    [Senate Hearing 106-536]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 106-536

                          TVA CONSUMER PROTECTION ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                  COMMITTEE ON
                          ENVIRONMENT AND PUBLIC WORKS
                              UNITED STATES SENATE

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                       ON

                                    S. 1323

     A BILL TO AMEND THE FEDERAL POWER ACT TO ENSURE THAT CERTAIN FEDERAL
         POWER CUSTOMERS ARE PROVIDED PROTECTION BY THE FEDERAL ENERGY
                             REGULATORY COMMISSION

                                   __________

                                OCTOBER 6, 1999

                                   __________

      Printed for the use of the Committee on Environment and Public Works

                         U.S. GOVERNMENT PRINTING OFFICE
    63-227 cc                    WASHINGTON : 2000

    _______________________________________________________________________
                For sale by the U.S. Government Printing Office
    Superintendent of Documents, Congressional Sales Office, Washington, DC
                                     20402

                   COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                           one hundred sixth congress
                     JOHN H. CHAFEE, Rhode Island, Chairman
    JOHN W. WARNER, Virginia             MAX BAUCUS, Montana
    ROBERT SMITH, New Hampshire          DANIEL PATRICK MOYNIHAN, New York
    JAMES M. INHOFE, Oklahoma            FRANK R. LAUTENBERG, New Jersey
    CRAIG THOMAS, Wyoming                HARRY REID, Nevada
    CHRISTOPHER S. BOND, Missouri        BOB GRAHAM, Florida
    GEORGE V. VOINOVICH, Ohio            JOSEPH I. LIEBERMAN, Connecticut
    MICHAEL D. CRAPO, Idaho              BARBARA BOXER, California
    ROBERT F. BENNETT, Utah              RON WYDEN, Oregon
    KAY BAILEY HUTCHISON, Texas
                         Jimmie Powell, Staff Director
                   J. Thomas Sliter, Minority Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

                                OCTOBER 6, 1999
                               OPENING STATEMENTS

    Chafee, Hon. John H., U.S. Senator from the State of Rhode Island     1
    Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...    11

                                   WITNESSES

    Fuller, Don, general manager, Paducah Power System...............    13
        Prepared statement...........................................    30
        Responses to additional questions from:
            Senator Inhofe...........................................    34
            Senator McConnell........................................    32
    Hewett, Robert M., president, Kentucky Utilities Company.........    13
        Prepared statement...........................................    35
        Responses to additional questions from Senator McConnell.....    42
    McConnell, Hon. Mitch, U.S. Senator from the Commonwealth of
      Kentucky.......................................................     1
        Analysis of S. 1323..........................................     5
        Charts.......................................................     7
        Letters:
            Several senators.........................................     9
            Paducah Power System.....................................    11
        Prepared statement...........................................     3
    Medford, Mark, executive vice president for customer service and
      marketing, Tennessee Valley Authority..........................    17
        Prepared statement...........................................    48
        Responses to additional questions from:
            Senator Inhofe...........................................    61
            Senator McConnell........................................    52
    Munson, Richard, executive director, Northeast-Midwest Coalition.    15
        Letter, followup to hearing testimony........................    48
        Prepared statement...........................................    43

                              ADDITIONAL MATERIAL

    Articles:
        TVA Anachronism..............................................    26
        TVA Must Prepare for Competition.............................    25
        TVA's River of Debt..........................................    24
    Reports:
        Tennessee Valley Authority: Assessment of the 10-Year
          Business Plan, General Accounting Office................... 80-12
        Tennessee Valley Authority: Facts Surrounding the Allegations
          Raised Against the Chairman and IG, General Accounting
          Office....................................................122-148
    Statements:......................................................
        Bunning, Hon. Jim, U.S. Senator from the Commonwealth of
          Kentucky...................................................    12
        TVA Kentucky Managers' Association, Austin Carroll...........    63
    Text of S. 1323, TVA Consumer Protection Act..................... 66-79

                          TVA CONSUMER PROTECTION ACT

                                  ----------

                           WEDNESDAY, OCTOBER 6, 1999

                                           U.S. Senate,
                     Committee on Environment and Public Works,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 4 p.m., in room
    406, Dirksen Senate Office Building, Hon. John H. Chafee
    (chairman of the committee) presiding.
        Present: Senator Chafee.

               OPENING STATEMENT OF HON. JOHN H. CHAFEE,
              U.S. SENATOR FROM THE STATE OF RHODE ISLAND

        Senator Chafee. We are now going to move to the
    consideration of S. 1323, introduced by Senator McConnell and
    Senator Bunning, called the TVA Customer Protection Act.
        This was introduced on July 1, 1999 and referred to this
    committee. I will summarize some of the provisions.
        It requires TVA to comply with the Federal Energy
    Regulatory Commission--FERC--regulations. It prevents TVA from
    recovering through power or transmission rates those costs
    associated with overseas activities. It prohibits TVA from
    competing with certain TVA distributors under long-term
    contract, and a series of other provisions.
        We are honored to have Senator McConnell with us. Senator,
    before the witnesses go on--we have four witnesses here--if you
    would like to say a word or two and make an opening statement,
    that would be perfectly acceptable.

                  STATEMENT OF HON. MITCH MCCONNELL,
             U.S. SENATOR FROM THE COMMONWEALTH OF KENTUCKY

        Senator McConnell. Thank you very much, Mr. Chairman.
        I appreciate your giving me the opportunity to be at the
    hearing on this bill, in spite of the fact that I am not a
    member of your committee. I thank you very much for having the
    hearing on S. 1323, which is the TVA Customer Protection Act.
        I would also like to thank the witnesses for agreeing to
    attend this hearing and provide testimony on relatively short
    notice.
        I want to recognize Austin Carroll, the manager of
    Hopkinsville Electric System, who is here, but due to the time
    constraints that we have this afternoon is going to have to
    just submit his testimony for the record.
        I apologize to you, Austin, that we could not accommodate
    everyone.
        I have introduced S. 1323, the TVA Customer Protection Act,
    to shine the light on the Tennessee Valley Authority. We all
    grew up thinking that if you had TVA power you were lucky. In
    fact, I was born in North Alabama--something I don't talk about
    a whole lot in Kentucky--the heart of TVA country. I remember
    from my very earliest days thinking that God had certainly
    blessed our area since I had been fortunate to have been born
    in and live in the TVA area.
        Unfortunately, however, if you are the nearly 212,000
    Kentucky families in 30 counties who receive power from TVA
    these days, it is not the case. Despite operating as a
    monopoly, TVA has racked up $26 billion in debt and provides
    power at rates higher than the rates of regulated utilities in
    my State.
        TVA would like Kentuckians to believe that membership has
    its privileges. However, over the next 5 years, TVA's Kentucky
    taxpayers will pay a whopping $250 million more for their power
    than if they were served by Kentucky Utilities, which is
    federally regulated.
        We have a bar chart here that represents the $250 million
    that my ratepayers would be paying over and above what they
    would be paying if they were in a regulated utility in
    Kentucky.
        Senator Chafee. Is that an annual charge?
        Senator McConnell. That is over 5 years, Mr. Chairman.
        This chart I think is also particularly revealing. We have
    taken a look at the rates over the past 10 years for three
    regulated utilities and then for TVA inside my State. If you
    were in the LG&E service area over the last 10 years, your
    rates would have gone down 5 percent. If you were in the
    Kentucky Utilities area over the last 10 years, your rates
    would have gone down 8 percent. If you were in the Kentucky
    Power area, your rates would have gone down 12 percent. And if
    you were in TVA over the last 12 years, your rates would have
    gone up 7 percent.
        So contrary to the perception one had as a child in North
    Alabama and as an adult in Kentucky, these days you are not
    particularly blessed to be residing in a TVA service area
    because your rates are higher and going higher still.
        As a self-regulated monopoly, TVA has not been accountable
    to its captive ratepayers. As a result, TVA has accumulated a
    mountain of debt that has forced TVA rates upward as I just
    demonstrated.
        TVA should be accountable to the people they serve and my
    bill would provide the relief to those forced to pay TVA's
    uncompetitive rates. The bill requires TVA to fully disclose
    and justify all rates, charges, and costs as ``just and
    necessary'' as required under the Federal Power Act, just as
    Kentucky's other regulated utilities must do.
        It would also make TVA a public utility subject to the
    authority of the Federal Energy Regulatory Commission. This
    would result in TVA customers enjoying the same independent
    regulatory protections as customers of other large utilities.
    For instance, TVA customers could challenge rates rather than
    be forced to accept rates as set by the TVA Board.
        Finally, Mr. Chairman, it would help customers hold the
    line on new deficit spending to ensure that TVA justifies all
    new construction of costly new generating facilities. This is
    not a cap on generation, but again a requirement that TVA
    demonstrate that its customers have a real need for this added
    capacity and that it is the most affordable solution for the
    valley.
        Over the past several years, the General Accounting Office
    undertook two studies on TVA's desperate financial situation.
    In 1995, GAO concluded that TVA's financial condition
    ``threatens its long-term viability and places the Federal
    Government at risk.'' In 1997, GAO found that TVA's fiscal
    situation poses a threat to its future competitiveness as well
    as a risk to the taxpayers.
        Only through years of unaccountability and fiscal
    irresponsibility could a monopoly power with total authority to
    set rates ever have reached this level of debt. We need to
    shine the light on TVA's power rates. The legislation that we
    are having a hearing on today will do that by providing the
    ratepayer a clear picture of TVA's rates and for the first time
    make the Agency accountable for its charges and costs.
        I do not pretend to know all the answers as to why TVA is
    an inefficient and costly power provider. However, it is
    painfully clear that at least in Kentucky TVA's customers are
    getting a raw deal from this new deal program. I hope this
    legislation will give customers the tools they need to get a
    better deal from TVA.
        Thank you very much, Mr. Chairman.
        [The statement of Senator McConnell follows:]
     Statement of Hon. Mitch McConnell, U.S. Senator from the Commonwealth
                                  of Kentucky
        Mr. Chairman, I want to thank you and the rest of the Committee for
    accommodating me by holding a hearing on S. 1323, the TVA Customer
    Protection Act. I would also like to thank the witnesses for agreeing
    to attend this hearing and provide testimony on such short notice.
        I would like to recognize Austin Carroll, the Manager of the
    Hopkinsville Electric System, who due to time constraints of the
    Committee will only be allowed to submit his testimony for the record.
    Austin, I look forward to reviewing your testimony and appreciate your
    efforts.
        I have introduced S. 1323, the TVA Customer Protection Act to shine
    the light on the Tennessee Valley Authority. We all grew up thinking if
    you had TVA power, you were lucky. Unfortunately, the nearly 212,000
    Kentucky families in 30 counties who receive power from TVA are finding
    out that's not the case. Despite operating as a monopoly, TVA has
    racked up $26 billion in debt and provides power at rates higher than
    that of regulated utilities in Kentucky.
        TVA would like Kentuckians to believe that membership has its
    privileges. However, over the next 5 years, TVA's Kentucky ratepayers
    will pay a whopping $250 million more for their power than if they were
    served by Kentucky Utilities, which is federally regulated.
        As you can see from the bar chart, Kentuckians captured inside the
    TVA fence are paying electricity rates which are higher than customers
    of Kentucky's regulated utilities. In 1997, TVA raised rates by 7
    percent, which sharply contrasts with power rates of regulated
    utilities which have decreased by an average of 8 percent.
        In short TVA's rates are high and going higher. and its competitors
    are low and aging lower.
        As a self-regulated monopoly, TVA has not been accountable to its
    captive ratepayers. As a result, TVA has accumulated a mountain of debt
    that has forced TVA rates upward. TVA should be accountable to the
    people they serve, and my bill will provide the relief to those forced
    to pay TVA's uncompetitive rates.
        The bill requires TVA to fully disclose and justify all rates,
    charges and costs as ``just and necessary,'' as required under the
    Federal Power Act--just as Kentucky's other regulated utilities must
    do.
        It would also make TVA a ``public utility'' subject to the
    authority of the Federal Energy Regulatory Commission. This would
    result in TVA customers enjoying the same independent regulatory
    protections as customers of other large utilities. For instance, TVA
    customers could challenge rates, rather than be forced to accept rates
    set by the TVA board.
        Finally, it would help customers hold the line on new deficit
    spending to ensure that TVA justifies all new construction of costly
    new generating facilities. This is not a cap on generation, but again a
    requirement that TVA demonstrate that its customers have a real need
    for this added capacity and that it is the most affordable solution for
    the valley.
        Over the past several years, the General Accounting Office
    undertook two studies on TVA's desperate financial situation. In 1995,
    GAO concluded that TVA's financial condition ``threatens its long-term
    viability and places the Federal Government at risk.''
        In 1997, GAO found that TVA's fiscal situation poses a threat to
    its future competitiveness as well as a risk to taxpayers.
        Only through years of unaccountability and fiscal irresponsibility
    could a monopoly power, with total authority to set rates, ever have
    reached this level of debt.
        We need to shine the light on TVA's power rates. My legislation
    will do that by providing the ratepayer with a clear picture of TVA's
    rates and for the first time make the agency accountable for its
    charges and costs.
        I don't pretend to know all the answers as to why TVA is an
    inefficient and costly power provider. However, it's painfully clear
    that in Kentucky, TVA's customers are getting a raw deal from this New
    Deal program. I hope that this legislation will give customers the
    tools they need to get a better deal from TVA.

        Senator Chafee. Thank you, Senator.
        There is a statement here from Senators Inhofe and Bunning
    and I will ask that they go into the record and be accepted as
    part of the record.
        [The prepared statements of Senators Inhofe and Bunning
    follows:]
       Statement of Hon. James M. Inhofe, U.S. Senator from the State of
                                    Oklahoma
        I am pleased we are having this hearing on the Tennessee Valley
    Authority. TVA is a subject within my Subcommittee, and unfortunately
    due to so many pressing issues we have been unable to hold an oversight
    hearing before now.
        Like many in Congress, I believe the monopoly of the TVA is a
    dinosaur in today's electric power business. Due to actions by State
    legislatures and Congress, the electric marketplace is changing at a
    rapid pace. While we may not have reached consensus on how best to
    proceed, action by the states or Congress is going to lead toward
    deregulation of the electric industry. With all other aspects of the
    electric industry changing, I believe the time has come for TVA to
    change as well.
        In light of the deregulation debate, I believe TVA's government
    protected monopoly has outlived it's usefulness. For too long, problems
    at TVA have been ignored or swept under the carpet--although I am not
    sure how it is possible to ignore a $28 billion debt. The debt
    refinancing plan which was attached to last year's Omnibus
    Appropriations Act was wrong and should not have occurred. In bypassing
    the committee of jurisdiction, it is estimated that it cost the
    taxpayers over $1 billion. These actions have simply become too large
    for Congress or the American people to remain silent. Created during
    the New Deal when only 15 percent of rural America enjoyed electricity,
    it is time for the reign of this bloated bureaucracy to come to an end.
    I believe the legislation before the committee today is a step in the
    right direction and long overdue.
                                     ______

     Statement by Hon. Jim Bunning, U.S. Senator from the Commonwealth of
                                    Kentucky
        Mr. Chairman, Thank you for providing me the opportunity to submit
    my testimony for the record on S. 1323, the Tennessee Valley Authority
    (TVA) Customer Protection Act. As a cosponsor of the bill, I wanted to
    share with you and our colleagues some of my thoughts on why and how
    this bill will improve the administration of the TVA and benefit
    consumers.
        For the past fifty years, TVA has been both a competitor and
    regulator within the transmission and power-generation industry.
    Unfortunately, at times these two roles have clashed, and as a result
    the customers of TVA have had to deal with higher rates than the people
    living outside of TVA's ``fence line.'' In the past, the TVA Board of
    Directors has tried to justify this to the people of the Valley by
    blaming their higher rates on the mammoth $26 billion in debt that they
    have acquired over years of operation. However, they simply miss the
    point that it is the Board's mismanagement and, in fact, the lack of
    oversight by the Federal Government that led to the acquisition of this
    debt. The TVA Crammer Protection Act will change this and bring some
    accountability to the TVA, and provide a layer of oversight by the
    Federal Energy Regulatory Commission to prevent further bad business
    decision making.
        Currently, the TVA is not required to make available to the public
    any of its documents and contracts that relate to its power business.
    However, under S. 1323, TVA will have to file and disclose the same
    documents and information that other public utilities are required to
    file under the Federal Power Act. The Tennessee Valley Authority has
    stated that they want to be ``America's power company.'' If this is the
    case, the TVA should operate under the same regulations as the rest of
    America's power utilities.
        In addition, our antitrust laws do not currently apply to TVA. This
    is wrong, and must be corrected. It is time that TVA be held to the
    same standards as the rest of our utilities. This bill will accomplish
    this goal, and provide the customers of the TVA some course of legal
    action in the future.
        I want to make it clear that this is a pro-TVA bill. It is simply
    an attempt to bring some reform to the agency, and prepare it for the
    future. It is clear that TVA will have to change its ways if it is
    going to compete in any future deregulated electricity market. This
    bill is a good first step in preparing them for that new market, and
    preparing TVA's customers for the future.
        For too long, the consumers of TVA's power have had to pay higher
    electricity rates then people living outside of the fence line. In the
    State of Kentucky, it is estimated that over the next five years that
    the customers of TVA will have to pay almost $250 million more for
    their electricity than if they had received it from a FERC-regulated
    utility. That is a bitter pill for my constituents to have to swallow,
    and hopefully this bill will provide them some rate relief.
        Again, Mr. Chairman, thank you for allowing me to submit my
    testimony. I look forward to working with you on preparing TVA for the
    next century.
        Senator Chafee. Now our first witness is Mr. Don Fuller,
    general manager, Paducah Power System.
        We will put each of your full statements in the record.
    These lights will go on allowing each witness 5 minutes. If you
    could stay within the 5 minutes, that would be helpful. The
    green light will go on, then the red at the conclusion of the
    period.
        Thank you.

     STATEMENT OF DON FULLER, GENERAL MANAGER, PADUCAH POWER SYSTEM

        Mr. Fuller. Thank you, Mr. Chairman.
        My name is Don Fuller and I am the general manager of
    Paducah Power System. I appreciate the opportunity to come
    before you today.
        I represent the position that the Board at Paducah Power
    and the city of Paducah has on several of these issues relating
    to restructuring of the electric industry and part of the bill
    that Senator McConnell has introduced. The main points we want
    to present is to remove the barriers to wholesale electric
    competition in the Tennessee Valley, subject TVA to the
    jurisdiction of the Federal Energy Regulatory Commission,
    including the FERC jurisdiction over TVA's transmission system,
    wholesale power sales and stranded costs, terminate TVA
    regulation of the distributors and revert that to local
    control, and apply the Federal anti-trust laws to the same
    extent that such laws apply to other Government entities.
        Part of that is looking into the future and not so much as
    the very present in such things as anti-cherry picking and the
    well-known TVA fence. We also think that TVA should be subject
    to all of the transmission tariffs that affect other public
    utilities or other utilities in the industry.
        Wholesale power rates should be subject to review by FERC,
    as well as the stranded costs if an entity decides to get out.
    We think that FERC order 888 covers that measure of determining
    what those stranded costs are.
        The retail sales of TVA into our jurisdiction should be
    terminated at some point where TVA would become just a
    wholesaler and not a retailer, thereby restricting any
    competition they would have against the small retailers.
        As far as selling outside the Tennessee Valley, S. 1323
    does not address that issue. At some point in the restructuring
    of the industry I do not believe that TVA should be limited to
    selling outside. Surely as the fence comes down, it should come
    down in both directions.
        Thank you, Mr. Chairman.
        Senator Chafee. Mr. Hewett, president, Kentucky Utilities
    Company.

