The
TVA is one of the largest electric utilities in the nation. It was created as
part of the New Deal in 1933 by assembling land surrounding the Tennessee River
and tributaries across seven states using land purchases and eminent domain.
With the advantage of taxpayer funding and federal legal power, the TVA bullied
private power producers out of the way, removed more than 15,000 people from
their land, and grew by selling power through municipal power distributors,
which were also subsidized by the government.
The
TVA was championed by Progressives, who wanted to uplift the people in the
Tennessee Valley with subsidized power, flood control, farming, and economic
development. It turned out, however, that neighboring states with private power
grew just as fast as Tennessee in subsequent decades, and they extended power
to rural communities as fast as the TVA.
Today,
the TVA generates and transmits power to nine million people. The power comes
from a fuel combination of 34 percent coal, 34 percent nuclear, 11 percent oil
and natural gas, 9 percent hydro, and 12 percent purchased power. The
company has 10,900 employees and about $11 billion in annual revenues.
The
TVA is a legally protected monopoly within its service region, and it has
unilateral authority to set its own rates without the regulatory reviews that
private utilities elsewhere in the nation face. The company does not pay
federal, state, or local income, property, or other taxes. It does make
"payments in lieu of taxes" to state and local governments, but those
are less than the typical taxes paid by private utilities. The TVA is
mainly a wholesaler of power, selling it to 155 municipal and cooperative
distributors, who in turn sell it to retail customers. In an anti-competitive
twist, those local utilities must provide 5- to 15-year notices if they want to
terminate their relationship with the TVA.
The
government-owned TVA has become an anachronism, as the global trend for three
decades has been to privatize electric utilities. In the United States,
private-sector corporations dominate the electric generation and transmission
industries. There is no theoretical or practical reason why the TVA should not
be private.
If
the TVA had a record of performing better than private utilities, government
ownership might make sense. But the company has a poor record on both financial
and environmental management. Privatizing it would create an institutional
structure that would improve efficiency, reduce costs, create more
transparency, and allow for better environmental oversight.
A
centerpiece of TVA's dysfunction has been its nuclear program, which has been
problematic since the beginning. A 1985 Washington
Post story provides a taste of the historic problems:
TVA
had envisioned the most ambitious nuclear system in the United States, planning
in three states to build 17 reactors capable of supplying 40 percent of the
Tennessee Valley's power.
Today
TVA is operating two atomic plants. Eight were abandoned while under
construction. Three were shut down by TVA earlier this year following pressure
from the [Nuclear Regulatory Commission (NRC)] over serious safety concerns.
Four others, now partially built, have experienced substantial construction
delays or have been questioned for safety reasons.
In
the intervening years, according to a recent NRC report, TVA has been cited for
more than 1,000 violations of NRC regulations, twice as many as an unidentified
utility of comparable size and three times the national average.
In
addition to a record number of fines and penalties, TVA appears to suffer
serious internal problems and has been criticized by the NRC for mismanagement.
Nuclear engineers and safety officials at TVA say they have so little
confidence in TVA management and the regional NRC that they have bypassed the
usual channels and gone to Capitol Hill to make serious allegations about the
adequacy of the reactors' design and construction.
Their
complaints have prompted four federal investigations, which are examining a
host of charges, ranging from inadequate safety standards to harassment of
whistle blowers.
Many
problems have afflicted the TVA's nuclear program, including ineffective
leadership, management infighting, and a major fire at an Alabama
plant. The company ended up canceling a slew of nuclear plants during the
1980s for which it had spent $5 billion. In 1998 Ralph Nader opined,
"TVA is by any measure the worst nuclear project in the
country . . . [and] has the poorest safety record."
In
2007, the TVA restarted its nuclear construction program with the building of
the Watts Bar 2 plant. Just like past nuclear projects, this project went far
over budget, with its cost rising from $2.5 billion to about $4.5 billion. Also, the TVA moved forward and then backward in recent
years on completing two Bellefonte nuclear plants in Alabama that were
originally started in the 1980s. The plants were almost complete, but now they
appear to be canceled for good. The company spent a remarkable $6 billion on
the Bellefonte plants — spending that is now down the drain.
Even
when they are up and running, the TVA's nuclear plants have not been good
performers. Operationally, they are generally less reliable than the nuclear
plants of other companies. All of this is not surprising because the
federal government's capital investments in general tend to be misallocated,
mismanaged, and subject to cost overruns.
The
TVA has another problem with capital investment: as a government entity, it
cannot tap equity markets for financing, so it relies heavily on debt. The
company is able to borrow at artificially low interest rates because it is part
of the government, but that has created an incentive to borrow excessively. As
a consequence, the TVA has built up a high debt load compared with private
utilities, which makes its financial structure unstable.
On
top of a large debt, the TVA has large unfunded obligations in its retirement
plans. At the end of 2014, the TVA's pension plan was only 61 percent
funded. A 2014 analysis found that the average pension funding level of
six comparable private utilities was 96 percent. The utility also has a
large unfunded obligation for postemployment health benefits.
The
TVA has a poor environmental record. In 2008, mismanagement led to major
environmental damage from a spill of five million cubic yards of coal ash into
the Emory River and across 300 acres of land at its Kingston Fossil Plant. That
was the largest coal ash spill in U.S. history. USA Today said, "Enough
muck spewed forth to fill a football field more than 2,500 feet into the
air." The company had been aware of the risk of such an accident but
had rejected ideas to fix the problem. It has since spent $1.2 billion
cleaning up the mess.
