The Tennessee Valley Authority (TVA) is one of the largest electric utilities in the nation. It generates and transmits power to nine million people within its service region. The power comes from a fuel combination of about one-third coal, one-third nuclear, and one-third other sources.1 The company has 10,900 employees and about $11 billion in annual revenues.
The TVA is owned by the federal government, and it benefits from a variety of special advantages. It 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 usually face.2 The TVA 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.3
The TVA is mainly a wholesaler of power, selling it to 155 municipal and cooperative distributors, who in turn sell it to retail customers. Those local utilities must provide 5- to 15-year notices if they want to terminate their relationships with the TVA, which is an anti-competitive arrangement that works to TVA's advantage.4
The origin of the TVA was in the New Deal. It was created in 1933 by assembling land surrounding the Tennessee River and tributaries across seven states with the aid of 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.5
The creation of a federal electric utility 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 did in subsequent decades, and they also extended power to rural communities as fast as the TVA did within its region.6
The government-owned TVA has become an anachronism, as the global trend for more than two 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 also be private.
TVA's Performance
If the TVA had performed better than private utilities over the years, there might have been an argument for government ownership. But it has performed poorly 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.7
Many problems have afflicted the TVA's nuclear program, including ineffective leadership, management infighting, and a major fire at an Alabama plant.8 The company ended up canceling a slew of nuclear plants during the 1980s for which it had spent $5 billion.9 In 1998 Ralph Nader opined, "TVA is by any measure the worst nuclear project in the country... [and] has the poorest safety record."10
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.11 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.12
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.13 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.14
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.15
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.16 A 2014 analysis found that the average pension funding level of six comparable private utilities was 96 percent.17 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 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."18 TVA had to spend $1.2 billion cleaning up the mess.19
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 study by the Environmental Integrity Project (EIP) found "a long history of environmental mismanagement" at the TVA.20 EIP found that the TVA
- "exemplifies some of the worst environmental practices in the utility industry";21
- spends less on coal-plant maintenance than private-sector utilities do;22
- has a "poor record of compliance with environmental law";23
- suffers from a "culture of neglect" that has created a "large and dirty" environmental footprint;24
- has "repeatedly invoked its status as a federal agency to avoid responsibility for its own environmental misconduct";25 and
- lags private utilities in adopting pollution controls, and indeed is "recalcitrant."26
The utility's inspector general issued a critical report after the Kingston coal waste spill.27 It blamed a corporate culture that focused on covering up mistakes rather than proactively reducing environmental risks. It said that the TVA "avoided transparency and accountability in favor of preserving a litigation strategy."28 In numerous investigations over 10 years, the inspector general repeatedly found noncompliance with safety policies and procedures.29
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.30 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 the retail rates in its service area are either similar or higher than for other utilities in the overall region.31 Glozer says the problem is that the TVA and its local distributors have become "highly inefficient" over time.32 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.33 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."34 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.35 In 2012 a Tennessee newspaper disclosed the company's salaries and found that 105 people were earning more than $200,000.36 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. Why not privatize the utility then? That way its highly paid employees would be in an environment where they could generate performances that match their compensation.
Time to Privatize the TVA
More than two decades after Britain privatized its electric utilities, our federal government still owns the TVA. However, the attraction of electric utility socialism may be waning. In the federal budget for 2014, President Barack Obama proposed the "possible divestiture of TVA, in part or as a whole" because it may "no longer require federal participation."37 Obama was following in the footsteps of President Ronald 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.38 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 figured that the TVA might sell for $30 to $35 billion.39 Ken Glozer estimated a similar figure, between $30 and $40 billion.40 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.41
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 nonpower 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.42 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 has 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 2013.43 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.
Notes:
1 Tennessee Valley Authority, Form 10-K filed with the Securities and Exchange Commission, Fiscal Year Ended September 30, 2015, p. 13.
2 The Energy Policy Act of 1982 also created an "anti–cherry picking" rule that exempts the TVA from Federal Energy Regulatory Commission orders requiring utilities to provide transmission access to other companies.
3 Ken G. Glozer, "Time for the Sun to Set on the Tennessee Valley Authority," Heritage Foundation Backgrounder no. 2904, May 6, 2014, p. 6.
4 Tennessee Valley Authority, Form 10-K filed with the Securities and Exchange Commission, Fiscal Year Ended September 30, 2015, p. 10.
5 Richard D. Obenshain, "Public Power and the TVA," The Freeman, September 1, 1959.
6 Jim Powell, FDR's Folly (New York: Crown Forum, 2003), chap. 11.
7 Stephen Labaton, "Tennessee Valley Authority Generates Woes with Nuclear Power Program," Washington Post, August 3, 1985.