      STATEMENT OF ROBERT M. HEWETT, PRESIDENT KENTUCKY UTILITIES
                                COMPANY

        Mr. Hewett. Thank you, Mr. Chairman and Senator McConnell.
        My name is Robert M. Hewett and I am president of Kentucky
    Utilities Company, a subsidiary of LG&E Energy Corporation, a
    diversified energy services company with businesses in power
    generation and project development, retail gas and electric
    utility services, and asset-based energy marketing.
        Kentucky Utilities serves 77 counties in Kentucky and 5 in
    Virginia. In addition, LG&E Energy also owns Louisville Gas and
    Electric Company, which services 16 counties in Kentucky. My
    company is also a member of TVA Watch, a coalition of investor-
    owned utilities operating in areas adjacent to the Tennessee
    Valley Authority, TVA. We appreciate your invitation to share
    with this committee the views of TVA Watch about the role the
    Tennessee Valley in the changing electric power industry.
        I would like to emphasize several points that are set forth
    in greater detail in my written statement.
        First, TVA has many powerful tools, such as exemptions from
    Federal and State regulation, as well as tax and antitrust laws
    that are not available to other utilities. These powerful tools
    led the Congress in 1959 to the fence that contains TVA within
    its current region. During the past 4 years, however, TVA has
    been carrying out a strategy to undermine the fence. As a
    result, my company and others in TVA Watch have had to sue TVA
    on more than one occasion to force TVA to comply with the law.
    Although we have prevailed in each instance, we believe that it
    is necessary to remain vigilant against other potential abuses
    of the 1959 law by TVA.
        Second, our electric power industry already is becoming
    more competitive and will continue to do so whether or not
    Congress passes a restructuring bill. The only way this
    competition can work for the benefit of consumers is if the
    success of any market participant is based on the quality of
    its service, the health of its balance sheet, and whether it
    competes under the same rules as everyone else.
        If its financial health is not up to par, then its
    management had better fix it. Unfortunately, TVA's financial
    health is not up to par. Even more unfortunate is the fact that
    TVA's management appears intent on convincing the public that
    TVA has no financial problems and that it is ready for
    competition under rules less stringent than those that govern
    other utilities. We submit that TVA has it backward. TVA should
    fix its financial problems first and then be prepared to
    compete under the same rules as everyone else.
        Third, Congress also should closely examine TVA's claims
    that is a low-cost utility that pays its fair share of taxes.
    Neither claim holds up. In Kentucky, TVA is the most expensive
    provider of wholesale power. Its rate to wholesale distributors
    is $47 per megawatt hour or 4.7 cents per kilowatt hour. In
    contrast, the wholesale full requirements rate my company
    charges to our municipal customers is $29.4 per megawatt hour
    or 2.94 cents per kilowatt hour. In fact, by the year 2003 our
    wholesale full requirements rate will be 2.91 cents per
    kilowatt hour while TVA projects that its 4.7 cents per
    kilowatt hour rate will remain the same.
        In the case of taxes, the best way to consider this issue
    is on an apples-to-apples basis--total tax obligation as a
    percentage of total revenue. In 1998, TVA total payment in lieu
    of tax obligation was 3.9 percent of total revenue. Kentucky
    Utilities total tax payment accounted for 8.1 percent of total
    revenue.
        Fourth, we need to consider what TVA believes to be fair
    competition. TVA insists that it must retain control over its
    prices and sales practices rather than have its prices and
    practices subject to review by the Federal Energy Regulatory
    Commission. TVA also insists that while it is willing to be
    subject to anti-trust laws, it should not be subject to fines
    or attorneys fees because it could not afford to pay them. We
    find both positions to be without substance. Put another way,
    my company pays its full share of taxes, follows all the rules,
    protects the environment, makes money for our shareholders, and
    still charges lower rates than TVA.
        We applaud Senators McConnell and Bunning for introducing
    S. 1323, which would go a long way toward ensuring that any
    competition between TVA and other utilities will be fair. We
    are very pleased that the companion legislation has been
    introduced in the House by Congressman Richard Baker.
        I thank the committee for the opportunity to present our
    views and would be please to respond to any questions.
        Senator Chafee. Thank you very much, Mr. Hewett.
        Mr. Munson, executive director, Northeast-Midwest
    Coalition.

      STATEMENT OF RICHARD MUNSON, EXECUTIVE DIRECTOR, NORTHEAST-
                           MIDWEST COALITION

        Mr. Munson. Thank you, Mr. Chairman and Senator McConnell.
        Noting that I have a short time, I will attempt to be quite
    blunt. Following up on Senator Baucus' comments, I would like
    to suggest that TVA is an embarrassing bureaucracy burdened
    with debt and mismanagement. You are going to hear in a second
    from Mr. Medford that TVA is financially sound and a well-run
    company. How can a well-run company accumulate a $28 billion
    debt? Such a feat, done at a time when they set their own
    rates, and they enjoy monopolistic control over their service
    territory--such a feat has to rank among this Nation's most
    egregious examples of business mismanagement.
        The TVA Board, finally in 1997, could not avoid this
    disaster any longer and came up with a 10-year plan to try to
    cut that debt in half by the year 2007. Great idea.
    Unfortunately, the General Accounting Office finds that the
    plan is filled with what it refers to as ``unreasonable
    assumptions.''
        TVA also, unfortunately, has ignored GAO's suggestions to
    update the plan. And most troubling, Agency officials--wanting
    now to build more power plants and expand their empire--are
    saying that they never really meant to have debt reduction as a
    goal in the first place. They have had their high-priced
    lobbyists oppose provisions within the VA/HUD bill that would
    scale back TVA's $30 billion debt ceiling.
        Unfortunately, according to GAO, most of the very small
    progress made in the past 2 years on debt reduction has come
    because of the subsidies, not because of increased efficiency
    at TVA. TVA may be lost in its quest for bureaucratic growth,
    but I would suggest that the American taxpayer and this
    Congress--which ultimately has oversight of TVA--needs to
    ensure that debt reduction is the highest priority for this
    debt-laden agency. The American taxpayers should not be saddled
    with TVA's debt.
        On the mismanagement side, is it a well-run company that in
    recent weeks has been the brunt of embarrassing accounts of
    mismanagement? Consider the story about the inspector general
    we heard about before. About a year ago the inspector general
    issued a scathing report about six-figure bonuses, secret
    retirement accounts, and noncompetitive consulting contracts
    for cronies and senior executives. Did TVA respond to those
    charges? How they responded was to launch a retaliatory
    investigation against the IG and issue a string of ugly charges
    about the IG to the press.
        Fortunately, because of Senator Thompson's good oversight,
    the General Accounting Office investigated those charges and
    just 2 weeks ago issued a report that said that the chairman's
    investigation of the IG ``could be viewed as an attempt to
    undermine the independence'' of the TVA watch dog. TVA went
    further to say that management's charges against the IG were
    nothing more than ``unsubstantiated allegations.''
        Consider also the embarrassing millions of dollars TVA is
    spending on lobbyists and public relations consultants. There
    was a recent story that showed that TVA was paying up to $435
    an hour for consultants to research TVA critics and to book the
    chairman giving speeches outside of the Tennessee Valley.
    Consider the $1.6 million that TVA on Friday admitted it
    overcharged its industrial customers last year because of some
    supposed unintended computer error. Industrial customers are
    suggesting the overcharge is closer to $100 million.
        Mr. Chairman, TVA is a national problem because it is a
    Federal agency that burdens taxpayers with its debt. Yet
    Tennessee Valley consumers--I should think--should be outraged
    by this giant and arrogant monopoly.
        Why should they pay $435 an hour to book the chairman's
    speech at Harvard University? Why should they allow TVA
    management to stifle independent analysis? But most
    importantly, why should they remain subject to TVA's monopoly
    control while the rest of the country begins to enjoy the lower
    costs and better service that result from competition?
        Senator McConnell has noted that his Kentucky constituents
    outside the TVA service territory enjoy lower rates than those
    within. Other competitors in a restructured market are going to
    offer better deals. So why should Tennessee Valley customers be
    left behind? Simply because of some Government bureaucracy and
    monopoly?
        As this committee considers how to restructure TVA in a
    competitive market, I encourage you to raise the fundamental
    question about whether the Federal Government, in the 21st
    century, has any business being in the electricity business. We
    wouldn't fathom having the Air Force compete against Delta
    Airlines, yet TVA will argue that Washington needs to continue
    to own and control the Nation's largest utility.
        Why? Is there some failure in the electricity market that
    would require the Federal Government's intervention? There
    might have been 70 years ago when only 15 percent of rural
    Americans enjoyed electricity. But today, there are hundreds of
    private sector companies and entrepreneurs out there who are
    struggling for the chance to sell electricity in an open and
    competitive market.
        While Congress will discuss these fundamental questions
    during the restructuring debate, I hope this panel more
    immediately advances needed reforms. Senator McConnell has
    proposed numerous, very logical changes affecting FERC
    oversight and anti-trust laws that would help ensure TVA plays
    by the same rules as other power generators.
        In order to protect U.S. taxpayers, I would hope that you
    add to that bill a measure to force TVA to slash its massive
    debt by ratcheting down its debt ceiling.
        TVA is a troubled bureaucracy, Mr. Chairman. It needs
    serious reform and restructuring.
        Thank you.
        Senator Chafee. Thank you, Mr. Munson.
        Mr. Mark Medford, executive vice president, customer
    service and marketing, Tennessee Valley Authority.

     STATEMENT OF MARK MEDFORD, EXECUTIVE VICE PRESIDENT, CUSTOMER
           SERVICE AND MARKETING, TENNESSEE VALLEY AUTHORITY

