr. MEATUS. Yes.

Senator BUNNING. Okay.

Mr. MEATUS. But I have an opportunity here to perhaps add

some useful things for people to think about, and let me proceed.

One of the presenters here today talked about reviews that other

utilities get. I am proud of the job I do at OMB, but we do have

one budget examiner looking at this $7 billion a year utility, which

is point one.

Point two, Senator, you mentioned that that does jump out at

you when you look at TVA. And people concerned about TVA’s customers have to be concerned about TVA’s debt.

Point three, and more directly in answer to your question, I participate in many discussions by thoughtful people about exactly

what the triple A rating means. For years I believed, and I now

think I am wrong, that the Federal Government, Senator Sarbanes,

like you say, would not back up the debt. If TVA ran into problems,

like any other business, TVA would pay the consequences. But

about 2 years ago, I discovered that I was the only person at the

staff level within OMB who believed that, because it was TVA debt,

33

because it was Government debt. And that is really important.

That is really important to come to terms with, it seems to me, because how does a business make decisions?

In part, it makes decisions based on the integrity of the people

involved, the character and so forth. And certainly, TVA is staffed

with talented people with integrity. But another practical concern

is the cost of capital. Frankly, I do not have the numbers in front

of me. The gentleman from Moody’s undoubtedly could answer the

question.

Your planning horizon looks much different if you have a triple

A rating than if you have something else. I think that it would be

a useful exercise for people to—and perhaps the gentleman from

Moody’s could answer the question. If you take one of the rating

agencies’ rating templates and fill in the blanks for TVA and forget

about the Federal Government backing up the debt, what would

the debt, what rating would it be? I do not know the answer. But

I know people who have told me the answer is somewhat less than

a triple A. Now, I do not want to overstay my visit and I appreciate

your patience. I hope my answer has made some sense to you.

Senator BUNNING. Thank you very much.

Mr. MEATUS. I will go back and check with the boss to see—— Senator BUNNING. To see what he meant? Mr. Meatus, that

would really help us.

Chairman SARBANES. Mr. Gates, that is a pretty direct challenge

to you.

Mr. GATES. Yes, I can respond to that.

Chairman SARBANES. Yes, I think you ought to, maybe before he

leaves the table.

Mr. GATES. Well, the triple A rating is very heavily based on the

statutory factors. If those statutory factors were to be changed or

they were to go away, then certainly, we would review the rating

for downgrade.

We do not actually have a rating template. You can look at the

various financial ratios of any issuer, including the TVA, but you

have to put those ratios into the context of the business risk of the

enterprise. And given that TVA has the Federal ownership, the

protected service territory, the ability to raise rates, and the statutory requirement that its rates be set at a level that is sufficient

to cover all of its obligations and its debt, the business risk is perceived as being very small. So, therefore, the financial ratios, which

do not alone look triple A, need to be viewed in the context of the

current status. If that status was changed, then the triple A would

go on review for downgrade.

Chairman SARBANES. I take it, Mr. Meatus, it is not one of your

objectives this morning that we should walk out of here with TVA’s

triple A rating downgraded, is it?

Mr. MEATUS. I actually came to hear the hearing today, and I am

once again pleased and honored to be here. I may get myself in

trouble. I have no interest in downgrading the triple A rating if it

is deserved.

Chairman SARBANES. All right. I am pleased to hear that.

Mr. MEATUS. If it is deserved.

Chairman SARBANES. Senator Bunning, I think you can go on.

Senator BUNNING. Thank you very much.

34

Mr. Crowell, I just want to ask one last question because it was

brought out earlier in the hearing about the recommendation of

splitting the auditor’s job in 1996 or 1995, I forget exactly the year,

by the IG. Is it true or false that because or in spite of the fact

that the IG made that recommendation, that he was fired by TVA?

Mr. CROWELL. Oh, no, no.

Senator BUNNING. He was not fired by TVA?

Mr. CROWELL. No, he retired from TVA.

Senator BUNNING. He retired.

Mr. CROWELL. But this is some years later. In 1995—let me just

answer your question. In 1995—— Chairman SARBANES. You were Chairman, then, right?

Mr. CROWELL. I was Chairman then.

Senator BUNNING. That is why I asked.

Mr. CROWELL. I think you make a good point because the IG

would have to be commended for making that recommendation in

1995. Now the fact that he made it to the TVA board and it also

went to Congress, and the fact that we missed it—if we had a crystal ball, I certainly would have separated the functions in 1995.

But in 1995, that was standard operating procedure for all of corporate America and all of the Government.

Those are the kinds of issues, Senator, that you wish you could

go back and do over again, but that was not the case at the time.

Senator BUNNING. They did not report to me in the House, and

it was my fault because I was not on the Energy Committee over

in the House.

[Laughter.]

Mr. CROWELL. No, I am simply making the point that it was

standard procedure then. Nobody at that time could have predicted, in my opinion, the situation that has occurred over the past

couple of years. That is a situation where, if you had a crystal ball,

you could be a lot smarter.

Senator BUNNING. I appreciate all of you testifying. Thank you.

Chairman SARBANES. Senator Carper.

Senator CARPER. I have no questions, thank you.

Chairman SARBANES. Well, this has been a very helpful panel

and we very much appreciate your coming and being with us today

and the time and effort that was put into both the written and the

oral presentations. We thank you very much.

Senator BUNNING. Thank you.

Thank you, Mr. Chairman.

Chairman SARBANES. The hearing stands adjourned.

[Whereupon, at 12:40 p.m., the hearing was adjourned.]

[Prepared statements and additional material supplied for the

record follow:]

35

PREPARED STATEMENT OF SKILA HARRIS

DIRECTOR, TENNESSEE VALLEY AUTHORITY

SEPTEMBER 17, 2002

Good morning, Chairman Sarbanes and other distinguished Members of the Committee. My name is Skila Harris, and I serve as Director on the Board of the Tennessee Valley Authority. On behalf of TVA’s Chairman Glenn McCullough and Director Bill Baxter and more than 13,000 employees, I would like to thank you for

the opportunity to appear here today to give testimony on corporate responsibility

at the Tennessee Valley Authority, as well as the breadth and depth of financial

disclosure and oversight at TVA. I would also like to discuss what TVA will do in

the future to uphold the spirit of the landmark Sarbanes-Oxley Act of 2002. We at

TVA commend you, Mr. Chairman, for your leadership and perseverance on this important legislation.

TVA’s Background

TVA has a proud heritage of service in the Tennessee Valley. TVA exists to serve

the public good, and our leadership standard is that TVA will achieve excellence in

business operations and public service for the good of the people of the Tennessee

Valley region. Created by Congress in 1933, TVA serves the people of the Valley

by producing reliable, affordable electric power; supporting sustainable economic

development; and maintaining stewardship of the region’s natural resources. A

corporation of the Federal Government, TVA uses the best practices of private

enterprise to achieve excellence in business operations and public service.

