The TVA Isn't Going Anywhere

 | Apr 15, 2013 | 6:00 PM EDT
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It is not going to happen. The Tennessee Valley Authority will remain a sovereign asset of the federal government for years to come. This should come as good news for investors and taxpayers. It is also good news for some Southern politicians.

The TVA is not what it appears. Many think of TVA as another large public utility. In many ways they are right. But it is much more.

Think of TVA as a regional development agency for seven southeastern states. Its charter is to stimulate economic development and support the nation's seventh-largest river system. TVA is responsible maintaining navigation, providing recreational opportunities and protecting water quality in a 41,000-square-mile watershed.

As part of its regional development responsibilities, TVA supplies power. The "profit" from that power pays for TVA's regional development responsibilities.

As a government utility, TVA is a not-for profit entity. This arrangement is more common than many might expect. More than 99% percent of the nation's utilities are not-for profit. This includes about 900 cooperative and 2,000 government-owned utilities.

TVA is an odd duck. It is an independent federal agency that has no direct ties to the Department of Energy or to any other agency. Because it is self-sustaining, it no longer requires taxpayer funds to operate.

But what makes TVA truly unusual is its regulatory structure. Most utilities are either deregulated utilities, such as Consolidated Edison (ED) and Northeast Utilities (NU), or regulated utilities, such as Southern Co. (SO) and SCANA (SCG). There are even utilities operating in both regulated and deregulated regions, such as Entergy (ETR) and NextEra Energy (NEE). Then there is TVA.

TVA regulates itself and sets its own rates. Since there are no profits, any savings go to regional development and power users.

For the federal government to sell TVA, it would need to separate TVA's social programs from the underlying utility (the social consequences of such a separation are another topic). After a separation, what could taxpayers expect to get for the utility?

The short answer is, not much.

The longer answer is, a mess. First, before TVA could be spun off, Congress and the seven state governments would have to change their statutes and regulations. That alone can take years.

Second, as a utility, TVA is not what many expect: TVA is a bulk power wholesaler. It is not a distribution utility. TVA generates and sells power to other utilities for resale. Most of its utility assets are tied up in power plants and transmission lines.

But TVA's customers are captive. Congress created a virtual fence around TVA's customers to make it statutorily impossible for competing utilities to offer services. Any change in federal statutes would likely unleash TVA's wholesale customers. In all likelihood, such a change would have the effect of restructuring TVA's generators and making them deregulated assets.

As investors learned in other states, if TVA relies on the deregulated power markets for valuation, its generators could be worth much less than they would be if they were regulated.

A work-around would be for affected states to capture TVA generating assets and treat those generators as state-regulated assets. But this is not as easy as it sounds. The minute the power crosses state lines, it is engaged in interstate commerce and subject to federal laws.

In either event, potential buyers would have to assume the legal, regulatory and economic liabilities of 37,000 megawatts worth of power plant capacity. This includes 50 coal-fired units, 113 hydroelectric units, six nuclear units (and one under construction), 98 gas or oil-fired units and nine diesel units.

Worse, TVA's 15,900 miles of transmission lines were not designed for sharing. Whoever buys TVA's transmission lines would need additional capital to upgrade and integrate TVA's system with the rest of the region.

Finally, even though politicians of both parties have offered the idea of selling TVA, many republicans oppose such a sale. According to the Chattanooga Times Free Press, "Southern Republicans slammed President Barack Obama's proposed TVA overhaul, calling it misguided, vague and unrealistic." Sen. Saxby Chambliss (R., Ga.) called it "a major, major decision." Several used the phrase "out of the blue." Sen. Johnny Isakson (R., Ga.) said, "It's not going to go anywhere. I don't want to have a big fight over it."

Isakson may be right. In the big picture, TVA is flea dust, and the return on political effort to sell TVA is too low. TVA falls in Washington's "too hard" pile.

What may be possible would be for Congress to consider selling utilities that come under the purview of the Department of Energy and Department of Defense. Those assets tend to be more digestible and easier to spin off. But that is a subject for later discussion.

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