Divesting the Tennessee Valley Authority

A new article at by William Newman, Jr.—a former Conrail executive that worked on its successful sale by the federal government via IPO—explores the Obama administration’s interest in a potential divestiture of the Tennessee Valley Authority (TVA) and reviews some options on how that could proceed in practice. Here’s an excerpt:

In 1987, the federal government divested itself of Conrail, a freight railroad based largely in the Northeast and Midwest. Just as that divestiture was nearing completion, President Reagan is reported to have asked: “Okay, when do we sell the TVA?” While Reagan wasn’t able to achieve the sale during his presidency, fortunately the current administration is revisiting the issue today. Buried in the Obama administration’s FY 2014 budget is a commitment to undertake a “strategic review of options for addressing the Tennessee Valley Authority’s (TVA) financial situation, including the possible divestiture of TVA, in part or as a whole.”

The administration’s rationale is eminently reasonable. First, it notes that, “Reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation, can help put the Nation on a sustainable fiscal path.” Second, the TVA already has $22.3 billion in debt outstanding, and the administration estimates that its current capital investment plan includes more than $25 billion of expenditures over the next 10 years, which could result in it exceeding its statutory $30 billion debt limit. As TVA notes in its most recent annual report, “TVA faces potentially large capital requirements to maintain its power system infrastructure and invest in new power assets, including generation assets using cleaner energy sources.”

The TVA’s primary function is power generation and transmission, hardly a necessary federal function given the ubiquity of private sector power provision in this country. In addition, TVA provides navigation maintenance on and flood damage reduction from the Tennessee River and its tributaries. These latter functions can be assumed by other appropriate federal agencies under any divestiture option. In any case, TVA ratepayers shouldn’t be subsidizing these functions through their electricity rates as they are today.

Divestiture, in whatever form, would bring two major benefits to taxpayers. First, according to the Congressional Budget Office, a divestiture of TVA would avoid adding roughly $10 billion to the federal deficit over the next decade through additional capital outlays (less the cost to the federal government of assuming the navigation maintenance and flood danger reduction functions of the TVA). Absent divestiture, TVA’s increased capital expenditures are scored in the federal budget as increased outlays, thereby increasing the deficit. Second—and much more importantly—a divestiture of TVA avoids another bailout of a “Too Big To Fail” government sponsored enterprise, not unlike Fannie Mae and Freddie Mac. By law, TVA’s bonds are not backed by the federal government; nonetheless they dropped in value on the day of the announcement of the administration’s budget because investors believe that, regardless of the statutory language, the federal government would ultimately bail out the TVA if it were unable to honor its debts. A divestiture would make such a taxpayer bailout considerably less likely.

Opponents of divestiture argue that the risk of a future financial meltdown resulting in a bailout is low. That may be true but even so, what’s the downside of divestiture? None. Such a scenario begs the question: other than waiting in the wings for a potential future bailout of TVA, why have continued federal ownership?

Newman goes on to explore three potential divestiture options: a public offering, an asset sale and divestiture to the states. Read the full article here. See also this April blog post by Steve Esposito on TVA divestiture pointing out some of the inherent challenges.