TVA is entirely self-financing and receives no funding from Congress. TVA’s mission, set forth by the TVA Act, remains at the cornerstone of TVA’s day-to-day

activities in the Valley. TVA is charged primarily with providing navigation, flood

control, and agricultural and industrial development, while providing electric power

to the Tennessee Valley region. At the core of TVA’s mission is creating value and

delivering quality service for stakeholders throughout the region.

Affordable, reliable electric power is the fuel of the economy in the Tennessee Valley, and TVA’s power system is setting performance records as it keeps pace with

increasing power demand. TVA’s electric power system has a winter dependable

generating capacity of 30,365 MW and operates 59 coal-fired units at 11 plants, five

nuclear reactors at three plant sites, 29 hydro power plants, and five combustion

turbine plants. Through 158 local power distributors and 62 directly served industrial customers, TVA supplies electricity for 8.3 million people in the Tennessee

Valley. As the Nation’s largest public power system, TVA reflects the Nation’s

strengths and challenges in developing a strategy for providing reliable, affordable,

and environmentally sound energy.

The Administration has proposed a national energy strategy that includes important efforts to restructure the electric power industry, improving the Nation’s energy

infrastructure and encouraging competition in the industry. TVA supports these policy reforms.

During this crucial time in our Nation’s history, it is also noteworthy that TVA’s

mission includes a role in national defense and a long-standing history of support

for U.S. national security requirements—from the early days of making munitions

in Muscle Shoals, Alabama, and building dams to supply power for vital aluminum

factories during World War II, to TVA’s current efforts to assist the Department of

Energy to obtain tritium.

In service to the region and the Nation, TVA manages the Tennessee River system, the fifth largest river system in the United States. Although similar responsibilities for resource management are funded with taxpayer dollars elsewhere in

the United States, TVA uses no current appropriation dollars for this work. Fiscal

year 1999 was the last year in which TVA received appropriated dollars for these

activities. The 652-mile-long river, the 42,000 miles of streams and tributaries, and

TVA’s 49 dams and 14 navigation locks are a vital part of the Nation’s navigation

system, providing for the shipping of 45 million tons annually. TVA’s other purposes

in managing the river system include reducing flood risk and producing hydro

power. The river and its 12 tributary watersheds touch 125 counties in portions of

seven States.

TVA’s Board of Directors is committed to achieving excellence in business operations and public service as the organization prepares for the competitive marketplace of the future. The Board and the employees of TVA are working to optimize

the corporation’s operational and financial performance while remaining dedicated

to economic development in the Valley, environmental stewardship, integrated resource management, and stakeholder communications. While there is still much

36

work to be done, I am confident that a bright future lies ahead for the people we

are charged to serve.

TVA’s Business Practices

TVA is committed to conducting its business in an open and forthright manner

that instills confidence in Congress and the Administration and in our investors, our

customers, and our ratepayers within the Valley and among Federal taxpayers and

citizens who have an interest in programs run by the Federal Government.

TVA’s owners, investors, customers, and other stakeholders, including taxpayers,

already benefit from a number of protections. I appreciate the opportunity to outline

those protections and to share with you today what TVA is already doing to ensure

financial integrity for our stakeholders.

For the future, TVA is also committed to doing even more, and TVA is making

specific commitments to corporate responsibility, auditor independence, and increased financial disclosure that will enable us to keep the continued confidence and

support of our stakeholders.

TVA’s Oversight

TVA’s stakeholders, including investors in its bonds, benefit from and can have

confidence in the multiple levels of oversight to which the TVA is subject, as a

corporation wholly-owned by the U.S. Government. Because TVA’s mission as a

Government-owned corporation is somewhat different from that of publicly-traded

companies, the oversight under which we operate is different from that under which

privately-owned, publicly-traded companies operate.

As I noted earlier, the TVA’s mission is to serve the public interest by supporting

economic development of the Tennessee Valley, managing a thriving Tennessee

River system, and supplying low-cost, reliable power to the Tennessee Valley region.

TVA’s mission is quite different from the profit-oriented goals of an investor-owned

company. In fact, far from calling upon the TVA to maximize earnings, TVA’s Congressional charter, the TVA Act, calls for TVA to offer electricity at rates as low as

are feasible—balanced with an additional requirement that TVA charge rates sufficient to meet, among other things, the annual principal and interest payments on

TVA’s bonds.

Privately-owned, publicly-traded companies have a similar responsibility to provide reliable goods and services to their customers while earning a fair return on

investment for their shareholders. The U.S. Securities and Exchange Commission

has the major regulatory and oversight role with respect to securities of publiclytraded companies; and its major focus, appropriately, is on ensuring fairness in the

issuance and trading of stocks.

Another difference between TVA and publicly-traded companies is that the ownership interest in TVA is held by the Federal Government. TVA has an interest in

protecting the interest of its owner, the U.S. Government and by implication the

American people, although TVA does not issue stock. Consequently, TVA does not

have any incentive to generate a return for shareholders, nor can TVA reward executive performance with stock options. As a result, the oversight Congress has put

in place for TVA is different from the oversight for publicly-traded companies.

But make no mistake, as a Government agency, TVA is subject to considerable

oversight.

TVA management is governed by a three-member Board of Directors appointed

by the President and confirmed by the U.S. Senate. Board members are sworn to

uphold TVA’s Congressional charter, the TVA Act, which bounds the range of business activities in which TVA can engage.

TVA, like many other Government agencies, has an independent Inspector General (IG) with broad audit and investigative powers. TVA’s Inspector General was

previously appointed by the TVA Board of Directors but, pursuant to recent legislation, will be appointed in the future by the President. TVA’s Acting Inspector General, Mr. Don Hickman, is here with me today.

TVA’s Inspector General conducts audits of the TVA’s financial systems, business

decisions, operations, and contracts. The Inspector General is also charged with conducting investigations of possible fraud, waste, and abuse within TVA. The Inspector General routinely publicizes its hotline to employees and investigates reports of

financial or accounting irregularities, in addition to its other responsibilities. The

Inspector General provides semiannual reports to Congress and to the public on the

results of its audit and investigative work.

In carrying out its audit responsibilities, the Office of the Inspector General provides TVA with oversight that is much like that provided by a publicly-held company’s Audit Committee. The Office of the Inspector General performs many of the

37

same duties and functions as those of an Audit Committee but does so with more

authority and professional resources. For example:

• An Audit Committee must include at least one member with financial expertise.

The Inspector General’s staff that oversees audits of TVA finances includes 19

certified public accountants.

• The Inspector General has greater access to TVA financial and management information than would a company’s Audit Committee because the Inspector General

has access to any information in TVA.

• The Inspector General has the authority to investigate not only financial matters

but also any alleged ethics violation in TVA, and the Inspector General is charged

by Federal statute with aggressively pursuing any such allegation.

• Also by Federal statute, the Office of Inspector General is independent of the

Board of TVA. A publicly-held company’s Audit Committee is a committee of the

company’s Board of Directors.

• The Inspector General has the authority to investigate any impropriety and report

expeditiously to the Attorney General whenever the IG has reasonable grounds

to believe criminal law has been violated. This authority extends not only to investigations of actions by TVA managers or employees, but also to actions by people outside TVA, such as contractors and vendors, when an alleged violation is

related to TVA.