8 Brian Dumaine, "Nuclear Scandal Shakes the TVA," Fortune, October 27, 1986.
9 Tennessee Valley Authority, Office of the Inspector General, Navigating Risk: Semiannual Report, October 1, 2012 to March 31, 2013 (Knoxville, TN: TVA, 2013), p. 8. See also "T.V.A. Cancels 4 Reactors," Associated Press, August 30, 1984.
10 Quoted in Jim Powell, FDR's Folly (New York: Crown Forum, 2003), p. 257.
11 Rebecca Smith, "U.S. Clears First New Reactor in Years," Wall Street Journal, October 22, 2015. See also "TVA: Watts Bar 2 Cost Overruns Soar by $2B; Operation Delayed to 2015," Power News, April 12, 2012, www.powermag.com.
12 Duane Gang, "6 Things to Know about TVA and Nuclear Power," The Tennessean, August 29, 2014.
13 Lazard Frères & Co., "Strategic Assessment of the Tennessee Valley Authority, Form 8-K Current Report," (Knoxville, TN: TVA, June 4, 2014), p. 38.
14 Chris Edwards and Nicole Kaeding, "Federal Government Cost Overruns," Cato Institute Tax and Budget Bulletin no. 72, September 15, 2015.
15 Julie Johnsson and Mark Chediak, "Roosevelt's TVA Seen as Hard Sell," Bloomberg.com, April 15, 2013.
16 Tennessee Valley Authority, TVA Performance Report: Budget Proposal and Management Agenda for the Fiscal Year Ending September 30, 2016 (Knoxville, TN: TVA, February 2015), p. 10.
17 Daniel M. Pitts, "TVA Falls through Cracks as Plan Funding Deteriorates," Pensions and Investments, May 26, 2014.
18 Duane W. Gang, "5 Years after Coal Ash Spill, Little Has Changed," USA Today, December 23, 2013.
19 Duane W. Gang, "5 Years after Coal Ash Spill, Little Has Changed," USA Today, December 23, 2013.
20 Environmental Integrity Project, Outside the Law: Restoring Accountability to the Tennessee Valley Authority (Washington: Environmental Integrity Project, December 2009), p. 15.
21 Ibid., p. 21.
22 Ibid., p. 16.
23 Ibid., p. vi.
24 Ibid., p. vii.
25 Ibid., p. 5
26 Ibid.
27 Tennessee Valley Authority, Office of the Inspector General, Review of the Kingston Fossil Plant Ash Spill Root Cause Study and Observations about Ash Management, Inspection Report no. 2008-12283-02 (Knoxville, TN: TVA, July 23, 2009).
28 Ibid., p. 4.
29 Ibid., p. 31.
30 Ken G. Glozer, "Time for the Sun to Set on the Tennessee Valley Authority," Heritage Foundation Backgrounder no. 2904, May 6, 2014, p. 8.
31 Ibid. Glozer finds them to be higher. But Lazard Frères found that TVA retail rates are near the median of utilities in its region: Lazard Frères & Co., "Strategic Assessment of the Tennessee Valley Authority, Form 8-K Current Report," (Knoxville, TN: TVA, June 4, 2014), p. 34.
32 Ken G. Glozer, "Time for the Sun to Set on the Tennessee Valley Authority," Heritage Foundation Backgrounder no. 2904, May 6, 2014, p. 8.
33 Lazard Frères & Co., "Strategic Assessment of the Tennessee Valley Authority, Form 8-K Current Report," (Knoxville, TN: TVA, June 4, 2014), p. 36.
34 Dave Flessner, "Top TVA Directors, Employees Given Millions in Bonuses," Chattanooga Times Free Press, November 21, 2015.
35 Ibid.
36 "Public Government Salaries," Right 2 Know Project, Chattanooga Times Free Press, 2012.
37 Budget of the U.S. Government, Fiscal Year 2014 (Washington: Government Printing Office, 2013), p. 51.
38 In 1996 TVA established a $5 million executive retirement plan that neither Congress nor TVA's inspector general knew about. In the late 1990s, the Chattanooga Times reported on hundreds of perhaps dubious non-bid contracts handed out by top managers. See Richard Munson, executive director, Northeast-Midwest Institute, Testimony before the Senate Environment and Public Works Committee, 106th Cong., 1st Sess., October 6, 1999.
39 Julie Johnsson and Mark Chediak, "Roosevelt's TVA Seen as Hard Sell," Bloomberg.com, April 15, 2013.
40 Ken G. Glozer, "Time for the Sun to Set on the Tennessee Valley Authority," Heritage Foundation Backgrounder no. 2904, May 6, 2014, p. 14.
41 William Newman, "Obama and Reagan Agree: Divest the Tennessee Valley Authority," Reason Foundation, October 8, 2013.
42 Dave Flessner, "Obama Softens Stance on Selling TVA," Chattanooga Times Free Press, February 2, 2015.
43 "TVA Privatization Would Benefit All," editorial, Chattanooga Times Free Press, April 14, 2013.
Departments:
