By John Kemp
LONDON May 10 For free-market purists, the
Tennessee Valley Authority (TVA) is a monstrous hybrid - part
giant electric producer, part government agency.
The Obama administration has announced a strategic review
that could recommend privatisation. But the case for reform is
weak and there is little chance of a significant change owing to
TVA's powerful political connections.
"Given TVA's debt constraints and the impact to the federal
deficit of its increasing capital expenditures, the
administration intends to undertake a strategic review of
options for addressing TVA's financial situation, including the
possible divestiture of TVA, in part or as a whole," the White
House announced last month.
But the fact the announcement was made in the president's
fiscal 2014 budget, in a chapter hopefully entitled "Creating a
21st century government," is a clue to its likelihood of
By law, the president must submit a unified budget to
Congress. But nothing obliges legislators to act on it or even
use it as a starting point for revenue and spending bills.
Especially in recent years, the budget has become more or less a
work of fiction, bearing little resemblance to eventual tax and
"Is the Obama administration really going to sell TVA?"
Senator Lamar Alexander asked incredulously at a hearing on
April 24. Alexander is not only the senior senator from
Tennessee. He is also the highest-ranking Republican on the
Senate Appropriations Subcommittee on Energy and Water
Development, which controls the energy portion of the federal
"You might suggest to the president's advisers that if he's
going to sell the agency that produces tritium - all the tritium
for our nuclear weapons system - he might get some advice from
the Department of Energy before he does so," Alexander told the
acting administrator of the National Nuclear Security
Administration, which manages the nation's stockpile of nuclear
weapons, at the hearing.
Created in 1933 by Congress as a federally chartered
corporation, TVA has always been a strange hybrid.
President Franklin Roosevelt asked Congress to create "a
corporation clothed with the power of government but possessed
of the flexibility and initiative of a private enterprise."
TVA was intended to operate "in the interest of the national
defense and for agricultural and industrial development, and to
improve navigation in the Tennessee River and to control the
destructive flood water in the Tennessee River and Mississippi
River Basins", according to the act which set it up.
Operating in one of the poorest parts of the country at the
height of the Great Depression, TVA built a series of dams to
control flooding and generate power. It also ran conservation
and farming programmes to develop fertilisers, improve crop
yields and replant forests.
Initially, the corporation was funded from the budget, but
since 1959 its power programme has been funded by electricity
sales, and federal funding for its environmental activities was
phased out by 1999, according to the corporation's website. TVA
is now fully self-financing, mostly through electricity sales.
TVA supplies power to nine million people over 80,000
squares miles in seven states, including most of Tennessee as
well as neighbouring parts of Alabama, Georgia, Kentucky,
Mississippi, North Carolina and Virginia. In much of this area
it is the exclusive power producer and transmission system
owner, protected by anti-cherrypicking provisions.
TVA has shifted far from hydro. Most power is now produced
by TVA's 59 coal-fired generating units (of which about 50 are
active); 98 gas-fired units; and 6 nuclear units. The
authority's 29 hydroelectric dams accounted for less than 10
percent of power generated in the year to September 30, 2012.
Much of the controversy surrounding TVA concerns the status
of its debt. By law, TVA can issue bonds worth up to $30 billion
(16 USC 831n-4(a)) but they are not guaranteed by the federal
government (16 USC 831n-4(b)).
"Bonds issued by the corporation ... shall not be
obligations of nor shall payment of the principal thereof or
interest thereon be guaranteed by the United States," the law
Nonetheless, TVA bonds have usually traded as if they
enjoyed a government guarantee. Like the pre-crisis borrowing of
Fannie Mae and Freddie Mac, investors have treated TVA bonds as
implicitly backed by the Treasury.
The confusion is not surprising. TVA has both corporate
(www.tva.com) and government (www.tva.gov) web addresses. It
appears to be as much a government agency as a power producer
and transmission operator.
Uniquely, the law gives TVA "power in the name of the United
States of America to exercise the right of eminent domain, and
in the purchase of any real estate or the acquisition of real
estate by condemnation proceedings, the title to such real
estate shall be taken in the name of the United States of
America" (16 USC 831c(h)).
The corporation's current capital investment plan includes
more than $25 billion of spending over the next decade,
according to the president's budget.
TVA's coal-dominated power generation system is vulnerable
to toughening emissions controls. It has already agreed to phase
out 18 coal-fired generating units by the end of 2017. Cleaning
up the power supply and modernising the transmission system will
cost a lot of money.
The problem is that TVA already has $24 billion of bonds
outstanding. "TVA's anticipated capital needs are likely to
quickly exceed the agency's $30 billion statutory cap," the
president's budget concludes.
In an article published on April 27, "The Economist"
favoured shifting TVA to the private sector. "Privatising the
TVA would end the perception of an implicit federal debt
guarantee. A similar implicit guarantee for Fannie Mae and
Freddie Mac ... ended up costing taxpayers untold billions"
("Dammed if you don't: Barack Obama mulls privatising America's
biggest public utility").
"Divestiture would also free the TVA to raise more capital
than the $30 billion debt cap allows ... though it would
probably pay steeper interest rates." Less plausibly, the
Economist thought power prices might come down if TVA's monopoly
was ended and multiple private companies start competing for
The Economist has never seen a government agency it doesn't
think would be better privatised so its position is hardly
surprising. But the arguments for privatisation are not strong.
TVA's borrowing is several orders of magnitude smaller than
the housing agencies, and it does not engage in risky maturity
and credit transformation, so the comparison is not valid. It is
not clear privatising or breaking up the power producer would
result in lower bills.
The main problem is optical. TVA's debt limit may need to be
raised, or creatively evaded, at a time when policymakers are
worried about the rising tide of red ink in the federal budget.
However, TVA's indebtedness is tiny in the overall picture.
It does not count towards the overall federal limit.
The main fear seems to be that without an increase in the
corporation's own $30 billion limit it will need to turn to the
federal government to meet its capital expenditure plans. But
that seems highly unlikely. TVA executives have insisted they
can operate within the existing limit.
"TVA may not be able to use bonds and notes to finance all
of the capital investments planned over the next decade, but TVA
has the ability to use other alternative forms of financing,"
the corporation noted in its own 2014 budget.
TVA can probably make use of leasebacks, and energy
prepurchase agreements with power distributors, which do not
count against the statutory ceiling, to cover the cost of
modernising its power plants and infrastructure and avoid
breaching the cap.
With so many other options for creative financing, and
entrenched political opposition to changing TVA's status, the
prospects for privatisation are slim.