Segment 2 Of 2     Previous Hearing Segment(1)

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TVA: ELECTRICITY RESTRUCTURING AND GENERAL OVERSIGHT

Wednesday, September 22, 1999
House of Representatives, Subcommittee on Water Resources and Environment,
Committee on Transportation and Infrastructure, Washington, D.C.

    The subcommittee met, pursuant to call, at 10 a.m., in room 2167, Rayburn House Office Building, Hon. Sherwood L. Boehlert [chairman of the subcommittee] Presiding.
    Mr. BOEHLERT. The hearing will come to order. Good morning and welcome to the Water Resources and Environment Subcommittee. Today we will address an issue important to this committee, the Tennessee Valley Authority. TVA is a Federal Government-owned corporation that has served the Tennessee Valley since 1933 through its economic development efforts, and it has provided the primary source of electricity to almost 8 million people in its seven-State region. This hearing will frame the discussion on what, if any, action the committee should take in reforming TVA as the electric utility industry becomes more competitive and as Congress considers acting on comprehensive electricity restructuring legislation.
    We will also continue past committee efforts to exercise general oversight over TVA and hear about TVA's efforts to reduce its debt, which is also directly related to its ability to perform in a competitive environment, among other oversight issues.
    TVA is essentially protected from electricity competition. The TVA fence is a statutorily described geographic area beyond which TVA is prevented from selling power. The anti-cherry-picking provisions of the 1992 Energy Policy Act also prevent TVA from having to transmit power from other utilities into its service area. Removing these protections and allowing TVA, the largest utility in the U.S. with some of the lowest national power rates, I might say, that are the envy of those of us up in the Northeast to enter into a competitive electricity market, would have broad implications for its many stakeholders and potentially on the environment.
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    Not only would TVA be impacted, so would its current wholesale and retail customers, other utilities in the valley and across the U.S., as well as the Federal Government and the U.S. taxpayers. I am concerned about other areas like New York where this year our residential rate is about 13.6 cents per kilowatt hour. The average rate for TVA's residential customers in 1998 was half that, 6.4 cents per kilowatt hour, while industry in the valley paid less than 5 cents per kilowatt hour for electricity, once again the envy of those of us in the Northeast.
    Cheap TVA power has lured many businesses out of the Northeast over the past three decades. In addition, if TVA increases its generation in a competitive market, how would that affect transboundary air quality issues such as acid rain and ozone transport, very important to those of us on this subcommittee and critical issues for the Mid-Atlantic and New England States.
    We look forward to hearing from today's witnesses to begin the dialogue on some of these issues. Our witnesses include TVA; the Tennessee Valley Public Power Association, representing TVA's 159 wholesale customers; Knoxville Utilities Board, representing itself and Memphis, two of the latest TVA wholesale customers; TVA Watch, representing surrounding utilities; and GAO will testify on TVA's debt reduction and efforts to prepare for potential competition.
    I would now like to recognize acting Ranking Member of the Water Resources and Environment Subcommittee, the distinguished gentleman from Tennessee Mr. Clement.
    Mr. CLEMENT. Thank you, Mr. Chairman. Good morning. I want to welcome our distinguished guests and thank you for joining us here today. I want to thank Chairman Boehlert for holding this hearing to discuss the Tennessee Valley Authority.
    It is critically important that we, as the oversight and jurisdictional committee of TVA, monitor its activities, especially as Congress examines proposals to deregulate the electric utility industry.
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    First of all, I want to ask the Chairman to include in the record of today's hearing a statement by Miles Mennell of the Association of Tennessee Valley Governments, and a statement by Lewis E. Wallace of the TVA Retirees Association. They could not be here, but provided me with copies of their prepared statement.
    Mr. Chairman, if you would accept their statements into the record—.
    Mr. BOEHLERT. Without objection, so ordered.
    Mr. CLEMENT. Last week, as some of you know, the Commerce Committee's Subcommittee on Energy and Power, chaired by Congressman Joe Barton, held a field hearing in Nashville where a similar panel of witnesses testified on the many issues facing TVA.
    In large part, witnesses all agreed that Federal legislation is necessary to introduce wholesale competition into the valley region, but disagreed over specific provisions that should be included in a so-called TVA title. When the Commerce Committee earlier this year circulated its draft restructuring bill, a placeholder was marked for this TVA title. Members of the committee have looked to the valley delegation and key stakeholders for advice on the drafting of such a title that would ultimately amend the TVA Act, bringing electricity competition inside the Tennessee Valley, which is now essentially without wholesale competition.
    Chairman Barton and Ranking Member Ralph Hall quickly discovered that while there is much agreement in the valley of what a TVA title should include, they also learned there is a significant intervalley disagreement on a few key issues such as TVA contracts and FERC regulations, which Mr. Fleming of the Knoxville Utilities Board will address. Mr. Larson will make the case on behalf of TVA Watch that their views differ even more so from those here representing TVA or TVPPA customer interests. Indeed, many groups from outside the valley have offered their proposals for a TVA title.
    Today we need to further flesh out some of the issues as we also contemplate TVA's financial health and the status of its 10-year debt reduction plan. As a native of the Tennessee Valley and as a former member of the TVA Board of Directors, my goal in electricity deregulation is pretty simple: To make sure if and when a Federal bill is passed, the TVA title treats the ratepayers in the Tennessee Valley area fairly.
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    Now, the definition of fair is really what we in Congress must determine. Should new regulatory authority come over the TVA transmission system? Should TVA renegotiate its contracts with its power distributors? Should TVA be prohibited from building new generation plants? Who will determine TVA's stranded cost? Should FERC have regulatory authority over TVA's rates? Should we expand the TVA Board? Should TVA be subject to antitrust laws?
    I don't have all of the answers, but clearly changes will be necessary in any Federal energy legislation, we all know that. To date, many of these issues that I have referred to have been addressed. TVA and TVPPA have reached agreements on several threshold issues. TVA and TVPPA have worked tirelessly to forge agreement on many controversial and difficult matters.
    The residents, consumers, business owners, power distributors, and power generators, they are the ones that need to determine what is really in the best interest of the Tennessee Valley, and I applaud their cooperation. However, groups and Congressional Members from other parts of the country will certainly offer their suggestions for TVA legislation. But we in the valley need to determine the makeup of the TVA title so that it is in the best interest of our region.
    As time goes on, and perhaps Congress does not pass Federal legislation this year, personally I believe TVA should do everything in its power to work to renegotiate its contracts with its distributors. Right now they have full-requirement 10-year contracts. The fact is, if and when deregulation legislation occurs, Congress must seriously examine giving the distributors the ability to renegotiate their contracts. But in the interim, TVA must be sensitive to the needs of its customers and try to do as much as feasible and economically possible to address distributor contract concerns.
    But let's get back to the fairness issue. We hear a lot about fairness and level playing fields when we talk about competition in the electricity industry. North versus South. I know the Chairman mentioned that a while ago. Hydropower versus nuclear power. People pointing fingers, whining about advantages of their competitors.
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    But let's face it, there are inequities all over. Why? If I went up to the Northeast, I bet I could go on a federally funded AMTRAK train, commuter train, subway or bus and go just about anywhere I want to. If you are in Massachusetts or New Jersey or New York or wherever, we don't have AMTRAK service. We don't get those Federal subsidies. We would sure like to.
    Come to Nashville, my friends. They discontinued our AMTRAK service. We are fighting hard to get a few million, not billions, but millions of dollars to start a commuter rail system. Our bus funds keep going down as our population grows, and Nashville is one of the fastest growing areas in the country.
    But I don't want to try to attack other regions. I don't want to cut their funds. I want to solve the problems in my State for my constituents. Yet Members from other parts of the country, with electric utilities that have high power rates, think fair means increasing the price of power for people in the Tennessee Valley. They will say that fair means prohibiting TVA from ever building new generation plants to meet future growth and demand in the valley. They will say fair means the ultimate elimination of TVA so that investor-owned utilities can divide TVA's transmission, generation, distribution and plentiful customer base to line the pockets of IOU stockholders.
    No, that is not fair. Regions in the North and the East have watched the South grow and prosper and claim that TVA is subsidized and is hurting their economy. Well, I represent a State that has long enjoyed the low-cost power. I have not addressed the high-cost electricity issues faced in the high-cost States. I will say that it is a disservice to valley residents when non-valley Members introduce legislation to raise our power rates. Talk about sour grapes.
    I am almost through, Mr. Chairman.
    As it stands, it is unclear whether or not Federal legislation has the potential to make it through the Commerce Committee this year and even next. In many ways what TVA needs to do now is to make sure that when competition is here, when the fence comes down, they are totally prepared to compete financially and operationally.
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    We in the valley have benefitted from the efficiency and innovation of TVA since 1933. Sixty-six years later in a changing electric utility industry on the brink of the 21st century, it is fitting to discuss the future of one of the technological marvels of the 20th century.
    I know that I will do everything in my power to stand up for valley residents and ratepayers and protect the original mission of TVA. Thank you, and I look forward to hearing from the panelists.
    Mr. BOEHLERT. I thank the gentleman for his comprehensive statement, and I want to pledge to him that I will work diligently with him to improve AMTRAK service to his State if he would work diligently with me to improve the utility rates for my State in the Northeast.
    Mr. CLEMENT. Mr. Chairman, I want fairness for all States.
    Mr. BOEHLERT. What a great American. Thank you so much.
    Now it is my pleasure to introduce the distinguished Chairman of the Aviation Subcommittee, someone who has worked diligently and continued to press both the Chairman of the full committee and the Chair to have this hearing and has been exceptionally helpful in setting it up, the gentleman from Tennessee Mr. Duncan.