        Mr. Medford. Mr. Chairman, I want to thank you for this
    opportunity to update the committee on a variety of issues
    relating to TVA's ongoing activities and electric industry
    restructuring, including S. 1323.
        My name is Mark Medford and I serve as TVA's executive vice
    president for customer service and marketing. My
    responsibilities include working with the 159 distributors of
    TVA power and 63 directly served customers within the Tennessee
    Valley who would be most affected by restructuring legislation.
        Mr. Chairman, before I begin my testimony, I would like to
    ask permission to submit testimony from Austin Carroll,
    representing the TVA Kentucky Managers' Association, and Miles
    Manell, representing the Association of Tennessee Valley
    Governments, who were not able to appear before the panel.
        Senator Chafee. Without objection, those prepared
    statements will appear in the record.
        Mr. Medford. Thank you.
        I applaud this committee's interest in the issues
    surrounding TVA's role in the evolving electric power industry.
    As you well know, other committees in both the House and Senate
    are considering issues related to industry restructuring at
    both the State and Federal level. TVA has been actively
    involved in these efforts. At the risk of stating the obvious,
    I can tell you that sorting out these issues in the context of
    Federal legislation is not an easy task.
        TVA has begun the difficult process of preparing itself for
    the new competitive environment. We have made painful staff
    reductions, cut costs, increased productivity, and decreased
    debt.
        In 1997, TVA unveiled a comprehensive program to guide our
    agency for the next 10 years. The overriding goal of this 10-
    year business plan is to ensure TVA's electricity will remain
    competitive.
        In the fall of 1997, the Department of Energy created the
    Tennessee Valley Electric System Advisory Committee. The
    purpose of this body was to build consensus and make
    recommendations for legislation that would shape the future of
    TVA. In addition to TVA, the participants included the
    Tennessee Valley Public Power Association, representing the
    distributors, large industrial customers directly served by
    TVA, industrial customers served by the distributors, the
    Southern States Energy Board, local environmental interests,
    rural consumers, the League of Women Voters, the International
    Brotherhood of Electrical Workers, and the Teamsters. As
    national energy stakeholders, ENRON, TVA Watch, and the
    Electric Clearinghouse also participated.
        Relying on the final report of the advisory committee, the
    Administration crafted a TVA title for inclusion in its
    comprehensive Electricity Competition Act. TVA supports this
    proposal. Also, the TVA congressional delegation strongly urged
    TVA to work directly with TVPPA to develop a regional solution
    for inclusion in a legislative proposal.
        I was pleasantly surprised at the amount of agreement
    between TVA and its customers. We have since jointly submitted
    recommendations to our delegation.
        The Administration and the TVPPA/TVA proposals are very
    similar. The most important characteristic is that they both
    represent regional consensus and regional compromise.
    Significantly, they were developed with the input of TVA's
    customers. These proposals, above all, affirm TVA's continued
    role within the valley to manage the river system and provide
    electricity for valley customers.
        However, we also note the new responsibilities and
    limitations that TVA will have in an emerging marketplace. For
    instance: TVA would be required to make its transmission system
    available to competitors for customers in the Tennessee Valley
    Region; TVA would be subject to anti-trust prohibitions; TVA
    transmission rates would be subject to FERC jurisdiction; TVA
    would be required--unlike any other utility in the country--to
    renegotiate all existing full requirements contracts with
    distributors within a year of enactment.
        Perhaps the most critical element of the agreement with our
    distributors is that changes should only come in the context of
    comprehensive legislation. It simply does not make sense to
    enact changes to TVA that may not be conform to broader
    congressional policies about the future of the industry.
        There is also agreement that TVA should have the ability to
    build new generation to serve the needs of the valley. Mr.
    Chairman, this is where we have big concerns with S. 1323. This
    legislation would place significant burdens on our ability to
    add new generation. I believe these burdens are insurmountable.
    The demand for electricity in our region is growing at about 4
    percent annually. Like most of the country, we are pushing the
    bounds of our current generation capacity. We have been
    fortunate that TVA has never had a capacity-related outage,
    period.
        The limitations on new generation included in S. 1323 put
    electric reliability at risk for our 159 customers and in turn
    the 8 million people they serve across the valley.
        As the electric power industry changes, its greatest
    strength is its diversity. Ranging from rural electric
    cooperatives to municipal systems to the largest private
    companies, this variety should be embraced and nurtured as we
    move forward.
        Mr. Chairman, we have made important progress in developing
    a regional consensus. I hope that we can continue to work
    together to build on this consensus and find a solution that
    truly fosters markets and helps customers in the Tennessee
    Valley.
        Thank you for the opportunity to testify before this
    important hearing. I look forward to answering your questions.
        Senator Chafee. Thank you very much.
        Senator McConnell, would you like to ask some questions
    now?
        Senator McConnell. Thank you, Mr. Chairman.
        Mr. Medford, you said in your prepared statement that the
    principal purpose of TVA was to protect customers from prices
    that might exceed those charged in a competitive market.
        As I discussed in my opening statement, there are three
    utilities in Kentucky, which are all federally regulated, that
    serve people in my State at rates below TVA.
        Why is that?
        Mr. Medford. I will make two observations, Senator
    McConnell.
        First, Kentucky is blessed with having some of the lowest
    electricity rates in the country. I will also observe, while
    much has been discussed about wholesale rates within Kentucky,
    the average retail price of electricity for TVA and its
    distributors--in the TVA-served portion of Kentucky--are among
    the lowest rates in the State. Only one other major provider
    has an average retail rate lower than that in the TVA part of
    Kentucky.
        Senator McConnell. Do you want to respond to that?
        Mr. Hewett. Yes, sir.
        As far as the retail rates, Kentucky Utilities for sure
    would have retail rates that are lower than TVA's rates. The
    average rate for Kentucky Utilities retail residential
    customers would be about 4.5 cents per kilowatt hour and for an
    industrial customer it would be about 3.2 cents per kilowatt
    hour. So we would have lower rates than TVA would.
        Senator McConnell. Then you are disputing what Mr. Medford
    just said?
        Mr. Hewett. That's right.
        Mr. Medford. I will tell you how we arrived at this
    information.
        Senator McConnell. You guys must be using a different
    calculator. Is that it?
        Mr. Medford. No, I will tell you how we arrived at this
    information.
        We took the revenues for each of the major providers--I am
    talking about the 10 largest providers in the State--we took
    the revenues collected at the retail level and divided them by
    the kilowatt hours sold. It is a pretty simple process.
        Mr. Hewett. Senator, TVA has a comparison of rates as far
    as retail customers. It is a survey that my company has
    participated in. That survey itself would document what I said.
        Senator McConnell. So you're saying, Mr. Medford, that
    contrary to my chart and my belief, that in fact the retail
    rates of TVA inside Kentucky are lower than the investor-owned
    utilities?
        Mr. Medford. The first thing I will observe, Senator
    McConnell, is that your charts are based on wholesale rates. My
    response was based on retail rates.
        And I don't want to miss the first point that I made--and I
    will stress it again. Kentucky, as a State, enjoys some of the
    lowest costs in the country. TVA's rates are competitive.
        Senator McConnell. I understand that. We are sitting on a
    lot of coal.
        The only issue I am probing here is the one we are
    debating, which is who has the lower rates. And you are saying
    that the retail rates of TVA are lower inside Kentucky----
        Mr. Medford. Than all but one of the other nine or ten
    major providers.
        Senator McConnell. Which is the one?
        Mr. Medford. Big Rivers.
        Senator McConnell. And you dispute that, Mr. Hewett?
        Mr. Hewett. Yes, sir, most definitely.
        Senator McConnell. I do not think we can resolve this this
    afternoon, but somebody is obviously wrong here and we will
    need to look at that further--unless somebody has some great
    idea about how to resolve this dispute.
        Mr. Hewett. Senator, we could obviously get the tariffs of
    both companies and build them out. That would be very easy to
    do.
        Senator McConnell. If it is all right with Chairman Chafee,
    I would like to leave the record open for some further
    submissions on this point from the witnesses. I don't think
    there is anyway to resolve this this afternoon, but I would be
    interested in hearing further from all of you about that issue.
        Senator Chafee. That's fine. Do they know exactly know what
    they are responding to?
        Senator McConnell. Well, Mr. Medford is saying that my
    chart may have been right with regard to wholesale rates but
    are not right with regard to retail.
        Is that correct?
        Mr. Medford. That is correct.
        Senator McConnell. And Mr. Hewett is disagreeing with him.
        It seems to me there is no way to resolve it this
    afternoon. I would like to have further submissions if that is
    OK with you.
        Mr. Medford, you noted that it is unacceptable to have FERC
    oversight over TVA with regard to wholesale electricity rates,
    yet you are willing to submit to FERC oversight on transmission
    and stranded costs.
        Why is it OK for one and not OK not OK for the other?
        Mr. Medford. The primary reason is that the TVA Board is
    charged with providing electricity in the valley at the lowest
    possible cost. That is a directive, by the way, which is not
    entirely consistent with the directive given by FERC.
        I see no purpose for one set of Presidential appointees
    overseeing another set of Presidential appointees in the
    determination of wholesale electricity prices. When you get
    into the area of transmission, the transmission network is not
    purely a regional issue. The transmission network--basically
    you are talking about three major components of transmission
    for the country, those being the western part, the eastern
    part, and Texas.
        With regard to stranded costs, stranded cost--FERC is the
    expert on stranded cost. FERC laid out the methodology for
    determining stranded costs and therefore I think it is entirely
    appropriate that they adjudicate stranded costs.
        Senator McConnell. Would any of the three other witnesses
    like to respond to that?
        Mr. Hewett. Senator, what the FERC is attempting to do
    through open access on the transmission tariffs and
    deregulation of transmission tariffs is to make sure that every
    customer has the opportunity to compete in an unregulated
    fashion when competition does prevail. So what FERC is trying
    to accomplish is to make sure that comparisons are achieved in
    an equal fashion to make sure that we do establish rates and
    that it is done in a fashion that is the same for everyone so
    that there is that equal access.
        My response would be that it is important to make sure that
    comparisons are done on the same basis. I think deregulation of
    transmission tariffs by the FERC is a way to accomplish that.
        Senator McConnell. Any comments from Mr. Fuller or Mr.
    Munson?
        Mr. Fuller. I would agree with that.
        Mr. Munson. I would just followup on Senator Thompson's
    comment about the unaccountability of TVA. The decisions of the
    Board are not reviewed by State regulators, FERC, other Federal
    agencies. Congress has not provided a lot of oversight
    recently. Because they have monopoly control over their service
    territory, they are not even accountable to market forces. I
    think FERC oversight makes perfectly logical sense to bring a
    little bit of accountability to this unaccountable agency.
        Senator McConnell. Mr. Medford, at some point, I think we
    would all agree that fence is likely to come down and TVA will
    be allowed to compete in an open market. Under the legislation
    you support, what FERC regulatory requirements would TVA be
    required to fulfill outside the fence that it is not required
    to meet inside the valley?
        Mr. Medford. We are aware that some legislative proposals
    have included provision for FERC regulation of TVA sales
    outside the fence and TVA does not oppose that.
        Senator McConnell. Why doesn't TVA think that the stranded
    cost formula that FERC applies to public utilities should apply
    to its own stranded costs?
        Mr. Medford. It is not quite as simple as that, Senator
    McConnell.
        Let me talk about the scope of application of stranded
    costs in TVA as opposed to other utilities.
        I served for 14 years with a private utility. Our sales
    structure was about 94 percent at retail and 6 percent at
    wholesale. TVA's sales structure is quite different from that.
    Approximately 85 percent of our sales are at wholesale and 15
    percent are at retail.
        So when you talk about stranded costs of losing wholesale
    customers, the issue is much more substantial for TVA than it
    is for the typical private utility. We are not saying that the
    standard FERC formula will be found to be inappropriate by FERC
    or TVA. It may be. We want to allow the FERC the latitude--
    after hearing from TVA, TVA's customers, and others--to use
    some approach other than the standard methodology they have
    laid out for others.
        Senator McConnell. In March, Standard and Poor's rating
    service put out a notice regarding problems that might be
    created for TVA as a result of competition. S&P noted that the
    Administration's legislative reforms could have implications
    for TVA's rating and that TVA's future operation and financial
    profile could be impaired.
        That doesn't exactly sound like a ringing endorsement from
    Wall Street.
        What is your reaction to that?
        Mr. Medford. Given that we have endorsed the
    Administration's title and the TVA/TVPPA proposal--which is
    very similar to the Administration's title--obviously we
    disagree with them. We think both of those documents represent
    a fair treatment of TVA in a competitive environment and will
    not have any untold adverse effect on TVA's financial
    condition.
        Senator McConnell. Finally, Mr. Medford, once the fence
    comes down, what will TVA's mission be with regard to its
    current service area?
        Mr. Medford. We see TVA as primarily a regional provider.
    We certainly are almost exclusively a regional provider today.
    Our roots are in the Tennessee Valley. We see ourselves being
    primarily a regional provider as we go into the future.
        I would also take note that most of the legislative
    proposals that have been discussed in terms of bringing down
    the fence, bring down the fence in a rather limited manner.
    True, we would be able to sell outside the fence, but with
    substantial restrictions, one of them being that we would not
    be allowed to sell at retail outside the region.
        Senator McConnell. Mr. Fuller, Paducah Power is uniquely
    located with other power suppliers right nearby.
        Mr. Fuller. Yes, we are, and that perhaps represents some
    of the differences we have with some of the proposals from
    TVPPA.
        Senator McConnell. Let me just say in that regard--I am
    curious. These neighboring suppliers really offer more
    competitive rates than TVA, do they not?
        Mr. Fuller. Some of their wholesale rates are, yes. Paducah
    Power System is located basically on an island surrounded by
    providers of non-TVA power. You have to go some 20 miles in
    three directions to get to the closest other TVA distributor.
        Senator McConnell. What opportunity do you have or do your
    customers have to challenge the rates imposed by the TVA Board?
    Do you have any opportunity for review or challenge of any of
    these charges TVA has incurred?
        Mr. Fuller. Typically not. We are allowed to enter into
    conversation, but I do not think it gets real serious. We have
    no negotiating power to speak of.
        Senator McConnell. You are in the middle of a 10-year
    contract?
        Mr. Fuller. We have signed what is called the five plus
    five contract, and 2 years of that have passed.
        Senator McConnell. What do you plan to do at the end of the
    contract? Or is that something you are not prepared to say yet?
        Mr. Fuller. I am not prepared to say at this point. Our
    board, several years ago, voted to terminate what was in the
    full tenure contract--or to give notice to TVA. And when the
    opportunity came up, and with the provisions of the five plus
    five, they voted to not go ahead and give that notice but to go
    ahead and sign the five plus five contract.
        Senator McConnell. Memphis and Knoxville have been
    outspoken in their differences with TVA. How does your position
    compare with these two larger utilities? And are you aware of
    distributors who support these views but are fearful of
    speaking out against TVA?
        Mr. Fuller. Having read the position by KUB and also
    Memphis, our views--which really pertain to our uniqueness and
    location with respect to the rest of the Tennessee Valley--our
    views are pretty much the same as Knoxville and Memphis.
        I know perhaps two or three others that hold the same view,
    but their location within the valley is not as particularly
    unique as Paducah's.
        Senator McConnell. Mr. Fuller and Mr. Hewett, TVA has said
    that FERC oversight would impose a cost burden which may
    require them to raise their rates.
        Does your experience support that statement?
        Mr. Hewett. No, sir, it does not.
        What the FERC would do is look at what the costs are and
    identifying whether or not there is investment you have made
    that is appropriate investment. So there is a real possibility
    that some investment might be found to be not supported by the
    customers' needs. I would think the possibility would be to the
    contrary.
        Senator McConnell. I gather TVA argues that it cannot be
    FERC-regulated and be able to satisfy Wall Street. How is it
    that LG&E Energy is able to accomplish this while maintaining
    some of the lowest rates in the Nation?
        Mr. Hewett. Sir, we have always felt that the ability for
    us to maintain some of the lowest rates is the fact that there
    has been very sound regulation, as exists within the FERC as
    well as within our home State of Kentucky. We feel that the
    regulation that has been provided as well as management's
    ability to work with our regulation has allowed us to maintain
    the low rate levels we have accomplished.
        Senator McConnell. Mr. Chairman, I have a bunch of
    questions I would like to have these folks answer in writing,
    if that is permissible.
        Senator Chafee. We want to give them some time. Why don't
    we give them 2 weeks.
        How complicated are the questions?
        Senator McConnell. We have 30 or 40--much more detailed,
    Mr. Chairman, than we have the time to go into today, but I do
    think it would help complete the record.
        Senator Chafee. Who are they submitted to?
        Senator McConnell. To all four.
        Senator Chafee. Gentlemen, that is quite a challenge for
    you. Can you meet that challenge in 2 weeks? You have not seen
    them, so you are in the dark a little bit.
        Senator McConnell. We will give them to you today and that
    will start the process.
        Senator Chafee. Well, do what you can and get the questions
    back in to the committee here.
        Mr. Medford, I would just like to ask you a quick question.
        Your seat mate has some pretty tough statements. TVA has
    accumulated a whopping $28 billion debt largely because of
    inaccurate predictions of future electricity demands. I must
    say that I was stunned to hear that you had a debt of $28
    billion.
        What do you say to that?
        Mr. Medford. First of all, that is a slight overstatement
    because it is less than $27 billion.
        Senator Chafee. OK, we won't argue over a billion. Make it
    $27 billion.
        Mr. Medford. First, one needs to remember that the debt
    market is basically the only form of capitalization TVA has. We
    do not have stockholders, we do not issue stock. So the debt
    from that perspective seems larger than it otherwise would.
        I will also acknowledge--if you look at TVA as an
    operation, we are a very well-run, very efficient, and very
    low-cost operation. We have a large challenge and that is that
    we are somewhat over-capitalized. That indeed was and is one of
    the purposes of the 10-year plan, to reduce that
    capitalization.
        I do not think of it as a whopping $27 billion. I think
    that was a challenge to this management and we intend to meet
    it.
        Senator Chafee. And then he goes on to say that TVA is
    exempt from hundreds of Federal and State laws and regulations,
    pays no Federal estate taxes, obtains low-cost loans because of
    this implied support--all that is true, isn't it?
        Mr. Medford. As I mentioned in my testimony----
        Senator Chafee. I think Mr. Hewett was talking about what
    percentage of his revenue he pays in taxes--what was it again?
        Mr. Hewett. Mr. Chairman, 8.1 percent.
        Mr. Medford. According to my understanding, he also
    dramatically understated our in lieu of taxes. Our in lieu of
    taxes are about 5 percent of our revenues. If you look at TVA's
    and TVA's power distributors' together, our total percentage at
    a retail level is something in excess of 6 percent.
        Having said that, I will acknowledge that public power
    entities enjoy some benefits relative to private power
    entities. Private power entities--and again, I have worked more
    in the private power industry than I have in the public power--
    enjoy many advantages which we do not enjoy.
        Senator Chafee. You point out somewhere in here that you
    have reduced your employment very, very substantially--over the
    past 5 years, I believe--from 30,000 to 13,000. That is an
    extraordinary figure. Is that accurate?
        Mr. Medford. It is indeed.
        Senator Chafee. Are you all finished, Senator?
        Senator McConnell. Thank you, Mr. Chairman.
        Senator Chafee. This is quite a burden we are asking you to
    comply with, but we will get you those questions right away. If
    you could answer them and send them in, we would appreciate it.
        Thank you all very much for coming.
        That concludes the hearing.
        [Whereupon, at 4:55 p.m., the committee was adjourned, to
    reconvene at the call of the Chair.]
        [Additional statements submitted for the record follow:]
       [From the Lexington (KY) Herald-Leader, Wednesday, July 28, 1999]
                              TVA's River of Debt
             regulate tva but don't make it vulnerable to takeover
        While this blistering summer brings brownouts and power outages to
    the Northeast, the Tennessee Valley wallows in megawatts. All that
    generating capacity comes at a price.
        Customers of the Tennessee Valley Authority in Kentucky and six
    nearby States are stuck paying off the federally owned utility's debt--
    $26 billion.
        This swamp of red ink is the product of a nuclear building binge
    launched 30 years ago. TVA's all-powerful, three-person board grossly
    miscalculated the region's needs and the difficulties of bringing
    nuclear plants on line. Consumers are paying for those mistakes.
        U.S. Senator Mitch McConnell of Kentucky has introduced legislation
    providing some protection from such ill-advised decisions in the
    future.
        McConnell's bill would subject TVA's rates to the same scrutiny as
    those of other electrical wholesalers. The Federal Energy Regulatory
    Commission would have to approve TVA's rates.
        McConnell's legislation also gives the public and the 159 local
    utilities that are TVA's captive customers access to information about
    the basis of TVA's rates and the right to challenge those rates.
    Surprisingly, privately owned utilities are required to reveal
    financial information that the taxpayer-owned TVA can keep secret.
    McConnell would end that absurdity.
        Compared with most of the country, TVA's rates are cheap. But
    McConnell estimates that over the next 5 years, TVA's 212,000
    residential customers in Kentucky will pay $250 million more than if
    they were getting their power from Kentucky Utilities Co.
        You can see why McConnell is demanding stronger oversight and
    accountability. TVA has enjoyed government subsidies, a monopoly and
    complete autonomy since its creation 66 years ago. McConnell would
    require TVA to behave more like a privately owned, would require TVA to
    behave more like a privately owned, government-regulated utility. And
    that's fine.
        But we worry that another provision in McConnell's bill could tilt
    the playing field against TVA in the deregulated market of the future.
        McConnell would prohibit TVA from adding generating capacity beyond
    what's needed in the region, protecting TVA ratepayers from subsidizing
    off-system sales.
        This makes sense as long as TVA has no competition and, as a
    practical matter, should have no effect in the near future because TVA
    isn't likely to take on more debt by expanding.
        But if deregulation reaches the region, TVA's ability to compete--
    and perhaps survive--could be jeopardized by such a limitation. Also,
    TVA's ability to import power during its peak winter demands could be
    impeded.
        TVA's detractors would love to see TVA sell itself off piece by
    piece to investor-owned utilities. Like the tobacco program that
    McConnell and other Republicans were ready to dismantle last year, TVA
    is one of the New Deal's enduring legacies.
        Protecting consumers from future TVA excesses is a fine idea.
    Preparing TVA to be plucked by Wall Street is not.
                                     ______

                   [From the Paducah (KY) Sun, July 7, 1999]
                                 Change Needed
                        tva must prepare for competition
        During the 1930's and 1940's, the Tennessee Valley Authority made
    its considerable reputation by delivering low-cost power and an array
    of other services to people living in the economically depressed
    Tennessee Valley. Now that paternalistic reputation is receding into
    history as the 6-year-old government corporation struggles with a heavy
    debt burden the possible end of Federal subsidies for its non-power
    programs and looming competition from private utilities in a
    deregulated power market.
        In effect, the shoe is on the other foot: Instead of providing
    special benefits for residents of the Tennessee Valley, the New Deal-
    era agency is relying on its customers to cushion it against the impact
    of declining Federal funding and other financial challenges. President
    Clinton said the era of big government was over; TVA is a big-
    government dinosaur battling to survive in an environment that's
    increasingly hostile to its original mission.
        TYA has done a great deal for this region, but the authority's
    management must justify its continued existence as a government-owned
    utility. The authority cannot expect to protect its far-flung empire by
    asking its customers to pay higher electric rates than those charged by
    private utilities. After all, TVA is supposed to serve the public.
        U.S. Senator Mitch McConnell recently suggested that the reverse is
    true--that TVA ratepayers are propping up the agency. McConnell noted
    that while several leading private utilities in Kentucky have cut their
    power rates in the past 2 years, TVA has increased rates by 7 percent.
        We grew up thinking if you had TVA power, you were lucky, McConnell
    said. ``Unfortunately, the nearly 212,000 Kentucky families in more
    than 30 counties who receive power from TVA are finding out that's not
    the case.
        The senator wants to subject TVA to the same regulations that apply
    to private utilities. Last week he introduced a bill that would forge
    TVA to justify its current rates and any proposed future rate
    increases.
        McConnell's frustration with TVA is understandable. The authority
    is failing to live up to its original mandate to provide low-cost power
    in the Tennessee Valley. However, the agency's plight is largely the
    result of factors beyond its control, including, most notably, the
    precipitous decline in congressional appropriations fur TVA non-power
    programs.
        Two numbers stand out: $222 million and $7 million. The first is
    the amount TVA received from Congress in 1980 for navigation flood
    control, recreation and other non-power functions The second is the
    total of non-power funding President Clinton included for TVA in his
    budget proposal this year.
        The Clinton budget eliminates Federal funding for all of TVA's non-
    power programs, with the exception of operations in the Land Between
    the Lakes recreation area. Most members of the Republican majority in
    Congress will be more than happy to honor the president's proposal to
    zero out funding for TVA's flood control, dam safety and river
    management duties.
        If congressional funding for the non-power programs dries up, TVA
    ratepayers will have to cover the cost of managing an inland waterway.
    In every other area of the country, the U S Army Corps of Engineers
    handles this basic Federal responsibility.
        Again, this would turn TVA's mission on its head by requiring the
    authority's ratepayers to help the Federal Government.
        It's clear that TVA officials can't turn back the clock to the days
    when the authority commanded unshakable support in Congress. The
    obvious reason is that the generally prosperous Tennessee Vailey no
    longer depends on the Federal Government for economic support.
        As the 21st century dawns, TVA must prepare for a future in which
    it will have to compete to survive The authority can't compete if it
    continues to carry the burden of non-power programs, in addition to a
    $26 billion dent and a hefty bill for compliance with Federal clean air
    regulations affecting coal-fired power plants.
        TVA officials and congressional leaders should begin planning now
    for a breakup of the agency. The corps of engineers should assume TVA's
    river management and flood control duties. McConnell and U.S.
    Representative Ed Whitfield already have tabled the U.S. Forest Service
    as a possible choice to take over management of the LBL.
        These changes would allow TVA officials to concentrate on serving
    their power customers. A streamlined TVA may be able to survive and
    even thrive in the future--not as a benevolent government provider but
    as clean, efficient power company.
        The fence that has long separated the Tennessee Valley Authority
    from the private power producers won't stand much longer. What then for
    this New Deal dinosaur?
                                     ______

