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.

Some History

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 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 total of about $13 billion [12.993] in capital assets that actually were producing revenue. TVA customers have paid for more canceled nuclear capacity by far than any other utility (em even prior to TVA's December 1994 announcement (em not counting the billions invested in the cold or incomplete units still in limbo. But if you consider the December announcement, and treat the three units TVA said it would not "complete alone" as de facto cancellations, then TVA's post-1994 total grows to 4608 megawatts (MW) canceled and exceeds the 4418-MW combined total of the other members of the "top 10" nuclear-capacity-cancelers, as shown in Figure 1.6

The extent to which TVA's nuclear investment has disfigured its balance sheet can be seen in Figure 2, which compares TVA's assets and revenues to those of the three large regional holding companies that border its service area (em American Electric Power (AEP), Entergy, and The Southern Company.7 Like TVA, Entergy and The Southern Company also built and canceled nuclear power plants; AEP is largely a coal-fired system. But here's the bottom-line comparison: TVA earns about 17 cents in revenue for each dollar of assets, while the other three systems earn about twice that.

In terms of plant operation, the TVA nuclear record is nearly as discouraging. As indicated in Table 1, two of TVA's five licensed reactors have not operated since 1986. The other three, at best, show spotty records. (The Nuclear Regulatory Commission [NRC] awarded its lowest mark in two of four categories during TVA's last review.8) TVA anticipates that one of its unlicensed reactors and one of its licensed-but-cold-since-1986 reactors will begin generating electricity within two years.

That TVA survives intact in the face of such sustained nuclear woe offers impressive evidence of the strength and resilience of its coal, hydro, and transmission sectors.

Has the Limit Worked?

Given the foregoing, it may appear odd to pose this rhetorical question. Nevertheless, this redundancy makes the point that for well over a decade, as TVA's nuclear program foundered, TVA's debt limit failed entirely as a mechanism for triggering external review or accountability (em despite the very fundamental changes that transpired since Congress pegged the debt limit at $30 billion in 1979.

All other control or accountability mechanisms have proven just as ineffectual and illusory. When, under prodding from Rep. Bob Clement of Tennessee (an ex-TVA Board member), the House of Representatives convened a one-day hearing on TVA's nuclear program in March 1994, it marked the first such Congressional hearing in six years. And even though almost all other utilities had halted their nuclear construction, neither OMB nor the U.S. Treasury's FFB ever evaluated the rationale for, or prudence of, the $17 billion the FFB automatically advanced to TVA prior to 1989 (when TVA left the FFB to borrow directly in private capital markets.)

External Control and Accountability

Franklin Roosevelt said TVA needed the power of government and the flexibility of a private business. So he gave it an autonomous three-member board appointed for nine-year terms to function without any oversight, save by Congress. In doing so, however, he neglected to provide even that modicum of external control that any garden-variety board of directors gives to a private corporation.

TVA's board is empowered to make all internal managerial decisions (and what for other utilities would be external regulatory decisions) by majority vote without any independent review or even explanation. Until 1974, TVA board meetings were closed to both the press and the public. It was not until 1993 that agendas for TVA's board meetings were circulated early enough to allow prior public comment.

Every independent review of TVA in the past two decades (from President Reagan's 1980 transition team report to a study by Alex Radin, an establishment Democrat who formerly headed the American Public Power Association) has concluded that TVA's autonomous, dual-purpose board ought to be replaced by an expanded part-time board (em one clearly separated from managerial decisionmaking, representing those served by TVA, and responsible for the debts of the TVA power system.9

Roosevelt tried to keep politics from subverting his TVA experiment. At the time, such structural insurance made sense. For a while it seemed to work. But today, no competent student of public utilities or administration would recommend TVA's autonomous, paternalistic strongman theory of governance and management (dependent on a Presidential pork barrel) as a sensible way to govern and control a large regional power system. TVA's nuclear record supports that view only too well.

End the Debt Limit

No persuasive reason remains to impose a debt limit on TVA. Although TVA's lopsided balance sheet certainly suggests a strategy of avoiding borrowing and reducing debt, even a self-imposed limit on total debt below the current $30-billion level, given the challenges the agency faces, is likely to prove unwise and inefficient.

Moreover, Congress and the debt limit have failed to provide effective external control and accountability. Like the Congressional debt limit it is patterned on, TVA's internal limit is cosmetic (em giving the appearance of control without repairing the underlying defects that created the need for the constraints in the first place.

As a first step, our representatives in Congress should amend the TVA act to provide an enlarged, regional, part-time board, clearly separated from managerial decisions. And, while they're at it, they should also remove the TVA debt limit. t

Allan G. Pulsipher is director of the policy analysis program, Center for Energy Studies, Louisiana State University, Baton Rouge, LA, and professor at LSU's Institute for Environmental Studies.

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