Portside

Executive summary

The Obama administration is considering whether to divest all or part of the federally owned Tennessee Valley Authority (TVA) as a means to pay down the U.S. debt. The selling off of all or part of the TVA to private ownership would have far-reaching consequences, especially for the 9 million people in the 80,000-square-mile region—encompassing parts of Tennessee, northern Alabama, Mississippi, Kentucky, Georgia, North Carolina, and Virginia—to whom the TVA provides electricity and other services.

The proposal has sparked a debate about the benefits and problems that divestiture might bring. Conservatives have long opposed the TVA on the grounds that it is an illegitimate government intrusion into the marketplace. The Obama administration’s fiscal year (FY) 2014, 2015, and 2016 budget proposals have called for reducing or eliminating the federal government’s role in programs such as the TVA “which have achieved their original objectives or no longer require Federal participation.” Worried that the TVA’s bond debt, then at $26 billion, could exceed its $30 billion statutory cap and thus impact the federal debt, the administration has suggested ending federal ties in order to “help mitigate risk to taxpayers” and “put the Nation on a sustainable fiscal path” (OMB 2013, 2014, 2015).

At the same time, the TVA’s major stakeholders have come out against divestiture. Opposition has been broad-based, from conservative congressional lawmakers from states and districts in the TVA service area; to the municipally owned and cooperative local power companies and the Tennessee Valley Public Power Association, which represents these distributors; to labor unions representing TVA employees.

This report presents an overview of the debate. It evaluates the pros and cons; summarizes the agency’s organizational, financial, and economic situation; and examines the potential implications of privatization for ratepayers, communities, and the regional economy.

The TVA is a corporate agency of the United States, governed by a nine-person board appointed by the president and confirmed by the Senate. Its operations have been self-financed since 1999, requiring no taxpayer money. The TVA operates one of the nation’s largest utility systems, accounting for about 3 percent of U.S. electricity capacity (EIA 2013). It had 37 gigawatts (GW) of electric power generation (summer net) capability in 2013, and over 16,000 miles of transmission lines.

Even though electric power generation and transmission is the TVA’s dominant function, it remains integral to and integrated with the TVA’s nonpower responsibilities, including river and land management, environmental stewardship, and economic development.

Opposition to divestiture received a major boost from a government-commissioned study prepared by Lazard Frères & Co. in 2014 (TVA 2014c). Lazard examined a range of options including privatization, public-sector spinoff, and status quo alternatives. It concluded that, although it had “recommended for privatization in other situations in the U.S. Power & Utility Industry,” several factors led it to “recommend against pursuing a divestiture of TVA.”

Lazard addressed the TVA’s financial situation and gave it high marks for putting its operation on a more financially sustainable path. It concluded that the TVA’s financial position had strengthened, and it was poised to cut its long-term debt over the next decade. It also identified several potential downsides; these included potentially higher electricity rates and potentially adverse impacts on the TVA’s power system and its nonpower functions, the management of which is highly integrated under the current TVA.

Building on and extending Lazard’s findings, this report presents the findings of an assessment of two related types of impacts that could result from privatizing the TVA:

1. The impacts on the TVA’s electric power system, i.e., on the new, restructured system’s ability to provide reliable and affordable electricity to stakeholders in the region.
2. The impacts on the TVA’s nonpower functions, especially its role in river and land management, environmental stewardship, and economic development.

Several general findings stand out in this analysis:

• It is difficult to see how divestiture would provide stakeholders with any greater benefits than the TVA system already provides.
• Privatization would sever the connection between most of the TVA’s power and nonpower functions, resulting in dis-synergies and impairing and diminishing the various electric power, river and land management, environmental, and economic benefits that the TVA has delivered since the 1930s.
• Privatization could increase electricity rates, reduce system reliability, increase price volatility, and lower the credit rating of local distributors of the TVA’s electric power.
• Privatization would inject uncertainty and complexity into the performance of all of the TVA’s power and nonpower functions, both during and after the long, complicated process of carrying out proposed divestiture scenarios.
• Instead of a single authority with responsibility for planning, implementing, and governing the various functions, under divestiture there would be many different, sometimes competing responsible entities, including federal agencies, state regulatory bodies, and private utilities. Difficulties coordinating these entitites could inhibit the ability to improve operations, build and rebuild facilities, and provide services with the same effectiveness and smoothness that the TVA offers today.

Specific findings of the assessment of privatization’s impacts on the TVA’s main power and nonpower functional areas are summarized below:

Electric power and transmission impacts

Electricity rates

• Evidence strongly suggests that electric power rates, in the short run at least, would likely increase, perhaps significantly, above TVA status quo rates.
• Private owners of the TVA’s power assets most likely would include additional costs in their rate structure, such as federal taxes and return on equity, that the TVA does not need to include because of its federal not-for-profit status.
• Divestiture is likely to introduce a high degree of uncertainty and volatility into electricity markets that could adversely impact electricity distributors and industrial customers in the TVA service territory.
• Divestiture would shift the responsibilities and burden of regulating the new owners of TVA assets to multiple state agencies.
• There could be an increase in the vulnerability of a privatized TVA system to price volatility, as it would now be reliant on external power markets.