                      [From Forbes Magazine, May 19, 1997]
                        The Tennessee Valley Anachronism
                                (By Bruce Upbin)
        The Tennessee River traces a blue curve through downtown Knoxville
    as it flows gently west to the Ohio. From Craven Crowell's wood-paneled
    office on the twelfth floor of the Tennessee Valley Authority's
    headquarters building, the bucolic view stretches northeast across the
    river valley and away to the hazy outline of the Great Smoky Mountains.
        About 500 miles away, in Washington, forces are building that
    threaten to shatter the TVA's peaceful world. A growing number of
    Congressmen want to privatize this vestige of New Deal collectivism.
    The $215 billion electric power business is racing toward deregulation.
    The $5.7 billion (annual revenues) TVA is the country's largest single
    power generator, but in a world of deregulated power, there is no way
    it can continue to do business as usual.
        Craven Crowell, 54, is a former Nashville, TN newspaperman who
    became TVA'S top flack and lobbyist during the 1980s and in 1989 chief
    of staff to U.S. Senator James Sasser (D-TN). He is determined to keep
    the TVA firmly in the hands of government. His allies in this quest
    include his good friend and Tennessee's favorite son, Albert Gore Jr.
        ``I sort of see TVA as America's Power Company,'' drawls Crowell. A
    memorable sound bite, but not a particularly truthful one. Although all
    Americans subsidize the TVA, to the tune of nearly $4 billion a year,
    only a handful of Americans--the 8 million people who live inside the
    80,000-square-mile area where the TVA is by law the sole supplier--
    enjoy the cheap power the subsidies buy.
        Nor is the TVA's power as cheap, relatively speaking, as it used to
    be. As the power industry is deregulated, efficient producers can
    ship--``wheel''--their juice to markets around the country. Example:
    Nashville residents could purchase electricity from nearby Kentucky
    Utilities Corp. for about one cent per-kilowatt-hour less than the
    nickel an hour they must now pay for TVA power. Why don't they? Because
    current law in effect prevents power from being wheeled into TVA's
    territory.
        The TVA'S Depression-era rationale--developing a backward part of
    America--no longer exists. The region has developed. Yet the TVA
    continues to enjoy its enormous advantages over investor-owned
    utilities. As a Federal authority TVA only has to cover its costs. It
    pairs no Federal or State income or property taxes although it is
    required to pay 5 percent of revenues ($976 million this year) to
    Tennessee and six surrounding States in place of taxes.
        Best of all, the TVA can borrow money much more cheaply than
    investor-owned utilities can. This is not because its balance sheet is
    strong--in fact its finances are feeble--but rather because creditors
    believe the U.S. Treasury stands implicitly behind the TVA's debt.
        One recent study put the value of all the indirect subsidies to the
    TVA at $3.7 billion for 1993. Without these gifts from the Nation
    America's Power Company would have to charge its customers 3 cents more
    per kilowatt-hour. That would make its juice almost as expensive as in
    some of the high-cost northeastern States. Yet the subsidies are now
    boxing the TVA in. Over the years the authority has abused its access
    to cheap credit. Thanks primarily to a disastrous nuclear plant
    construction binge in the 1970's, the TVA now owes $27 billion. While
    the typical investor-owned utility pays 16 cents on the revenue dollar
    to service its debt, TVA pays 35 percent of revenue and 97 percent of
    operating income. That leaves little room for error and no room to cut
    rates in a competitive marketplace.
        Crowell knows he has to start paying down principal on TVA's
    Everest of debt. But how? And at what political cost?
        Ratepayers in the valley know that Crowell is now mulling a rate
    increase as high as 10 percent. But raising rates will weaken Crowell's
    case that only as a government-owned utility can the TVA carry on the
    job of providing cheap power to an area that needs to attract
    investment and jobs.
        Crowell also wants to attack the debt problem by selling some of
    TVA's power to other markets. But the cost of going down that road is
    to reopen the hoary question of how far the subsidized TVA should be
    allowed to compete against investor-owned utilities.
        In 1959 the TVA wanted to expand its power program without the
    bother of asking Congress for appropriations every time. The TVA won
    permission from Congress to issue bonds. But for the privilege it had
    to agree not to sell power outside its existing operating area. A fence
    went up that exists to this day.
        The fence was originally meant to protect private utilities from
    competing against the VA's federally subsidized power. But in the last
    few years, as private producers have grown more efficient, the fence
    has been left up to protect the TVA from the most efficient of the
    private producers. The Energy Policy Act of 1992 forced all utilities
    to open up their transmission lines and wheel wholesale power into
    their areas from competitors. One utility was explicitly exempted from
    this provision of the 1992 law: the TVA.
        In effect, that exemption makes it impossible for customers inside
    the fence--the city of Nashville, say--to drop the TVA and buy its
    power from nearby Kentucky Utilities Corp., even though KU's customers
    pay about 20 percent less for their juice. The only way a competitor
    can market electricity in TVA's territory is to build in its own
    transmission lines. The cost of doing that would, of course, eliminate
    the cost differential.
        But the fence is rickety and Crowell knows it. ``The fence no
    longer makes sense,'' he told a gathering of public power executives 2
    years ago. `'And when it does come down, competition will be a two-way
    street, and TVA will once again have the freedom to compete anywhere in
    the country.''
        The fence is developing holes. Last year TVA started selling some
    cheap power to a marketing unit of Louisville Gas & Electric. Southern
    Company promptly sued to stop TVA from selling the discount juice to a
    competitor. Southern won--for a time the fence held. But last April
    Southern caught TVA outside the fence again and is now back in court.
        The TVA has been only partially successful in using the fence to
    keep competitors out. It recently suffered what may prove a very
    significant defeat in the little city of Bristol, in the southwest
    corner of Virginia, on the edge of TVA's territory. Worried about the
    fence coming down and its customers escaping, in 1989 TVA began forcing
    its 160 distributors to sign 10-year contracts locking them into the
    TVA grid. Bristol refused to sign and later, in 1995 when its original
    20-year contract was up, agreed instead to a 30-month extension.
        Figuring that TVA'S debt load could only push up rates, Bristol
    began shopping around and found 18 investor-owned utilities that would
    match or beat TVA rates: The city informed TVA that starting in January
    1998, it will buy its power from Cincinnati-based Cinergy, Corp., one
    of the country's most efficient utilities. Cinergy plans to wheel in
    the power over lines owned by American Electric Corp. if it cannot
    reach an agreement with TVA by June. With Cinergy, Bristol expects to
    shave its $22 million a year bill by $7 million per year for the next 7
    years.
        ``Bristol only buys 140 megawatts, but it's a stalking horse for
    other distributors,'' says Robert Gross, the energy consultant who
    helped Bristol with its bidding process.
        The TVA wins some battles, too. In December 1993, 4-County Electric
    Power Association, a co-operative in Columbus, Miss., told TVA it
    wanted to end its contract to buy TVA power. 4-County got 30 bids, the
    best of which would have cut its TVA bill by $63 million over 7 years.
        But at the time TVA was negotiating a long-term power purchasing
    contract for a new coal-burning plant that would provide hundreds of
    $12-an-hour jobs for impoverished Choctaw County, right in 4-County's
    backyard. TVA told 4-County that if the town went elsewhere for power,
    the TVA would reconsider building the plant. Today 4 County is back
    inside the TVA fence, paying more than it has to for power.
        Grouses Earl Weeks, chief executive officer of 4-County Electric
    Power, ``When TVA gets through a 10 percent rate increase this year,
    there's no question they're going to incur the wrath of Congress.''
        Crowell already has. In March he appeared before a congressional
    subcommittee to do some appropriations horse-trading. ``Keep your hands
    off my river!'' Representative Harold Rogers, a Republican from
    Kentucky, bellowed at Crowell when the TVA chairman proposed that TVA
    hydroelectric engineers could do a better job than the Army Corps of
    Engineers managing nine hydroelectric dams on the Cumberland River.
        Other Congressmen piled on. New Jersey Republican Rodney
    Frelinghuysen's aides had discovered TVA ads running in New Jersey
    newspapers, using cheap power to lure New Jersey businesses to the
    Tennessee Valley. Frelinghuysen didn't think New Jerseyans should be
    subsidizing an attack on the State's job base. He introduced a bill
    (H.R. 677) that would end over $100 million of TVA appropriations
    immediately.
        Momentum to sell the TVA is building. The small Alaska Power
    Administration will be sold near the end of the year to State and city
    agencies for an estimated $80 million. Bill Clinton's 1996 budget
    included the sale of four more of the government's six Power Marketing
    Administrations, for $4.4 billion--excluded was the Pacific Northwest's
    Bonneville Power Authority, which Congressman Scott Klug (R-Wis.)
    figures would bring $7 billion. The plan died, but this year Arizona
    Republican Congressman John Shadegg reintroduced legislation to sell
    the PMAs.
        The TVA is a power generator, not a power marketing agency, but
    Crowell is nevertheless fighting the privatization pressures on several
    fronts. Appealing to the Al Gore Jr. political left he asks: ``If you
    drive to the bottom line and all you're interested in is making money,
    who's going to worry about the environment and universal access [to
    power]?''
        To which House Republican Dan Schaefer scoffs: ``Reliability is a
    red herring used by monopoly utilities to stall the inevitable approach
    of true competition.'' Crowell also conveniently ignores the fact that
    some of the TVA's harshest critics over the years have been the
    environmentalists. On another tack to save the TVA as he knows it,
    Crowell is trying to make the authority look more like a private
    business. He and his predecessor, Marvin (Carvin') Runyon, now head of
    the U.S. Postal Service, deserve credit for cutting $800 million from
    the TVA's annual operating budget since 1988, mainly by slashing
    payrolls from 34,000 to 16,000.
        Making a virtue of necessity, Crowell in 1995 imposed a debt limit
    on the TVA of $28 billion. Next year still be the first in 35 years TVA
    won't increase its debt.
        At the end of the day, however Crowell knows that his best defense
    against privatization is the TVA's $27 billion mountain of debt, nearly
    all of it held by institutions and individuals. His threat: If TVA were
    privatized--and absent a U.S. Treasury guarantee of some kind--its
    paper would collapse in price. Its cost of capital would nearly double,
    probably bankrupting the TVA.
        Glowers Crowell, shrewdly playing up the implicit, but not binding,
    U.S. backing of TVA's debt: ``If you did anything legislatively that
    put TVA in a position where it would not succeed, then you end up
    putting it in a bailout position in which the taxpayers would then have
    to pick up the debt.''
        In fact, privatizing the TVA would not be nearly as painful as
    Cromwell would have one believe. Against its liabilities, and $6.3
    billion worth of idle nuclear power plants, it also has some very
    valuable assets. The crown jewels are TVA's mostly written-off coal-
    fired and hydroplants, worth roughly $8.5 billion on the open market.
    There is also $5 billion in so-called proprietary capital, similar to a
    private company's retained earnings account.
        Craven Crowell doesn't buy this. He thinks the TVA is too deeply
    embedded in American politics and economics for it to be ripped out and
    told to stand on its own. He concludes his case with a broad smile on
    his face: ``You can't ignore us, you can't leave us behind, you can't
    break us up, and you can't sell us.''
        On the other hand, hasn't the past decade taught that when change
    starts to blow through countries and industries, not even the toughest
    old dinosaurs can find shelter
        Our bet: The TVA'S days are numbered.
                                   __________

                                     ______

     Responses by Don Fuller to Additional Questions from Senator McConnell
        Question 1. Do you support FERC jurisdiction over TVA's wholesale
    sales of electricity? Would it make any sense for Congress to give FERC
    jurisdiction over TVA's wholesale sales outside, but not inside, the
    Tennessee Valley?
        Response. I support FERC jurisdiction over TVA's wholesale sales of
    electricity. For TVA to be both a supplier and regulator is not sound
    public policy and very much like the ``fox guarding the hen house.'' It
    only makes good sense for FERC to have jurisdiction over TVA's
    wholesale sales both inside and outside the Tennessee Valley.

        Question 2. Do you think that mandatory arbitration of disputes
    over TVA rate increases is a good idea? If not, why not?
        Mandatory arbitration of disputes over TVA rate increases is not a
    good idea. Arbitration would be a very lengthy and costly process. FERC
    is an established entity that is best suited to reviewing and approving
    TVA's wholesale rates.

        Question 3. Isn't alternative dispute resolution at FERC an option
    for those distributors who would prefer to arbitrate rate disputes?
        Response. Alternative dispute resolution under FERC oversight is a
    viable method for distributors preferring to arbitrate rate disputes.
    Other arbitration or methods of resolution could be subject to persons
    or entities that may not fully understand all the issues in rate
    structures.

        Question 4. Do you think that the statutory barriers to wholesale
    competition in the Tennessee Valley should be repealed?
        Response. Statutory barriers to wholesale competition in the
    Tennessee Valley should be repealed. This would give distributors in
    the valley access to competitive wholesale markets that exist in most
    of the country.

        Question 5. When will your existing TVA contract terminate? Do you
    support legislation that would permit you to terminate before then?
        Response. Paducah Power System is signatory to a ``5 plus 5'' all
    requirements contract with TVA. This contract became effective October
    1, 1997. Under the terms of the contract, notice of intent to cancel
    can be given at the end of the fifth year, with a 5-year notice. If
    this is done, our contract will terminate September 30, 2007. At this
    time, no stranded costs will be owed. We do support legislation that
    would permit earlier termination.

        Question 6. Should Congress restrict TVA's ability to construct or
    acquire new generation facilities? If so, what kind of restrictions
    would be appropriate? Should Congress require that the customer on
    whose behalf the facilities are constructed or acquired commit to bear
    the costs of such construction? Should it be left to TVA to determine
    when new generation facilities are ``necessary'' to serve distributors?
        Response. TVA should have the ability to function like and under
    the same terms and conditions as any other utility. (i.e.--Under FERC
    jurisdiction.) This should be part of the final restructuring bills.
        As an interim measure, customers on whose behalf the facilities are
    constructed or acquired should bear the costs. The decision to add new
    generation or facilities should be based on good engineering and
    business practices. Under FERC jurisdiction those ``reasons'' would
    have to be shown. Prior to action placing TVA under FERC jurisdiction,
    if TVA adds generation or facilities to serve Bowling Green, for
    example, Paducah should not have to help pay for that expenditure.

        Question 7. Should TVA be permitted to expand any further into the
    retail business than it already has? Doesn't permitting TVA to compete
    for retail customers with distributors that purchase more than 50
    percent of their power from wholesale suppliers other than TVA penalize
    distributors who take advantage of the competitive market to obtain a
    majority of their requirements?
        Response. TVA should not be permitted to expand any further into
    retail business. Permitting TVA to compete for retail customers with
    distributors that purchase less than 50 percent of their power from TVA
    would indeed penalize those distributors taking advantage of the
    competitive market. An exception to this would be where a distributor
    could not or did not want to serve a particular large retail load then
    permission could be granted by the distributor for that load to be
    served directly.

        Question 8. Paducah Power System is uniquely located with other
    power suppliers nearby. Do these neighboring suppliers offer more
    competitive rates than TVA?
        Response. Paducah Power System is located in an area surrounded by
    an electric cooperative not served by TVA. Additionally there are two
    power suppliers besides TVA with transmission lines routed through the
    area that Paducah Power System currently serves. The wholesale rates of
    both these suppliers are presently less than TVA' s.

        Question 9. Currently, what opportunity do you have, or do your
    customers have, to challenge the rates imposed by the TVA Board? Do you
    have any opportunity to review or challenge any of the charges TVA has
    incurred?
        Response. The only method to challenge rates imposed by the TVA
    Board is through the Tennessee Valley Public Power Association. This is
    an association made up of distributors of TVA power. The Rates and
    Contracts Committee of this association typically negotiates or
    discusses rates with TVA and then brings their recommendations to the
    membership for a vote. I am not sure what the next move would be if the
    membership did not approve a rate increase.

        Question 10. Memphis and Knoxville have been outspoken in their
    differences with TVA. How does your position compare with these two
    larger utilities? Are you aware of distributors who support these views
    but are fearful of speaking out against TVA?
        Response. I was not aware of the position taken by Memphis and
    Knoxville until the week of October 3, 1999. After reading their
    position papers I find Paducah Power System's position to be very
    similar. Yes I am aware of distributors that hold most of the same
    views as Paducah but are fearful of speaking out against TVA.

        Question 11. Do you have a clear understanding of how TVA intends
    to calculate stranded costs? Are you aware of any independent review of
    what TVA intends to collect through stranded costs? Could TVA's
    allocation of stranded cost adversely affect your ability to seek the
    purchase of lower cost power from another generator, like Kentucky
    Utilities?
        Response. Paducah Power System does not have any understanding of
    how TVA intends to calculate stranded costs. I am not aware of any
    independent review of what TVA intends to collect through stranded
    costs. TVA's allocation of stranded cost could adversely affect our
    ability to seek the purchase of lower cost power.

        Question 12. What type of notice has TVA provided to you about its
    plans to recover stranded costs if you attempt to leave TVA? Are you
    confident that you will only be billed for charges incurred by Paducah
    Power System?
        Response. Paducah Power System's only notice from TVA concerning
    stranded costs is that associated with our current contract. (i.e.--
    There will be no stranded costs if we stay the term of the contract
    that expires September 30, 2007.) If the decision were to leave
    earlier, I am not confident Paducah would only be billed for charges
    incurred by us.

        Question 13. Some TVA distributors have advocated for a third party
    arbitrator. Are you aware of individual customers who would be party to
    this arbitration? Do you know if this arbitration would require TVA to
    open up its books so that customers could view all of TVA's rates and
    charges?
        Response. I can only guess who some of the individual distributors
    might be that would be party to arbitration. I have no knowledge as to
    requirements for TVA to open up its books so that customers could view
    all of TVA's rates and charges.

        Question 14. Does TVA seek your input on the construction of new
    generation facilities?
        Response. TVA has never sought my input on the construction of new
    generation facilities.

        Question 15. Over the next 5 years, TVA's 211,427 Kentucky rate
    payers will pay $250 million more than if they were customers of
    Kentucky Utilities, which is FERC regulated. Please tell the committee
    what impact FERC regulation of TVA would have on your utility.
        Response. Regulation of TVA by FERC would not have an immediate
    effect on Paducah Power System. The longer term impact will be, in my
    opinion, to help keep wholesale rates down by controlling unnecessary
    additions and expenses not directly related to serving energy to the
    distributors.
                                     ______

      Responses by Don Fuller to Additional Questions from Senator Inhofe
        Question 1. Please detail on a kilowatt/hour basis how rates of
    Paducah Power compare with rates of TVA.
        Response TVA is the supplier of power to Paducah Power System. For
    the billing period August 24, 1999 through September 23, 1999, Paducah
    Power paid TVA 5.017 cents/KWH. This, for example, compares to a
    Kentucky Utilities wholesale rate of 2.9 cents/KWH.

        Question 2. Do you or any of your customers have any opportunities
    to challenge the rates imposed by the TVA Board?
        Response. The only method to challenge rates imposed by the TVA
    Board is through the Tennessee Valley Public Power Association. This is
    an association made up of distributors of TVA power. The Rates and
    Contracts Committee of this association typically negotiates or
    discusses rates with TVA and then brings their recommendations to the
    membership for a vote. I am not sure what the next move would be if the
    membership did not approve a rate increase.

        Question 3. Utilities in Memphis and Knoxville have been extremely
    vocal in their criticism of TVA. Is their position unique to these
    larger utilities? Do you agree with their view of TVA?
        Response. I was not aware of the position taken by Memphis and
    Knoxville until the week of October 3, 1999. After reading their
    position papers, I find Paducah Power System's position to be very
    similar. I don't think their position is unique to larger utilities.

        Question 4. Has TVA provided you any type of notice or information
    about its plans to recover stranded costs should you attempt to leave
    TVA? Please provide any information which you will use to verify.
        Response. Paducah Power System does not have any understanding of
    how TVA intends to calculate stranded costs. I am not aware of any
    independent review of what TVA intends to collect through stranded
    costs. TVA's allocation of stranded cost could adversely affect our
    ability to seek the purchase of lower cost power.
        Paducah Power System's only notice from TVA concerning stranded
    costs is that associated with our current contract. (i.e.--There will
    be no stranded costs if we stay the term of the contract that expires
    September 30, 2007.) If the decision were to leave earlier, I am not
    confident Paducah would only be billed for charges incurred by us.

        Question 5. In disputes with TVA, some distributors have advocated
    a third party arbitrator. Have you been approached by customers who
    would participate in such a system? If arbitration should occur, should
    TVA be required to open up its books so that customers could verify
    rates?
        Response. I can only guess who some of the individual distributors
    might be that would be party to arbitration. TVA should be required to
    open up its books so that customers could view all of TVA's rates and
    charges.

        Question 6. Does TVA seek comments from other suppliers on the
    construction of new generation facilities?
        Response. As a distributor, TVA has never sought my input on the
    construction of new generation facilities. I have no knowledge if TVA
    seeks comments from other suppliers.