    Mr. DUNCAN. Thank you very much, Mr. Chairman. It was my privilege to hold two field hearings in upstate New York on Monday, and I received very warm hospitality there. I am already late to go to a large meeting of my constituents with a number of speakers that I had previously scheduled, so I will have to be very brief.
    But first of all, I want to associate myself with the remarks of my good friend Mr. Clement. He made many points that I could make here today and have made in the past.
    I do want to enter a statement into the record, and I want to thank you for allowing me to sit here on the dais and participate since I am not a member of this subcommittee. I will be very brief.
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    TVA has been important not only to me, but to many other Members of both the House and Senate, to not only the TVA region, but really the entire Nation. TVA, as you have noted, Mr. Chairman, is the single largest generator of electricity in this country. It provides many other services in addition to that throughout our region, many of which—all of which, I suppose, would have to be taken over by other Federal agencies if TVA was not there.
    Due to some hugely expensive environmental mandates by the Federal Government, primarily in the 1970's, and the fact that TVA did not follow conservative fiscal policies during that time, an unbelievable amount of debt was incurred. I know you, Mr. Chairman, referred to that a few minutes ago.Every time I read a story or a report about TVA, it seems to have a different figure about that debt, but most say that the debt was approaching the $30 billion range and today is approximately $26 billion or $27 billion.
    It is certainly sad, perhaps even scandalous, that TVA was allowed to go so deeply into debt. Today and for the past many years a huge portion of TVA spending has gone just to service that debt. I am pleased that the Board over the past few years has been paying down some of that debt and has announced plans to cut it in half by 2007. We will be hearing from Mr. Smith more about that, I assume.
    I have said many times, both publicly and privately, that the best thing for the future of TVA and its ratepayers would be for the agency to follow extremely conservative fiscal policies and not spend one penny that was not absolutely essential to spend. I have been disappointed that TVA has spent so many millions on advertising and public relations and other expenses, especially when so many TVA employees and the Board itself, and even many Members of Congress from the TVA region are supposed to be, and in some cases are, doing those same things.
    Along this same line, I think one way to do more about any waste, fraud or abuse at TVA in the future would be to increase the independent oversight of TVA. I recently introduced H.R. 2013 to require that the TVA inspector general be appointed by the President and confirmed by the Senate. I am pleased that the Government Reform Committee has told me that it soon will mark this bill up.
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    I am also pleased that TVA Chairman Craven Crowell has endorsed this bill as well. I believe this legislation would help root out more wasteful spending and help restore a degree of public trust and confidence in TVA both at home and here in the Congress. I hope this oversight hearing will play a constructive role in making TVA an even greater and more effective and efficient organization than it has been in the past.
    I want to once again thank you for allowing me to make these comments before I go to attend this other series of meetings. I also mainly want to welcome two of my constituents, two very respected members of my community and my district, Mr. David Smith, who is the Chief Financial Officer for the Tennessee Valley Authority and a man with whom I have met on several occasions; another one of my bosses, Mr. Larry Fleming, who is President and chief executive of the Knoxville Utilities Board and another good friend. I want to welcome them.
    Finally, Mr. Chairman, let me say this: The thing to do is to lower your rates in the Northeast, not increase our rates in the Tennessee Valley.
    Mr. BOEHLERT. I can buy into that. Thank you very much. Let me thank you for all that you have done preceding this hearing to make certain that we are well-informed about issues important to you and your State. I can't help but observe if AMTRAK had a $26 billion debt, if they had all of that revenue, we could provide service to every county in the State of Tennessee.
    The Chair will recognize Mr. Pascrell for a brief statement.
    Mr. PASCRELL. Thank you, Mr. Chairman. I didn't intend to, but I couldn't let fly by what my good friend, the Congressman from Tennessee, mentioned.
    I think there is a big difference. I don't think that it is quantitative, I think it is qualitative and essential. When you compare what, I believe, is a very small amount of Federal dollars that go to TVA to the large subsidy that goes to AMTRAK, which also goes into the South, I find it not a good comparison for many reasons.
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    There is only one track. There are potential competitors to TVA, and we—and I believe you have always felt this as well—think that there should be equity so there can be an open market and fairness. That doesn't say that that doesn't exist right now, but in the AMTRAK situation, we are talking about one track. There is no competitors that I know of that are interested in building another track that will compete against AMTRAK. In fact, what we have talked about is maybe selling AMTRAK to a private corporation.
    Mr. CLEMENT. If the gentleman would yield, I know there is a lot of confusion about so-called subsidies. We contend we don't get any subsidies. The fact is what we do differently than other parts of the country when it comes to flood control and navigation, we utilize TVA as our vehicle to provide for flood control and navigation, whereby you utilize the Corps of Engineers. Therefore, other parts of the country, particularly the North and the East, says, well, TVA is being subsidized because you are getting Federal money.
    Yes, we are getting Federal money, but it is for flood control and navigation. Naturally we could have some other Federal agency to provide those services. We just happen over the years to utilize TVA as the vehicle to provide for those services.
    Mr. BOEHLERT. I thank the gentleman from Tennessee and my distinguished colleague from New Jersey. We are not going to get into a debate on North versus South. We are a committee that is one in mind and spirit, and we are going to maintain that.
    The Chair will now recognize Mr. Costello.
    Mr. COSTELLO. Thank you, Mr. Chairman. I thank you for calling this hearing today. The hearing is very important to energy customers throughout my region, the region that I represent in Illinois, and particularly in southwestern and southern Illinois. Deregulation of the TVA could have a profound effect on our utility companies and their customers.
    While an increase of competition within the electric power industry will in theory be beneficial to customers, we must ensure that all competitors are on a level playing field, and that the TVA does not have an unfair advantage because of its government affiliation. Like other institutions which are partially or wholly subsidized by the Federal Government, TVA retains some advantages in providing energy to its customers that private industry does not.
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    Mr. Chairman, I have a lengthy opening statement, but at your request and your desire to get on with the hearing, I will insert the rest of my statement into the record.
    Mr. BOEHLERT. Thank you very much.
    If there are no other colleagues who seek recognition, we will welcome our distinguished panel consisting of David Smith, who is the Chief Financial Officer for the Tennessee Valley Authority; James O. Baker, the President of the Tennessee Valley Public Power Association; Larry Fleming, who is President and CEO of the Knoxville Utilities Board; Lyle Larson, Counsel for the Tennessee Valley Authority Watch; and Linda Calbom, who is Director of Civil Audits for the U.S. General Accounting Office.
    As can you see, it is a diverse panel, and it is a panel that we appreciate being here because of the expertise that each of you bring to the subcommittee. We would ask that you try to summarize your statement in 5 minutes or less, but I will be arbitrary in that because I know that each of you has something important to impart to the subcommittee. But give some consideration to other panelists, and allow us ample opportunity for questions.
    Mr. BOEHLERT. So we will go in the order of introduction. Mr. Smith, you have the honor of being the lead-off batter.

TESTIMONY OF DAVID N. SMITH, CHIEF FINANCIAL OFFICER, TENNESSEE VALLEY AUTHORITY, KNOXVILLE, TENNESSEE; JAMES O. BAKER, PRESIDENT, MIDDLE TENNESSEE ELECTRIC MEMBERSHIP CORPORATION, ON BEHALF OF THE TENNESSEE VALLEY PUBLIC POWER ASSOCIATION, MURFREESBORO, TENNESSEE; LARRY FLEMING, PRESIDENT AND CEO, KNOXVILLE UTILITIES BOARD, AND REPRESENTING MEMPHIS LIGHT, GAS AND WATER DIVISION, KNOXVILLE, TENNESSEE; LYLE D. LARSON, ESQ., BALCH & BINGHAM LLP., BIRMINGHAM, ALABAMA, AND COUNSEL, TENNESSEE VALLEY AUTHORITY WATCH; AND LINDA M. CALBOM, DIRECTOR, RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT, ACCOUNTING AND FINANCIAL MANAGEMENT, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE
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    Mr. SMITH. Thank you, Mr. Chairman, and I want to thank you for the opportunity to address this subcommittee on the important subjects of deregulation of the utility industry and TVA's preparation for this eventuality.
    My name, as you know, is David Smith, and for the past 5 years I have served as TVA's Chief Financial Officer. The southeastern region of the United States offers some of the lowest power prices in the Nation. TVA, with residential rates some 23 percent below the national average, is, in fact, a regional leader. But during the past several years, TVA has worked harder to improve our operation still further.
    As the person responsible for the financial health of TVA, I am particularly proud of our financial achievements. In 1997, we committed ourselves to a comprehensive 10-year financial plan with one overriding goal, to keep TVA's cost of power consistent with the market price of power in the southeastern United States. I emphasize this competitive price goal to distinguish it from the several strategies that we adopted to meet that goal. Our strategies included a reduction in unit labor cost, unit material cost, as well as interest expense. Furthermore, TVA committed to take all of the savings generated by these strategies and use that cash for debt reduction and thereby reduce interest expense still further.
    TVA originally envisioned that pursuing these strategies would ensure that we remain a competitive choice of power in the valley and coincidentally that our debt burden would be reduced by half. I have no doubt of our future competitive position, but I am sure that we will significantly reduce our debt as well, just perhaps not by half. Our 10-year plan is now 2 years old, and during that 2 years several changes have occurred. Let me elaborate on just two.
    First, there has been a change in the expected needs for power supply in our service territory. Frankly, the growth rates are greater than we anticipated, and this is going to create greater demand for capital investment in generating capacity. That is going to take money that was previously earmarked for debt reduction. Furthermore, after the experience of the past 2 summers, TVA is now taking steps to avoid overreliance on purchased power. In other words, we are building more peaking plants in order to improve reliability and drive down our average cost of power. But those plants also will take moneys that were previously earmarked for debt reduction.