TVA also has an independent external auditor, PricewaterhouseCoopers, which is

appointed by the TVA Board. The TVA’s Office of the Inspector General provides

oversight of the firm’s work and maintains the budget for the firm’s annual audit

of TVA. The Inspector General also has the legal authority to determine whether

TVA’s audit will be performed by the Office of the Inspector General itself or by an

independent external auditor.

PricewaterhouseCoopers audits TVA’s financial statements in accordance with

Government auditing standards and provides an opinion on whether those statements are presented in conformity with generally accepted accounting principles, or

GAAP. TVA’s financial results are also included in the Federal Government’s consolidated financial statements, which are audited by the General Accounting Office.

In addition, Congress exercises considerable oversight over TVA, as exemplified

by today’s hearing. The U.S. Senate is charged with providing oversight through the

Environment and Public Works Committee and its Subcommittee on Clean Air,

Wetlands, and Climate Change.

The U.S. House of Representatives is charged with providing oversight through

the Transportation and Infrastructure Committee and its Subcommittee on Water

Resources and Environment.

The General Accounting Office (GAO) conducts frequent audits of various TVA

activities and programs, often at the request of Members of Congress. GAO is also

authorized by the TVA Act and the Government Corporation Control Act to audit

TVA’s financial statements.

Under the provision of the TVA Act, TVA is obligated to periodically provide Congress, the Federal Energy Regulatory Commission, the Office of Management and

Budget, and other interested Federal and State agencies with detailed financial

and operational information on the generation, transmission, and distribution of

electric energy by the TVA system. The development and submission of this information is a element of the ‘‘yardstick’’ function that TVA was intended by Congress

to serve—to better enable Congress to formulate legislative policy for the electric

power industry.

TVA also files various reports with the President, Congress, and U.S. Treasury:

• Under the TVA Act, TVA files an annual report with the President and Congress,

which contains financial statements and a complete report of TVA’s business

activities.

• Under the Government Performance and Results Act, TVA submits annual performance reports to Congress.

• Under the Government Corporation Control Act, TVA submits an annual budget

to the President and TVA’s proposed budget is subject to review and approval by

the President and his staff in the Executive Branch as part of the normal budget

preparation process.

• In accordance with OMB Circular A–34, TVA reports on a quarterly basis its

financial outlays from the previous quarter to the U.S. Treasury.

• In addition, the U.S. Treasury frequently asks TVA to provide a forecast of future

receipts and disbursements.

Furthermore, before TVA can issue bonds with maturities of 1 year or more, the

Secretary of the Treasury must approve the time of issuance and maximum interest

38

rate of the bonds. Also, since most of TVA’s bonds are listed on the New York Stock

Exchange and trade through its bond exchange, TVA must meet the NYSE’s listing

requirements.

As you can see, TVA, as a Government agency, has a considerable amount of oversight that provides significant assurance to our stakeholders. Additional measures

further ensure TVA’s integrity in the areas of corporate responsibility, auditor independence, and increased financial disclosure.

Corporate Responsibility

By law, all TVA employees must adhere to the standards of ethical conduct for

Federal employees, which require that all Officers complete ethics training and file

financial disclosure statements annually. In addition to that requirement, TVA will

develop a code of financial ethics consistent with the Sarbanes-Oxley Act for all Officers and Business Managers, as well as a training program on full, fair, accurate,

timely, and understandable financial and nonfinancial disclosure, TVA’s corporate

governance practices, and financial ethics requirements for all employees who prepare TVA’s financial and business reports.

Beginning with the 2002 TVA Annual Report, TVA’s Board and CFO will certify

the financial statements and related information for the fiscal year ending September 30, as well as all future financial statements and related information. The

Information Statement, which is the TVA’s primary disclosure report to the public

financial markets, will be similarly certified. The certification process will include

signed certifications by all TVA Officers and Business Managers of the information

they provide for these reports.

Because TVA is wholly-owned by the U.S. Government and cannot issue stock,

TVA Directors and Officers do not receive stock options. In addition, TVA does not

presently make personal loans to its Directors or Officers and does not plan to make

any such loans in the future.

Auditor Independence

TVA has significant protections in the area of auditor independence. The independent TVA Inspector General has broad audit and investigative responsibilities.

The Inspector General conducts ongoing audits of TVA’s operational and financial

matters in accordance with Government auditing standards. The Inspector General

also conducts an annual audit of the work of TVA’s independent external auditor,

PricewaterhouseCoopers, to ensure compliance with Government auditing standards. TVA’s Office of the Inspector General itself undergoes a peer-review audit

every 3 years conducted by an Inspector General from another Federal agency.

Beginning next fiscal year, the TVA will not enter into any new contracts with

PricewaterhouseCoopers for nonaudit services, and the TVA will phase out all consulting and actuarial services currently performed by PricewaterhouseCoopers.

In addition, TVA’s Inspector General, Senior Vice President of Procurement, and

Chief Financial Officer have clearly defined the roles of all parties with responsibilities related to the external audit of TVA’s financial statements in order to ensure

auditor independence, with the Inspector General being responsible for the technical

management of the audit contract with PricewaterhouseCoopers.

TVA is taking several other steps to ensure auditor independence, comparable to

those in the Sarbanes-Oxley Act. TVA will require its external auditor to rotate the

lead audit partner and the audit partner responsible for reviewing the audit every

5 years. Also, TVA’s CFO, Controller, and Chief Accounting Officer will not be hired

from its external auditor if they have worked on the TVA audit during the preceding

year. TVA currently does not have a Chief Executive Officer, but this prohibition

will also apply to TVA’s CEO if TVA has one in the future.

The TVA Board will ensure an appropriate review of its external audit through

quarterly meetings with the Inspector General and the external auditor.

Financial Disclosure

TVA is committed to fully disclosing all material financial and business information to the public financial markets by providing a steady flow of timely, comprehensive, and accurate information. TVA currently issues quarterly financial reports and

publishes an annual report that includes a Management’s Discussion and Analysis

of Financial Condition and Results of Operations and audited financial statements

prepared in accordance with generally accepted accounting principles.

We provide Information Statements and Offering Circulars, similar to prospectuses for publicly-traded companies, to investors and the bankers and brokers

who sell TVA’s bonds. TVA issues news releases on significant events and conducts

open Board meetings to ensure that major decisions by TVA’s Board are made in

a public arena with opportunity for input from the public we serve.

39

1 16 U.S.C. § 831 et. seq. 2See Securities Act § 3(a)(2), 15 U.S.C. § 77c(a)(2); Exchange Act §§ 3(a)(12) and 3(a)(42), 15

U.S.C. § 78c(a)(12) and (42). 3See 16 U.S.C. § 831n–4. 4See 16 U.S.C. § 831y. 5See TVA, Financing Program Highlights, undated.

TVA also conducts an annual conference in New York for financial analysts and

investors and distributes a detailed Fact Book with information on TVA’s strategy,

finances, and operations.

TVA is forming a Disclosure Committee to document procedures for reporting material events and occurrences on a more timely basis.