        Question 7. Please detail what effects FERC regulation of TVA would
    have on your utility.
        Response. Regulation of TVA by FERC would not have an immediate
    effect on Paducah Power System. The longer-term impact will be, in my
    opinion, to help keep wholesale rates down by controlling unnecessary
    additions and expenses not directly related to serving energy to the
    distributors.
                                   __________
     Statement of Robert M. Hewett, President, Kentucky Utilities Company,
                             on Behalf of TVA Watch
    Summary
        The debate over TVA's future in an increasingly competitive
    electric power market is a difficult one. However, it is one that must
    be confronted and dealt with fairly. TVA Watch believes Congress must
    remain alert to the problem that led to the creation of the TVA
    ``fence'' in 1959. The problem was, and remains, unfair competition by
    the Federal Government.
        Without the ``fence,'' TVA would be able to gain market share not
    by virtue of its being the most efficient supplier, but because it
    could undercut the market based upon its governmentally-granted
    benefits. TVA has the ability to set its own wholesale and retail
    rates, is exempt from anti-trust laws and makes only ``token'' payments
    in lieu of taxes to local governments. No other entity in the country
    even comes close to having this type of authority or license. Yet, TVA
    has amassed a $27 billion long-term debt, far in excess of any
    comparably sized private sector utility. Moreover, TVA's progress in
    dealing with this enormous debt has been inadequate and has resulted in
    a sizeable potential liability for U.S. taxpayers.
        The fact that TVA has such powerful tools while other utilities do
    not is the very reason Congress created the ``fence'' in 1959. The fact
    that TVA's financial health is impaired because of its long-term debt
    is another reason Congress should not increase the risk to U.S.
    taxpayers by lowering the ``fence'' without first bringing about
    fundamental reform to TVA. These concerns are especially valid today
    because, during the past 4 years, TVA has been carrying out a strategy
    to undermine and eliminate the ``fence.'' As a result, several
    companies in TVA Watch have had to sue TVA to enforce the 1959 law that
    keeps TVA inside the ``fence.''
        TVA Watch believes the following ground rules that apply to TVA's
    potential competitors must apply to TVA itself if the ``fence'' is to
    be removed:
        1. Anti-trust laws that apply to private-sector utilities must
    apply with the same force and effect to TVA.
        2. TVA must come under the jurisdiction of the Federal Energy
    Regulatory Commission (FERC) to the same degree as other utilities.
    This includes regulation not only of TVA's transmission system, but its
    power sales practices.
        3. TVA must not be allowed to build new or expanded generation
    resources with the wide range of subsidies that are denied other
    utilities.
        4. TVA must bear the same Federal, State and local tax burdens as
    other utilities.
        5. TVA should not have preferential access to power from other
    Federal facilities at rates below fair market value.
        6. TVA's exemption from open access transmission system
    requirements should be repealed.
    Introduction
        Mr. Chairman and Members of the Committee: my name is Robert M.
    Hewett. I am President of Kentucky Utilities Company of Lexington,
    Kentucky. Kentucky Utilities is a subsidiary of LG&E Energy
    Corporation, a diversified energy services company with businesses in
    power generation and project development; retail gas and electric
    utility services; and asset-based energy marketing. In addition to
    Kentucky Utilities Company, which serves 77 Kentucky counties and five
    counties in Virginia, LG&E also owns and operates Louisville Gas and
    Electric Company, which serves 16 Kentucky counties.
        LG&E also is a member of TVA Watch, a coalition of investor-owned
    utilities operating in areas adjacent to the Tennessee Valley Authority
    (TVA). TVA Watch is a political and judicial coalition of shareholder-
    owned utilities that was formed to serve two public policy functions:
    First, to ensure that TVA complies with the TVA Act. Second, to promote
    policy discussion regarding the proper role of TVA in a competitive
    marketplace. In addition, TVA Watch supports efforts to bring
    meaningful reform to TVA as America's electric power industry evolves
    into a more competitive market.
        We appreciate your invitation to share with this committee the
    views of TVA Watch about the role of the Tennessee Valley Authority in
    a changing electric power industry.
        In considering the future of TVA, there are three issues facing
    Congress. First, should TVA be allowed to compete against other
    utilities outside the fence that has limited the scope of its electric
    power operations since 1959? Second, if the answer to the first is
    affirmative, then under what terms and conditions should TVA be allowed
    to compete? Third--and we consider this to be an especially important
    one regardless of whether TVA is allowed to compete outside its fence--
    is TVA doing enough to address its poor financial condition resulting
    from its massive $27 billion debt?
        These issues are difficult and must be approached with great care.
    But, before sharing the views of TVA Watch with this Committee, I want
    to emphasize at the outset that my company and others in TVA Watch have
    worked well with TVA under a provision of the 1959 law that allows our
    power grids to be interconnected for purposes of maintaining
    reliability and exchanging surplus power. Recent evidence of this
    positive working relationship came during this summer's heat wave when
    all of us worked to exchange power that kept our systems running.
    However, when we disagree with TVA, as we do in the case of how TVA
    should be allowed to compete with other utilities, we do so in the
    spirit of constructive debate.
        To assist this Committee in evaluating TVA's future role, we should
    be mindful of where TVA came from and what it has become. As originally
    enacted in 1933, the TVA Act did not authorize TVA to build power
    plants or to sell power. This authority was added a few years later.
    TVA is merely ``authorized,'' rather than instructed, to build power
    plants and maintain a power function. However, what began as merely a
    side function has become TVA's core business--a $30 billion power
    utility enterprise that has become, by far, the biggest part of its
    business.
        Until 1959, TVA was required to come to Congress for direct
    appropriations to pay for the growth of its power business. In 1959,
    Congress agreed to grant TVA the ability to issue revenue bonds to
    finance the growth of its generation business. In so doing, however,
    Congress erected the fence around TVA so that TVA could not use its
    unique powers in direct competition with other utilities in its region.
    Senator Jennings Randolph, the dean of the West Virginia Congressional
    delegation and a veteran of the New Deal Congress that created TVA,
    predicted in 1959 that ``when memories have dimmed and new faces have
    come upon the scene'' the purposes of the TVA Fence law might be lost.
        As Senator Randolph stated in 1959, ``it would be inadvisable to
    permit excessive competition by TVA to encroach on the areas served by.
    . . investor-owned public utilities, to siphon off their customers and
    to destroy the value of their properties.''
        Until recently, TVA continually reassured Congress about the value
    and importance of the fence. In 1979, for example, Congress amended the
    TVA Act to raise TVA's debt ceiling from $15 billion to $30 billion.
    (In 1959, TVA's debt limit was less than $1 billion!) The increase was
    actively championed by TVA. However, in response to concerns that it
    had aspirations to expand the scope of its service territory, TVA
    repeatedly stated it had no desire to compete in bulk power markets
    outside its territory, as demarcated by the 1959 Bond Act. Congress
    took TVA at its word. The Senate Report accompanying Public Law 96-97,
    stated:
        ``In reporting (the debt ceiling increase bill), the committee
    (Senate Environment and Public Works) is mindful of the repeated
    assurances of the present Board of Directors of TVA that the
    Corporation has no intention of acting in any manner, directly or
    indirectly, to expand its service area outside the boundary as fixed by
    the TVA Self-Financing Act of 1959. The utilities whose service areas
    adjoin the service area of TVA continue to need to be entitled to the
    protection of the provisions of the 1959 Act. In now acting to increase
    TVA's debt authority from $15 billion to $30 billion, the committee
    reaffirms the provisions of the 1959 Act and accepts the assurances of
    TVA that it will continue to abide by those provisions.''
        Congress believed that because the rules for government and private
    utilities were different, TVA should only be allowed to sell or deliver
    power to two broad classes of recipients, and under limited
    circumstances:
        ``to local wholesale distributors within the area for which TVA was
    the primary source of electric power supply in July of 1957, and to
    certain end-users to whom it sold power at that time; and to electric
    utilities with which it was interconnected in July of 1957 for the
    continued cooperative 'exchange' of power between neighboring utility
    systems.''
    TVA's Departure from Its Agreement Not to Compete
        In 1995, however, TVA departed from its previous pledge that it had
    no intention to compete outside the fence. TVA began pursuing a
    strategy to undermine the 1959 law so that it could compete against
    other utilities beyond the fence. For example:
        In April 1995, TVA released a study stating that TVA is ready for
    competition.
        In 1995, TVA began to advertise outside its service territory.
        In 1996, TVA undertook steps to sell power outside the fence in
    violation of the 1959 Bond Act. This prompted the creation of TVA Watch
    and forced members of TVA Watch to initiate three lawsuits against TVA
    to force compliance with the law. TVA Watch member companies have
    prevailed in each action. This recent experience convinces us that
    continued vigilance over TVA is necessary to assure that the interests
    of consumers and taxpayers are protected.
    If the Fence is to Come Down, There Must be a Level Playing Field
        TVA Watch is mindful that some of TVA's distributors want Congress
    to bring more competition into the electricity industry and that
    removing the fence should be part of legislation to accomplish that
    goal. TVA Watch believes the desire on the part of TVA's customers
    should be taken seriously, but offers two observations: First, current
    law gives TVA the right to permit wholesale competition in the Valley
    and allows TVA means to adequately mitigate potential stranded costs by
    selling surplus power on a limited basis to neighboring utilities.
    Second, as Congress considers electricity restructuring legislation,
    issues surrounding the TVA--its huge debt, substantial subsidies,
    exemption from basic laws, artificial competitive advantages, and its
    lack of accountability--must be addressed before the fence can come
    down. Failure to do so will simply undermine the primary goal of fair
    and efficient competition.
        In setting the ground rules by which TVA could be allowed to
    compete, TVA Watch believes the following rules that apply to TVA's
    competitors must apply to TVA itself:
        1. Anti-trust laws that apply to private-sector utilities must
    apply with the same force and effect to TVA.
        2. TVA must come under the jurisdiction of the Federal Energy
    Regulatory Commission (FERC) to the same degree as other utilities.
    This includes regulation not only of TVA's transmission system, but its
    power sales practices.
        3. TVA must not be allowed to build new or expanded generation
    resources with the wide range of subsidies that are denied other
    utilities.
        4. TVA must bear the same Federal, State and local tax burdens as
    other utilities.
        5. TVA should not have preferential access to power from other
    Federal facilities at rates below fair market value.
        6. TVA's exemption from open access transmission system
    requirements should be repealed.
        We urge Congress to resist the temptation to pick and choose from
    among this list. The issue is whether or not we are going to have
    competition where TVA competes under the same rules as its potential
    competitors. It is not good enough to pick a few rules and conclude
    it's ``close enough.'' Our position is that if TVA doesn't want to play
    ball under the same rules as everyone else, they should not be allowed
    into the competitive supply game. Close enough is not good enough.
    TVA Wants Its Own Rules
        TVA, however, strenuously disagrees that it must play by the same
    rules as other utilities. TVA argues it can compete fairly under a
    special set of rules, especially when it comes to setting its own
    electricity prices. TVA wants to retain its ability to set its own
    prices. In a December 31, 1998 letter to the Department of Energy the
    Chairman of TVA argues the TVA Board should retain sole control over
    setting its power rates rather than having its decisions reviewed by
    the Federal Energy Regulatory Commission (FERC). The letter said in
    part:
        ``We see no reason why another set of presidential appointees
    should be designated to do the job we were appointed to do. . . . The
    ability of the TVA Board to raise and lower rates as necessary is vital
    to TVA's financial health and its ability to keep the region's power
    supply costs as low as feasible. The reversal of a TVA Board decision
    by FERC could mean that TVA does not collect enough revenue to meet its
    financial obligations to bondholders, operate the power system
    economically, or ensure the safe operation of its nuclear plants. . . .
    TVA is not a private power company, and one cannot ascribe to it the
    same motivations that drive private power companies--to increase market
    share and profits.''
        We would point out that the investor-owned utilities in our
    coalition have been subject to Federal and State regulation for years
    and have always met their financial obligations.
        Numerous ``electricity restructuring'' bills with provisions
    dealing with TVA have been introduced. TVA Watch commends Senators
    McConnell and Bunning for introducing S. 1323, the ``TVA Customer
    Protection Act of 1999,'' along with Representative Baker's House
    companion bill, which both would go a long way toward assuring that any
    competition between TVA and other utilities would be conducted fairly
    and equitably.
        TVA, however, has endorsed electricity restructuring legislation
    proposed earlier this year by the Clinton Administration (H.R. 1828/S.
    1047). The Administration's bill would permit TVA to issue more debt to
    build and operate facilities anywhere in the country with only
    superficial changes in the rules that currently govern TVA. U.S.
    taxpayers would be placed at greater risk for any TVA business activity
    and consumers would be denied the benefits of fair competition.
        The provisions in the Administration's bill dealing with TVA are
    largely derived from a 1998 report prepared by the U.S. Department of
    Energy following the completion of a special task force, the Tennessee
    Valley Electric System Advisory Committee (TVESAC). This advisory
    committee consisted of several interests, including TVA, TVA Watch,
    labor, environmental and consumer groups. While TVA Watch was pleased
    to participate in the TVESAC process, we emphatically disagree with
    assertions by TVA that the report (Report of the Tennessee Valley
    Electric System Advisory Committee, U.S. Department of Energy, March
    31, 1998) represents a ``consensus'' among the various interests. If
    anything, the report points out the fundamental disagreements over how
    TVA should be regulated in an increasingly competitive market.
        TVA Watch also wishes to state its deep concern about a legislative
    draft currently under consideration before the House Energy and Power
    Subcommittee. While the TVA title in that draft appears to create a
    more level playing, it really does not. The draft calls for certain
    regulation of TVA by the FERC and application of some antitrust laws.
    However, the draft contains a ``savings clause'' that none of these
    provisions could be implemented in a way that would undermine TVA's
    ability to pay its bondholders. This clause, in effect, ``swallows''
    the other provisions and renders them useless.
        We would point out that even though TVA supports the
    Administration's bill to remove the fence and allow TVA to compete with
    these lenient rules, TVA itself recently has stated it intends only to
    serve the electricity needs inside the Tennessee Valley. As we have
    stated above, the experience of the past means we should continue to
    monitor TVA's activities closely. We also should be frank to say that
    if TVA is permitted to compete outside the fence under terms such as
    those in the Administration's bill, the result would be to allow a
    financially impaired agency of the Federal Government to compete
    against other utilities under one set of rules while those other
    utilities would have to operate under more stringent rules. Not only
    would consumers be denied the economic benefits of fair competition,
    taxpayers would be at risk for even more debt.
    TVA Is In Poor Financial Shape to Compete
        Frankly, we believe TVA should concentrate on getting its financial
    house in order before--not after--it worries about whether it will be
    able to compete under its own set of lenient rules.
        Since 1959, TVA has used its free reign to grow rapidly,
    particularly in the late 1960's and 1970's, obtaining congressional
    approval to increase its debt cap a number of times, from the original
    $750 million to the $30 billion authorization that exists today. TVA's
    financial performance has not been impressive. In a 1995 Report to
    Congress (GAO/AIMD/RCED-95), the GAO discussed TVA's lack of financial
    stability:
        ``TVA is $26 billion in debt and has invested $14 billion in
    nonproductive nuclear assets (called 'deferred assets') that are not
    included in its electricity rates. As a result, TVA has far more
    financing costs and deferred assets than its likely competitors have,
    which gives TVA little flexibility to meet competitive challenges. To
    the extent that TVA cannot compete effectively and improve its
    financial condition, the Federal Government is at risk for some portion
    of TVA's debt. . . . While no cash-flow crisis exists today, GAO
    believes that TVA's financial condition threatens its long-term
    viability and places the Federal Government at risk. Resolving TVA's
    financial problems will be costly and require painful decisions.''
        TVA issued a ``10-year plan'' in July of 1997. The 10-year plan
    called for lowering TVA's fixed costs by reducing its outstanding debt
    by about one-half, to about $14 billion by 2007--about $1.4 billion per
    year. The plan also provided for rate increases whereby TVA could start
    recovering from its customers nearly all of its $8.5 billion in
    deferred, nonproductive, assets. (These assets consist of nonproducing
    nuclear plants and other unamortized regulatory assets. As reported by
    GAO, ``the balances of these items were $6.3 billion and $2.2 billion,
    respectively.'').
        TVA Watch was pleased that TVA issued this 10-year plan because it
    reflected an admission by TVA that it really has no use for its $8.5
    billion nonproductive assets, and that it will have to amortize the
    debt associated with those assets at some point. It also reflected an
    acknowledgment by TVA that it can't sit on its mountain of debt
    forever, and that it will have to pay down that debt if it wants to be
    able to compete in the future.
    TVA's Debt Reduction Plan Going in Wrong Direction
        But it was too good to be true. The GAO (GAO/AIMD-99-142) recently
    reported that TVA is unlikely to meet the plan's objectives and needs
    to update its assumptions. Now, what was originally a ten-year plan
    seems more like a 20 or 40 year plan. TVA expects to end the current
    fiscal year paying down its debt by $306 million. This is far short of
    TVA's needed debt retirement projected to be near the 10-year plan. At
    the rate of $300 million per year in debt retirement, it will take TVA
    over 40 years to reach their stated goal of cutting TVA debt in half.
        Moreover, TVA already is already backtracking on its plan to cut
    its long-term debt in half. In recent weeks, TVA's leadership has
    issued press statements that they may need to issue up to $3 billion in
    additional debt to fund the construction of more power plants. This
    would run TVA's long-term debt right up to its $30 billion limit. We
    submit this is going in the wrong direction.
        TVA issues its massive debt in the form of various types of bonds.
    These bonds are sold to private investors not just in the United
    States, but around the world, at rates just barely above the U.S.
    Treasury rate. TVA is able to borrow money at government rates because
    the investment community is convinced that the Federal Government will
    bail out TVA, whenever push comes to shove. In an April 28, 1999,
    statement, Standard & Poor's said:
        ``The (AAA) rating reflects the U.S. government's implicit support
    of TVA and Standard & Poor's view that, without a binding legal
    obligation, the Federal Government will support principal and interest
    payments on certain debt issued by entities created by Congress. The
    rating does not reflect TVA's underlying business or financial
    condition.''
        TVA does little to dispels the perception held by investors that
    placing their money in TVA's hands is tantamount to giving it to Uncle
    Sam himself. In a classic understatement, TVA's Chairman testified
    before Congress (House Public Works and Transportation Committee, March
    9, 1994), ``. . . when you start looking at selling bonds, the fact
    that we're a government agency obviously is a big help.''
        The faith of the investors in TVA also is founded on the
    unrestrained ability of the TVA Board to raise electric rates if needed
    to pay the bondholders. Thus, the financial markets have afforded TVA
    an investment status equivalent to a government entity with authority
    to levy taxes. Even though its bonds are not expressly guaranteed by,
    or obligations of, the Federal Government, TVA's debt obligations
    nonetheless are viewed as ``risk-free.''
    What If TVA Were Rated As Other Utilities?
        What would happen to TVA's debt rating if the Standard & Poor's
    benchmarks that are applied to investor-owned utilities were applied to
    TVA? TVA's rating would be lower than that assigned to junk bonds. For
    example, with a debt to capital ratio of more than 80 percent, TVA's
    rating would be lower than ``B'' while most investor-owned utilities
    have ratings of ``A'' or ``BBB'' with debt to capital ratios of about
    50 percent. Also, with a pre-tax interest coverage ratio of 1x, TVA's
    rating would be lower than that assigned to a typical investor-owned
    utility. Still, because of its ``AAA'' rating resulting from its status
    as an agency of the Federal Government, TVA has a significant cost of
    capital advantage over its investor-owned neighboring utilities. TVA,
    therefore, is able to borrow funds at lower interest rates than other
    utilities because of that higher credit rating.
        It is not surprising that TVA, whose capital structure is otherwise
    exceedingly risky (87 percent debt), can obtain such a low cost of
    capital relative to most investor-owned electric utilities. TVA's
    average cost of money is lower than the average for all IOUs, even
    though the financial conditions of private utilities are generally
    healthier. TVA also has enjoyed the financial advantages of avoiding
    writing-off certain nonperforming assets.
        If TVA were regulated as an investor-owned utility, it is likely
    that under conditions of the Financial Accounting Standards Board
    (FASB) Statement No. 90 (Accounting for Abandonment and Disallowance of
    Plant Costs), TVA would have already dealt with the $5 billion in
    deferred and currently useless assets. Thus, once again, TVA's
    financial competitiveness is founded upon practices that would not be
    acceptable for any of its potential competitors.
    Power Rates, Taxes, and Anti-Trust Laws
        Let me focus briefly on three other important advantages that TVA
    wants to retain. First, TVA's desire to retain control over its power
    rates. Second, TVA's ability to make only token payments in lieu of
    taxes. Third, TVA's ability to escape penalties if it runs afoul of
    anti-trust laws.
        Let's start with the rates paid by TVA's customers and those paid
    by the customers of other utilities. In defending its position that it
    should retain its ability to set its own rates, TVA maintains that it
    is a low-cost utility and that subjecting it to regulation by the
    Federal Energy Regulatory Commission (FERC) would force its rates up.
    But, let's consider the rate picture in Kentucky. Currently, TVA's rate
    to its wholesale distributors is $47.0/MWH. In contrast, the wholesale
    full requirements rate my company charges to our municipal customers is
    $29.4/MWH. In fact, by the year 2003, our wholesale full requirement
    municipal rate will be $29.1/MWH while TVA's will remain unchanged at
    $47.0/MWH.
        If TVA is to be allowed to compete outside the fence, then Congress
    should ensure that it is required to follow the same rate regulations
    that all shareholder-owned utilities are required to follow. This not
    only would include wholesale power rates, but also open access
    transmission tariffs at FERC as are all shareholder-owned utilities.
    The purpose of those tariffs is to guarantee that any power market
    participant can gain non-discriminatory access easily and quickly to
    transmission services from jurisdictional utilities. Currently, TVA is
    not required to make such filings because the Commission does not
    regulate them.
        Although FERC has attempted to impose reciprocity requirements on
    TVA, if a power seller seeks to move power across TVA, TVA's compliance
    is frequently obtained only by the seller requesting an order from
    FERC, which can slow a transaction by months, or even eliminate it.
    TVA's voluntary transmission ``guidelines,'' for example, are, for the
    most part, ``window dressing'' which appear to be intended as much to
    persuade policymakers and the public that TVA will play by the same
    competitive rules that other utilities must obey, as to provide
    transmission access.
        In addition to not being subject to FERC rate rules, TVA avoids
    payments to FERC and the costs of securing FERC licenses for its
    hydroelectric projects. Shareholder-owned utilities, on the other hand,
    pay FERC millions of dollars for the privilege of being regulated. In
    addition, shareholder-owned utilities spend millions of dollars--not to
    mention upwards of 7 years of regulatory proceedings--to obtain FERC
    licenses for hydro projects.
        Second, let us turn to taxes. TVA claims that it has no subsidy
    there because it has no income (so it would not have to pay income
    taxes anyway) and that it makes ``payments in lieu'' of taxes to local
    and State governments. However, with all respect to TVA, they miss the
    point. TVA's ``payments in lieu'' of taxes do not even begin to reach
    the amounts of taxes paid each year by shareholder-owned utilities.
        The best way to consider this is on an ``apples to apples'' basis,
    total tax obligation as a percentage of total revenue. In 1998, TVA's
    total payment in lieu of tax obligation was 3.9 percent of its total
    revenue. In 1998, Kentucky Utilities' total tax payments accounted for
    8.1 percent of total revenue. This disparity between TVA's payments in
    lieu of taxes and the tax burdens of investor-owned utilities is should
    be closely reviewed not only by this Congress, but by State and local
    authorities as well.
    TVA Must Play By Same Rules As Its Potential Competitors
        Finally, another key area that Congress must deal with is anti-
    trust laws. I cannot emphasize strongly enough that if TVA is not
    subject to basic rules that govern all other competitors, that
    exemption, coupled with its total discretion in rate-making, give TVA
    the power to ``control the market'' by engaging in predatory pricing or
    other anti-competitive activities.
        TVA is clearly engaged in a commercial enterprise, the supply of
    electric power. There is no doubt that the activities of private sector
    companies in the commercial business of supplying electric power are
    subject to antitrust laws. This means that power suppliers, including
    members of TVA Watch, all are subject to lawsuits by private parties
    and by the government for violations of antitrust laws such as the
    Sherman Act, the Clayton Act and the Federal Trade Commission Act. For
    example, if a public utility were to supply power to somebody on the
    condition that the customer agree not to compete with that utility, the
    Department of Justice would probably file an antitrust lawsuit against
    that utility seeking treble damages and other penalties.
        TVA insists the reason it should be allowed to compete either
    inside or outside the fence under a separate set of rules is that it
    lacks the ``motivation'' to engage in anti-competitive behavior because
    it is a ``not-for-profit'' agency. However, TVA Watch offers another
    reason for TVA's position: We believe the real reason TVA seeks to
    compete under a relaxed set of rules is because of its financial
    weakness. In other words, TVA very likely believes it could not succeed
    in a competitive market unless its financial weakness is compensated by
    a relaxed set of rules.
        In response to calls that it be made subject to the antitrust laws
    and to treble damages for violations of those laws, TVA offers two
    general responses, both of which are inadequate. First, TVA claims that
    it is incapable of competing on an unfair basis because it was created
    solely to promote ``governmental'' and ``public'' purposes. Second, TVA
    claims that the antitrust laws are directed to eliminating the
    concentration of economic power in the hands of those who serve only
    their own profit-making interests, and because TVA is not operated on a
    ``for profit'' basis, it should remain exempt from the antitrust laws.
    Both of these arguments are easily dismissed.
        TVA's power program--its sale and transmission of power at retail
    and at wholesale--is a commercial enterprise. What this means is that
    TVA, in reality, is in the commercial business of selling electricity.
    Moreover, the absence of a ``profit motive'' is hardly grounds for
    immunity from antitrust laws. The antitrust laws contain no such ``non-
    profit'' exemption and the instinct of a drowning enterprise to survive
    gives it a more intense motive to suppress competition.
        The Supreme Court has also recognized that the instinct of
    government to survive and thrive in a competitive environmental can
    lead to anti-competitive behavior. In the landmark case of City of
    Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 408 (1978), the
    Supreme Court noted that public corporations, such as TVA, are fully
    capable of competitive mischief:
        ``. . . the economic choices made by public corporations in the
    conduct of their business affairs, designed as they are to assure
    maximum benefits for the community constituency, are not inherently
    more likely to comport with the broader interests of national economic
    well-being than are those of private corporations acting in furtherance
    of the interests of the organization and its shareholders. . . When
    (government) acts as owners and providers of services, they are fully
    capable of aggrandizing other economic units with which they
    interrelate, with the potential of serious distortion of the rational
    and efficient allocation of resources, and the efficiency of free
    markets which the regime of competition embodied in the antitrust laws
    is thought to engender.''
        TVA's position that it can compete fairly under only certain
    antitrust laws simply does not serve the public interest because there
    will be no deterrent. If the remedy at the end of the proceeding is a
    slap on the hand, then no rational person would ever initiate the
    process. There must be a deterrent to keep TVA from committing anti-
    competitive acts in the first place. That deterrent can only come in
    the form of making TVA pay damages for the competitive injuries that
    result from violations of the antitrust laws. If TVA claims that it, a
    billion dollar commercial enterprise, can't afford to pay antitrust
    damages, we have one simple response: If you can't do the time, don't
    do the crime.
    Conclusion
        TVA Watch encourages this Committee, and indeed all of Congress, to
    consider carefully the ramifications on TVA's original mission, and the
    significant effects on the nation's debt and taxpayer's pockets, of
    enacting legislation allowing such competition from a taxpayer-
    supported Federal utility.
        TVA Watch supports efficient competition that is not skewed by
    allowing TVA to escape legal or regulatory burdens shareholder-owned
    utilities must bear. This disparate treatment distorts competition.
        We at TVA Watch are committed to working not only with this
    Committee, but with all others who are genuinely interested in
    reforming TVA. The plain language of the TVA Bond Act remains and its
    purpose has not been lost. TVA Watch hopes that this Committee, and
    Congress as a whole, will assure that the objective of encouraging more
    competition in America's electric power industry will be supported by
    making the right decisions about the future of TVA.
                                     ______