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    The second major change to our planning assumption is in the area of spending required for environmental compliance. Two years ago we could not foresee the exact timing or the magnitude of expenditures that might be required, but we knew that eventually these costs would be imposed on the industry. In fact, almost all industry participants would bear some costs. When that happens, then we knew the market price of power would have to rise in order for all of these industry participants to recoup those investments. I am sure, in fact, that is part of the reason why several of the experts who were cited in the GAO report on TVA's 10-year plan predicted future prices in the range of 3.6 to 4.35 cents per kilowatt hour.
    Without question the investments in the new power supply and reliability and the environmental programs have reduced the amount of cash that we would have overwise used for debt reduction. But the economic returns on generative capacity, the savings on other plan assumptions, as well as the upward pressure on market prices, all of these things, in my judgment, are going to leave TVA in a position to meet the goal of the 10-year plan, which was to have market-priced electricity in 2007.
    I want to turn for a minute to the subject of deregulation. I think you know earlier this year the administration crafted a TVA title for inclusion in their deregulation bill. TVA supports that TVA title even though we know it would impose new responsibilities and new limitations on TVA and the emerging competitive marketplace. At the same time the Administration was drafting its bill, some Members of Congress from TVA's region urged TVA to work with our customers through the TVPPA to develop a regional solution which they could include in restructuring legislation being introduced before Congress. Those discussions led to an agreement on a number of areas, but of course there is still some differences as you would expect any time a seller and his several customers sit down to discuss their relationship in a changing environment.
    Now, a word of caution to this subcommittee. There are some proposals being made that jeopardize TVA's ability to continue to provide low-cost, reliable power to the people of our region. Some proposals would effectively prevent TVA from ever developing new generation resources to meet the ancitipated growth in demand in the valley. In that situation we very much worry about our smaller and rural customers having the opportunity to obtain alternative power supply elsewhere.
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    Several proposals suggest increase TVA's tax burden. Our critics generally ignore the $300 million a year of tax equivalent payments that we make to State and local governments in our region, and they also ignore the substance of TVA's ownership when they argue about Federal income taxes. We all know that TVA doesn't pay Federal income taxes. It is hardly a secret. It is certainly not a scandal.
    For private companies, the Federal tax on income provides the means whereby the government lays claim to about a third of their earnings. But since TVA is federally owned, the government owns 100 percent of our income.
    Some of our critics want to level the playing field, they say, but by suggesting this, they ignore the fact that many regional cost differences simply cannot be legislated away. Southeastern utilities enjoy lower rates than other parts of the country in part because of their proximity to raw materials and the operating benefits associated with serving four moderate seasons. TVA even enjoys a another unique strength because of our coverage territory encompassing two time zones. People in Knoxville literally take hot showers 1 hour before the people in Memphis, and that helps spread our daily load demand.
    The differences between high-cost regions and the Tennessee Valley Authority should never be mislabeled as subsidies to public power.
    Mr. Chairman, I want to thank you for the opportunity to testify before this meeting today.
    Mr. BOEHLERT. Thank you very much. I do appreciate your comprehensive statement. Let me assure all of the witnesses that your statements will appear in the record in their entirety, and this committee has the reputation of examining those statements in their entirety.
    Mr. Baker.
    Mr. BAKER. Thank you very much, Mr. Chairman.
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    Chairman Boehler, members of the Subcommittee, my name is James O. Baker, and I am President of the Middle Tennessee Electric Corporation. That is an electric cooperative headquartered in Murfreesboro, Tennessee. Middle Tennessee currently purchases all of its wholesale power from the Tennessee Valley Authority and provides retail service to more than 300,000 individuals in four counties. It is one of TVA's largest wholesale customers and one of the largest rural electric cooperatives in the United States on the basis of number of customers served.
    But I am testifying today on behalf of the Tennessee Valley Public Power Association. TVPPA is the regional service organization for over 160 not-for-profit consumer-owned electric utilities in the Tennessee Valley, including all of the municipal and cooperative-owned systems that distribute power generated by TVA to 8–1/2 million consumers in this seven-State region. In the language of the TVA Act, these municipal and cooperative utilities are called distributors.
    TVPPA appreciates the Chairman's invitation to appear today to present our views on the role of TVA in a restructure or competitive electric industry here in the Tennessee Valley. It is vitally important to us to participate and contribute to the debate because we will be the most directly affected by any changes to TVA. Drafting a TVA title that both protects the interests of the consumer in the valley and makes TVA more competitive will be no easy task. However, we strongly believe that if changes are to be made to TVA, they should be driven by those of us who represent the interests of our consumer owners.
    The seven States that receive TVA power are among the 23 States where retail electric rates are below the national average. For that reason TVPPA had approached the matter of Federal utility restructuring with very much caution. We have opposed a Federal mandate for retail competition or customer choice because we are not convinced that it would result in lower cost or benefits to our consumers. We believe that any restructuring legislation must put the interests of the electric consumers first.
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    Overall, TVA has been very good for the valley. For more than 60 years TVA has provided reliable and reasonably priced power for consumers and has promoted economic development for the region. We believe that TVA's mission with regard to the delivery of power should continue to meet the power needs inside the valley, and they should be able to develop resources without unnecessary or arbitrary restrictions. At the same time we recognize that the electric utility industry is moving towards greater competition and that all utilities must adapt to this changing environment.
    We know that TVA and its distributors cannot fence ourselves off from changes and the rest of the electric utility industry. We also know that Congress has the authority to change the TVA and the way it operates, and that if we in the valley do not take the lead to restructure TVA, others will be happy to do the job for us.
    Finally, if the Federal restructuring legislation goes forward, we believe that eliminating the statutory fence and the anti-cherry-picking provisions in current law that prevent two-way wholesale competition in the valley could result in benefits to our consumers.
    Acting through its government relations policy and the Board of Directors, TVPPA has devoted a significant amount of time and energy over the last 3 years to develop positions regarding the role of TVA in electric restructuring. In this ongoing policy development process, TVPPA has worked with TVA and all of the distributors to try to reach consensus on the issues. While we continue to have some areas of disagreement on policy and wording, we are in substantial agreement that changes are needed in the contractual relationship between TVA and its distributors and in the wholesale electric market in the region. Specifically, we agree with provisions that, one, take down the fence and allow TVA to sell excess power at wholesale outside of the region. Concurrently the anti-cherry-picking provisions of the Energy Policy Act of 1992 should be repealed to allow outside suppliers to sell power at wholesale in the valley.
    Second, we allow current restrictive long-term wholesale contracts between TVA and distributors to be shortened and modified to give the distributors the right to purchase all or a portion of their wholesale power and energy from other suppliers; subject the rates and terms and conditions relating to the use of TVA's transmission systems to regulation by FERC to ensure open, nondiscriminatory access by distributors and by others; next, allow FERC to determine TVA's stranded costs, if any, resulting from shortened or cancelled contracts prior to October 1, 2007, using the same standards and rules that apply to other utilities, but ensuring the costs are not shifted among the customer groups; next, eliminate TVA's retail rate-setting authority over distributors and allow those not-for-profit municipal and cooperative utilities to be self-regulating as they are in most States; apply Federal antitrust laws to the TVA power program as they apply to local government entities and without the financial penalties that would burden our consumers.
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    In addition, TVPPA believes that the following provisions are also in the best interests of our member distributors and the customers. First, allow the distributors to challenge TVA's wholesale rates through an alternative dispute resolution mechanism such as arbitration or mediation; limit TVA sales outside the valley to excess energy at wholesale; and limit TVA's retail sales inside the valley to existing customers. Any new retail sales would be allowed only under restrictions agreed upon by the distributors.
    Before closing, I want to emphasize that if Congress acts to change the rules that govern the way that the Nation's electricity is bought, sold, and supplied, we want to ensure that TVA remains a viable, competitive option to supply consumers. We look forward to working with the subcommittee to forge a TVA title that is fair for the region's consumers and permits TVA to operate in a competitive environment.
    We appreciate the opportunity to appear before this subcommittee, and we will be happy to answer any questions.
    Mr. BOEHLERT. Thank you very much, Mr. Baker.
    Mr. Fleming.
    Mr. FLEMING. Mr. Chairman and members of the subcommittee, my name is Larry Fleming, and I am president and CEO of the Knoxville Utilities Board. I am here today on behalf of KUB and the Memphis Light, Gas, and Water Division. Thank you for the invitation to present our views on the topic of TVA electric restructuring and general oversight. My remarks will focus on the subject of TVA restructuring.
    Before I highlight the specific actions KUB and MLGW urge this Congress to take, I would like to emphasize what may be the most important point of all, that it is essential that Congress do something on TVA. I know nationwide electric restructuring is a daunting task, and there are those who say retail competition has already taken hold through actions taken by the States and will gradually spread across the country even if this Congress does nothing. But there is a huge difference between taking a wait-and-see approach for the rest of the country and taking it for TVA.
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    Nobody but Congress has the power to introduce competition to the Tennessee Valley. The States and the marketplace cannot do it because Federal law prohibits it. It simply will not happen unless Congress takes action.
    Whereas the rest of the country already enjoys wholesale electricity competition, and a question is whether to mandate retail competition, the Tennessee Valley does not even have access to wholesale competition. We need Congress to act now simply to allow the valley to catch up with the benefits the rest of the country have enjoyed since 1992, access to wholesale electric competition.
    The most important specific actions we urge Congress to take are remove the statutory barriers to wholesale electric competition in the Tennessee Valley, shorten the 10-year notice period in our power supply contracts with TVA, and subject TVA to the jurisdiction of the Federal Energy Regulatory Commission including Federal FERC jurisdiction over TVA's transmission system, stranded costs, and wholesale power rates. We believe these measures are critical to ensure full and fair transition to competition in the Tennessee Valley.
