Kudos to the Obama Administration and its proposed fiscal year 2015 budget for continuing “to believe that reducing or eliminating the federal government’s role in programs such as TVA [the Tennessee Valley Authority], which have achieved their original objectives, can help mitigate risk to taxpayers.” The TVA remains a government-sponsored enterprise, despite being the largest power generator in the United States-hardly a core government function given the robust private marketplace in electricity.
The Obama administration correctly sees TVA, saddled by $26 billion in debt, as a risk to the taxpayer-a Too-Big-To-Fail enterprise waiting in the wings to financially stumble. TVA claims that it is not currently a burden to taxpayers, having ceased taking federal appropriations for its power program in 1959 and for its environmental stewardship and economic development activities in 1999.
Nevertheless, TVA is unwilling to sever its umbilical cord to the federal government, and it is reasonable to expect that its stakeholders would show up at the federal government’s doorstep, begging for relief, if TVA stumbled financially (despite provisions in its federal charter stating that TVA’s debt is not guaranteed by the federal government).
That’s the reason d’être of continued federal ownership, especially since the market prices TVA bonds as if they were government bonds backed by the full faith and credit of the federal government. For example, TVA sold $1 billion in 10-year, non-callable bonds in 2013 at an interest rate of 1.75%, at the same time that 10-year Treasuries, which are also federally taxable, sold for between 1.5-2.0%.
Yet in its review of TVA earlier this month, the credit rating agency Moody’s cited a number of troubling risk factors including TVA’s $30 billion statutory debt ceiling (that causes it to use alternative funding mechanisms), its underfunded pension plan, the unresolved cost of the coal ash spill at Kingston, TN, and the cost overruns of its Watts 2 nuclear construction project. While Moody’s has given TVA bonds its best rating, “Aaa,” for many years and currently classifies TVA’s outlook as “stable,” these ratings hinge upon two important factors:
- Moody’s stated that “TVA’s Aaa credit rating could be downgraded if there are any limitations on the independence of TVA, including it ability or willingness to set rates at sufficient levels to cover operating expenses and debt service requirement.”
- Moody’s also noted that, “TVA is unlikely to maintain its “Aaa” rating in the event of a divestiture from the U.S.”
In other words, Moody’s maintains its high rating of TVA’s debt so long as TVA is seen to be independent for ratemaking purposes (the TVA board sets its rates which are not subject to review by a public utility commission or any outside parties) but it must continue to be owned by the U.S. government.
There’s only one reason why bondholders want continued ownership of TVA by the federal government-in case the wheels come off on TVA’s financial performance. And this is why TVA management and labor are spreading fears of a “sale” and rising electricity rates, which have been repeated uncritically by many in the Tennessee media.
Public officials and journalists in Tennessee continue to describe the administration’s proposal as “privatization” and a “sale,” as opposed to what it actually proposed: a transfer. According to the budget proposal, the administration “stands ready to work with the Congress and TVA’s stakeholders to explore options to end Federal ties to TVA, including alternatives such as transfer of ownership to State or local stakeholders.”
Nowhere is the word “sell” or “privatization” used in the administration’s budget proposal. In fact, the language is sufficiently broad to allow the federal government to consider different transfer scenarios, including the transfer of the ownership to the states that TVA operates in, or alternatively, to its distributors, or even a combination of states and distributors as well as other alternative transfers.
What the administration is actually proposing could run a wide gamut of options. The federal government could simply transfer title to the TVA assets and its accompanying responsibilities-including its non-power generating responsibilities, like river navigation maintenance and flood control-to state or local stakeholders and change next to nothing, including the rates it charges which are fixed by the TVA board. Or it could transfer TVA’s navigation maintenance and flood control functions to other federal agencies and transfer TVA itself to its stakeholders, potentially both states and/or distributors. Or it could even overhaul or completely repeal TVA’s federal charter-the TVA Act-which created the TVA and mandates everything from who can serve on its board and how rates are set to the federal and state laws to which it is subject.
The best approach would be for the federal government to transfer TVA to the seven states in which the utility operates, using one or more metrics-such as the number of employees or sales in each of the seven states-to determine what each state’s ownership interest would be. Such a transfer would not only transfer the assets operations to the states, but also any risks associated with the TVA assets and operations. When the federal government “sold” the Alaskan Railroad to the state of Alaska, the railroad played a leadership role in facilitating that transfer, working with both the Congress and the state to make the transfer as easy and transparent as possible as well as to maximize its subsequent successful operation after the transfer. TVA’s footprint is biggest in Tennessee, and that state can and should play the role of leader of the states served by TVA with respect to the transfer, just as Alaska did in the Alaska Railroad transfer.
Another plausible scenario for TVA is to follow the Metropolitan Washington Airports Authority (MWAA) model. In 1987, Congress transferred the Washington Dulles International and Washington National Airports to the Metropolitan Washington Airports Authority under a 50-year lease authorized by the Metropolitan Washington Airports Act of 1986. By statute, MWAA pays the federal government $3 million annually to lease the facilities, is responsible for capital improvements and otherwise runs these airports. Prior to the transfer, the airports had been owned and operated by the Federal Aviation Administration.
While not as attractive as a straight transfer of ownership, a TVA lease would limit the federal government’s potential liability to that of a landlord. Moreover, the lease could be written to allow, and even incentivize, a subsequent complete transfer. Unfortunately, were TVA to financially stumble, stakeholders in a lease scenario in which the federal government is the landlord may believe that the federal government will backstop its lessee, just as the financial world sees an implicit federal guarantee of TVA bonds today, legal restrictions notwithstanding.
By contrast, if TVA were transferred to the states and/or its distributors and such an adverse event to occur, stakeholders might still try to seek a federal bailout, but such intervention and recourse would be much more difficult to secure than under the status quo or a lease scenarios. When the United States Enrichment Corporation, which was a division of the Department of Energy until privatized in 1993, financially stumbled in recent years, Congress and the administration worked together to find ways to direct government largesse to it in an unsuccessful effort to keep it from bankruptcy. TVA stakeholders would demand nothing less, and in all likelihood, much more government assistance and intervention, in the event TVA were to stumble.
What’s really missing in regards to TVA is imagination and creativity. Most TVA stakeholders cannot see beyond the status quo, but the world has changed and will continue to change. It is no longer 1933, when few people had electricity in the Tennessee Valley. And given the federal government has spent the last decade bailing out Too-Big-To-Fail companies and government-sponsored enterprises like Fannie Mae, Freddie Mac, AIG, General Motors, and Chrysler, it is refreshing that the Obama administration has rightfully concluded that it doesn’t want to have to confront a similar bailout option with respect to TVA in order to mitigate risk to taxpayers.
Tennessee, where the bulk of TVA’s operations and employees are located and where the greatest benefits of TVA are reaped, needs to think about how it wants the future TVA to look, and it should work with both the TVA and the federal government to design the post-federally owned TVA to assume the risk that federal taxpayers assume today. TVA President and CEO Bill Johnson recently stated that, “[TVA] will continue to work collaboratively with the Office of Management and Budget […] [b]ut, be assured, our focus tomorrow will be the same as it is today – to provide lower cost, reliable power to the 9 million people of the Tennessee Valley.”
By transferring TVA to the states it serves, both Johnson and the Obama administration can achieve their stated goals. TVA’s focus would be the same as it is today; in fact, a post-transfer TVA could be practically identical to today’s TVA. Only the ownership would change-and the risk currently assumed by federal taxpayers.
William B. Newman, Jr., is Senior Adviser to HC Project Advisors in Washington, DC. He is a former executive of Conrail, and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history. His previous articles on TVA divestiture are available here.