If TVA doesn’t get approval from Congress to raise its debt ceiling of $30 billion, ratepayers may be forced to pay the price
The Tennessee Valley Authority (TVA) has a goal to be a national leader in clean energy and increased nuclear production. But to do this, the federal power producer needs money, and its credit could soon be dried up.
TVA has a congressionally imposed debt ceiling of $30 billion, but the entity is currently more than $23 billion in debt. TVA has an aging coal fleet and is mulling plans for a nuclear power plant that would cost at least $9 billion, while continuing to work on a nuclear plant in progress. Like electricity producers nationwide, TVA is guessing about expenses that will come with federal emissions regulations.
TVA has two options: Get Congressional approval for an increased debt cap or raise customer rates.
Whether Congress would approve a debt raise and in what time frame is anybody’s guess.
TVA’s finance office told the Mississippi Business Journal that its “only means of raising capital for major investments in the power system is through power revenues, or issuing bonds up to a level capped by Congress three decades ago. While we are pursuing additional financial flexibility, as one means for funding investments in new assets, we could still move forward with nuclear construction by recovering the costs through rates if necessary.”
TVA also said it intends to reduce its debt by $2.4 billion in fiscal year 2011.
At its August board meeting, TVA president Tom Kilgore said, “We want to be one of the nation’s leading providers of low-cost and cleaner energy by 2020…We want to be the nation’s leader in increased nuclear production.”
Formed in 1933, as part of President Franklin D. Roosevelt’s New Deal, TVA has a generating capacity of 28,000 megawatts and serves more than 7.7 billion people in seven states, including more than 320,000 people in Northeast Mississippi.
Former TVA chief economist Dr. Allan Pulsipher is concerned that a halt in TVA’s credit would be unfair for ratepayers. Current customers would have to pay for upcoming nuclear projects in rates before they could reap the financial benefits of those projects.
Pulsipher, who now directs the Louisiana State University Center for Energy Studies, said, “They should pass a law removing the debt ceiling.”
“Sometimes borrowing is the smart thing to do… with interest rates so low, it makes more sense to borrow,” so current ratepayers don’t have to foot the bill for expensive nuclear projects when they are not currently reaping the cost savings benefit from those projects, he said.
Today, the issue is whether costs will be placed on current ratepayers instead of future ratepayers. The debt ceiling is putting current ratepayers at risk of high rate increases, because without borrowing money, ratepayers must pay for projects in rate base.
Although TVA’s bonds are rated triple-A and viewed as backed by the government, they are actually only backed by the entity’s power revenues. TVA is a wholly owned instrumentality of the U.S. government and is protected by law from competition in its service territory.
Mississippi native Glenn McCullough, who served as TVA chairman from 2001 to 2005, maintains that the federal power producer is a success.
“As a TVA retiree and ratepayer, I’m pleased with TVA’s performance. TVA is holding the line and making sure rate prices are competitive,” he said.
McCullough does not believe TVA can reduce debt now in light of the need for an increase in nuclear power and uncertainty about federal emissions regulations.
“The most difficult thing is really not knowing what the rules are… It would be difficult to make the capital investments TVA is going to have to make for economic growth in the Valley, meet emissions reduction requirements and hold the line on rates (while reducing debt). When I was there, we tried to walk that tight rope, and it’s gotten even more difficult in recent years. I hope Congress is conscious that TVA plays a vital role in the lives of almost 10 million Americans and is the largest public power utility in the country. I am confident Congress and TVA can work together to come up with a solution that is fair to the ratepayer and serves the country well,” McCullough said.
The TVA board’s fiscal year 2011 budget includes $248 million for work on the Bellefonte nuclear site in Alabama that will allow it to continue to be a nuclear option. The budget also includes $635 million for construction of the Watts Bar 2 nuclear facility in Tennessee.
Current rates are below the national average
In a recent MBJ guest editorial, TVA’s executive vice president for public relations, Kenneth R. Breeden, said TVA’s current residential rates are below 10 cents per kilowatt hour, which is below the national average.
Increases — such as the one announced this month, which should add between $1 and $3 to monthly residential bills — are due to increasing fuel costs. Additionally, increased electricity demand during summer months also causes bills to rise, Breeden said.
According to the Associated Press, TVA’s fuel cost increases totals about 22 percent since March.
TVA structure: Conflict of interest?
TVA serves most of Tennessee and parts of Alabama, Georgia, Kentucky, North Carolina and Virginia.
Publicly owned utilities — such as Mississippi’s Entergy and Mississippi Power Company — have corporate boards and shareholders but are regulated by a state Public Service Commission.
TVA is different. The federal power producer has been self-funded since 1959, and is governed by a board of directors appointed by the President of the United States. It pays no dividends to shareholders.
Pulsipher believes the system is a bad one and that an independent commission should be created to set TVA rates and review the performance of its management.
“It’s just not a good public policy model,” he said. There are no checks and balances; the same people are managing and regulating the agency, he said.
TVA was formed during the Great Depression as Roosevelt asked Congress to create “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise,” and in 1933 the TVA Act was passed.
The federal power producer helped bring electricity to rural America. In addition to electricity production, TVA is charged with operating waterways and reservoirs, managing public lands and natural resources, and working with local governments to recruit industry. TVA is protected by law from competition in its service territory.
By the 1970s and 1980s, TVA’s debt soared, as the agency began constructing 17 nuclear power plants, only to make costly cancellations of most of them.
TVA’s finance office said that today, “Most of the costs of these (uncompleted nuclear facilities) has been written off, and the remaining portion will be written off by 2016. In order to write-off these facilities, the costs written off must be recovered through rates.”
The MBJ reported in 1997 that the TVA board at that time planned to cut its debt — which had then reached more than $27 billion — in half.
Then-TVA CFO David Smith said: “Our goals for 2007 are to reduce the wholesale cost of power from the current 4.11 cents per kilowatt-hour to 3.46 cents, slash TVA’s debt in half to $13.8 billion and respond to changing customers’ needs. This TVA board is the first to tackle the reduction of TVA’s $27.6 billion debt. By implementing this plan, TVA can, by 2007, reduce its debt to the lowest level since 1981.”
In 1997, TVA was spending about a third of every dollar it gleaned from power sales on debt interest.
The board didn’t quite meet its debt-reduction goal. By 2003, TVA’s debt was down only slightly at $25 billion, and Congress and the Bush White House pressured the agency to make further reductions.
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