    First, the provisions of Federal law that prevent Tennessee Valley residents from having access to competitive electric markets must be repealed. It has now been 7 years since the passage of the Energy Policy Act. Wholesale electric competition is already a reality throughout most of the United States, and nearly half of the States have already taken steps to implement electric competition at the retail level. But America's largest power generator, TVA, is still a federally sanctioned monopoly. The Tennessee Valley has been walled off from the rest of the country, which continues to move forward with electric restructuring while we are left behind. We urge Congress to take action to tear down these walls. There can be no retail competition in Tennessee unless and until there is wholesale competition.
    Neither the States nor FERC have the power to mandate wholesale competition in the valley, and TVA is not about to start transmitting power of other suppliers voluntarily. Why would TVA willingly subject itself to competition for customers inside the fence when it is prohibited for competing for customers outside the fence?
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    To leave these barriers in place would be unfair to Tennessee Valley residents and could retard economic development of the Tennessee Valley region. When new enterprises are choosing a location, will they choose an area of the country where they have competitive power supply options, or will they choose the Tennessee Valley where there are no such options? The Tennessee Valley has been left behind once before. We do not want to see that happen again.
    The mere repeal of these statutes without more will not fully open the valley to competition. There are other barriers to implementation of wholesale electric competition in the region. Our current contracts with TVA, for example, renew automatically each year and require 10 years notice of termination. This means that unless Congress takes action to modify these contracts, KUB and MLGW will still be captive TVA customers when the children born on the date the Energy Policy Act was signed into law graduate from high school.
    We have tried without success to renegotiate these agreements, but due to the extended notice period, TVA has no incentive to make any meaningful concessions. We need negotiating leverage. Only a shortened notice period will give us the leverage we need. For this reason we strongly urge Congress to shorten the 10-year notice of the determination provisions contained in our power supply contracts with TVA.
    Finally, if TVA is going to become a market participant, fairness requires that they be subject to the same rules and regulations that apply to public utilities. These Federal electric restructuring legislations removing the TVA fence should provide that FERC shall have jurisdiction over TVA transmission systems, stranded costs, and wholesale power rates. FERC jurisdiction over TVA's wholesale power sales will be particularly important to rein in TVA's market power during the early years of transition to a wholesale electric competition in the valley.
    In sum, we are only seeking what the rest of the country already has, the option to diversify supply portfolios and more flexible power contracts. We want access to competitive power markets for our customers and for the long-term economic well-being of the Tennessee Valley region.
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    We appreciate the opportunity to be heard on these issues and hope that Congress will continue to take our views into account as it moves forward with restructuring the electric industry. Thank you very much.
    Mr. BOEHLERT. Thank you very much, Mr. Fleming.
    Mr. Larson.
    Mr. LARSON. Thank you, Mr. Chairman, members of the panel. Thank you for inviting TVA Watch to testify today. I am Lyle Larson, a partner in the law firm of Balch & Bingham in Birmingham, Alabama, and serve as counsel to TVA Watch.
    TVA Watch was formed in 1995 and consists of six public utilities, all concerned about unfair competition against TVA. TVA was created in the 1930's as a Depression-era public works agency. Its original mission was primarily to create jobs in the impoverished Tennessee Valley, provide flood control, increase waterway navigation, and promote economic development. It was not established as an electric utility.
    TVA expanded its power program rapidly in the 1940's and 1950's. Currently, it is one of the largest electric utilities in the Nation. During that expansion TVA drove over 20 public utilities out of business. By the late 1950's, utilities were greatly concerned about unfair competition against a predatory government corporation like TVA armed with its numerous subsidies and inherent government advantages.
    As Secretary of the Interior Harold Ickes said in explaining why public utilities were forced to abandon their service territories to TVA, quote, The private utilities were confronted with the dilemma of facing competition or selling their properties to TVA. They couldn't do the former, so they did the latter. It was the club, extending the right arm of TVA, that brought the private utilities to their knees.
    As a result of these predatory practices and the suppression of competition by TVA, Congress passed legislation in 1959 which erected a statutory fence around TVA's territory. The legislative history of the 1959 Bond Act vividly illustrates that the fence was erected to protect public utilities, such as the members of TVA Watch, from unfair competition against a subsidized government entity. For four decades the fence has made for good neighbors between TVA and the members of TVA Watch.
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    If the past is indeed prologue, then the debates of the 1950's about TVA are largely the same as now; that is, how can a subsidized government utility coexist with private enterprise and a fundamental infrastructure industry in this country?
    So TVA Watch was formed for two reasons. First, TVA's leadership began to make statements about the need for the fence to be removed. Even worse, they believed that they should be allowed to sell electricity nationally outside the fence and talked about becoming America's power company.
    The second reason why TVA Watch was created was because of increased examples of TVA violating the TVA Act by selling power outside of its statutory boundary. TVA Watch member companies have sued TVA on three separate occasions over the past 3 years, each time successfully, to restrain TVA from its ambitions to sell power outside the fence.
    TVA Watch has a simple proposition, a simple position regarding TVA: Leave the fence intact until TVA can reduce its $27 billion debt in half and until Congress can determine what TVA's future role should be in a restructured environment. If Congress decides that the fence should come down, then we believe that sound public policy and basic fairness require that TVA engage the market on a nonsubsidized basis. No more exemptions from taxation, FERC, or State regulatory requirements; no more exemptions from the antitrust laws. It needs to become accountable just like the members of TVA Watch are, just like all private enterprise is. Only then can we compete fairly, and only then can taxpayers be protected.
    Several bills have been introduced and are being debated by your colleagues in the House Commerce Committee concerning TVA. We find them deficient. They would allow TVA to escape the fence with few important protections for taxpayers, TVA Watch's member companies.
    TVA's positions on several of the core TVA issues are growing increasingly confusing and are contradictory. When asked, TVA cites its 10-year plan and its original goal of cutting that debt in half. But according to a recent GAO study, newspaper accounts, TVA will fall far short.
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    Also while claiming that it will reduce its debt in half, TVA has vehemently opposed legislation that would reduce its borrowing limit from $30 billion to $27 billion. As TVA has a goal to cut its debt in half, it seems that they should not be opposed to a reduction of the debt cap.
    Another contradiction is that TVA claimed in its 10-year plan that they had adequate generation resources to meet the needs of the valley in the future. But in their testimony today they tell us that their forecasts of 2 years ago were wrong by half. Two years ago they didn't need to build new power plants. Two years later they say they do.
    Another contradiction, TVA also claims that it should remain exempt from antitrust laws, or at least the enforcement provisions of those laws, because they lack the profit motive in our government corporation. Is this the same TVA that engaged in predatory practices in the case of Bristol, Virginia, or Trico Steel in Decatur, Alabama?
    When it comes to FERC regulations, TVA invokes executive privilege and states that it should not be overseen by another group of Presidential appointees. Yet TVA waives these claims when regulated by the EPA or the Nuclear Regulatory Commission.
    So is the real TVA the company with expansionist desires that wants to be America's power company, or is it the one that told the Commerce Committee panel last week in Nashville that it has no intention to go national and remain focused on the valley? Is the real TVA the one that brags about its low rates, or the one against whom some of its industrial customers have filed a class action lawsuit for alleged overcharges?
    In conclusion, Mr. Chairman, TVA Watch members remain concerned about TVA expanding beyond the fence, especially with its powerful subsidies and competitive advantages in place. We believe that history tells us that Congress was right in 1959 by erecting the fence. In looking forward we should not ignore the lessons of the past.
    Thank you, Mr. Chairman and members of the panel. I would be glad to answer any questions.
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    Mr. BOEHLERT. Thank you very much, Mr. Larson.
    Now, as a cleanup hitter, Ms. Calbom.
    Ms. CALBOM. I have never had the opportunity to be cleanup hitter. Although being fifth, I am not sure that is the word.
    Thank you, Mr. Chairman and other members of the subcommittee. I am pleased to be here today to summarize the results of our work analyzing TVA's 10-year business plan. My testimony is based on a report that we issued in April of this year which assesses the plan in depth. I have provided some copies of that report outside today, and I believe each of you has a copy as well.
    Increasing competition in the electricity industry led TVA management to develop this plan to position TVA to be more competitive by, among other things, reducing its high debt and other fixed costs. Because of concerns about TVA's ability to achieve the 10-year plan's objectives, we were asked to determine whether TVA will be able to reduce debt as envisioned in the plan and whether its goals and assumptions regarding capital expenditures and revenues and expenses are achievable or reasonable.
    I would like to now just very briefly summarize the results from our April report, and these are also talked about in more detail in my written statement.
    First of all, implementation of the 10-year plan is moving TVA in the right direction towards its strategic objectives by addressing the key issues that it faces. Those are, of course, its high fixed financing cost and its large investment in deferred assets that have not been recovered through rates. The plan, which was issued in July 1997, calls for lowering fixed costs by reducing outstanding debt by about one-half, as we have been talking about here today, which would be roughly to about 14 billion by 2007. The plan also provides for the recovery through rates of all but about $500 million of the $8.5 billion in deferred assets outstanding as of the plan issue date. Of course, these deferred assets relate to some of the nuclear investments that TVA made where these plants did not come online.
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    The year 2007 is key for TVA because it expects to face greater competitive pressures by then and because many long-term contracts with their customers could begin to expire by about that time. As a result, the plan emphasizes changes designed to enable TVA to offer competitive rates by the end of 2007. The more progress TVA can make towards addressing the key issues it faces while it maintains its legislative protections and before its customers contracts begin to expire, the better position it will be to successfully operate in a competitive market.
