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Rates, debt, air quality control, nuclear costs and risks, and its whole method of management are all on the line.

by Barry Henderson

When the Tennessee Valley Authority celebrated its 50th anniversary 20 years ago, it asked for employee suggestions of a slogan to commemorate the occasion.

Jim Dykes, the curmudgeonly Knoxville journalist who was then doing time as an information officer for the giant public utility, had the most widely circulated submission: "TVA—Fat, Fifty, and Fading."

It brought grins everywhere it was related. It might have been more nearly true than anyone thought at the time, and if the agency hadn't slimmed down through lay-offs and out-sourcing in the years of former Chairman "Carvin'" Marvin Runyon, it might have faded completely, the remnants sold off piecemeal to private power companies.

Today, TVA is at a crossroads once again, testing its resiliency as the grand old experiment in public power production. Ironically, and perhaps ominously enough, it is passing the Biblical three score and ten this year. It's beset with a host of problems, largely fiscal, that are the legacy of its overambitious, long-since scrapped nuclear power plant construction program that was nipped in the bud when its own power demand projections collapsed in a heap in the 1970s and early 1980s.

What was left behind was tens of billions of dollars in debt, a total that has barely shrunk in the interim, despite the professed intentions of its recent directors. TVA's interest expense on that debt, $1.3 billion in 2003, now takes up 19 percent of its annual revenues, a percentage that Mike Rescoe, TVA's chief financial officer for less than two months, proudly pointed out last week is "the lowest (percent of revenue) since 1979." TVA was in the process of raising its electric rates mostly, or at least ostensibly, to pay the $1 million per day—a planned $3.6 billion over 10 years—in costs it is incurring in air pollution control improvements at its aging battery of coal-fired power plants. At the same time, TVA is restarting a nuclear power generating unit idled 18 years ago at Brown's Ferry, Ala., in a plant that is more than 40 years old, at a projected cost of $1.8 billion. All of those commitments are stretching the annual budget, $7.5 billion for 2004, to the limit. Past the limit, for CFO Rescoe projects a deficit of $276 million in that year, despite the rate increase approved by the three-member, full-time TVA Board last week.

Passed on mostly to residential and small-business customers at 7.4 percent, the increase is included in a rate restructuring that actually gives large-scale manufacturers a 2 percent rate break, which the directors and staff explained was to stimulate job growth in a region that has lost 100,000 manufacturing jobs since 2000—a 10 percent decline. The restructuring is vigorously opposed by many of TVA's local area power distributors and their ordinarily powerful organization, the Tennessee Valley Public Power Association, some of whose members have hinted they may sue to block implementation of the plan before it goes into effect Oct. 1.

TVA has contracted for a one-time cash infusion of $1.5 billion from Memphis Gas, Light, and Water, the largest of its power distributors, in a maneuver that will provide short-term relief but is to be paid back in electricity at a minimum of 50 percent of the MGLW demand over a 15-year period. The distributor can borrow the money through non-taxable bonds, which TVA cannot do, and TVA and MGLW will each make money on paper on the difference in their borrowing rates. TVA Director Bill Baxter, the board's newest member and its emerging leader, says the deal is good for TVA. "It ties up our biggest customer for 15 years," he says, at a point when anticipated power deregulation would allow Memphis to purchase its electricity anywhere. Nonetheless, the contract adds to TVA's debt and guarantees a reduction in total annual power sales revenues.

Stephen Smith, executive director of the Southern Alliance for Clean Energy and a serious student of TVA policy and critic of it and its execution for the last dozen years, told the board at its August meeting that the agency has cash-flow problems it hasn't acknowledged. Although praising the expense for clean air, he jumped on its debt-reduction progress since the last rate increase in 1997. He reminded the board of the TVA promise that it would use that rate hike to cut its debt of almost $28 billion in half in 10 years. "Six years later we are over $5 billion behind schedule," Smith said.

David Smith (no relation) who retired June 30 after eight years as the agency's CFO, partly reinforces Stephen Smith's claim. He says that paying down the debt, meeting the Clean Air Act requirements, and restarting Brown's Ferry Unit I, will be extraordinarily difficult under the new rates and their structure, with interest rates rising and "all the low-hanging fruit" of debt refinancing having been "picked."

David Smith says the debt was reduced about 10 percent to less than $25 billion between 1997 and 2003, and the interest cost was cut by 25 percent as those rates went down to the lowest level in more than 50 years. TVA won't have that advantage in refinancing the next round of maturing bonds, he predicts. But he also says TVA has no other way to raise money than by bond issue or rate increase. "It can't issue stock and sell it," he says, "so there will always be debt." He says the trick is to keep the debt within rein. There is a $30 billion limit set by Congress, but the former CFO indicated that debt in that range might exceed the value of TVA's assets.

Meantime, TVA is embroiled in a controversy over its newly accepted contribution to the nation's nuclear weapons production program in terms of tritium to be obtained from spent nuclear fuel rods when they are removed from TVA power plant reactors. To be done as a public service at the request of the Department of Energy, the program will be cost-neutral, providing no additional revenue to TVA.