Conclusion

In conclusion, TVA is committed to conducting its business in an open and forthright manner that instills confidence in Congress and the Administration and in our

investors, our customers, and our ratepayers. TVA already has a number of mechanisms in place for the protection of its stakeholders, and we are committed to doing

even more to ensure that we earn your continued support and confidence.

Thank you. I look forward to answering any questions the Committee might have.

—————

PREPARED STATEMENT OF ALAN L. BELLER, ESQ.

DIRECTOR, DIVISION OF CORPORATE FINANCE

U.S. SECURITIES AND EXCHANGE COMMISSION

SEPTEMBER 17, 2002

Introduction

Chairman Sarbanes, Senator Gramm, Members of the Committee, I am pleased

to have this opportunity to testify before you on behalf of the Securities and Exchange Commission regarding the application of disclosure and reporting requirements of the Federal securities laws to the Tennessee Valley Authority (‘‘TVA’’). As

you know, TVA was statutorily created in 1933,1 the same year the first of the Federal securities laws was enacted. It was formed to provide flood control, navigation

and agricultural and industrial development and to promote the use of electric

power in the Tennessee Valley region. From its creation in 1933, TVA has been

wholly-owned by the U.S. Government and is considered an agency and instrumentality of the United States. As such, the offer and sale of its securities has been exempt from registration under the terms of the Securities Act of 1933 (‘‘Securities

Act’’) and its securities are exempted securities and Government securities under

the terms of the Securities Exchange Act of 1934 (‘‘Exchange Act’’).2

TVA’s Borrowing Authority and Types of Debt Issuances

TVA is currently authorized by statute to issue only debt. Until 1959, any indebtedness incurred by TVA was backed by the full faith and credit of the United States.

In 1959, Congress eliminated the backing of TVA debt by the full faith and credit

of the United States. Under its current statutory authority, TVA may borrow up to

$30,000,000,000 to finance its power program and to refund any outstanding bonds

and is permitted to repay the bonds only from its net power proceeds (and proceeds

of any bond refunding).3 The TVA is also obligated to repay the Government for its

original investment,4 also known as appropriation investment, which payment was

$55,000,000 in 2001. At its September 30, 2001 fiscal year end, TVA continued to

have an obligation to repay the Government its remaining appropriation investment

of $508,000,000.

TVA has stated that it issues bonds in a variety of structures and sells its bonds

to institutional and individual investors on a global basis. According to TVA, as of

February 28, 2002, it had 49 long-term public bond issues outstanding, including

at least one specifically designed for individual investors.5 Based on its 2001 annual

report, at September 30, 2001, TVA’s long-term debt was $22,359,000,000, and its

short-term debt in the form of discount notes was $3,016,000,000. At least two of

TVA’s debt securities, the putable automatic rate reset securities and the Valley

inflation indexed power securities, are listed and traded on the New York Stock

Exchange.

40

6TVA, as an agency and instrumentality of the United States, is not subject to the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79b(c)(‘‘PUHCA’’). Even without this exemption,

we understand that TVA would not be subject to PUHCA since it is not permitted to have subsidiaries and all the utility assets and businesses therefore are held at the TVA level. 7Department of the Treasury, Securities and Exchange Commission, Board of Governors of

the Federal Reserve System, Joint Report on the Government Securities Market, January 1992. 8See 16 U.S.C. § 831h. 9Pub. L. 107–204, 116 Stat. 745 (2002).

Our area of interest as an agency involves disclosure to investors in TVA debt and

not other aspects of Federal regulation or incentives in the power market.6 Because

TVA is wholly-owned by the United States and does not issue any equity securities,

the most appropriate way to evaluate its disclosure is from the standpoint of debt

investors. In 1992, the Commission participated with the Department of Treasury

and the Board of Governors of the Federal Reserve System in a Joint Report on the

Government Securities Market (‘‘1992 Report’’).7 As a Government agency, TVA was

excluded from the recommendations regarding Government Sponsored Enterprises

(‘‘GSE’s’’) in the 1992 Report. Further, the Commission has not considered the status of TVA since that time.

Application of the Federal Securities Laws

As an agency and instrumentality of the United States, the offer and sale by TVA

of its debt is exempt from registration under the Securities Act, and its securities

are within the definition of exempted securities and Government securities under

the Exchange Act. In addition, as part of the 1959 amendments, Congress explicitly

exempted the issuance and sale of TVA bonds from the requirements or limitations

of any other law, which includes the Federal securities laws. Therefore, TVA does

not register the offerings of its debt securities under the Securities Act, and its debt,

including debt that is listed on the New York Stock Exchange, is not subject to registration under the Exchange Act. Congressional action would be required to eliminate these various statutory exemptions.

The effect of the exemptions from the Securities Act and the Exchange Act is that

disclosures by TVA are largely unregulated at the Federal level. Financial statements are statutorily mandated under the Tennessee Valley Authority Act of 1933.8

The staff of the Commission does not review these financial statements or any other

TVA disclosure documents. However, TVA is subject to general antifraud restrictions prohibiting false or misleading statements of material facts, including the

omission of material facts necessary to make the statements made, in light of the

circumstances under which they are made, not misleading.

TVA is also not subject to the provisions of the recently enacted Sarbanes-Oxley

Act of 2002.9 For example, TVA will not be subject to the independent audit committee requirements, the auditor independence rules, the certification requirements

or the code of ethics provisions.

Comparability of Disclosure

TVA, while a unique Federally owned corporation, has many of the same disclosure issues as publicly held utilities. TVA bonds are sold to the public in underwritten offerings. We believe investors in those debt securities are entitled to the

same type of information as that provided by other issuers of public debt. We further believe that the Commission’s detailed disclosure rules and filing requirements

and the staff review and comment process provide the best framework for disclosing

information to which investors are entitled. Currently, TVA’s annual, periodic, and

offering disclosures have been governed by the demands of market participants and

antifraud strictures, not by our disclosure rules.

The effect of the lack of the full faith and credit backing of the United States for

TVA’s bonds, of course, makes TVA’s disclosure more relevant. Because investors in

TVA’s bonds may look only to TVA’s net power proceeds (and refunding proceeds)

for repayment of the bonds, disclosures by TVA should give the holders of its debt

a materially complete and accurate picture of the TVA’s financial and operational

situation to evaluate whether there may be sufficient net power proceeds to repay

their bonds.

In preparation for this testimony, the staff of the Commission has considered certain recent disclosures by TVA available on their website. This overview does not

represent a full review, has not involved a typical comment process with TVA, and

does not attempt to cover all the comments the staff might issue in a full review.

While TVA disclosures in its most recent information statement and annual report,

quarterly reports, offering circulars and other materials generally include most of

the same disclosures as companies that file reports with the Commission, there are

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10See generally Regulation S–X, 17 CFR 210. 11See Item 305 of Regulation S–K, 17 CFR 229.305. 12 15 U.S.C. § 79a. 13See Items 402 and 404 of Regulation S–K, 17 CFR 229.402 and 404. 14See Item 601 of Regulation S–K, 17 CFR 229.601.

certain areas where we believe TVA’s disclosures would be enhanced if the Commission’s line item disclosure requirements and staff review applied.