    While focussing on the right issues, TVA's plan does not fully address certain costs. Mr. Smith has talked a little bit about this already. Not addressing these costs could jeopardize full achievement of the plan's objectives. Specifically, the plan does not include the capital costs of increasing generating capacity to meet the growth and demand for power that is now currently expected, the costs of complying with new and proposed environmental regulations, or the cost of nonpower programs that were formerly funded through appropriations. TVA estimates that these additional costs could be more than $1 billion over the remaining life of the plan.
    We also found that while many of the plans, goals, and assumptions were, in fact, achievable or reasonable, certain of them were not, and that is largely due to these additional costs. For instance, because of these additional costs, it is unlikely that TVA could reduce its debt to the extent planned by 2007. We have had some discussion about that already today as well. TVA has acknowledged that its debt reduction goal will likely not be achieved until 2009. This is graphically illustrated in the chart here that I have brought today, also on page 15 of my written statement.
    The added costs will also negatively impact TVA's ability to meet its goal of reducing the balance of deferred assets since TVA may not have the ability to begin recovering these costs through rates if it does not sufficiently reduce its other costs first. Achieving these two goals is key to TVA meeting its strategic objective of increasing financial flexibility by reducing fixed costs. This in turn is key to its ability to offer competitively-priced power by 2007, which, of course, is their ultimate objective.
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    While TVA has acknowledged major changes to several of the plan's goals and assumptions and has factored these into its internal planning, the 10-year plan has not been formally updated to reflect these changes. Until the plan is formally updated, the Congress and other external users of the plan will not have the current information needed to make policy, oversight, and investment decisions related to TVA. Because of this we recommended in our April report that TVA move quickly to update the plan and periodically report to the Congress and other plan users about its progress towards meeting the plan's objectives.
    That concludes my statement, Mr. Chairman.
    Mr. BOEHLERT. Thank you very much.
    As I am sure you can appreciate, I am particularly interested in your statement because I view you as sort of the objective person on the panel. This is not to discredit anyone else—Mr. Larson, OK, fine.
    Ms. Calbom, describe the linkage between TVA agency reducing its debt and its preparation to better position itself for a competitive electricity market.
    Ms. CALBOM. As you know, in a competitive market, it is all about cost and who can produce their product at the lowest cost. One of TVA's major costs is its interest expense. Its interest expense currently runs about 27 percent of its total cost. That is down. It was 33 percent just a couple of years ago, so they have improved there with some of their restructuring and whatnot. That is one of their major costs.
    TVA is behind the curve as far as having higher costs than some of its potential competitors, so it is essential for them, if they want to operate in a competitive environment, to bring those costs down so they would be in the position to have the flexibility to reduce their rates as needed. One of the things to keep in mind, their rates are low today, but some are artificially low because there are certain costs that TVA is currently not recovering through their rates. That relates to these deferred assets that I was mentioning earlier. They have about $8 billion of those currently.
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    Mr. SMITH. Mr. Chairman, I would like to respond to that if I may?
    Mr. BOEHLERT. Sure.
    Mr. SMITH. I don't think we agree with the premise that our costs are higher than most competitors. In fact, I think we are lower than most competitors. That is acknowledged in independent periodicals that rate TVA's facilities versus others in the United States.
    But the one I think I am most sensitive to is the comment that we are not recovering all of our costs. As the CFO, I have to be sensitive to that one. Specifically, she is speaking about deferred costs associated with facilities that have not yet been completed, but more importantly, no determination has been made in regards to what we are going to do with those facilities. The proper accounting rules would simply say that until you decide what you are going to do with a facility, you don't amortize the investment until you know what the useful life is going to be. That is why they are properly classified as deferred and not including them in our expenses.
    Mr. BOEHLERT. Point, counterpoint. Just like a ping-pong match. I will go back to you, Ms. Calbom. Would you respond to what Mr. Smith just said?
    Ms. CALBOM. Yes. We do have some disagreement with the treatment of those deferred costs. As we stated in our report we did in 1997, these costs are deferred because, in fact, as Mr. Smith said, the decision has not yet been made as to what to do with these particular plants. I believe it is Bellefonte and Watts Bar 2. However, these plants have been in existence for many, many years, and I can't think of any other utilities who have these kind of deferred costs on their books. If you have a situation that you know you aren't going to be able to put those assets in a producing type of a situation in the foreseeable future, you ought to begin to write them off or put some reserves against them. When you start to do that, that is part of your cost.
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    The point is—and my team is trying to get me the number of years that these plants had been, in effect, mothballed—there comes a point in time when you have to make a decision that these things just aren't going to happen. For most other utilities FERC makes that determination; TVA's Board is the one that makes the determination in this case.
    Mr. BOEHLERT. Thank you.
    Let me ask Mr. Baker or Mr. Fleming, do your positions differ on how TVA should recover stranded costs from a distributor who decides to leave the TVA system in whole or in part, and, if so, how? Mr. Baker, first, and then Mr. Fleming.
    Mr. BAKER. Essentially we have both agreed that FERC should be the exterminator of stranded costs, if any, for systems that leave the system either in whole or in part. There may be some different methods to use, one of which would be to determine ahead of time what the stranded costs might be. The other method is to wait until a system decides to leave and determine stranded costs at that time. I think that is about the only difference and disagreement that we might have.
    Mr. BOEHLERT. Mr. Fleming, do you want to comment?
    Mr. FLEMING. Mr. Chairman, Memphis-Knoxville's position is that there is far too much money at stake to be negotiated on a preplan, that there are already existing processes that exist at the FERC that would appropriately and independently determine whether or not costs are, in fact, stranded. Knoxville-Memphis does not intend or propose to avoid any stranded costs. We simply want an independent determination from a disinterested third party.
    Mr. BOEHLERT. Thank you.
    Mr. Larson, how about members of your organization? Are you concerned about the TVA stranded cost recovery? Would you comment on that?
    Mr. LARSON. So long as FERC determines their stranded costs in a manner identical to the way that it determines stranded costs for investor-owned utilities who sell it wholesale, we don't have any problems with the proposal that has been laid out.
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    Mr. BOEHLERT. Let me ask you another question while you have the mike, Mr. Larson. What are the bond ratings of other utilities throughout the U.S., and what do you think the TVA bond rating would be if it wasn't implicitly backed by the Federal Government?
    Mr. LARSON. I can tell you up front that no utility, public utility, in the country has a triple A bond rating like TVA. Also no other investor-owned utility like TVA has nearly as much debt as TVA has. So it is an odd situation. Most public utilities have substantially less debt in proportion to their assets, but yet don't have a triple A rating. I think the ratings of the public utilities range from barely above investor grade to high quality Bs, but I am not sure about that.
    But we do believe that if TVA were evaluated by the investment community such that they were not seen as a taxing authority and were treated as if they did not have the backing of the Federal Government, then their bonds would probably not have reached junk bond level.
    Mr. BOEHLERT. Thank you very much. The timekeeper is very generous for the Chair. Each time the Chair asked a question, she started a new time. That is not the way that we are going to work it. I will have my 5 minutes like everyone else, but I do thank her very much for her generosity.
    The Chair will ask my colleague Mr. Baker to sit in for me temporarily while I go to the floor and participate in a debate on another issue sensitive to New Yorkers, the dairy issue. I will recognize Mr. Clement for 5 minutes.
    Mr. CLEMENT. Thank you, Mr. Chairman.
    Mr. Larson, in your testimony you said the TVA should be subject to travel damages, but if a TVA Watch member company violates the antitrust laws, who pays the damages?
    Mr. LARSON. The entity that is found guilty of an antitrust violation.
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    Mr. CLEMENT. Is it not the shareholders that are ultimately responsible?
    Mr. LARSON. To the extent the public utility paid damages in a civil action that would impair their earnings, which would ultimately impair their net income, which could eventually impair distributions to shareholders and growth and value of the stock.
    Mr. CLEMENT. In TVA's case, is it not correct that the ratepayers in the Tennessee Valley would pay the price?
    Mr. LARSON. I don't know that that is true. TVA is owned by investors just like investor-owned utilities. It has an outstanding $27 billion. Those are issued to private investors just like investor-owned utilities. In fact, to contact Mr. Smith on the Internet, you dial up investor@TVA.com. So I would say that TVA's investors would pay.
    Mr. SMITH. Mr. Clement, I would like to respond to that. With all due respect to the comments made, these folks are not ownership investors. There is a great difference between somebody who invests in an enterprise as an owner and someone who invests as a lender of money.
    TVA's investors, and we do call them investors, have invested their money for a fixed return and a return of principal. That is not like any other fixed-income investor in any other private utility. It represents no ownership rights, nor would they ever be expected to be assessed damages, as you pointed out, from some judgmental award.
    And while I have the microphone, if I may, just so that the record shows, I don't want anyone here to think that TVA would be rated as a junk bond security if we were not owned by the government. I think the evidence of Moody's reports on TVA and other analysts indicate that we would be as good a rating as Duke, who has an A–1, Georgia Power, Southern Company, any of the others in the industry that are the outstanding performers. So I don't know where he concludes that we would be junk bond, but I think we have a better sense of that than he might.
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    Mr. CLEMENT. Mr. Larson, Watch has stated that certain bond issues by TVA are guaranteed by the U.S. Treasury, citing four provisions of the TVA Act. However, TVA tells me that the TVA Act specifically states that TVA's authority to issue bonds under all four of those provisions expired on January 1, 1941, or earlier, and that the last of those early bonds were retired in 1956, 3 years prior to the enactment of the 1959 self-financing amendment to the TVA Act.
    What is your response, or do you have any comments on this matter?