As all of this roils and bubbles across the valley, the two Tennessee senators and some other members of the Valley congressional delegation are either stumping for or talking favorably about legislation that would increase the membership of the board of directors to at least nine, including power, business, and environmental specialists, who would serve part time, determine policy, and hire a chief executive officer to carry out that policy and run the agency on a day-to-day basis. The board expansion is set out in a Senate bill offered by Bill Frist, the senior Tennessean in that body and the Senate Majority Leader, a position of significant influence.

To make that change, Congress would be opening up the TVA Act of 1933 to amendment, a maneuver that has been resisted for decades because of TVA's "enemies" —both real and perceived. That dilemma doesn't bother this congressional delegation or the TVA power distributors, who also have opposed tinkering with the act in the past, insiders say. It's an obvious attempt to address what are thought of by Frist and his allies as management shortcomings that have festered for years. Whether that kind of board and management juggling by congressional edict could help ease TVA's financial woes is hard to predict, just as the current board's effectiveness in that area is difficult to judge. It has kept a relatively low profile up until 2001

Enter Baxter. In his first two years as a director, Baxter has established himself as the board's most out-front personage in addressing policy matters. Energetic, confident, and aggressive, Baxter has assumed a role the chairman ordinarily performs, especially around TVA's Knoxville headquarters. The chairman himself, Glenn McCullough, is more reserved, and some insiders close to the board say he's perturbed by Baxter's ready, voluble presence.

At the August meeting, for example, McCullough, whose nine-year term is over less than two years from now read an opening statement heaping praise on the agency's good quasi-governmental corporate citizenship and on Knoxville, the headquarters city. From then on, most of the questions were asked by Skila Harris, who's in her term's fourth year, and most of the answers were supplied by Baxter. TVA sources say Baxter idolizes Runyon, or at least aspires to the sort of role Runyon played. McCullough, even his advisers are saying, appears increasingly uncomfortable in the chair.

Baxter denies any rift and says there's little friction among the directors. "TVA people tell us we get along as well or better than any other board," he says. He also says McCullough "works very hard. He's all over the Valley making appearances for us all the time." The chairman, a former mayor of the mid-sized Mississippi city of Tupelo, commutes from there weekly. He was originally a Clinton appointee but was appointed chairman by George W. Bush. "There is no conflict. I feel fortunate to have two intelligent, articulate, [directors].... We have an effective working relationship," McCullough says of the insider assertions.

On that subject, Harris asked what the insiders were saying about any conflict and how they were saying she fit in. Told she wasn't considered a player in that game and was described as sticking mostly to policy decision-making rather than internal politicking, she laughs. "You mean I'm not doing boy things? Does this mean I'll never be king of the hill?"

More seriously, Harris says she thinks it's this board's "strength that we bring a variety of experiences to the table. There's a healthy give and take...in philosophical differences." Harris, a Kentuckian, was formerly a DOE official. She was also on Clinton's and Vice President Gore's staffs and was appointed a director by Clinton.

On the question of board enlargement, Harris says she believes the original congressional act set up a pretty effective system. "I'm not sure whether the design of a board makes a difference as much as its makeup does."

"There are pros and cons to every government structure," Baxter says and explains: "Sen. Frist's proposal has perhaps more pros than cons. It's a structure with which I'm more familiar, as a businessman." Baxter ran Holston Gases in Knoxville before serving three years as commissioner of the state Department of Economic Development in the administration of former Gov. Don Sundquist. He describes his take on the Frist proposal: "One of the negatives is that it's difficult to fully understand what's going on in here.... Being here every day is one of the positives of the current structure. Another negative is that it makes for a three-headed CEO."

David Smith, who worked with the two most recent boards, including the one chaired by former director Craven Crowell, says the political forces are difficult to work under, with a board appointed by presidents and nominated and overseen by Congress. "Put three politicians in place and tell them to run the company, it may not work out well in the business sense," he says. As a man with a big-business accounting background (Smith was CFO of LTV, appointed to help bring it through what was then the nation's largest corporate bankruptcy in the early '90s before coming to TVA), he says he favors a business- and policy-oriented board and a strong CEO.

Former Chairman Runyon took the same approach when he was invited to speak to a congressional caucus called by Sen. Lamar Alexander here in July on the board proposal. Runyon, who ran the agency by exerting more single-handed authority than any chairman since Aubrey "Red" Wagner did 30 years before him, told the caucus that a larger board of perhaps 12 people, selected for special backgrounds or areas of expertise, and a "very active" CEO serving at the board's will would be his recommendation. His appearance and statements stirred speculation that Runyon, who went on to be U.S. Postmaster General, would be returning to any newly enlarged board. He's gone on record as suggesting that TVA would do well to go to nuclear power generation in order to eliminate the coal-fired power plants, but he's not said publicly he's interested in returning to the board.