        Responses of Robert Hewett to Additional Questions from Senator
                                   McConnell
        Question 1. TVA has said that FERC oversight would impose a cost
    burden which may require them to raise their rates. Does your
    experience support that statement?
        Response. No. The cost of FERC regulation is not material in
    relation to the scope of a utility's business. My company is
    considerably smaller than TVA and does not raise its rates as a result
    of the costs of FERC regulation. In fact, FERC regulation would provide
    an economic costing discipline that would benefit customers in the
    decisionmaking process on capital expansion and expense control.

        Question 2. Mr. Hewett, TVA argues that it can't be FERC regulated
    and be able to appease Wall Street. How is it that LG&E Energy is able
    to accomplish this (walk and chew gum at the same time), while
    maintaining some of the lowest rates in the nation?
        Response. We have found that FERC regulation is a key source of
    discipline in measuring the soundness of our balance sheet. Other
    sources of discipline include competition, State regulation, debt
    ratings and, of course, the price of our stock. The extent to which our
    company is able to measure up to the standards set by these various
    disciplines is directly related to the confidence expressed in our
    performance by Wall Street.

        Question 3. Mr. Hewett, how does FERC regulation impact your
    decisionmaking in setting a course for your company, and has FERC
    regulation inhibited your ability to adequately serve your customers?
        Response. As a result of FERC regulation we must provide non-
    discriminatory open access to our transmission system and must charge
    our wholesale requirements customers just and reasonable rates. These
    regulatory requirements affect how we make business decisions. Such
    requirements reflect FERC's implementation of the Congress ' public
    policy decision to limit regulated utilities' ability to leverage
    essential facilities and market position at the expense of consumers.
    We accept these as legitimate constraints on our business. Such
    constraints, however, do not limit our ability to serve our customers.
    Indeed, we have found that, in addition to normal rate proceedings,
    FERC provides useful data that enables us to monitor the activities of
    other utilities and market-related developments. In addition, FERC
    requires utilities under its jurisdiction to operate under a consistent
    set of requirements which accomplishes customer pricing benefits.

        Question 4. Mr. Hewett, have you been able to meet your customers'
    demand during the peak demand periods of the past two summers? Will you
    be able to meet the rising demands of the region in the foreseeable
    future? What role does FERC play in this planning?
        Response. While events of the past two summers presented our system
    with significant challenges, we were able to meet the needs of our
    customers. We attribute this success to To factors. First, the
    employees of our company performed their functions in an exemplary
    fashion. Second, we were able to work with our neighboring utilities,
    including TVA, to ensure that all of us had access to other supplies of
    electricity on the spot market. We expect to meet the rising demands of
    our customers. FERC plays a useful role by making available data that
    we utilize in formulating our business plans. Additionally, it is
    noteworthy that, as a general matter, FERC's open access transmission
    policies increase the efficiency of the electric power market in its
    ability to meet peak demands and our ability to access the market for
    purposes of purchasing peaking options and, if necessary, energy on the
    hourly market.

        Question 5. LG&E Energy Corp., which owns KU, made an announcement
    earlier this year that they will reduce electricity bills by $52
    million over 5 years. This was excellent news for LG&E and KU
    customers. How do you explain why TVA's rates are higher and going
    higher, while the rates of your company and other utilities in Kentucky
    are lower and headed lower?
        Response. We believe a key reason for this disparity is the level
    of long-term debt between TVA and other utilities. TVA's long-term debt
    of nearly $27 billion is more than four times the level of a comparably
    sized utility. Moreover, nearly $8 billion of TVA's long-term debt is
    not currently being recovered in rates. In contrast, LO&E, which is
    roughly one-quarter the size of TVA, has a long-term debt of
    approximately $1.6 billion. As I mentioned in my written testimony, the
    General Accounting Office (GAO) has said that as competition evolves in
    the electric power industry, TVA's flexibility to respond to market
    signals will be impaired if it does not successfully implement its goal
    of cutting its long-term debt in half by 2007.

        Question 6. On average, how many cents of every dollar in KU rates
    go toward paying interest charges?
        Response. Approximately four cents.