Financial Statements. TVA provides audited annual financial statements, prepared in accordance with U.S. GAAP. TVA includes in its information statements

and annual reports 3 years of Statements of Income, Cash Flows, Changes in Proprietary Capital and Comprehensive Income (Loss). TVA’s presentation of the types

and number of years of financial statements appear to be generally consistent with

Commission rules and the financial statements that other public companies provide.10 The staff did not conduct a complete accounting review, so we are unable

to state whether the financial statements meet all the line item requirements.

Management’s Discussion and Analysis. It would appear that TVA provides more

summary analysis and less trend information than the Commission would seek, although all of the required categories of information appear to be included.

Market Risk Disclosure. TVA provides more abbreviated disclosure regarding

market risk, and in particular less quantitative disclosure, than a public reporting

company would be required to provide.11 TVA presents a market risk section that

briefly discusses risk policies, interest rate and foreign currency risk, commodity

and equity price risk and forward contracts. The discussion does not quantify the

effects of price risk for commodity-based derivative instruments. In addition, there

is very limited quantitative disclosure on interest-rate risk or foreign-currency risk.

TVA presents no detailed quantified information surrounding its use of derivatives,

other than identification of the use of interest-rate and currency swap contracts to

hedge inflation-indexed and foreign currency denominated debt issues, respectively.

Business and Property. TVA’s discussion of its business is somewhat less comprehensive than that which the staff would typically see in disclosure provided by

publicly-owned utilities. Some of the differences in the level of disclosure provided

may be attributed to the different statutory provisions applicable to the TVA and

to regulated publicly-owned utilities that are subject to the strictures of the

PUHCA 12 and other State and Federal laws utility, energy and environmental laws.

Notwithstanding the different regulatory requirements that TVA is subject to, the

staff might expect to see somewhat more disclosure in a few areas, such as types

and sources of fuel and supply contracts, regulation and licensing requirements.

TVA’s description of its properties is also somewhat less detailed than public

reporting utilities typically provide. For example, most owners of power generation

facilities include more comprehensive disclosure regarding location of, nameplate

capacity in Megawatts (MW) and number of generating units in, each plant. TVA

has included most of this information as it relates to its nuclear plants. However,

TVA includes only aggregate summary information about its other plants.

Executive Compensation and Related Party Transactions. The staff did not find

any disclosure regarding executive compensation and related party transactions.

TVA is not organized in the same manner as a private corporation—for example,

the directors are appointed by the President of the United States rather than

elected by shareholders. TVA’s information statement and annual report do not

include executive compensation information that would be required by our rules.

TVA’s information statement and annual report also do not describe any related

party relationships or transactions.13 As a Government entity, at least part of the

information regarding compensation of directors and executive officers is likely publicly available from sources other than TVA’s website.

Material Contracts. TVA does not publicly provide copies of the types of contracts

that are typically filed by reporting companies.14 These might include power purchase contracts and long-term supply contracts with five key customers.

Disclosure Alternatives

There is a tension between the TVA’s status as a Government agency and instrumentality and the resulting statutory exemptions on the one hand, and the need for

disclosure that meets Commission standards on the other hand. As previously indicated, the 1992 Report did not address TVA because it was a Government agency

and instrumentality. Unlike GSE’s addressed in that report, including Federal National Mortgage Association (‘‘Fannie Mae’’) and the Federal Home Loan Mortgage

Corporation (‘‘Freddie Mac’’), TVA is not a profit-making corporation with private

shareholders. As such, a different statutory regime may be appropriate.

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15See Securities Act § 5, 15 U.S.C. § 77e; Exchange Act § 15(d), 15 U.S.C. § 78o(d). 16See Exchange Act § 12(a), 15 U.S.C. § 78l(a). 17 Exchange Act § 13(a), 15 U.S.C. § 78m. 18See Regulation S–K (17 CFR 229) and Regulation S–X (17 CFR 210). 19 15 U.S.C. § 77aaa et. seq. 20See 17 CFR 240.3a12–11 and Exchange Act § 16(a), 15 U.S.C. § 78p(a).

There are a number of ways that a disclosure regime could be applied to TVA.

One way would be to change the statutory scheme to eliminate the Securities Act

and/or the Exchange Act exemptions. Removing the Securities Act exemption would

result in registration of public offers and sales of TVA’s debt and Exchange Act periodic reporting at least for so long as TVA had more than 300 holders of any class

of its debt.15 Because at least two classes of TVA’s debt securities are listed on a

national securities exchange, without an Exchange Act exemption TVA would have

to register these classes under the Exchange Act.16 Once TVA became subject to the

reporting requirements of the Exchange Act, it would have to file periodic and current reports with the Commission under Exchange Act Section 13(a), including an

annual report on Form 10–K, quarterly reports on Form 10–Q, and current reports

on Form 8–K.17 If TVA registered its securities and became a reporting company,

its disclosures would have to comply with the Commission’s detailed line item disclosure requirements.18 Given the Commission’s integrated disclosure system, the

information available to investors would be virtually identical even without registration under the Securities Act. In addition, TVA would become subject to the provisions of the Sarbanes-Oxley Act applicable to reporting companies. Further, TVA

would have to qualify its borrowing resolution as an indenture under the Trust Indenture Act of 1939 19 and would have to engage an independent trustee. Since TVA

does not issue any equity, however, it is important to note that it would not become

subject to the proxy or ownership reporting requirements of the Exchange Act.20

Because TVA is a Government agency and instrumentality and because the Commission has not considered TVA’s status since the 1992 Report (from which it was

excluded), we are not advocating such a change in the statutory arrangements

under which TVA operates. In particular, we believe that the Commission’s objective—disclosure that meets Commission requirements and standards—can be

achieved by alternative means. As one example, exemptions could be conditioned on

TVA’s providing the same periodic disclosure as required for reporting companies

under the Exchange Act. Another possibility would be voluntary compliance or registration under the Exchange Act, a course of action recently taken by Fannie Mae

and Freddie Mac and which achieves effectively the same results in respect of disclosure as eliminating the exemptions.

Conclusion

The individual and institutional investors who hold TVA’s debt securities depend

for repayment on TVA’s net power proceeds and refundings, and not a Government

guarantee. We believe that applying the Commission’s disclosure requirements and

processes is the preferred method of ensuring that these investors receive the materially accurate and complete disclosure they deserve. TVA’s status and exemptions

from the registration and reporting requirements of the Federal securities laws are

not necessarily an obstacle to that result. As previously indicated, there are a number of courses of action, including voluntary action by TVA, to achieve the desired

standard of disclosure that is consistent with the Commission’s standards and requirements.

—————

PREPARED STATEMENT OF CRAVEN CROWELL

CHAIRMAN, GCW CONSULTING

FORMER CHAIRMAN, TENNESSEE VALLEY AUTHORITY

SEPTEMBER 17, 2002

Good morning, Mr. Chairman. My name is Craven Crowell and I served for 8

years as Chairman of the Tennessee Valley Authority. I had the distinct pleasure

of serving the TVA for a total of 17 years, first as a member of the senior management team and then, as I have said, as Chairman of the Board of Directors. I retired

last year after 25 years of Federal Government service and now serve as Chairman

of GCW Consulting, an energy and aviation consulting firm with offices in Arlington, Virginia.

