Fortnightly
GAO Reports, TVA Retorts
October 15, 1995By Lori A. Burkhart
The U.S. General Accounting Office (GAO) has released its report on the Tennessee Valley Authority (TVA), Financial Problems Raise Questions About Long-Term Viability \(em a report that TVA strongly disputes. The report responds to Congressional concerns over TVA's nuclear program and its financial condition \(em especially debt growth nearing the $30-billion ceiling established by Congress in 1979.
According to GAO, TVA in 1994 was $26 billion in debt and had invested $14 billion in nonproducing nuclear assets, giving it far more financing costs and deferred assets than its likely competitors, and little flexibility to meet competitive challenges. GAO concludes that TVA's financial condition not only threatens its long-term viability and places the federal government at risk, but will require costly and painful resolution.
While TVA paid $1.9 billion (35 percent) of its 1994 power revenues for financing costs, similar expenses for neighboring utilities averaged only 16 percent of revenues. Also, despite having excluded its deferred assets, TVA's rates, while low, are not the lowest among neighboring utilities.
GAO noted, however, that TVA is protected from competition in the short run, because almost all of its 160 contracts with distributors require 10 years' notice of cancellation. Also, current legislation does not oblige TVA to give other utilities access to its transmission lines to provide service to TVA's customers.
Nevertheless, GAO disagreed with an April 1995 report commissioned by TVA, which concluded that TVA is well positioned to meet competitive challenges and recommended removal of legislative restrictions to render the power agency fully competitive. GAO believes the restrictions protect TVA from competition that could affect its long-term financial viability.
To resolve TVA's debt situation, the GAO report suggests three options:
s Take no action; let TVA tackle its problems.
s Remove statutory barriers to competition.
s Privatize the agency.
However, GAO cautions Congress that each option involves tradeoffs. GAO suggests that Congress forgive some TVA debt, but points out that such action would have a negative impact on the federal deficit.
TVA chairman Craven Crowell, who received a draft of the report over the summer, begs to differ. In a letter to Charles A. Bowsher, Comptroller General of the United States, Crowell states: "[The] GAO staff members responsible for this report lack an adequate, indepth understanding of the electric utility industry and have therefore produced a report characterized by inaccuracies, false assumptions, and misleading information." He also points out that GAO gathered much of its information from the nine investor-owned utility (IOU) competitors that stand to gain the most if TVA is dismantled.
Crowell claims that TVA is financially healthy and that GAO made "inappropriate" and "misleading" comparisons between TVA's capital structure and those of IOUs. TVA, he notes, may raise capital only by issuing debt, while IOUs also may sell common and preferred stock. He adds that TVA's $27-billion debt is not out of line with the total capitalization of other utilities, and that its yearly revenues of more than $5.4 billion easily covered its debt service of $1.9 billion in 1994.
TVA has taken steps to improve its financial
performance \(em cutting its workforce from 34,000 to 16,500, cutting overall expenses by $800 million, halting construction on nuclear units, and capping its debt below the limit set by Congress. Those steps have enabled TVA to forgo rate increases since 1987. During that time, TVA's ranking has jumped from 48th to 30th among the 130 least-expensive utilities. TVA plans no rate hikes until at least 1997.
Crowell also charges that GAO "misrepresented" construction projects in progress as $14 billion in deferred assets. To include the $14 billion in "deferred assets" in rates, he explains, TVA would have to begin depreciating the assets before putting them in service \(em in violation of accounting principles. Crowell also points out that Watts Bar Unit 1 and Browns Ferry Unit 3, which represent $7.8 billion of the $14 billion in construction projects, will go on line in the first quarter of 1996 and begin producing revenue. Contrary to the GAO report, Crowell says no rate increase will be needed to start up the two nuclear plants.
Meanwhile, a Palmer Bellevue report, The Ties That Bind, finds TVA financially sound enough to withstand a more intense competitive market in the regional electric industry. The report concludes that TVA is ready for the new industry structure, and will become more responsive to its wholesale customers and more creative overall.
Crowell favors GAO's hands-off recommendation to Congress, which would allow Congress to continue TVA oversight, while allowing the market to motivate TVA. t
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