        Question 7. Please discuss how you see the TVA Customer Protection
    Act benefiting TVA customers.
        Response. We believe the most important elements of Senator
    McConnell's bill are (1) requiring TVA to comply with the same anti-
    trust laws and wholesale price and transmission regulations that govern
    other utilities and (2) imposing limits on TVA's construction of new
    generation facilities without the expressed agreement of its customers
    that they will bear the costs of such facilities. TVA Watch believes it
    is imperative that as the electric power industry evolves to a more
    competitive structure TVA plays by the same rules as other utilities.
    TVA's customers will benefit because they will enjoy that same
    competitive opportunities as other utilities' customers and will enjoy
    the same protections from discrimination and the exercise of market
    power that are available to others' customers.
                                   __________
      Statement of Richard Munson, Executive Director, Northeast-Midwest
                                   Institute
    Testimony on the Tennessee Valley Authority
        The Tennessee Valley Authority is a political creation facing its
    most serious challenge. The nation's largest electric utility suffers
    an enormous debt, mismanagement, and falling political support at the
    very time that lawmakers are restructuring the nation's electric
    utility industry and transforming the way consumers buy electricity.
    Sixty-five years after it was created, this giant Federal agency can no
    longer justify its existence.
        TVA has accumulated a whopping $28 billion debt, largely because of
    its inaccurate predictions of future electricity demand, its failure to
    control the costs of constructing nuclear power plants, and its
    unwillingness to impose rate increases in order to meet those costs.
    Other signs of mismanagement were revealed in a recent report from
    TVA's own Inspector General (IG), who criticized the agency's six-
    figure bonuses and secret retirement funds for top executives, non-
    competitive consulting contracts to cronies of those officials, and
    expensive building leases with well-connected developers.
        The IG's report highlights perhaps TVA's most serious problem its
    unaccountability. This Federal institution is run by a board of three
    individuals appointed to staggered nine-year terms by the president,
    often as a favor to political supporters from the region. Board members
    are not answerable to the voters. Their decisions are not reviewed by
    State regulators or Federal agencies, and until recently, Congress
    provided little oversight. TVA also enjoys a monopoly in its service
    territory, so it's not accountable even to market forces.
        TVA has been propped up by enormous taxpayer subsidies which can no
    longer be justified or countenanced. The giant utility is exempt from
    hundreds of Federal and State laws and regulations, it pays no Federal
    or State taxes, and it obtains low-cost loans because of Washington's
    ``implied'' support.
        There's little doubt that TVA has become a burden to the nation's
    taxpayers. What's becoming increasingly apparent is that the status quo
    also harms the very Tennessee Valley residents that TVA is supposed to
    serve. Some of the region's politicians, of course, continue to defend
    the agency and its subsidies, but TVA's functions could be provided
    more effectively and less expensively by other corporations or
    agencies.
    Subsidies
        TVA officials often repeat a mantra about their power operations
    being supported solely by electricity sales, but in this era when
    subsidies are suspect the giant utility remains the beneficiary of
    enormous taxpayer largess. It pays no taxes, enjoys access to low-cost
    capital, and avoids scores of Federal laws and State regulations.
        According to the study by Putnum, Hayes & Bartlett, a respected
    consulting firm hired by investor-owned utilities, TVA's tax and cost-
    of-capital subsidies in 1993 totaled a whopping $1.2 billion. Included
    in that figure, TVA avoids more than $570 million annually in Federal
    and State income taxes that would be paid by a comparable-sized private
    utility. It also escapes more than $450 million annually in State and
    local ad valorem and other taxes. TVA counters that it contributes more
    than its share of local taxes through its 5-percent ``payments in lieu
    of taxes,'' but shareholder-owned utilities pay State and local taxes
    that amount to 8.3 percent of operating revenues, plus Federal taxes
    that equal 4 percent of operating revenues. In short, for every dollar
    of revenue collected, TVA pays only 5 cents while investor-owned
    utilities pay some 12.3 cents in taxes.
        Other benefits are substantial but not quantifiable. Unlike other
    power companies, for instance, TVA avoids ratemaking oversight by the
    Federal Energy Regulatory Commission and State public utility
    commissions. It is free from the financial oversight of the Securities
    and Exchange Commission. It is exempt from Federal and State antitrust
    laws. It doesn't have to worry about strikes by its employees. It
    benefits from government purchasing programs. It doesn't have to comply
    with numerous environmental regulations.
        TVA is literally above the law. It is exempt from at least 137
    Federal statutes, ranging from workplace safety and hydroelectric
    licensing. It is immune from civil liability for its wrongful acts, yet
    it enjoys far-reaching Federal eminent domain authority. TVA also
    claims immunity from an array of State legislation and regulations,
    including at least 165 in Alabama alone.
        TVA's bond rating is a particularly odd but very generous benefit.
    Despite having a massive debt of some $28 billion, TVA enjoys a AAA
    bond rating, the highest available. No shareholder-owned utility,
    despite much better balance sheets, has such a rating. Even though
    Federal legislation specifically declares that taxpayers do not
    guarantee TVA bonds, the rating agencies assume such backing is
    implied. According to Moody's Investors Service, ``Although TVA's debt
    is not an obligation of the U.S. government, the company's status as an
    agency and the fact that the government explicitly is TVA's only
    shareholder, indicates strong 'implied support' (that) would afford
    assistance in times of difficulty. This implied support provides
    important bondholder protection. TVA's extensive nuclear risk, average
    competitive position, and high level of debt would make it unlikely to
    maintain its current (AAA) status.'' TVA's chairman, in fact, promotes
    the agency's bonds as having ``an obvious, implied'' guarantee from the
    Federal Government. (It should be noted that if the government did
    guarantee TVA bonds, taxpayers would be left holding the bag if the
    agency defaulted on any portion of its multi-billion-dollar debt.)
    Several analysts suggest that TVA's large debt and low cash flow should
    cause its bonds to be rated as junk. TVA's artificially high credit
    rating, therefore, allows the giant utility to issue large levels of
    debt at low cost. According to the Department of Energy, if TVA were to
    lose its AAA rating, its annual interest cost could increase by some
    $270 million. This indirect Federal subsidy would be even higher if TVA
    bonds were rated as junk, or below investment grade.
        TVA officials like to suggest that the utility can compete in a
    deregulated electricity market. But the more important question is
    whether TVA, armed with its subsidies and other competitive advantages,
    should be allowed to compete.
    Environmental Steward or Threat?
        One of TVA's orginal missions was to manage the region's natural
    resources, but he agency long has invoked the ire of environmentalists.
    TVA, for instance, was the leading promoter of destructive coal strip-
    mining, ruining vast tracts of land and debilitating Appalachia's
    underground coal industry. Its reclamation efforts were minimal and
    only marginally effective. Aubrey Wagner, who directed the agency for
    almost two and one-half decades, voiced and attitude that sent chills
    up the spines of conservationists: ``but. . . if yo looke at what these
    mountains were doing before this stripping, they were just growing
    trees that were not even being harvested.''
        TVA remains one of the nation's worst violators of the Clean Air
    Act. The agency, in fact, is the largest emitter among eastern
    utilities of nitrogen oxide (NOx), which causes smog. It is the third
    largest emitter of sulfur dioxide (SO2) and carbon dioxide (CO2), which
    has been identified as the leading cause of global warming.
        TVA's nuclear program has been so plagued with safety and economic
    problems that consumer activist Ralph Nader in 1998 declared: ``The TVA
    is by any measure the worst nuclear project in the country, has the
    most expensive set of nuclear reactors, has a debt of $29 billion, has
    the poorest safety record with TVA reactors spending more time on the
    Nuclear Regulatory Commission's watch list than any other utility.''
        Like many private utilities, TVA from the mid 1960's through the
    mid 1980's continually overestimated the future demand for electricity.
    Unlike most other companies, however, TVA went whole hog for nuclear
    power to meet that projected demand. The agency in the mid 1970's
    announced plans to build 17 reactors at seven sites. It completed only
    six, and one of those was shut down in 1985.
        Rather than promote energy efficiency, TVA has used promotional
    campaigns and subsidized rates to encourage its consumers to be
    wasteful guzzlers. The average Tennessee resident uses more electricity
    than consumers in any other State, more than 50 percent above the
    national average. The other six States partially electrified by TVA
    also rank among the most energy intensive. Decrying TVA's early
    promotion of electric heating rather than less-expensive, more-
    efficient, and less-polluting natural gas, former TVA Director David
    Freeman observed that TVA customers were ``snookered into using so much
    electricity.'' If a Tennessee homeowner in the 1950's had installed a
    natural gas furnace instead of an electric heater, he or she would have
    saved more than $300 each year in energy bills. TVA, at the same time,
    would have avoided the need to build expensive and polluting power
    plants.
    Bonuses and Questionable Contracts
        TVA's senior officials seem to treat themselves and their
    colleagues well. So well, in fact, the TVA's Inspector General in early
    1998 lambasted agency operations, including secret retirement accounts,
    six-figure bonuses, and non-competitive consulting contracts. Perhaps
    the best description of the charges comes from an editorial by the
    Chattanooga Times, a key Valley newspaper that usually defends TVA.
    ``One of the most egregious abuses is in the area of compensation,''
    commented the paper. ``TVA secretly established a Senior Executive
    Retirement Plan (SERP) in 1996 and funneled almost $5 million in
    previously undisclosed contributions through it to 24 high-ranking
    managers over the past 2 years. Neither the agency's Inspector General,
    nor congressional leaders, nor the general public, knew about the SERP
    until the IG discovered it last month.''
        The Inspector General also attacked TVA's end-of-the-year bonuses
    to key managers. According to Electricity Daily, ``The Tennessee Valley
    Authority sweetened the holidays for some of its top executives, but
    the agency's decision to award six-figure bonuses has soured a
    Tennessee congressman. Rep. John Duncan Jr. (D-TN) said . . . he was
    disgusted that TVA paid out $1.9 million to 84 of its top executives in
    year-end bonuses. The Knoxville congressman said he believed the agency
    was using the bonuses to dodge a salary cap imposed by Congress.''
        The generous consulting contracts also were lambasted by the
    Inspector General. Again in the words of the Chattanooga Times: ``TVA's
    free-flowing millions on consulting contracts (631 consulting and
    training contracts with 350 different vendors totaling $145.1 million,
    with an average of $29 million per year over 5 years) are equally
    disturbing. Excessively generous contracts are given to cronies or
    friends of top managers without bids or acceptable oversight. The
    practice suggests responsible fiscal management is not being applied
    and undermines TVA's integrity and its pending request for Federal
    appropriations.''
    Playing Hard Ball
        While TVA is quite generous to its managers and their friends, it
    maintains a rather domineering relationship with its own customers. TVA
    consumers, in fact, are burdened with long-term, all-requirements
    contracts which they can terminate only by providing a ten-year notice.
    These are not ten-year contracts that expire; they are rolling
    provisions that after each new day cannot be terminated for another 10
    years. The municipal utilities and rural electric cooperatives that buy
    power from TVA, as a result, are restricted from the benefits of
    competition; they cannot even obtain realistic price quotations for
    power to be supplied in 10 years. The Federal Energy Regulatory
    Commission does not allow private utilities to use similar anti-
    competitive provisions.
        The 4-County Electric Power Association, wanting lower rates,
    notified TVA in December 1993 that it would be seeking another power
    supplier. Earl Weeks, the Mississippi association's general manager,
    subsequently received some 30 bids from other electric generators,
    several of which would have saved the association more than $7 million
    annually in wholesale power costs. TVA, unwilling to lose a customer,
    responded aggressively. According to Weeks, TVA lobbied 4-County's
    biggest customers ``to put pressure on us to rescind that notice.''
    More troubling to the association manager, TVA representatives
    ``questioned my integrity'' by suggesting to customers that perhaps
    Earl Weeks didn't know what he was doing. But TVA's most effective
    tactic was to threaten cancellation of a lignite-burning power plant
    and elimination of the associated construction jobs and economic
    development in that employment-hungry region. Not surprisingly, 4-
    County Electric buckled under the pressure.
        The Bristol Utility Board in southwest Virginia met similar
    resistance when it notified TVA that it, too, wanted to leave. Angry
    about high industrial electricity rates, the municipal utility gave TVA
    ``years of forewarning'' that it wanted to end its 52-year relationship
    and to seek bids from other suppliers. TVA's price offer turned out to
    be the very highest of 20 bids. Therefore, Bristol in 1997 signed a
    contract to purchase electricity for its 15,000 residents from Cinergy
    of Cincinnati, Ohio, saving the local government $70 million over 7
    years, double the city's annual budget. TVA responded by secretly
    trying to sell power directly to Bristol's industrial customers for 2
    percent less than the best bid (and well below what TVA had previously
    been charging, and well below the agency's recent bid). TVA also
    promptly charged Bristol $54 million for ``stranded costs'' investments
    the Federal agency claimed it made with the expectation that it would
    continue to supply power to Bristol. Rep. Rick Boucher (D-VA), the
    local congressman, reacted with angry letters and volatile hearings. He
    complained that TVA was using tactics ``to punish a former customer for
    exercising its legal right to obtain power from a less expensive
    supplier. TVA is seeking to make an example of the city of Bristol so
    as to discourage any other community presently served by TVA from
    considering the purchase of power from a TVA competitor.'' After a
    Boucher-inspired hearing before the House Judiciary Committee, at which
    die-hard liberals such as Reps. Barney Frank (D-MA) and John Conyers
    (D-MI) asserted that TVA's arrogant ways and monopolistic practices
    would make ``FDR turn over in his grave,'' and after it appeared that
    the Federal Energy Regulatory Commission would not allow the agency to
    recover these costs, TVA backed down, announcing that it would no
    longer seek stranded cost recovery from Bristol.
        TVA's other customers took hope from Bristol's victory.
    Representatives of the ``Big Five'' (municipal utilities in Nashville,
    Chattanooga, Huntsville, Memphis, and Knoxville), which constitute 30
    percent of TVA's market, began meeting to discuss strategies. Larry
    Fleming, general manager of the Knoxville Utilities Board, which is
    about ten times larger than Bristol, said other distributors want a
    deregulated industry in which they can purchase less expensive power in
    a competitive market without having to pay TVA for ``stranded
    investment costs.''
        The Valley's municipal utilities and rural cooperatives are making
    progress, albeit slowly. TVA recently said these distributors can avoid
    paying stranded costs if they sign new ten-year service contracts that
    include a five-year cancellation notice (reducing by 5 years the
    current notice requirement).
        Yet TVA is not welcoming competition. It defends vehemently its
    right to restrict other power suppliers from moving or ``wheeling''
    electricity over TVA's grid to customers inside the fence. That
    effectively leaves Valley residents with just one option: Pay what TVA
    charges or go dark.
    Facing Economic Realities?
        To accumulate a $28 billion debt while enjoying monopolistic
    control over its service territory must rank among the most egregious
    examples of business mismanagement. During the many years when the
    agency's debt skyrocketed, politically-motivated officials refused to
    raise revenue by increasing electric rates. In fact, they boasted that
    rates had not risen for a full decade. Yet in July 1997, TVA officials
    could no longer avoid reality they increased rates by 5.5 percent and
    announced an ambitious ten-year plan to cut the agency's debt in half
    (from $28 billion to $14 billion by 2007) and subsequently to reduce
    its prices by 16 percent (from 4.11 cents per kilowatt-hour to 3.5
    cents by 2007).
        The much-needed proposal demonstrates a new commitment to get TVA's
    financial house in order. Unfortunately, the plan, according to the
    General Accounting Office, is based on ``unreasonable assumptions.''
    For instance, for TVA to argue that it will reduce its capital
    expenditures from $732 million in 1997 to $500 million in 2000 it must
    exclude the $1 to $3 billion it must spend to meet clean air
    requirements. TVA also fails to account for replacing or upgrading its
    aging coal, nuclear, and hydro units, and it assumes that it need not
    build any new generators to meet its own projected increased demand for
    electricity.
        TVA, moreover, does not specify how it will achieve $2 billion in
    cost cuts. Although the electricity market throughout the country is
    becoming competitive and most utility restructuring bills before
    Congress eliminate electric monopolies, TVA assumes that it will retain
    monopoly control of its customers. Although TVA's total operating
    revenues since 1989 have declined more than 10 percent in real terms
    even while kilowatt-hour sales increased by about 35 percent, TVA
    unrealistically assumes that a rate increase in 1997 will result in
    increased revenues of $345 million in 1998, or more than 6 percent on
    average. And although TVA's operating expenses have increased in recent
    years, the agency projects that its operating expenses (less
    depreciation) will decline over the next four to 5 years and rise only
    by small amounts thereafter.
        Moreover, TVA assumes that the energy market will not change, that
    it will maintain monopoly control over its distributors, despite the
    billion-dollar-deals and aggressive competition engendered by new State
    restructuring programs. Consider just the potential competition from
    privately-owned generators fired by natural gas. Although pipelines
    have tended to avoid the Tennessee Valley, in part because of TVA's
    dominance, three natural gas firms showed up recently to compete for
    new markets in Clairborn County, Tennessee. Since innovative natural-
    gas-fired turbines can generate electricity cheaper than can TVA,
    industrial customers within the Valley may soon be able to generate
    their own less-expensive power. New microturbines are making this
    option available even for commercial firms like a McDonald's
    restaurant, and engineers envision refrigerator-sized turbines
    supplying individual homes with electricity and heat. As new pipelines
    offer natural gas throughout the Valley, independent power producers
    also will soon compete for markets with TVA, throwing the giant
    utility's growth projections into serious question.
    Restructuring, Reform, and Privatization
        A growing number of States have restructured their utility
    industry, replacing monopolies with competition. Federal lawmakers are
    advancing similar proposals, and TVA, just like every smaller utility
    throughout the nation, faces change.
        TVA bureaucrats may like the status quo, but the current monopoly
    structure complete with its arrogance, unaccountability, and
    mismanagement simply is too expensive for both the nation's taxpayers
    and the Valley's ratepayers. Senator Mitch McConnell (R-KY), a senior
    senator from within the Tennessee Valley, introduced legislation in
    April 1998 to make TVA accountable to its customers. The Tennessee
    Valley Customer Protection Act, according to McConnell, ``will require
    TVA to justify its rates.'' To have TVA play in a competitive
    marketplace without unfair advantages, McConnell proposes to have
    agency become a ``public utility'' subject to the authority of the
    Federal Energy Regulatory Commission. He would force TVA to disclose
    publicly its tariffs and schedules, to abide by antitrust laws, and to
    restrain from competing against private-sector businesses for equipment
    leasing and engineering services.
        McConnell's reforms move significantly toward accountability and
    fairness. Other possible steps include the removal of TVA's exemption
    from nuclear decommissioning rules, a requirement that TVA abide by all
    relevant environmental laws and regulations, and an equalization of
    labor laws and civil liability laws among all power suppliers.
        Noting the increased calls for reform, even TVA officials have
    begun to admit that some changes are probably needed, but their
    proposed ``reforms'' are rather cute . . . and suspect. Noting
    criticism that it alone in the utility industry doesn't face oversight
    by the Federal Energy Regulatory Commission, TVA recently offered to
    follow FERC rules voluntarily. But such a move differs substantially
    from submitting to the same rigors of regulation as the rest of
    electricity industry. TVA's proposal, for instance, would exempt it
    from paying penalties for failing to comply with FERC regulation.
        Noting criticism that it alone avoids antitrust oversight, the
    government-owned monopoly also recently offered to allow courts to
    review its actions. But TVA cleverly notes that it would not subject
    itself to the same level of enforcement and penalties as others in the
    power industry. TVA may not want treble damages, but the threat of such
    penalties influences behavior and is needed as a check on all unfair
    competitors.
        The most direct reform, of course, would be privatization getting
    the Federal Government out of the electricity business. At least two
    dozen other countries over the past decade have launched electricity
    privatization programs, including highly developed countries such as
    Australia and Britain, as well as emerging economies such as Argentina
    and Taiwan, as well as former communist countries such as Hungary and
    Poland. This global move from government control to the free market is
    described well in Daniel Yergin's recent The Commanding Heights.
    Senator Frank Murkowski (R-AK), who knows first hand about the
    privatization of the Alaska Power Administration, stated the issue
    succinctly: ``When the rest of the world is trying to get government
    out of business, so should we.''
        The privatization debate offers some fascinating rhetorical
    inconsistencies. Some TVA beneficiaries argue vehemently that the
    government should get out of business and let the free enterprise
    system work its wonders. Although they wouldn't fathom having the Air
    Force compete with Delta Air Lines, some maintain that Washington
    should continue to own and control the nation's largest utility.
        Is there some failure in the electricity market that requires
    government intervention? There was 70 years ago when only 15 percent of
    rural Americans enjoyed electricity. But strong private-sector
    electricity companies exist throughout this country. One could argue
    that there's far more justification for the Air Force to provide rural
    airplane service than there is for the Federal Government to generate
    electricity.
        A long list of suitors--power brokers, independent power producers,
    shareholder-owned utilities, and investment bankers--have expressed an
    interest in TVA assets, assuming the agency reduces its enormous debt.
    Peter Lynch, the famous former manager of the giant Fidelity Magellan
    mutual fund, stated, ``There has never been a serious effort to
    privatize the TVA but if there was I would be the first in line to get
    a copy of the prospectus.''
        Privatization advocates have even come from within the agency.
    William Malec, who retired in 1995 as TVA's executive vice president
    and chief financial officer, argued that selling the ``New Deal
    dinosaur'' could reduce the Federal deficit and add $600 million a year
    in taxes to the Federal till. Privatization, said Malec, ``would move
    one of the largest electric companies in America out from under the
    burden of Federal bureaucracy into the private sector, where I believe
    it could compete effectively, without excuses or alibis.'' Noting that
    a sale would generate big savings for the U.S. taxpayer, Malec called
    TVA's hydropower and coal-fired plants ``dramatically undervalued'' and
    added: ``If TVA's physical generating capacity were valued at only half
    of what it would cost to replace it, TVA's net asset value would be $50
    billion, rather than its current book value of $32 billion.''
        Options for selling TVA's assets are numerous and varied, according
    to Should the Federal Government Sell Electricity, a November 1997
    study by the Congressional Budget Office (CBO). The British privatized
    their electric utilities and other industries, selling common stock in
    the enterprises to the general public. The U.S. government already has
    sold numerous assets, including the Alaska Power Administration,
    Conrail, the U.S. Enrichment Corporation, the naval petroleum reserve
    at Elk Hills, and radio spectrum rights. According to CBO, ``There are
    strong similarities between the sale of spectrum licenses and power
    facilities: many different combinations of asset types and locations
    may be offered, each having a different value for different buyers.''
        Federal restructuring legislation must address TVA, if for no other
    reason than TVA is the nation's largest utility. The government simply
    must get its own house (or businesses) to participate fairly in a
    competitive electricity market as it orders others to do the same. Any
    such legislation must recognize that in this era when hundreds of
    private-sector firms want to generate and sell electricity, the Federal
    Government should no longer do so. It's time for politicians to declare
    victoriously that TVA served its purpose. Yet since situations have
    changed in the past 65 years since TVA was created, it's also time for
    politicians to restructure this outmoded government agency that has
    become too expensive for both taxpayers and ratepayers.
                                     ______

                                   Northeast Midwest Institute,
                                 Washington, DC 20003, October 14, 1999

    The Honorable John H. Chafee,
    Committee on Environment and Public Works,
    U.S. Senate,
    Washington, D.C. 20510.