The TVA has played a vital role in creating prosperity for people of the Tennessee

Valley since its creation in 1933. It brought opportunity and hope to thousands of

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people who lived mostly in rural areas and who had few prospects for improving

their lives and the lives of their children. I can remember as a small child when

TVA electricity first came to the farmhouse where my grandparents lived and the

excitement electric lighting created in the rural community of Fairview, Tennessee,

where they lived.

There is no doubt that the TVA contributed greatly to the quality of life in the

Tennessee Valley and it is my fervent hope it will continue to play a vital role in

creating opportunity for many generations to come. I can say with certainty that

the TVA has played an important role in my life and career and I shall always be

grateful for having had the opportunity to serve the people of the Tennessee Valley.

Mr. Chairman, the Committee has asked me to address two questions: whether

the TVA should be required by Federal law to disclose financial and operational information to debt-holders and prospective investors, and, if so, whether the TVA

should be made subject to the requirements of the Securities Act of 1933 and the

Securities and Exchange Act of 1934. I want to express my appreciation to the Committee for its interest in my views on this important matter. I would, however, like

to make a few preliminary comments about TVA’s debt that I believe are relevant

to our discussion this morning.

In 1959, Congress gave TVA the authority to issue bonds to raise capital for ex- pansion and other related activities and subsequently set a debt limit of $30 billion.

For the next 38 years, the TVA continued to increase its debt until it reached $27.7

billion. In 1997, TVA realized that not only was the size of the debt coming dangerously close to its borrowing limit, but also the interest expense as a percent of

revenue at 34 percent was having a negative impact on TVA’s competitiveness.

As a result of concerns about the size of the debt, TVA developed a 10-year plan

in 1997 to reduce the debt and create a stronger financial position in preparation

for deregulation of the electric power industry. Since 1997, TVA has reduced its indebtedness by almost $2.5 billion and has reduced the interest expense as a percent

of revenue to 21 percent—producing a savings of nearly $500 million per year in

interest expense.

I am pleased the current TVA Board of Directors has continued to focus on reducing the debt. In all likelihood, TVA’s debt is greater than the market value of its

total assets in today’s market, although the agency’s book value remains higher

than its indebtedness. It is my hope the TVA Board will continue to reduce the debt

in the years ahead.

Now, if I may, let me speak to the issue of the disclosure of financial and operational information by the TVA.

During my tenure as Chairman, TVA undertook a significant expansion of its finance program in order to lower interest costs. The collective result of those efforts

over the last few years has resulted in TVA being recognized for its innovation and

responsiveness to investors.

TVA entered the global bond market for the first time in 1995 and the same year

issued its first bonds targeted to retail investors. The retail bonds were enormously

successful and resulted in a large increase in the number of TVA investors. With

this came the recognition that TVA would need to increase the opportunities to further disclose and communicate information about the agency that was of significance and importance to the investment community.

So in 1996, TVA created a staff of investor relations professionals to ensure that

investors in TVA bonds had information they needed to make informed investment

decisions. The broad responsibilities of this group were to ensure the adequacy and

accuracy of disclosures in TVA’s annual report, quarterly reports, information statements, and periodic offering circulars.

Additionally, the investor relations department routinely handled hundreds of inquiries from investors. The TVA Board also became more active with the investment

community and began hosting meetings in New York with major investors and

began meeting with investors in other countries.

In every meeting I attended, TVA was viewed as a stable, well-run Government

corporation that offered a sound investment opportunity. In no instance did any investor ever express to me the slightest concern about the business standards of

TVA, the soundness of the business or the adequacy or timeliness of our disclosures.

I might add that stable rates are an important signal to investors of TVA’s business stability. But there are other significant signals, as well. Investors have taken

note of the outstanding operating performance of TVA’s power system. Capacity and

efficiency are continuing to increase, and, during my tenure, TVA’s nuclear program

was recognized by the industry for its high level of performance.

In this discussion, we also should recognize that the TVA’s operations and bond

indebtedness are already subject to significant oversight to guarantee proper and

complete disclosure. Two examples include an independent auditor in the form of

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an Inspector General who will be appointed by the President with Senate confirmation, and the General Accounting Office that has full and complete access to all documents and information in TVA’s possession.

TVA routinely provides information about its finances and operations in many

other ways. TVA Board meetings are conducted in public with opportunities for the

public and news media to ask questions on any subject; press releases are issued

anytime an event occurs of interest to the citizens of the Tennessee Valley or the

members of the investment community; public meetings on a variety of subjects are

conducted throughout the TVA area; and, perhaps of most significance, TVA’s operations and activities come under the jurisdiction of Oversight Committees in both

the Senate and House.

It is my opinion, Mr. Chairman, TVA already exceeds the reporting requirements

that would be expected of any other corporation both public and private.

But, let us not forget a key element in this discussion. TVA is a Government corporation—100 percent owned by the U.S. Government. It exists for the sole purpose

of serving the citizens of the Tennessee Valley. Its mandate is to provide services

at the lowest possible cost and it does not seek to enrich shareholders or corporate

executives, since it has only one shareholder—the U.S. Government.

We all are aware that bonds act differently in the marketplace than equity ownership through stocks. Stock prices can change depending on the vagaries of the

marketplace and, therefore, are subject to manipulation as all of us with 401(k)’s have painfully experienced in the past few months. Bonds, on the other hand, are

priced at the time of issue, and, while liquidity and interest rates can contribute

to some changes in value, they are a stable and predictable investment. The TVA

does not issue stock.

In response to the Committee’s question about whether the TVA should be made

subject to the requirements of the Securities Act of 1933 and the Securities and

Exchange Act of 1934, I would hope the Committee would review carefully the disclosures TVA already makes before acting on legislation that, in my view, would

simply add another layer of bureaucracy to TVA’s operations and result in additional cost and a decrease in flexibility. In managing its debt, TVA needs the ability

to move quickly and take full advantage of refinancing opportunities without being

encumbered by another layer of process.

I wish to thank you, Mr. Chairman, and the other Members of the Committee for

asking me to appear here today.

—————

PREPARED STATEMENT OF ALLAN G. PULSIPHER

EXECUTIVE DIRECTOR, CENTER FOR ENERGY STUDIES

MARATHON OIL COMPANY PROFESSOR OF ENERGY POLICY

LOUISIANA STATE UNIVERSITY

SEPTEMBER 17, 2002

Thank you for the invitation to testify before this Committee. I am the Executive

Director of the Center for Energy Studies at Louisiana State University. Previously

I was the Chief Economist at TVA for most of the 1980’s. Other relevant experience

includes serving as a Program Officer with the Ford Foundation and as a Senior

Staff Economist with the Council of Economic Advisers under Presidents Nixon and

Ford. I have followed TVA’s fortunes with interest both as an ex-employee and a

student of energy policy but my attention has become more sporadic than systematic

in recent years.