    Mr. LARSON. If that comment in that testimony is indeed inaccurate as you represent, then we would correct our testimony. But we will observe that TVA does benefit from an investment community perception that they are backed by the government that TVA does not make efforts to correct or to emphasize that the government would not bail them out. We submit that cultivates the implicit notion that the government would bail them out.
    Mr. CLEMENT. Ms. Calbom, representing GAO in this matter, and pleased to have you here. Do you foresee any circumstances that TVA can accelerate those debt payments within the next 10 years in order to pay off faster than they have proposed by cutting the TVA debt in half in order to be more competitive in the 21st century?
    Ms. CALBOM. Well, certainly we feel that in their 10-year plan they are taking the right actions they should be taking to try to reduce their debt as much as they can. It all depends on what interest rates are going to do. If interest rates would continue to go down, they have some debt that is ready to mature. If they were able to refinance at lower rates, that would help.
    You are paying lower interest, that allows you to pay down your debt more, which causes your interest to be even lower. It is kind of a cycle like that. It all depends on their ability to stick to their plan, and if some of these unforeseen costs that have come up maybe aren't as significant as they thought, that would help them pay down the debt faster.
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    This is why it is very important to us that they continuously update this plan, so that we can see where they will come out based on what they do know, in fact, today to be the facts about their assumptions of these various expenses.
    Mr. CLEMENT. My last question has do with the fact that, as you know, in other parts of the country they receive taxpayers' dollars for flood control and navigation, yet we have been zeroed out in the future to receive Federal tax dollars for those specific purposes, which would help us that much more to reduce our debt. Do you agree with that statement?
    Ms. CALBOM. Certainly any additional funds that TVA has available to them to pay down the debt are going to certainly expedite that process.
    Mr. CLEMENT. Thank you.
    Mr. BAKER OF LOUISIANA. [presiding.] Mr. Horn.
    Mr. HORN. Thank you, Mr. Chairman. That is an interesting panel here, and we have got good diversity.
    Let me start with this question. One of the purposes of TVA when it was founded, and into the 1940's and 1950's, was the yardstick factor; namely, that TVA would make sure that the private utilities provide things that help the farmer more, and small business person. When TVA started, the idea of George Norris, the Senator from Nebraska, was to get the needs met in the seven-State area. The people that hated the TVA the most, was not just the utilities, the private ones, but also the Department of Agriculture and the Department of the Interior, because in essence TVA took over their functions in that seven-State area, whether it be soil conservation or electrification or whatever.
    I am curious. To what extent do you think the yardstick factor is still pertinent? And some of the proposals that you have made, would that mean that the private utilities would no longer have a yardstick if you did certain things to TVA?
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    We will let you first, Mr. Smith, since you are representing TVA.
    Mr. SMITH. Thank you.
    I think that is a good question because I think TVA still today is a yardstick for many activities in the utility industry. Many of the things that we do in a sense set the pace or are on the leading edge. I talked some about our initiatives in environmental compliance, some of the steps that we have taken. We are trying to be responsive to, in a sense, the wishes of the people as they are expressed by Congress.
    Part of the reason that we end up being a yardstick isn't just because we think that's a nifty role to have, but it is really a derivative of our ownership. We feel like being owned by the government, there is a responsibility to be a leader in carrying out the wishes of the people as they are expressed, these acts. So I think in terms of developing new generation, developing new technologies for production and delivery of power, clean air initiatives, all of these kinds of things, we truly do try to continue to be a yardstick very much as we were in the past.
    Mr. HORN. Mr. Baker, do you have any comment on that question?
    Mr. BAKER. I think when TVA was formed, and essentially all utilities in the country were franchised service areas, there probably was a need for the yardstick. As we move in a competitive environment, competition will be the yardstick under it. So I think the role has changed in the 60 years under it. The competition will decide what the proper price and what efficient operations are. We will move to that very shortly.
    Mr. HORN. So you feel if TVA was changed in terms of its structure financially and had to compete from the basis of a private utility, let's say, you are saying that there isn't a need for the yardstick function anymore; is that it?
    Mr. BAKER. I think at the present time TVA's overall competition is equal to a private utility under it. They do pay taxes. It appears to be a misnomer that the TVA bonds are backed by the Federal Government. I own some TVA bonds, have them in my portfolio. It specifically says the these bonds are not backed in any way by the Federal Government.
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    If Wall Street wants to make some sort of interpretation about what might happen, that is not our problem, but essentially, I think TVA pays its fair share of taxes through a different method, obviously, than private utilities, but it pays its fair share of taxes. And it is subject to a number of other laws that affect Federal Government operations that private utilities are not affected by. There are things on both sides of the fence.
    Mr. HORN. Mr. Fleming, any thoughts on this?
    Mr. FLEMING. I won't try to repeat what has already been said, but essentially I think Memphis-Knoxville would like to see TVA's functions unbundled. In other words, it is very difficult today to tell where dollars are going and how they are served. Our primary role in relationship to TVA would be as a power distributor, and to the extent that they do other things that are governmentally related, then it should be governmentally supported and identified.
    Mr. HORN. Mr. Larson?
    Mr. LARSON. I generally concur with Mr. Baker and Mr. Fleming, that competition supplants the yardstick function with regard to TVA's power program. We would say, to paraphrase Harold Ickes, that yardstick became a whooping stick in the 1940's and 1950's when TVA undercut competitive prices with its subsidies. So we don't quite like the term of the yardstick.
    Mr. HORN. Ms. Calbom, how about it? Where is the neutral, bipartisan General Accounting Office?
    Ms. CALBOM. I was about to say I don't have a comment on this issue.
    Mr. HORN. Well, I count on you in every other hearing that I have been in, so what is your thinking on this? Is the yardstick idea sort of crazy and out of date, and the big, bad private utilities would not be raising the prices the minute TVA disappeared? That is the argument some make.
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    Ms. CALBOM. We haven't really particularly studied that issue. But I would have to say that competition is going to be the key. If you let people compete, the market is going really be the yardstick. So I guess that I would have to agree with some of the others on that.
    Mr. HORN. Let me move to another question and that is on the debt of TVA and what, Mr. Smith, are the plans to reduce that debt. As I read the testimony, we are talking about not even being able to get it to the $14 billion point, which would be the halfway mark, I guess.
    What is TVA doing in this respect?
    Mr. SMITH. Well, as I mentioned in my oral testimony and in the written testimony, the TVA plan was premised on the idea that we would take all available dollars from these various cost initiatives and dedicate all of that to debt reduction. The record thus far, as you are probably aware, we had through 1996 an unbroken, although unenviable, record of increasing the debt every single year. But starting in fiscal 1997, 1998, and this year, 1999, each year we have reduced the debt significantly. I suspect that this year the debt will be down to $26.3 billion at the end of the year. That is versus 27.7 at its high point at the end of 1996. So 1.4 or $1.3 billion reduction, even for TVA, is a fairly significant reduction in debt.
    Also as I mentioned in my testimony, the debt reduction would have been higher had we not diverted moneys to meet new generation demands, including peaking plants, and to accelerate some of the expenditures on the environmental initiatives. I think the short answer to the question, how is the debt reduction plan going, is, first of all, to clarify once again for everyone that it was truly not a debt reduction plan. It was one of several initiatives. It was a plan to get TVA into a competitive position in the year 2007. Clearly stated in the plan—I should have brought more copies to submit to the committee for their reading for it is not a very long document to read—but you find in the plan the objective, the stated objective. The only stated objective is to improve our cost position to meet the competitive price of power by reducing our reliance on fixed cost. One of the several initiatives was debt reduction. I think we are making tremendous progress on that as well as all of the other initiatives in that plan.
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    Mr. HORN. Would you agree with that, Ms. Calbom, when you looked at the books, and could more be done or less?
    Ms. CALBOM. We found that TVA was making good progress towards its goals in the plan. We believe that one of the key goals is this debt reduction, as you stated. The ultimate objective is to be able to offer the competitively priced power. You can see from the chart where TVA is in being able to reduce their debt, and that they are falling a bit short of the goal as far as the debt reduction.
    We think that is so critical because when we looked both in 1997 and 1995 where TVA stood next to its likely competitors, their total debt costs were about double that of their likely competitors. Now, when you take a look at just fixed debt costs—so in other words, for the competitors, when you take out the dividends they pay to their stockholders and whatnot—so the fixed cost they have to pay on an annual basis—TVA was five times higher than their competitors.
    So I agree that the ultimate goal is to be able to offer competitively priced power, but to get there you have to get on a level playing field. That is why we think the debt reduction is so critical, and they really need to stay the course on that.
    Mr. BAKER OF LOUISIANA. We will go to Mr. Costello and come back for a second round, if you might?
    Mr. HORN. I have to leave. If they could answer that question, that is it.
    Mr. Larson, Mr. Fleming, Mr. Baker, what would you like to say on the debt situation with TVA?
    Mr. BAKER. We as distributors would certainly like to see the TVA debt as low as possible. Larry and I are two of the birds that have to collect this money from our customers under it. But essentially I think that Dave is right. The plan that TVA adopted was to have what was estimated to be a competitive-priced power in 2007 under it. Fixed costs are just one of those components that go to make that up. We certainly applaud their relationship. They could not continue the way they were going. We applaud the Board and the operational management of TVA to do that.
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    Mr. FLEMING. Congressman, my comment would be while I also agree that we think TVA has taken the right direction, really from our perspective it misses the issue. We believe that TVA should not have a unilateral right to set rates, that we ought to be working on contract issues that allow us to negotiate like we do with every other business partner that we have. That way we don't have to worry about whether to do the debt or not. They take care of that themselves. We don't have to attempt to run their business. We have enough to run our business.
    Mr. HORN. Do you want to say anything, Mr. Larson, on this?