Private
businesses also make mistakes that harm the environment. But over the decades,
the TVA has been particularly irresponsible. As a government entity, it has
been less transparent about its environmental and safety activities than
private companies and more immune from outside criticism.
A
2009 study by the Environmental Integrity Project (EIP) found "a long
history of environmental mismanagement" at the TVA. EIP found that
the TVA
·
"exemplifies
some of the worst environmental practices in the utility industry";
·
spends
less on coal-plant maintenance than private-sector utilities do;
·
has
a "poor record of compliance with environmental law";
·
suffers
from a "culture of neglect" that has created a "large and
dirty" environmental footprint;
·
has
"repeatedly invoked its status as a federal agency to avoid responsibility
for its own environmental misconduct"; and
·
lags
private utilities in adopting pollution controls, and indeed is
"recalcitrant."
The
utility's inspector general issued a critical report after the Kingston coal
waste spill. It blamed a corporate culture that focused on covering up mistakes
rather than proactively reducing environmental risks. Furthermore, it stated
that the TVA "avoided transparency and accountability in favor of
preserving a litigation strategy." In numerous investigations over 10
years, the inspector general repeatedly found noncompliance with safety
policies and procedures.
In
the early years federal taxpayer dollars heavily subsidized the TVA, allowing
it to charge artificially low rates. But rates have risen substantially over
the decades, partly because of the TVA's expensive mistakes. A 2014 study by
former federal budget official Ken Glozer found that the utility has somewhat
higher rates than utilities in nearby states today, despite the tax and
regulatory advantages that it enjoys. The TVA is exempt from a range of
regulations that are imposed on private producers, it can borrow cheaply
because it is owned by the government, and its power is sold at retail by
subsidized local utilities.
Given
those advantages, the TVA should be able to sell power for substantially less
than if it were a private utility. But according to Glozer, the retail rates in
its service area are higher than for other utilities in the overall
region. He says the problem is that the TVA and its local distributors
have become "highly inefficient" over time. Another study compared the TVA's operating and
maintenance costs (other than fuel costs) with 18 other utilities and found
that the TVA's costs were the highest. Apparently, the TVA's
government-conferred cost advantages end up being consumed by the company's
general bloat and mismanagement.
The
TVA's employee compensation is generous. It pays its leaders not like civil
servants, but like top-performing corporate executives. In 2015, its top five
executives "were paid anywhere from five to 16 times more than what
President Barack Obama is paid." TVA's CEO Bill Johnson has an annual
compensation package of more than $6 million, and four other executives are
paid more than $2 million. In 2012 a Tennessee newspaper disclosed the
company's salaries and found that 105 people were earning more than
$200,000. The company also gives its employees large performance
bonuses. All this is in a state where median income is 19 percent below
the U.S. average.
In
sum, the TVA is compensating employees as if it were a very successful private
company, but it is delivering the performance of a government bureaucracy. Then
why not privatize it? That way its highly paid employees would be in an
environment where they could generate performances that match their
compensation.
The
attraction of electric utility socialism may be finally waning in America —
more than two decades after the United Kingdom privatized its utilities. In the
federal budget for 2014, President Obama proposed the "possible
divestiture of TVA, in part or as a whole" because it may "no longer
require federal participation." Obama is following in the footsteps
of President Reagan, who also favored privatization.
Privatization
would create incentives for the TVA's leaders to cut costs, improve
environmental stewardship, and set power rates at efficient market levels. The
company has a history of shady dealings, such as handing out noncompetitive
contracts to cronies of company leaders and creating a secret retirement fund for
executives. Privatization would reduce those sorts of problems and make
the TVA a more transparent and accountable organization.
The
TVA has been profitable in recent years, so privatization would raise billions
of dollars. An analyst for the investment research firm Morningstar told Bloomberg.com that the TVA
might sell for $30 billion to $35 billion. Ken Glozer estimated a similar
figure, between $30 billion and $40 billion. He noted that Duke Energy
purchased Progress Energy in 2012 for $32 billion, and Progress had somewhat
lower revenues than the TVA.
Privatization
would better ensure that the TVA's capital investments were allocated and
managed efficiently. It would free the utility from costly prevailing wage
labor rules. The federal budget would benefit because a privatized TVA would
pay federal income taxes. And privatization would spare taxpayers from a possible
future bailout stemming from the utility's high debt and pension obligations.
Policymakers
could privatize the TVA through a public share offering or by a direct sale of
portions of the company to utilities in neighboring states. Some portions
of the company not related to power production — such as recreational areas and
non-power dams — could be transferred to the ownership of state and local
governments.
In
recent years, the TVA has made some reforms, including trimming its bloated
labor force and canceling work on the Bellefonte nuclear plant. Perhaps a
Democratic administration in the White House that threatened to privatize it
prompted the company to make changes. In other good news, the TVA's Watts Bar
Unit 2 nuclear plant recently received a federal license to generate power.
Those positive developments will help ease the transition to privatization and
allow the government to command a higher sale price.
The
editorial page of the Chattanooga
Times Free Press favored
privatizing the TVA in 2013. It listed four advantages: greater safety and
accountability, environmental improvements, higher tax revenues for
governments, and reduced financial risks of a possible taxpayer bailout. To
those advantages, we could add greater operational efficiency, better capital
investment management, and the potential to open the region to more
competition. It is long past time to privatize the TVA.
Norb
Leahy, Dunwoody GA Tea Party Leader
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