Gas Price Prudence: From Hedge-and-Hope to Best Practice
Utilities and regulators should follow the same ideas that govern risk management at the largest...
On December 12, 1994, Craven Crowell, chairman of the board of the Tennessee Valley Authority (TVA), issued two well-publicized announcements. First, TVA would not finish three of the nuclear units it has had under construction since the 1970s, unless it could find partners willing to share their construction costs (a prospect he subsequently characterized as "very slim,").1 Second, TVA planned to set an internal cap on its total debt at a level $2 to $3 billion below the $30-billion limit imposed by the Congress. Both pronouncements struck many TVA-watchers as the proverbial pledge to lock the barn door after the cow has made her escape.
TVA's enduring nuclear woes and enormous (relative to its competitors) debts are clearly serious. But more than that, both are symptoms of a more fundamental, long-standing structural disorder (em one that will remain unaffected by TVA's new plans and policies.
From its inception at the low point of the Great Depression, TVA financed its dams and power plants with general revenues appropriated by Congress. But in 1959 the TVA power system was made "self-financing." The agency took direct responsibility for its own borrowing, and arrangements were stipulated for TVA to repay the U.S. Treasury for the initial, cumulative, pre-1959 federal appropriation or investment. When this was done, Congress set a limit of $750 million on TVA's total indebtedness, and then proceeded to raise the limit periodically: to $1.25 billion in 1966, $5 billion in 1970, and $15 billion in 1975. In 1979, Congress raised TVA's debt limit to its current level of $30 billion.
Between 1974 and 1989, TVA borrowed from the Federal Financing Bank (FFB), a part of the U.S. Treasury Department. The FFB made borrowing a simple, no-questions-asked process. At the crest of its nuclear construction efforts in the early 1980s, TVA was borrowing $1 or $2 billion annually.
TVA left the FFB in 1989 to take advantage of falling interest rates and refinance its high-interest debt. Since that time, TVA has borrowed about $18 billion in the private capital market. It used most of that $18 billion to refinance or defease high-interest debt, but allocated about $3.3 billion in new borrowing largely to maintain the nation's only active nuclear construction program.2 By spring of
1994, this rush of new financing had put the agency within $250 million of its
$30-billion Congressional debt limit (if one includes $4.5 billion of defeased
debt, a convention that TVA followed previously).
Approaching Whose Limit?
Shortly before Congress held hearings on TVA's nuclear program in March 1994, TVA decided that defeased debt shouldn't count against its debt limit. Staff at the Office of Management and Budget (OMB) questioned TVA's decision and asked for an opinion from OMB's general counsel, who reportedly was "leaning" toward the view that it ought to count.3
Logically, if not legally, defeased debt should not count. Debt is defeased when its repayment is guaranteed (em not only legally, but financially. In TVA's case, interest rates fell so far below the levels at which its bonds were originally sold (to the FFB) that for