    Mr. LARSON. I will just observe that by retaining a very large amount of debt on its books, TVA retains sort of a poison pill. They will have leverage over Congress to do right because of the presumption in the investor community that because TVA has so much debt, that it cannot be placed in a position where it will not be guaranteed to have success. Therefore it would be protected. If its debt were cut to a responsible amount, then it would be expected to compete on fair terms, and it doesn't seem to be willing to do that.
    Mr. HORN. I thank the Chair for his generosity.
    Mr. BAKER OF LOUISIANA. Thank you, Mr. Horn.
    Mr. Costello.
    Mr. COSTELLO. Thank you, Mr. Chairman.
    Mr. Smith, what is TVA's current capacity for electricity generation? What is the current capacity of TVA for electricity generation?
    Mr. SMITH. We have capacity of a little over 28,000 megawatts comprised obviously of a mix of hydro facilities, the original generating facilities; a fossil plant complex, which really accounts for about 60 percent of the total protection. Then, as you are aware, we have five nuclear facilities that comprise the balance and puts us in the position of being, I guess, the second largest nuclear producer in the United States. So it is a balanced portfolio with 28,000 in total.
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    Mr. COSTELLO. How much of that capacity are you using in the TVA service area?
    Mr. SMITH. Well, virtually all of it is used in the TVA service territory. This past summer that we are just now finishing up, we had, as I recall, 8 or 10 days of peak capacity where our requirements within the Tennessee Valley were greater than they were the year before; in other words, new peaking days. And each of those required over 28,000 of capacity.
    Mr. COSTELLO. Your forecast for consumptions in the future in your 10-year plan, what are you forecasting for the next 5, 10, 15, 20 years?
    Mr. SMITH. When we put the plan together, we originally estimated that growth of demand in the valley would be at around 2 percent per year. As I mentioned in my opening comments, we are now in the judgment that that might be a little conservative. The past 10 years in the TVA service territory, our growth has been more closer to 4 percent per year. I think that we were conservative in forecasting only 2 in the future, but frankly, we just didn't know how long to continue to expect this economic expansion.
    But I might do the math for the committee just so you understand the order of magnitude facing us. With 28,000 megawatts of installed capacity and most of that demanded by the valley, if, in fact, we do grow 4 percent a year, that means that we have got to come up with something around 1,000 megawatts of new capacity every year. There was much discussion of Watts Bar nuclear plant when we brought that online. Just as a point of reference, that was only just a little over 1,000 megawatts of capacity from that one plant. So the demands to provide new generation just to meet the needs in the valley are quite enormous, obviously, depending on the rate of growth in the future.
    Mr. COSTELLO. There has been a lot of discussion this morning about the Federal Government's obligation concerning your debt and the bonding authority. One, are you aware that—the statement was made by one of the witnesses that there was no other utility company in the country that has a triple A rating, is that correct, other than TVA?
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    Mr. SMITH. That is correct.
    Mr. COSTELLO. I also think that I understood that someone said there is no other utility company in the country that has the debt that TVA has. Is that correct?
    Mr. SMITH. That is also correct, although I would like to clarify why that is. The first reason is fairly obvious. No one has as large of a debt as we do, but no one is as big as we are.
    The second reason, though, is probably more profound. It gets into sort of corporate finance and how you structure your business. Every other investor-owned utility in the United States finances their business with a capital structure, if you will, and it is comprised of common stock issuance, preferred stock issuance. And, of course, for many of them, because they are profit generators and reinvest the profit each year, what they don't pay out in dividends, they end up with large retained earnings. Those represent old money reinvested in the business.
    So an investor-owned utility will have several buckets to dip into for the purpose of financing their business, several buckets that are not available to TVA. So when TVA was set up, being government-owned, the provision was made that we couldn't issue common stock, we couldn't issue preferred stock. By and large we weren't supposed to make that much money, so there wasn't going to be a lot of retained earnings to reinvest year to year. In that situation the only way that you can finance the business is with debt. That is what TVA has done over the years, and that is why we have a larger debt than most everybody.
    To truthfully and fairly look at TVA's capital structure versus any other company, you have to look at the other company and add up all of those other components of their capital structure and then divide them by whatever you want to divide them by, units of capacity or something like that, to figure out how we compare.
    Mr. COSTELLO. If, in fact, TVA has more debt than any other utility company, and if, in fact, it is the only utility—TVA is the only company that has a triple A rating, why is that if the Federal Government is not responsible for standing behind the bonds—is that your position, the Federal Government is not responsible for the bonds?
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    Mr. SMITH. It is absolutely our position. As Mr. Baker pointed out, he has checked his bonds in his vault, and they do indeed say the Federal Government is not responsible. Every time we issue debt securities—I am not sure whether we are required or we just do that, but in bold type on the offering circular, we do note that these bonds are not guaranteed by the U.S. Government.
    I don't frankly think there are too many savvy investors out there that are confused about this issue.
    Mr. COSTELLO. Why is it that you retain this triple A rating if, in fact, you have the debt that you have?
    Mr. SMITH. I will tell you one reason you may find hard to believe, and that is that TVA is a pretty well run company. I would have you to outside sources to confirm that. Don't just take my word for it. But if you look at a source like Moody's Investor Service or S&P—but particularly Moody's is very readable—it talks about TVA's competitive position. It talks about TVA's operations, our cost of production versus others in the region.
    As I said, you may be surprised, but you will find that TVA is indeed a very competitive enterprise. That is surprising to a great number of people because it is not what one normally expects from a government-owned enterprise. One mentioned AMTRAK before as an example perhaps of one that is not a triple A operation.
    The other reason, and I will admit to this, there probably are some investors who do believe that there is what is called an implied government guarantee or an implied government support for TVA. They look at TVA, and they look to our owner, which, of course, is the Federal Government. This is not dissimilar from somebody when they buy a Georgia Power bond look to the fact that Georgia Power—they look to their owner, their parent. So the parental ownership and the strength that that implies is often considered by an investor even though there may not be any direct guarantee.
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    Mr. COSTELLO. If, in fact, either now or in the future the fence is brought down, and TVA is able to go outside of your current service area, and other competitors are able to come into your service area, do you really believe that other companies can compete with TVA in the valley given the fact that you do have benefits because of the affiliation with the Federal Government that others do not have?
    Mr. SMITH. I believe they can compete. That is sort of the American way. You are always going to find some people who will come in and offer a product for a price, a service that is appealing to somebody. I think maybe some of our customers, Mr. Baker or Mr. Fleming, might be better to answer that. They obviously think that somebody can come in and give them a better product or service for at least a portion of their demand.
    Mr. COSTELLO. Mr. Baker?
    Mr. BAKER. We very definitely think that competition is a real and viable element in the electric utility industry. And, yes, we have every ability to think that a portion of our requirements will ultimately be supplied by another supplier of it. Whether they are all supplied by another supplier or not is very problematical under it. But, yes, there is no question, based on today's—even at today's rates and at today's thinking and projecting that into the future, there is no question. That is one of the reasons that Larry and I have abdicated taking down the fence, allowing TVA to be competed against, but at the same time allowing TVA to replace those lost sales with competition.
    So, yes, sir, we firmly in that position.
    Mr. COSTELLO. Mr. Baker, do you think that can and will happen? If the fence comes down, should Congress take a look at some of the benefits that TVA has as far as taxes and the other benefits that they receive because of their affiliation with the Federal Government? Are you just saying that if the fence comes down, the competition will be there, or are you saying that we need to take a look at some of the other issues to level the playing fields with the competitors?
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    Mr. BAKER. If the fence comes down, the competition will be there. It is there today. I have on my desk proposals from outside systems that are very attractive.
    Mr. COSTELLO. Mr. Larson, would you like to comment on that?
    Mr. LARSON. We can only speculate about what the future will hold on that. History teaches that when the fence is down and TVA subsidies aren't addressed, TVA cut their prices below their cost and drove 20 utilities out of business. We know that. We also know that TVA is immune from antitrust laws. It has no deterrence against committing antitrust violations. They have complete and unfettered discretion over their ratemaking. Nobody can look over their shoulder. Cases in the past few years have been dismissed from court without so much as a hearing because of customers complaining about rates. They have no right to even go to court to complain about the rates.
    Mr. COSTELLO. So your earlier statement that competition, of course, is what we should be pursuing here, it is competition with adjustments as far as the government subsidies to TVA?
    Mr. LARSON. That is right. TVA's tax immunities are tax subsidies. Just last year TVA got a billion-dollar subsidy through its avoiding the prepayment penalties with its Federal financing backing. A billion dollars with the stroke of a pen is very, very dangerous.
    Mr. COSTELLO. Mr. Chairman, thank you.
    Mr. BAKER OF LOUISIANA. Thank you, Mr. Costello.
    Mr. Smith, you are the Chief Financial Officer; is that correct?
    Mr. SMITH. That is correct.
    Mr. BAKER OF LOUISIANA. Are you familiar with other government-sponsored enterprises in similar corporate structures, say, as Fannie Mae, Freddie Mac, Federal Home Loan Bank, Ginny Mae?
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    In your view, those agencies that are rated by Moody's and Standards generally at double A, triple A, is your view that those ratings come from the fact that they are extremely well run entities, or that there is some implicit guarantee of Federal debt that gives them an advantage in the market?
    Mr. SMITH. Well, I am not familiar with the nature they get their ratings nearly as I am with TVA's. We are obviously familiar with them as issuers of debt securities because we frequently face them in the marketplace. We don't sell at quite as good a rate as they do in some cases.
    Mr. BAKER OF LOUISIANA. Why is that, I wonder?
    Mr. SMITH. It's a fairly complex finance answer. It has to do with liquidity. Fannie Mae, as you know, has several hundred billion dollars of debt outstanding, so investors prefer to buy a more liquid issue, and they will pay a premium for that.