I have a short statement with four main points that I have outlined as follows.

First, TVA is a large electric power system not a regional development agency

that executes governmental functions. Operationally, technologically, functionally,

and financially it is the same as the other large power systems that operate in the

Southeastern United States. The exemption of TVA’s securities from provisions of

the Securities Act of 1933 and the Securities Exchange Act of 1934, to the extent

that it is derived from the exemption from the registration requirements given to

securities of municipal, State, and Federal Governments, has no cogent rationale

today with respect to TVA.

Second, the accounting and investor protection issues that this Committee has

spent so much time on this past year are as relevant to TVA as they are to its competitors. To illustrate:

a. TVA’s unfinished nuclear plants are likely to go on to the accounting hall of

fame’s top 10 list of the most ‘‘write-off-resistant,’’ unproductive assets, probably

ranking just below the Empire State Building’s mooring tower for dirigibles. To my

45

recollection, TVA is the only utility that still carries unfinished nuclear plants as

assets on its books. Despite the fact that it has both cancelled and written off about

four times as much nuclear construction as its closest competitor in the cancelled

nuclear plant category.

b. TVA’s current outside auditor has been retained by the agency for over two decades, and also has been the principal consultant to the agency on its accounting,

informational technology and financial systems, as well as other managerial issues.

I could not find the calculation or the required data in TVA’s public reports, but

my hunch is that TVA’s payment for auditing and nonauditing services exceeds the $2.69 in nonauditing services for every $1 in auditing services average cited by Mr.

Bevis Longstreth in testimony before this Committee on March 6, 2002.

c. TVA recently has executed lease-back arrangements for 16 peaking turbines

that appear to be designed primarily to keep their financing from appearing on the

agency’s books as debt.

Third, these accounting and investor protection issues are more serious for the

TVA than for its competitors because the agency lacks even the minimal mechanisms for oversight, disclosure and control, whose adequacy is under consideration

by this Committee and many others. A unique but un-imitated, full-time, three-person board appointed by the President for 9-year terms manages TVA.

a. Many of those who have been appointed have had no experience or specialized

knowledge of the electricity business before their appointment. A few board members have been effective leaders and strategists, but these have been exceptions

rather than the rule.

b. It is useful to keep in mind; TVA ‘‘backed into’’ the electric power business. The

three-person board arrangement was specified at its inception, well before that time.

The rationale for the arrangement was that TVA needed to be protected from hostile

political and economic interests who would be threatened by this frankly experimental initiative. There were no arrangements included in TVA’s charter to allow

regional participation or review of its activities.

c. Thus the oversight, regulatory, disclosure, and auditing functions that are performed by independent, external public utility commissions for the electric power

systems with which TVA competes, by default, more than conscious design, are also

the responsibility of TVA’s three person managerial board.

Fourth, every study of TVA, the well-known study by Alex Radin former Executive Director of the American Public Power Association, the study by Regan Transition Team, the study organized by the Southern States Energy Board, have all concluded that TVA’s three-member board is an antiquated, contradictory, paternalistic

arrangement which should be replaced by an independent, expanded, regionallybased, part-time board. Regardless of politics, every study has made this recommendation and, just as consistently, and also regardless of politics, every TVA

Board has dismissed it out of hand.

a. The relevance of this arrangement to the problems of accounting accuracy and

auditing that this Committee is considering can be made clear by considering some

of the solutions to those problems this Committee and others have identified. In testimony before this Committee on March 14 of this year the Director of the Brookings Institution’s Economic Studies Program said: ‘‘As long as management continues to choose the auditor, the potential will always exist for a conflict that could

compromise the quality of the audit.’’ After reviewing a number of possible ways to

strengthen the oversight of audits, including; requiring that only external board

members serve on audit committees, charging the audit committee with the selection of the auditor, making the selection of the auditor the responsibility of a third

party, prohibiting auditors from doing nonauditing work; he advised requiring the

auditor to be hired by the Board’s auditing committee as a pragmatic compromise.

b. In TVA’s case, of course, the Board has no external members, there is no audit

committee, and, in fact, it is the consequences of the Board’s own managerial decisions and policies that the audit should accurately and comprehensively document

and evaluate.

c. The more fundamental relevance of the TVA’s outdated double-duty board to

problems of inadequate disclosure is well illustrated by the dialogue between the Director of the Federal Office of Management and Budget and the TVA Board over

the Board’s reticence to provide a basic business plan to explain its decision to resuscitate a nuclear unit at its Brown’s Ferry site. The unit was licensed to operate

in the 1970’s but has been closed because of safety concerns since 1985. This effort

will add about $1.7B to TVA’s debt and seems inconsistent with the movement toward the use of smaller, more decentralized generating technologies which entrepreneurs and large industrial energy users are willing to build on their own tab.

While I commend OMB for asking these questions, under the regulatory arrangeVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 89115.TXT SBANK4 PsN: SBANK4
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ments TVA’s competing power systems operate, such a request would come from a

public utility staff and there would be no question about the need or desirability

of responding.

d. Another example is the implicit abandonment of TVA’s strategy to insure its

survival and ability to compete in the future by reducing its debt and interest cost

by about a half by 2007. In 1997, this strategy was spelled out and well received

by both customers and investors. Since that time TVA has reduced its debt modestly

but is far off the path to survival it laid out in 1997. Given this inconsistency between plan and performance, I would expect most utility analysts to predict that

TVA would increase its rates to get back on the survival track it articulated in 1997.

However, TVA decided to leave its rates unchanged other factors may have changed:

(1) TVA may have developed a new strategy for reducing costs and revenue requirements, or (2) Revised its assessment of its competitor’s positions, or (3) Decided electricity markets will remain, isolated, monopolistic and regulated. But there was no

incentive, under current arrangements, to articulate and document such changes or

subject them to evaluation and questioning by knowledgeable, informed, independent analysts. The same state of affairs exists about other important issues facing

the agency.

In summary, should the Tennessee Valley Authority provide timely, accurate and

objective information about its operations, finances and performance to its investors

and customers and the public? Should the information be provided in the same format, use the same definitions, terminology and conventions, cover the same time

period, provide the same degree of detail, meet the same standards for auditing and

timely disclosure, as is required of its competitors in its primary line of business?

Would using SEC standards and procedures help progress toward those goals?

My answer to these questions is ‘‘of course.’’ However, TVA, its customers and its investors have a more serious problem

of corporate governance and control that is the result of an obsolete and inherently contradictory organizational structure that is long overdue for a fundamental

redesign.

I want to thank you again for the opportunity to state my views and will be happy

to answer any questions you may have.

—————

PREPARED STATEMENT OF DANIEL GATES

MANAGING DIRECTOR

MOODY’S INVESTORS SERVICE

SEPTEMBER 17, 2002

Introduction

Good morning, Mr. Chairman and Members of the Committee. My name is Daniel

Gates, and I am a Managing Director of Moody’s Investors Service. I am pleased

to be here today to discuss the credit ratings process, and the role of disclosure requirements in that process, particularly for the Tennessee Valley Authority. I hope

that Moody’s views add to the Committee’s consideration of this issue, though I also

appreciate that our opinions represent only one perspective on this matter.

