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Financial News

Fortnightly Magazine - March 1 1995

many issues it paid the agency to borrow enough at lower interest rates on Wall Street to set up trust funds whose interest and principal payments were adequate to service the high-interest issues until maturity. Since about $3 billion of TVA's defeased debt matured in October 1994, giving TVA $3.25 billion in financial breathing room under any interpretation, OMB apparently has decided to consider the issue moot and has not pushed for a formal resolution of whether TVA's defeased debt "counts."

How long such breathing room will sustain TVA, however, remains unclear. In Congressional testimony in March 1994, chairman Crowell said TVA would need "new borrowings" of $600 million a year until 2000 to finance its construction program.4 But the fiscal year 1994 business plan that TVA furnished to the U.S. General Accounting Office (GAO) in July 1994 called for annual new borrowings averaging $1.677 billion over the period 1995 to 2000. The $600-million figure used in TVA's March 1994 testimony apparently represented the net addition to its debt (em new borrowings minus the value of debt refunded.5

But all this leaves two important questions unanswered:

1) What is the purpose of TVA's debt limit?

2) How well has it worked?

Why a Debt Limit?

One reason for a debt limit is to limit liability (em in this case the federal government's. But TVA's bonds are not federally guaranteed; TVA's power system gets no federal funds or subsidies, except that it pays no federal income taxes as a federal agency. Moreover, when Congress passed the self-financing act in 1959, it set up a series of standard financial tests that TVA must satisfy to protect its bondholders, including the U.S. Treasury. Hence there is no more of a financial or a fiduciary rationale for subjecting TVA to a debt limit than for imposing such a limit on a privately owned utility.

TVA's debt limit stands as a vestige of Congressional desire to retain control over the agency's power program after it was made self-financing. In theory, the limit allowed Congress to review TVA's finances and operations each time the agency approached for financing authority. Unfortunately, the device has proved less than useless as a way of ensuring external review.

When the limit was raised to $30 billion in 1979, TVA's total debt stood at about $10 billion. Both TVA and the Congress believed that another $20 billion would be enough to finish paying for the 14 nuclear reactors TVA then had under construction, as well as any other nonnuclear capital needs. Since that time, eight of those 14 reactors have been canceled, with $4.6 billion written off TVA's balance sheet. Four reactors are still under construction; only two of the original 14 reactors have won licenses and begun operating. Those two, plus the three reactors licensed before 1979, give TVA a total of five reactors with operating licenses. Table 1 summarizes the fate and status of all 17 units.

As of December 1993, TVA's investment in cold or incomplete reactors and associated nuclear fuel stood at almost $15 billion [14.895], compared to a