Electric power reliability

• The complexity and uncertainty associated with divestiture could adversely affect the TVA’s reliability record.
• Divestiture would divide the TVA’s well-integrated, balanced electric power system into independent and no-longer-accountable component parts, comprising a mix of electric power generation and transmission assets, whose management and operation would now fall under multiple private entities.
• Planning, investment, construction, and operation of the TVA’s generation and transmission capacity would no longer be integrated and coordinated across the service area.
• The responsibilities for maintaining the system and coordinating with distributors and other utility systems would shift to unknown, multiple entities.
• Decisions about expanding, upgrading, managing, and repairing capacity—and other factors that affect the reliability of the electric grid—would shift from a single body, subject to long-term integrated planning, to multiple independent private utilities, overseen by several different state regulatory agencies.

Electric power distributors

• Local power companies (LPCs) would have to make new power purchase arrangements with multiple power providers over time, instead of having to make new long-term power purchase agreements with one wholesaler (i.e., the TVA). This change would add new uncertainty to the LPCs’ power contract terms and prices.
• LPCs may be required to purchase some electricity directly from unregulated wholesale markets, from independent power producers and other power providers outside their service areas, subjecting them to further sources of supply and price volatility.
• The potential sale of the TVA’s assets could threaten local power distributors’ bond ratings, sending negative signals to financial markets and to potential economic developers.

State and local taxes

• Privatizing all or part of the TVA’s capacity would create uncertainty about the sources and size of the new owners’ tax payments.
• The tax collection process would become more complex and less certain as to the expected revenues states and local jurisdictions would receive; instead of collecting from one entity based on a straightforward formula and process, the states and municipalities would collect from multiple private power companies.

Clean energy and energy efficiency programs

• Privatization would create uncertainty about whether the new owners would make a similar commitment and scale of investment as the TVA in nonhydro renewable generation.
• There would be uncertainty about the implications for current contracts with wind farms and other renewable sources provided outside the region; new owners might need to renegotiate these arrangements, based on their own business plans.
• The high level of integrated planning and implementation of clean energy facilities throughout the Tennessee Valley would disappear under privatization, though many private investor-owned utilities (IOUs) also are making efforts to expand their renewable portfolio and reduce their carbon footprints.
• The fate of the TVA’s renewable energy research initiatives would be very uncertain—i.e., who would pay and take over responsibility for these programs, or would they be terminated?
• The TVA’s federal connection may make it more amenable to internal and public pressures to support federal and state clean energy and emissions mitigation efforts; as a federal corporation, the TVA might be more directly compelled to respond to federal regulatory mandates and requirements than are privately owned utilities.

Impacts on the TVA’s nonpower functions

River, land, and resource management

• The potential separation of the TVA’s integrated water management approach from its hydro-generation system would hamper both functions, negatively affecting the quality of services and economic costs.
• Severing the TVA’s power generation function from river and land management could diminish both functions, as well as the TVA’s economic development initiatives.

Environmental stewardship

• The integrated approach that helps to optimize the TVA’s environmental, power, and economic development objectives would no longer be in effect under most divestiture scenarios.
• Privatization would weaken if not sever the crucial linkages between the region’s river and land management resources and environmental stewardship mission, which are highly integrated in the TVA’s strategic planning activities.
• The direct tie between managing the TVA’s power generation and its environmental mission would be weakened under divestiture.

Economic development

• The TVA’s economic development initiatives are closely associated with its river and land management functions, and benefit directly from access to the TVA’s competitively priced, reliable electricity.
• Economic development is integral to the TVA’s mission—it works with local power companies and regional, state, and local economic development agencies, providing a variety of incentives and services to attract and retain companies and help communities benefit from economic growth opportunities.
• Privatization would leave uncertain which entities would take over and finance this function.
• The separation of economic development from generation and transmission, as well as from the TVA’s river and land management activities, could substantially diminish the scale and effectiveness of economic development activities.

The old cliché is fitting here: “If it ain’t broke, don’t fix it.” There is no question that the TVA has needed to address serious financial problems and bring in new leadership to lead a renewal effort. The silver lining of the privatization debate is that it may have helped spur the TVA to make these necessary changes while preserving its overall capabilities as an integrated system. As TVA Chief Executive Officer Bill Johnson has observed, “I just don’t see how, as an economic proposition, this could be done better than it is today” (EIR 2013).

Introduction

The Obama administration is considering whether to divest all or part of the federal government’s ownership of the Tennessee Valley Authority (TVA) as a means to pay down the U.S. debt. The Office of Management and Budget (OMB) has convened an interagency working group to conduct a strategic review of the TVA and examine options for addressing its financial situation. Among these options are selling off the TVA wholly to a single investor-owned utility (IOU) or to multiple IOUs, or maintaining the TVA as a wholly owned federal corporation but selling various TVA assets to IOUs or independent power producers (IPPs).