Moody’s Role in the Financial Markets

To understand the relationship between financial disclosure requirements and our

work at Moody’s, a summary of Moody’s role in the financial markets may be helpful. For over 100 years, Moody’s has played an important part in providing independent credit analysis and opinion to investors. Moody’s assigns credit ratings to

debt instruments and to other obligations to reflect the relative creditworthiness of

those obligations. Moody’s is the oldest credit rating agency, founded by John Moody

in 1900 to rate the creditworthiness of railroad bonds. As early as 1924, Moody’s

was rating nearly every bond in the United States market, as well as many international bonds.

Today, Moody’s is a leading global credit rating and research firm with more than

800 analysts worldwide. Our credit ratings cover a broad range of debt instruments

totaling over $30 trillion, and our analysts publish research that covers thousands

of institutions. Moody’s ratings are valuable informational tools used by: (1) institutional investors to analyze the credit risks associated with fixed-income securities

and other obligations; (2) issuers seeking access to the capital markets; (3) regulators, for such purposes as measuring the capital adequacy of banks, brokerdealers, and insurance companies; and (4) governments, economists, the media, academics, and other market observers.

47

Ratings contribute to efficiencies in financial markets by providing credible and

independent opinion forecasts of credit risk. The predictive quality of our credit ratings is empirically verifiable, and is evaluated by Moody’s and by independent third

parties. Our track record is published annually in our default studies. We make our

historical ratings and default data available to subscribers, interested scholars and

regulators. Although Moody’s rates a wide range of debt obligations, the heart of our

service lies in rating long-term bonds, for which we have nine primary debt rating

categories. Investment-grade ratings range from a high of Aaa, down to a low of

Baa. Ratings from Ba to C are considered noninvestment grade or speculative grade.

Overall, Moody’s ratings are designed to provide a relative measure of risk, with the

likelihood of credit loss increasing as the rating decreases. The lowest probability

of default is expected at the Aaa level, with a higher expected default rate at the

Aa level, a yet higher expected default rate at the single-A level, and so on down

through the rating scale.

It is equally important to note what our work at Moody’s does not include. A rating of Aaa is neither a buy recommendation, nor is it a seal of approval; rather,

the Aaa rating, like all of our ratings, reflects Moody’s opinion of the relative creditworthiness of a fixed-income security. Furthermore, just as we do not insure the

bonds we rate, we do not audit the financial information provided to us. Accordingly,

our ratings rely very heavily on the completeness and veracity of both the public

financial statements and any proprietary information that may be provided to us

by issuers.

The Moody’s Rating Process

Moody’s takes a number of steps to ensure the rigor of our ratings process. We

assign ratings by committee. Rating committees vary in size, and generally include

senior and junior analysts and one or more managing directors. A Credit Policy

Committee (CPC) and credit standing committees under the control of the CPC review ratings practices and policies internally.

Moody’s takes active steps to maintain the integrity of our ratings process.

Moody’s analysts are not evaluated or compensated based upon the revenues associated with their portfolios, nor are they permitted to hold or trade the securities of

the issuers they rate except in diversified funds managed by professional managers.

Moody’s also does not create investment products, or buy, sell, or recommend securities to users of our ratings, or invest in securities for its own account. Furthermore,

although we derive 90 percent of our annual revenue from the issuers that we rate,

we recognize that the long-term value of our franchise depends on our independence

and objectivity, and ultimately on the predictive value of our ratings, an analysis

of which we publish annually. The influence of individual issuers is further limited

because Moody’s does business with over four thousand issuer groups.

The Role of Disclosure Requirements for Moody’s

In order to analyze a company’s ability to meet its debt obligations, Moody’s

analysts rely on a variety of information sources, including publicly-available information that is filed with regulatory authorities or is otherwise available, audited financial statements, third-party analyses of the company and the industry sector,

and information provided by the company directly to our analysts. Moody’s ratings

are based primarily upon the issuer’s published financial reporting, and we believe

that SEC’s disclosure requirements are strong enough that, in the great majority

of cases, we have sufficient public information to express an opinion. In addition,

as a Nationally Recognized Statistical Rating Organization, companies are permitted to share material nonpublic information with Moody’s. Each Moody’s analyst

and managing director has a portfolio of companies that he or she tracks. Moody’s

analysts speak periodically with issuing companies to obtain additional information,

and all of these data are incorporated into the ratings process.

In an ideal world, the rating agencies always would have access to complete and

accurate financial and operational information. The disclosure requirements created

by the Securities Act of 1933 and the Securities and Exchange Act of 1934 (‘‘1933

and 1934 Acts’’) contribute to the integrity of the financial information Moody’s receives by creating civil and criminal penalties for inaccurate or incomplete reporting. As a general matter, our preference is that all financial information provided

to our analysts be complete and reliable. We strongly believe that in the United

States, the Federal securities laws add to the reliability of that information. Outside

the United States, and for some classes of issuers within the United States, however, Moody’s conducts analysis without SEC-mandated disclosure by obtaining

information directly from the companies and other sources. Moody’s and the other

ratings agencies for many years have rated companies not subject to reporting requirements, such as foreign issuers and Government agencies, including the TenVerDate 11-MAY-2000 11:28 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 89115.TXT SBANK4 PsN: SBANK4
48

nessee Valley Authority. For these entities, Moody’s relies on the completeness and

veracity of issuers’ public and private disclosure of information, along with industryspecific knowledge and macroeconomic analysis.

While we prefer that all financial reporting be subject to the disclosure standards

set forth in the 1933 and 1934 Acts, we believe that the TVA has operated in good

faith in providing accurate and reliable financial information to facilitate our rating

analysis of the Authority’s power bonds. Moody’s analysts have a constructive working relationship with multiple contacts at the TVA, and Moody’s analysts regularly

call on these contacts to provide, for example, additional background on operational

developments, industry news, or Government proposals. We receive annual and

quarterly reports from TVA and regular briefing material.

As with any issuer, Moody’s analyzes multiple factors when rating the TVA. To

illustrate, we have considered TVA’s cash flow, balance sheet, capital structure,

prospects for raising or lowering debt in the near future, protected service territory,

power costs, ability to set electric rates, and at the macro level, the growth rate of

the region it serves. We have obtained all of this information from the company directly or from third-party sources. Furthermore, as a general rating approach to

Government Sponsored Enterprises such as TVA, Moody’s uses an integrated analysis of both the fundamental creditworthiness of the enterprise as a business, and

the Enterprise’s relationship with the U.S. Government.

Conclusion

As I have stated, Moody’s supports steps to improve the quality and reliability of

the information that market participants, including investors and our analysts,

receive. This support for higher quality information, however, should not be interpreted as reflecting any particular concerns over the reliability of the financial information we have received from TVA. Rather, as a major consumer of financial data

and SEC filings, Moody’s generally supports efforts to enhance financial disclosure,

because they improve the overall reliability of financial information in the marketplace, and thus contribute to more efficient capital markets.

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