    Mr. BAKER OF LOUISIANA. It also goes to the capital adequacy of the loan loss reserves and their management technique. Explain to me if you can the distinction capital loan loss reserves in your financial perspective and what I believe are called coverage ratio.
    Mr. SMITH. I am not sure what you mean by that question.
    Mr. BAKER OF LOUISIANA. Well, in your case, I would help this way. You have retained earnings that you put in a stock. That is equal to capital on a financial institution side of the ledger. Loan loss reserves by a financial institution would be money prescribed for perceived threats required by FASB, Financial Accounting Standards Board, to meet short-term capital needs within the accounting fiscal year. I am somewhat surprised to find out that your coverage ratio relates to the amount of cash revenue income versus debt obligations for interest payments in a fiscal year. By law it is set at 1.0, although I understand yours is at 1.15.
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    To put that in more basic terms, I will ask this question: Your revenue stream, is all of that from fees paid by customers today?
    Mr. SMITH. Yes, it is. I should say absent $7 million that you give us for managing Land Between the Lakes.
    Mr. BAKER OF LOUISIANA. Has any refinancing of existing debt obligations yielded any benefit to your revenue stream?
    Mr. SMITH. Not to the revenue stream, but certainly to the net income. For example, we just finished a billion-dollar bond offering last week which was at a coupon rate of 6 percent. The expiring issue, which will come due on October 1, has an 8–3/8 percent rate on it. On that particular issue, my interest expense will decline by 20 some million dollars a year for the life of the issue. But that doesn't help revenue, but it helps as net income.
    Mr. BAKER OF LOUISIANA. Correct. I misspoke. My point being is that from all operations, whether domestic or foreign, that the total revenue to the corporation exceeds its obligations in interest payments by a ratio of 1.5 today; is that correct?
    Mr. SMITH. That is roughly correct. What you are really reciting is the fact that we basically operate as a nonprofit. The revenues and the expenses in most years would be about the same, 1.0.
    Mr. BAKER OF LOUISIANA. I only make that clear because other government-sponsored enterprises—and let me define for you what their status is. They are created by a special provision of law, granted a particular position in the market which grants them access to Treasury lines of credit at below-market rates of interest, thereby allowing them to get access to debt for their mission-related purposes.
    I found it very interesting that the amount of capital adequacy and rates of return on equity are far in excess of what you see with TVA activities. Why has it been necessary to expand to international markets beyond the TVA's border to meet your mission of compliance requirements?
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    Mr. SMITH. I do apologize. I think I may have missed the point you were making, that some of these other agencies have much better financial performance, if you will, than TVA.
    In that regard, I would remind you that all of those other agencies, Fannie Mae and the others, have public shareholders. They are for-profit enterprises. Naturally, somebody like Fannie Mae is going to have a handsome profit, otherwise they are not going to raise any common stock in the marketplace.
    That is not TVA's mission. As stipulated in the TVA Act, our mission is really the flip side of that. Our mission is to deliver power at the lowest feasible cost. What that means is—on an ongoing basis—we basically operate at cost, at break even. So you are never going to find comparability between TVA and the other publicly-owned agencies in that regard.
    Mr. BAKER OF LOUISIANA. To that extent, the principal mission of those housing GSEs is to provide a required compliance and to provide access to housing to low-income individuals, and that is their principal mission. Whether they have increased the earnings beyond that of the TVA only enables them to pursue their mission.
    I assume when TVA was originally constructed, it was the view of Congress that fees charged and earnings from services provided would be sufficient to enable them to stand on their own bottom and to expand their service scope without the extraordinary levels of debt we now see in the current operation. With regard to the bond rating, that is extraordinarily important to your ability to go to the markets and get the funding you need for either expansion or continued operations. Listening to Mr. Baker's comments that we cannot understand why, and it is their problem if they do, why private rating agencies look at the TVA as something with an implicit government guarantee, Moody's says, ''Although TVA's debt obligation is not an obligation to the U.S. Government, the company's status as an agency of the United States Government, and the fact that the Government is TVA's only shareholder indicates strong implied support that it would afford assistance in times of difficulty.''.
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    Standard and Poor: ''without the financing flexibility associated with Federal ownership, TVA would face a significantly greater challenge in maintaining its competitive posture.'' .
    It would appear that relatively sophisticated financial observers have concluded that your relationship with the Federal Government is the principal reason for the pricing of your debt issuances, and, secondly, that it enables you to operate successfully; that without such a government-implied guarantee, that the TVA's mission might be made a great deal more difficult. Do you dispute Standard and Poor's and Moody's?
    Mr. SMITH. Absolutely not. I think they probably evidence what people do interpret from our government ownership. I have never denied for a moment that some investors do think that is a strength for a lot of reasons.
    Our debt ratings are important to us. Debt ratings for my company are important to them because that at the end of the day determines how much you are going to pay for your borrowed money.
    But let's put it in an order of magnitude. If TVA were not triple A, then speculatively what might it be? I would point out to you that if we fell to, for example, the same rate as Georgia Power—I don't know, I think that we probably run as good as they do—we might have to pay a quarter point more or half a point. I don't know what the number might be, but let's say it is a quarter point on TVA's total debt. That would be an added interest cost—if it implied that whole $27 billion of debt, that would be an added interest cost of 60 or $70 million a year. That is a big number. I don't mean to minimize it because, in fact, Congress imposed almost that big of a number on us on the unfunded mandate last year for the nonpower programs.
    So it would be a significant factor to assume in our operations and pay for, but I don't know that you are talking about anything that would be a disaster to TVA.
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    Mr. BAKER OF LOUISIANA. If you were to constrain expansion plans and simply operate the TVA in the most efficient manner possible given current market conditions, would you be able to give assurances to the committee that you would be able to pay your existing 27 plus billion dollars off, or is the extension participation required in order to service the debt?
    Mr. SMITH. The answer there is probably evident if you just look at the statistics of the past few years. We have—as I said, we have, in fact, paid down the debt over a billion dollars, 1.3 or $1.4 billion, by the end of this year, and at the same time added several hundred megawatts of new capacity in these peaking plants that we have installed throughout the valley to accommodate growth in peak demand. So I think we can accommodate both initiatives. We can serve the needs, the growth needs, of the valley and provide for the environmental requirements that are imposed on us, and do all of that at the same time we are paying on the debt at some rate.
    Mr. BAKER OF LOUISIANA. Sure, but my question was given your current scope of operations, without additional planned activities being put online, could you in your existing market continue to operate in your current fashion and be assured that you would be able to pay off the lines of credit that now exist for the TVA without the additional income provided by the diversification?
    Mr. SMITH. If we do not increase capacity—I guess I will digress for just a moment and say we missed the whole point of the TVA mission. If we don't have additional capacity, in all likelihood I will not be able to meet the power needs of the Tennessee Valley, so presuming that you have some other way for folks like Mr. Fleming and Mr. Baker to purchase power if they can't get it from me. The only other choice I would have is to purchase the power from some external source myself, try to bring it in and provide it to them.
    Mr. BAKER OF LOUISIANA. Is that not a customary practice in the electric industry today? You don't find sufficient capacity in Baton Rouge, Louisiana, to serve the growth of south Louisiana.
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    Mr. SMITH. It used to be a lot more practical than it is today. The reason why, I think many folks saw in June of last year and again this year, for that matter—but in June of last year when there was a heat wave, a lot of people—TVA included—were trying to buy power and bring it into their service territory.
    Two things are true now, more so than in the past. One is there is not a lot of excess capacity out there. In other words, there is not a lot to be bought. That is why the prices went way up. Number two, if you can find it, it is not altogether clear that you can even get it in. There are real transmission constraints. This is in part, I think, one of the aberrations that is going to occur in the accompanying deregulation.
    When you deregulate this industry, the participants in the industry that used to build plants because they got, if you will, a guaranteed return on that investment are all of a sudden going to face great uncertainty about whether they will get a return on their investment. When people face uncertainty about returns, they don't invest.
    That is what you are seeing happening in the industry today. There is not as much investment in new capacity, generating capacity, and certainly not as much investment in transmission capacity as was historically true. So the feasibility of purchasing power to meet the needs is not as sure as it might have been in the past.
    Mr. BAKER OF LOUISIANA. Thank you. I don't want to protract the meeting. I have been informed by Mr. Boehlert that he will not be able to return immediately.
    I just wanted to make a comment. I have introduced legislation today relative to the TVA and wanted to make it clear for the record that I feel the TVA has performed an important mission in providing services to the people of the valley, and I think in most cases it operated as well as can be expected. However, as a government-sponsored enterprise, we continually have to be concerned about encroachment into the free markets. Given the dramatic expansion and growth in many parts of the region, it is not unreasonable to expect that free-enterprise entities could equally, or perhaps in some cases, better serve the needs of those consumers.
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    We face the same problem on the other side of the ledger with the financial GSEs that I made reference to earlier in my comments, and I have got legislation on them, too. So my concern is not just specifics of the TVA, but simply to point out that I have great concern about the underlying financial strength. And although we are enjoying extraordinarily positive economic times, if we were to have an unexpected downturn, with the expansion of investment and a lessening of demand or increase in cost to you of operations, the potential liability to the government, ultimately the taxpayer, is not something that we should ignore.
    Given those concerns, I hope that you will understand as we move forward in the process my concerns related to ensuring that our ability as a government-sponsored enterprise as well as the United States Government to limit our exposure to what is a relatively significant debt in relation to the corporation's size.
    Would you care to respond?
    Unless there is anybody who wishes to make further comment, the meeting stands adjourned.
    Thank you.
    [Whereupon, at 11:54 a.m., the subcommittee was adjourned.]

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