Opponents of tampering with the board's size say there is always the worry that nine political appointees would be more difficult to get down to business than three and that a larger, part-time board may be less responsive to the public and to staff recommendations than a smaller, full-time one, especially for an agency that is not subject to regulation by a public service commission or similar body and is only beholden to Congress. Stephen Smith and his alliance are adamant that the agency needs an independent, outside reviewing body to oversee it much more closely than has Congress, no matter how the board is designed or derived. He says that Baxter's expressed attitude of pride in pushing the new rates and structure through a slow-moving bureaucracy was objectionable to him and his organization.

No such quickly established rate increase and rate restructuring would have been possible for competing private utilities, who have to submit such proposals to outside regulating bodies for approval or denial.

TVA has always run its own affairs and set its own rates. Part of its mission has been to provide a demonstration of the efficiency of public power and to offer it at the cheapest rates possible. It's a non-profit enterprise by definition.

Its restructuring to offer lower rates to big industry while raising the rates for residential and commercial customers was based on the rationale that the residential rates in the Valley were 11 percent lower than the regional average, while the manufacturers' rates were 12 percent higher than those charged by bordering electric utilities. The objections from distributors, who are sometimes accused of acting as if they "own" TVA, included their assertion that there has been no study of rates' effects on industry here, and that there is no firm data to indicate that lowering industrial rates by two percent will influence manufacturers to locate in the Valley or to remain here. Representatives of some of the distributors also pointed to the hardship that falls on their residential customers when rates are increased only slightly, a few dollars a month. There were more supportive distributors, including Knoxville Utilities Board, represented by President Larry Fleming, who did not object to the restructuring and, in fact, endorsed it as an economic development tool.

Besides rates and air quality, there are current power-generation issues that foster some public concern. The restart at Brown's Ferry, for instance, is controversial both because of its expense and its nuclear technology, which wasn't considered the optimum way to build a reactor set when the entire plant was mothballed. Yet two of the three units are back in service, and the board is convinced that bringing the third unit back on line will pay for itself in the relatively inexpensive electricity it produces—without contributing to air pollution. Detractors, including Stephen Smith and David Orr, who represents a relatively new watchdog group calling itself Citizens for Utility Reform, contend that the nuclear option is innately risky and that the storage of its radioactive wastes creates a long-term environmental hazard. Orr is particularly critical of the decision to allow tritium extraction from a TVA reactor for U.S. thermonuclear bomb production, calling it "a dark day for TVA."

Baxter brushes off such comments, by saying the board simply acceded to the DOE request "in the national interest," pointing out that TVA was originally formed, in part, to supply the federal government with material for making weapons. The DOE is picking up any extra cost of the procedure, he says.

On more recent questions concerning the condition of the TVA power transmission grid in the wake of the system failure that blacked out parts of the Northeast, Midwest, and southern Canada, Baxter says the TVA transmission system is "the envy of the nation." It has been kept up and improved, he says, to the point where it enjoys the utility industry's highest rating: "99.999 percent reliable."

Locally, a board proposal he advocates is the leasing of one of the two TVA twin towers on Summit Hill Avenue. The current TVA need for office space can be accommodated in one of the buildings, he says. Some downtown office building owners are skeptical of the prospect of TVA competing with them for tenants, but Baxter says the agency is working with the other building owners to establish leasing rates that are competitive without undercutting the market, and, he says, the goal is to attract an entirely new downtown tenant to the space. That tactic worked out well for TVA when it leased space in Nashville, where Bridgstone-Firestone moved downtown, and Chattanooga, where the Provident Life Insurance Co., took up TVA space downtown.

Baxter's well aware of the multiple pressures on the TVA budget and revenue stream, he says, as is Harris, who echoes his sentiment by saying, "Obviously, it's a huge challenge.

"One of the beauties of TVA is its complex and comprehensive mission," she says, "and we've done very well in moving to a level of performance that reflects new efficiencies. There are more opportunities for efficiencies and savings, and our people are moving toward them. In 2007 we're going to have new cash flow from Brown's Ferry Unit I, as well."

Baxter adds that the strategy of the board is to prepare TVA for gradual deregulation and the attendant price and delivery competition it will experience directly for the first time with other electric utilities.

"Choice and deregulation are good things," Baxter says, "and if we can't compete, shame on us."

Along the way, the path is strewn with political pitfalls. Asked how political influences from seven states and the federal government affect the agency, Baxter's answer is quick and succinct: "Inordinately."

He says he really enjoys the business aspects of guiding the electric utility, governing the stewardship of the river system, and promoting the economic development of the Valley. "But the political pressures, particularly from Washington, consume an inordinate amount of our time. Then there are the groups that care only about reducing the debt, or only about clean air, or only about cheap power...." Baxter's usually strong voice trails off there for a moment.

Times are tough at TVA. It's more than just the money that's needed for it to be all things to all constituents, of course, but money issues loom above the rest. The grand public power experiment hinges on their solution.

"It's not an exaggeration to say that TVA's at a crossroads," says David Smith, the CFO who just left the agency. "But it's been through many crossroads before, and it's morphed into many things. It adapts and changes. That's the reason it's still there."

Seventy years old and struggling, but TVA's still there.