Transfer the Tennessee Valley Authority's Electric Utility Functions and Associated Assets and Liabilities

In 1933, the Tennessee Valley Authority (TVA) was established as a federal agency to control flooding, improve navigation, and develop the hydroelectric resources of the Tennessee River for the benefit of a seven-state region in the southeastern United States. Since then, TVA has developed an extensive network of transmission facilities and nuclear- and fossil-fuelpowered electricity-generating plants. As one of the largest electric utilities in the nation, TVA accounted for 5 percent of national electricity generation in 2010. To maintain sufficient capacity, TVA anticipates that it will need to make large capital expenditures in the next decade and beyond. TVA funds its investments primarily by issuing debt, and it services those debt obligations from revenues earned through electricity sales to customers over several decades.

This option would transfer most of TVA's electric utility functions and associated assets and liabilities to a non- federal owner and operator--a private firm, for example, or to an entity owned by its distributors. That entity could be similar to the newly formed Seven States Power Corporation, a nonprofit electricity generation and transmission cooperative in the Tennessee Valley. The hydropower assets and liabilities would be retained by the government because they serve several other purposes, such as flood control and recreation. This option assumes that the transfer of TVA's electric utility functions and associated assets and liabilities would be completed by the end of 2013. Such a transfer could be accomplished in different ways: TVA's assets and liabilities could be conveyed free of charge, for example, or they could be sold in a competitive auction to a nonfederal entity. Proceeds from such an auction would depend on the terms and conditions of the sale. As a result, potential proceeds are not included in this estimate.

Even in the absence of auction proceeds, the Congressional Budget Office estimates that implementing this option will reduce net outlays by about $1 billion over

the 2012-2016 period and by nearly $4 billion over the 2012-2021 period. Those savings reflect the estimated net outlays that TVA otherwise would have incurred to build new electric power facilities over the next 10 years. CBO's estimate assumes that the current $30 billion ceiling on TVA's borrowing would be maintained; if that ceiling was raised, the budgetary savings from this option would probably be greater over the 2012-2021 period.

The 10-year budgetary impact of such a capital transfer does not fully capture its long-term impact on the government. For example, although the government would avoid new capital outlays, it would also forgo a stream of future income that would accrue from those outlays. That income would not fully compensate for the up- front capital costs, however, because of the implicit subsidies conveyed to ratepayers in the region. By law, TVA's rates are set to recover its costs and maintain an operating reserve. But the capital charge included in those rates is artificially low because, unlike private utilities, TVA does not have to provide a return to equity holders--in this case, the taxpayers, who are exposed to the risk of having to make up for future revenue shortfalls. In addition, TVA's borrowing costs are relatively low because its status as a federal agency leads many creditors to assume that TVA's obligations would be paid off in the event of default, even though existing law explicitly states that TVA's debts are not guaranteed by the federal government.

One rationale for this option is that transferring ownership could give state regulatory agencies and TVA's customers more control over future costs. TVA is exempt from most state regulatory review because of its status as a federal agency. Its operations are sheltered from competition, moreover, because federal law requires customers in its service area to purchase virtually all of their electricity from TVA. Increased competition, proponents would argue, could produce greater efficiency and improve cost control. In addition, many would argue that the generation and transmission of electricity are fundamentally private-sector activities. A final rationale is that it would eliminate the implicit subsidies that the government now provides to the region's ratepayers.

An argument against this option is that TVA's contribution to the economic development of its seven-state region could be diminished if TVA was under nonfederal ownership. For example, a new owner might reduce expenditures on efforts to attract new businesses to the communities in TVA's service area. Furthermore, a reduction in public subsidies would probably cause an increase in electricity prices. Finally, regulatory and other constraints on the new owner and operator of TVA's system could limit the potential benefits of a transfer.