The prospect of the TVA’s divesture has sparked concern among major stakeholders in the Tennessee Valley. The selling off of all or part of the TVA to private ownership would have far-reaching consequences, especially for the 9 million people in the 80,000 square-mile region—encompassing most of Tennessee, northern Alabama, northeastern Mississippi, southwestern Kentucky, and portions of Georgia, North Carolina, and Virginia—to which it provides electricity and other services. (See Figure A for a map of the TVA’s electric infrastructure and the geographical area it serves.)

Figure A

TVA’s electric infrastructure and service area

Source: EIA (2013)

The TVA operates one of the nation’s largest electric power and transmission systems, and the system is integral to a number of important nonpower functions over which the TVA has responsibility—river and land management, environmental stewardship, and economic development—and that are vital to the economic and environmental well-being of the Tennessee Valley. The TVA’s operations cannot be fully understood without appreciating the multiple linkages among these critical activities.

In short, based on this assessment, it is difficult to see how divestiture would provide stakeholders in the Tennessee Valley, the federal government, or American taxpayers with any greater benefits than the current TVA system already provides.

The TVA story

The Tennessee Valley Authority was one of the most successful and ambitious of President Franklin Roosevelt’s New Deal programs. Created by the Tennessee Valley Authority Act of 1933, the TVA was the fulfillment of the vision of populist Republican U.S. Senator George Norris of Nebraska, who for many years had called for harnessing the power of the Tennessee and other large rivers. Norris saw the enormous impact of periodic floods in large areas of the United States, but also the opportunity that the nation’s streams and rivers presented “to produce great amounts of electricity for homes and factories of the nation.” In his view, the improvements in flood control, navigation, and irrigation, in hand with the generation and development of electricity, were “inseparably linked” (Munzer 1969, 69).

Congressional support for the regulation and control of rivers feeding the Mississippi, including tributaries such as the Tennessee River, received impetus from the floods of 1927, which devastated huge areas of the Mississippi River valley. FDR, who had a lively interest in regional resource planning, had publicly promised that the development of the Tennessee Valley, through the harnessing of its river, would be a priority in his administration (Munzer 1969). As stated in the Tennessee Valley Authority Act of 1933, the TVA was created:

…to improve the navigability and provide for the flood control of the Tennessee River; to provide for reforestation and the proper use of marginal lands in the Tennessee Valley; to provide for the agricultural and industrial development of said valley; to provide for the national defense by the creation of a corporation of Government properties at and near Muscle Shoals in the State of Alabama and for other purposes.

The TVA was also given the power “to construct dams, reservoirs, power houses, power structures, transmission lines, navigation projects, and unite the various power installations into one or more systems by transmission lines.”

By all accounts, the TVA has fulfilled its mission well, and it can claim significant accomplishments over its 80-year history (Munzer 1969; Encyclopedia 2004). For example:

• Aside from taming the river and enabling navigation, the TVA and the system of local power distributors (municipally owned and rural electric cooperatives) that it helped create brought electricity to the least-electrified region of the country. The TVA’s success in rural electrification was a model for the Rural Electrification Administration, later reorganized into the Rural Utilities Service under the U.S. Department of Agriculture.
• Along with stopping devastating floods, the TVA’s control of the river helped to end malaria in the United States. Up until this point, malaria was a common, debilitating disease that afflicted many people in the South.
• It was a great spur to economic development—its reliable and affordable electric power and navigable water systems have attracted businesses and stimulated industrial growth, including a strong recreational industry, throughout the region (Encyclopedia 2004).1

In short, as noted in one history of the agency, the TVA became “[a]n important symbol of constructive government action and the idea that the public weal should vigorously challenge a negligent private will” (Encyclopedia 2004).

The TVA system

The TVA is a corporate agency of the United States, governed by a nine-person board appointed by the president and confirmed by the Senate. However, its operations have been self-financing since 1999, requiring no taxpayer money. The TVA operates one of the nation’s largest utility systems, accounting for about 3 percent of U.S. electricity capacity (EIA 2013), and in 2013 it had 37 GW of electric power generation (summer net) capability and over 16,000 miles of transmission lines.

Even though electric power generation and transmission have become the TVA’s dominant function, they remain integral to its nonpower responsibilities, including river and land management, environmental stewardship, and economic development. The operation of the TVA system as a whole cannot be understood without appreciating the multiple linkages among these various functions (schematically illustrated in Figure B).

Figure B

TVA’s integrated power and nonpower functions

 

For example, the TVA’s revenues, which derive almost solely from electric power generation, provide for flood control, navigation, and land management for the Tennessee River System and assist local power companies and state and local governments with economic development. The provision of low-cost power facilitates economic development in the region, and water stewardship is jointly managed with the TVA’s hydro operations (States News Service 2014). Water-quality management and the operation of the TVA’s nuclear and thermal electric power plants, which draw upon and release water effluents into the region’s rivers and waterways, are also tightly linked.

While the TVA has accomplished its original mission to bring electricity to poor rural areas, tame and manage the region’s rivers, and foster economic growth, it continues to carry out most of its original functions, to the benefit of the residents of its service area and to the nation as well. The integration of the TVA’s power and nonpower functions was central in its original conception and continues to guide its strategic planning process today (summarized in Appendix A).