        Re: Tennessee Valley Authority

    Dear Mr. Chairman: Your 7 October letter did not include questions
        submitted by Senator Mitch McConnell, and subsequent conversations
        with his staff suggest that the Senator's questions were not
        directed to me. However, I'd like to add two thoughts to the
        hearing record, responding to points advanced at the hearing.
        First, Senator Fred Thompson complained that Congress had
    eliminated appropriations for TVA's non-power programs. It needs to be
    made clear that the original suggestion for such action came from TVA's
    own chairman. It also needs to be stated that the $1.2 billion subsidy
    provided to TVA in last year's omnibus appropriation cannot be viewed
    as compensation for the relatively small $50 million that might be
    appropriated for non-power operations.
        Second, Mark Medford stated that TVA had no interest in selling
    power outside of the Tennessee Valley. I would caution the committee
    about TVA's history of shifting its positions. Just a year ago, TVA's
    chairman was suggesting that. the agency would become ``America's power
    company,'' providing electricity (subsidized by taxpayers, I should
    note) throughout the nation.
        Thank you for the opportunity to testify before your committee
    about needed reforms for the Tennessee Valley Authority.
                Sincerely,
                               Dick Munson, Executive Director.
                                   __________
     Statement of Mark Medford, Executive Vice President, Customer Service
                   and Marketing, Tennessee Valley Authority
    Introduction
        Mr. Chairman, I want to thank you for this opportunity to update
    the Committee on a variety of issues relating to TVA's ongoing
    activities and electric industry restructuring, including S. 1323,
    which is entitled the ``TVA Customer Protection Act of 1999.'' My name
    is Mark Medford and I serve as TVA's Executive Vice President for
    Customer Service and Marketing. My responsibilities include working
    with the 159 distributors of TVA electric power and 68 direct-served
    customers within the Tennessee Valley who would be most directly
    affected by restructuring legislation. I also have been designated as
    the lead TVA executive on electricity restructuring matters.
        I applaud this committee's interest in the issues surrounding TVA's
    role in the evolving electricity industry. As you well know, other
    committees in both the House and Senate have been contemplating the
    intricate issues surrounding industry restructuring at both the State
    and Federal level. TVA has been actively involved in these efforts and,
    at the risk of stating the obvious, sorting out this legislative effort
    is not an easy task.
        I also appreciate your care in seeking assurance that new laws and
    regulations pertaining to TVA will not impair TVA's ability to serve
    the needs of the Tennessee Valley in the restructured industry of the
    future.
        I look forward to responding to the questions this subcommittee may
    have as you address how TVA fits into this debate.
    Background on TVA
        The Tennessee Valley Authority is large and complex. TVA is a
    Federal corporation, the nation's largest public power producer, a
    regional economic development agency, and the steward of the Tennessee
    River basin. TVA was established by Congress in 1933, primarily to
    provide flood control, navigation, and electric power in the Tennessee
    Valley's seven State region. The TVA Act also directs its three-member
    Board of Directors to set the lowest feasible electric rates for the
    Valley. TVA is a recognized leader in the Tennessee Valley, certainly
    for providing low-cost electricity, but also for our economic
    development initiatives, and our integrated resource management
        The Tennessee River is the fifth largest river system in the United
    States. It stretches 652 miles from Knoxville, Tennessee to Paducah,
    Kentucky. It encompasses 11,000 miles of shoreline, more than 50 dams
    and a dozen locks. About 34,000 loaded barges travel the Tennessee
    River each year--the equivalent of two million trucks traveling the
    roads. Before TVA, the Tennessee River flooded regularly, causing
    millions of dollars of damage whenever it left its banks. Under TVA's
    integrated resource management the Tennessee River is the only major
    river system in the United States that has not suffered widespread
    flooding in over 60 years.
        TVA's power system has a dependable generating capacity of 28,417
    megawatts. TVA's generation consists of approximately 61 percent coal,
    28 percent nuclear, and 11 percent hydropower. TVA provides wholesale
    power to its 159 local municipal and cooperative power distributors
    through a network of 17,000 miles of transmission lines in the seven
    State region. TVA also sells power directly to 63 large industrial and
    Federal customers. Ultimately, TVA supplies the energy needs of nearly
    eight million people every day over a power service area covering
    80,000 square miles, including Tennessee, and parts of Mississippi,
    Alabama, Georgia, North Carolina, Virginia, and Kentucky.
        TVA's service area is now limited by law. A ``fence'' keeps TVA
    from serving customers outside its region as defined under a 1959 law.
    Under the 1992 Energy Policy Act, electricity companies are prohibited
    from ``cherry-picking'' customers inside the TVA region, the most
    attractive of which have large, concentrated loads.
    TVA's Recent Efforts to Improve
        Over the past 5 years TVA has worked very hard to improve all
    aspects of its operations. Two years ago, TVA adopted a Ten-Year
    Business Plan specifically designed to ensure that TVA will be
    comparable with the evolving electricity industry of the future. The
    Ten-Year Plan was not developed as a plan to avoid financial failure.
    On the contrary, TVA is more financially sound today than it has been
    in many years. We have reversed a pattern of increasing debt that was
    unbroken for 35 years and have now been on a path of debt reduction for
    three consecutive years; reducing our total debt by well over $1
    billion. We have maintained adequate power supply and transmission
    capacity to ensure reliable electricity delivery, even during the
    challenging summers of 1998 and 1999. At the same time, we have reduced
    our workforce from more than 30,000 10 years ago to little more than
    13,000 today. We have established an $800 million fund to fully provide
    for the future decommissioning of our nuclear plants; we sponsor this
    country's 110th largest pension plan holding assets well in excess of
    liabilities. We have done all of this, I might add, with only one
    modest price increase in the last 12 years and with the refinancing of
    the Federal Financing Bank debt.
        The overriding goal of the Ten-Year Plan was simply to keep TVA's
    total delivered cost of power at a level consistent with the forecast
    of the future market price of power in the Southeastern United States.
    I point out this competitive price goal to distinguish it from the
    several operating and financial strategies we committed to pursue in
    order to meet that goal. Among these operating strategies were reducing
    the labor and material components of our cost and increasing the
    utilization of our facilities. TVA committed to take all of the cash
    generated or released by these operating strategies and use that cash
    for debt refinancing and debt reduction, thereby reducing interest
    expense--one of our largest expense categories.
        The Ten-Year Plan is now 2 years old and during that 2 years,
    changes have occurred--some positive and some negative. One obvious,
    and positive, change, for example, has to do with interest rates which
    been substantially lower than the 7 percent estimate of 2 years ago.
    The continued strength of the U.S. economy, coupled with several
    refinancing strategies TVA pursued, means our average interest rate
    will be lower than expected.
        But let me focus on two more complex assumption changes that have
    occurred in the past 2 years.
        The first is in the area of spending for environmental compliance.
    TVA is committed to environmental leadership. With regard to Clean Air,
    last summer TVA announced that it would commit to early compliance with
    regard to NOx reductions--at a cost of approximately $500 million. In
    addition, TVA was one of the first and largest participants in the
    Climate Challenge. However, TVA must also strive to balance its
    environmental leadership commitment with its responsibility to ensure a
    sound financial future. We are following closely developments which
    would assist in that regard. For example, Mr. Chairman, we have been
    very interested in developments such as your Credit for Early Action
    bill (S. 547). Unfortunately, there are significant financial
    uncertainties associated with the possible outcomes of proposals
    relating to Clean Air Act compliance and climate change.
        Two years ago, we noted in our Ten-Year Plan that we could not
    foresee the exact timing or magnitude of expenditures that might be
    required. But, we reassured our stakeholders that such costs, when they
    occurred, should not render TVA non-competitive, because such costs
    would be imposed on almost all industry participants to a greater or
    lesser degree. When that happens, then the market price of power must
    rise, so that all industry participants can recoup their investments.
        The second major change has been in expected needs for power supply
    in our service territory. Demand is now expected to exceed our 1997
    estimate of 2 percent annual growth and perhaps be closer to the near-
    four percent rate of the past decade. We intend to accommodate this
    growth without an increase in the levels of overhead and if we do, it
    will drive our average costs still lower. But we know this growth comes
    at a price. It will impose higher demand for capital investment for
    generating capacity, taking money previously earmarked for debt
    reduction.
        But something else is affecting TVA in terms of power supply and
    that has to do with the availability and reliability of purchased
    power. All industry participants are now well aware of the risks of
    relying on purchased power during times of peak power demand. Just this
    past summer, several power marketing organizations failed to meet power
    supply contracts. This has forced all utilities to question the
    reliability of short-term power contracts to meet peak power demands.
    Some, like TVA, have refused to gamble with reliability and instead
    have committed to the addition of physical plants to ensure an adequate
    and reliable source of electricity. While these plants promise to drive
    down our average cost of power, they will, like the generating
    facilities discussed above, impose higher demand for capital
    investment, taking money previously earmarked for debt reduction.
    TVA's Future Role
        It is an understatement to say policy-makers in Washington and the
    States have spent a substantial amount of time and effort on the future
    of the electricity industry. I can assure you that we in the Valley
    have also dedicated a great deal of time and resources on this
    important issue. We look forward to continuing to participate in this
    debate as Congress moves forward.
        We are pleased that most of the debate affirms TVA's continued role
    within the Valley to manage the river system and to be a provider of
    electricity for Valley residents. In this regard, we want to emphasize
    that TVA supports the TVA Title in the Administration's Comprehensive
    Electricity Competition bill, released on April 15 of this year, and
    greatly appreciates DOE's impressive effort that was undertaken to
    integrate the interests of a wide variety of stakeholders.
        Almost at the same time the Administration was drafting its bill,
    some Members of Congress from the TVA region urged TVA to sit down with
    its distributors and work directly with the Tennessee Valley Public
    Power Association, which represents TVA's 159 distributors, in order to
    develop a regional solution for inclusion in the restructuring
    legislation before Congress. I was pleasantly surprised at the number
    of areas we agreed upon. Of course, there are some outstanding
    differences, just as one would expect when a seller and his customers
    sit down to discuss their relationship in an emerging marketplace. In
    fact, the diversity of the TVA customer base has resulted in some
    differences even among our customers. Nevertheless, we are committed to
    continuing our discussions with TVPPA and all stakeholders in the
    Valley.
        Of course, the Administration's bill is not the only proposal on
    the table. There are many with a variety of provisions. As we move
    forward, we note with an element of caution that there are some
    proposals being actively considered that risk compromising the low-
    cost, reliable electricity available for the people of our region. We
    believe that some aspects of the TVA Customer Protection Act of 1999
    may inadvertently have such effects and it is for that reason that we
    welcome the opportunity to discuss the potential implications of the
    bill today.
    TVA Customer Protection Act of 1999
        First, it is essential that TVA's future role in a restructured
    electric power industry should be addressed in the context of
    comprehensive national electric power industry restructuring
    legislation. To seek to address TVA independently of those national
    policy decisions presents significant risks of fashioning a future for
    TVA that is ill-suited for how the regional electric power markets will
    be operating.
        The TVA Customer Protection Act of 1999 is limited in its coverage
    to only TVA--changing the way TVA provides power within the Valley by
    placing a number of new restrictions on TVA, as well as by expanding
    regulation of the activities of TVA.
        These proposals are, of themselves, somewhat unusual in the context
    of a discussion of ``deregulation'' because they would impose far more
    outside regulation of a governmental entity like TVA at the same time
    that the trend is to reduce the regulation of private utilities. In
    addition, some proposals, such as subjecting TVA to monetary penalties
    for violations of the antitrust laws, are very unfair to TVA ratepayers
    and can only unnecessarily drive their power rates up. When a private
    utility violates the antitrust laws, its stockholders bear that cost.
    However, governmental entities like TVA have no stockholders, and the
    financial costs of such penalties have to be borne by the people who
    are supposed to be served. Other governmental entities are not liable
    for such monetary penalties under the antitrust laws, and there is no
    reason why TVA should be singled out to be treated differently.
        Our major concerns are those provisions of the bill that would
    require FERC and State regulation of TVA prices and for FERC's
    determination of the need for new TVA generation. The fundamental
    purpose of TVA, as far as power production is concerned, is to deliver
    power at the lowest feasible cost to the people of the Tennessee
    Valley. Responsibility for fulfilling that mission is placed on the
    three member TVA Board, nominated by the President of the United States
    and confirmed by the Senate. To superimpose a higher regulatory body,
    FERC, to pass judgment on the decisions of the TVA Board in these areas
    seems both duplicative and inappropriate.
        An examination of the social goal of rate regulation (by FERC or
    State PUCs) in contrast to the mission of the TVA supports the
    inappropriateness of the proposal to subject TVA to FERC rate
    regulation.
        When any corporate entity like a private utility, created for the
    principal purpose of enhancing the wealth of its owners, is granted by
    a government a legally incontestable right to serve a group of
    customers, government has historically seen a need to protect those
    customers from price abuse. It is in this spirit that regulations of
    private utilities were created--to protect customers from prices that
    might exceed those charged in a competitive market. Contrast this to
    the purpose of public power. Public power entities, like TVA, are not
    created to ``enhance the shareholder wealth.'' Quite the contrary, they
    are usually mandated (as TVA is in the TVA Act) to provide power at the
    lowest feasible rate.
        Congress wisely foresaw the need to charge the TVA Board with the
    responsibility to provide for the power needs of the people of the
    Tennessee Valley. Giving FERC and seven separate States (which might go
    seven separate directions--thereby undermining TVA's highly successful
    regional nature), the authority to reverse decisions of the
    Presidentially-appointed TVA Board would have no apparent purpose, but
    would unnecessarily risk TVA's remaining ability to continue to provide
    reliable, low cost power for the Valley.
        You don't need to look much further than this summer to see how
    important this capability is to people in the Valley. Throughout our
    history, TVA has never had the type of outages that other regions of
    the country have experienced in recent years. Just a few weeks ago when
    electric power systems that neighbor TVA and systems across the Eastern
    interconnection were experiencing substantial problems associated with
    record demand, TVA provided the electricity necessary to keep
    businesses running, as well as homeowners' lights and air conditioners
    on in the Valley.
        TVA is now facing a record demand. During a 10-day period in July,
    TVA surpassed our previous all-time peak demand on eight of those days,
    including a Saturday. Clearly, we are at the margins in the Valley and
    need to maintain the flexibility to respond to this growing Valley
    demand in the future. This is a reason we are particularly conerned by
    that would hinder TVA's ability to compete to serve the growing demand
    for electricity in the Valley. For instance, the provision that would
    impose a requirement that TVA secure all future generation facilities--
    for the life of those facilities--through contractual arrangements with
    customers. In practice, that means TVA would be forced to find
    customers willing to sign long-term (20 to 30 years) contracts tied to
    specific power plants--not a likely prospect in a competitive
    marketplace. Effectively, this would prevent TVA from ever pursuing new
    generation resources to meet the anticipated demand in the Valley. And
    recent date suggest that this need may arise sooner rather than later.
        The TVA service territory has recently experienced about four-
    percent demand growth for electricity per year. This trend is projected
    to continue well into the foreseeable future. We do not think their
    future access to cost competitive power from TVA should be contingent
    on such a restrictive contractual obligation.
        A final consideration is the interpretation that the financial
    markets might place on Congressional actions taken. Investors now hold
    all of TVA's debt that finances the power program. Except for the
    pledge of TVA's power revenues, this is unsecured debt. TVA debt is not
    backed by the U.S. Government, nor is it supported by mortgages on TVA
    plant property and equipment--all of which is owned by the U.S.
    Government. It is secured solely by the sound financial operation of
    TVA as well as the Bond Covenants and the provisions of the TVA Act.
        TVA bondholders place considerable reliance on the fact that the
    TVA Board not only has the right to set rates, but also has the
    affirmative obligation to raise rates to the extent necessary to
    provide the funds for debt service. What this means, to a TVA investor,
    is that if current operations do not provide sufficient funds for debt
    service, the ratepayers of the Tennessee Valley will be assessed an
    increased rate sufficient to do so. If the TVA Board's authority and
    responsibility to set final rates were subordinated to authority of
    FERC and State regulatory authorities, there is little question that
    TVA's financing costs and financial vitality would be unnecessarily
    placed at risk.
        TVA's current low-cost, reliable power in the Valley can be
    threatened by attempts to make TVA look and behave exactly like an
    investor-owned utility--which it was never intended to be. Mr.
    Chairman, I for one think the greatest strength in our electricity
    industry, particularly as we move to a new marketplace, is its
    diversity. We have a very broad spectrum of providers, from rural
    electric cooperatives to the biggest private companies, and from
    municipal systems to regional Federal power providers. I believe this
    variety should be embraced and nurtured, not discarded as we move
    forward. Public power and investor-owned utilities make different, but
    very important contributions to the strength of our Nation's electric
    power supply networks. The continued, viable presence of both in a
    future restructured marketplace will help ensure a reliable power
    supply for all on an affordable basis.
    Conclusion
        Mr. Chairman, TVA is working hard to prepare for a restructured
    future competition by reducing our debt, keeping our electric rates
    low, and efficiently managing the Tennessee Valley's integrated
    resource system.
        TVA remains committed to work with the Administration, the Congress
    and TVA stakeholders to determine the nature of the future role that
    TVA will play in this changing industry.
        Thank you for the opportunity to testify before this important
    hearing.
                                     ______

        Responses by Mark Medford to Additional Questions from Senator
                                   McConnell
        Note. In responding to these questions, TVA is expressing its own
    views and is not speaking on behalf of the Administration.

        Question 1. What is the current level of TVA debt?
        Response. As of September 30, 1999, TVA's debt was $26.4 billion.

        Question 2. How much of that total debt is owed to the Federal
    Government?
        Response. None of this debt is owed to the Federal Government.

        Question 3. How much does TVA pay the Federal Government annually
    in debt payments? At that rate, how long would it take TVA to fully
    satisfy its obligations to the U.S. government? What interest rate is
    attached to this Federal debt?
        Response. None of TVA's outstanding debt is owed to the U.S.
    Government. Sometimes the U.S. Government's proprietary capital
    (referred to in the TVA Act as ``appropriation investment'') in TVA is
    incorrectly thought to be debt.
        As part of the 1959 Self-Financing Amendment to the TVA Act and the
    cessation of congressional appropriations to fund the TVA power
    program, the amount of appropriations invested by the U.S. Government
    was calculated. To provide for the systematic reduction of that
    appropriations investment ($ 1.4 billion) over a multi-year period, the
    TVA Act requires TVA to make annual payments to the U.S. Treasury from
    net power proceeds of $20 million, plus an annual ``dividend'' payment
    (referred to in the TVA Act as a ``return on the appropriation
    investment'') which is calculated by multiplying the outstanding
    balance of the appropriation investment by the computed average
    interest rate payable by the U.S. Treasury on its total marketable
    public obligations as of the same date. As of September 30, 1999, the
    outstanding balance was $548 million. Through the combination of these
    two annual payments to date, TVA has paid to the U.S. Treasury a total
    of about $3 billion.

        Question 4. What percentage of TVA bonds are in foreign ownership?
        Response. TVA began actively marketing its bonds in the
    international market in 1995. Since that date, 38 percent of globally
    marketed bonds have been purchased by foreign investors at the time of
    issuance. However, TVA has no way of knowing whether ownership of these
    bonds has changed in the secondary market since that time.

        Question 5. Of TVA bond issuances, how many issues and how many
    dollars of bonds were issued abroad?
        Response. TVA global bonds are registered on both United States and
    foreign exchanges, supported in the international secondary market by
    investment bankers, and marketed to both international and domestic
    investors to broaden demand and improve pricing.
        Since TVA began marketing global bonds in 1995, TVA has issued 8
    original global bonds and reopened 2, which has raised more than $ 10
    billion to refinance expiring or callable debt. This represents about
    half of TVA's total debt issued since 1995.

        Question 6. Will TVA increase or decrease its debt level this year?
    If TVA increases its debt, why will that occur? If TVA decreases its
    debt level this year, how will it do so? In other words, will it pay
    off more of the debt it owes the Federal Government or others?
        Response. TVA reduced its debt in fiscal year 1999 by $308 million
    by generating more cash-flow from operating activities than it
    reinvested in capital.

        Question 7. Every prospectus for TVA bond offerings States that
    payment of interest or principal of these bonds is not guaranteed by
    the U.S. Government, however, in a Forbes article on TVA, Chairman
    Crowell states that if Congress ``did anything legislatively that put
    TVA in a position where it would not succeed, then you end up putting
    it in a bailout position in which the taxpayers would then have to pick
    up the debt.'' If the bonds are not backed by the Federal Government
    and therefore, the taxpayers of this country, then do TVA's ratepayers
    have to pay off that debt?
        Response. Section 29 of the TVA Act expressly states that no
    amendment or repeal of provisions of the TVA Act ``shall operate to
    impair the obligation of any contract made by'' TVA. However, to the
    extent that Congress were to enact legislation which would preclude TVA
    from being capable of paying its debt obligations, some investors may
    feel that they have a claim against the U.S. Government for any
    financial damages that they incurred.

        Question 8. Assuming, as does the General Accounting Office, that
    the U.S. Government may ultimately be liable for TVA's debt
    obligations, does TVA have a REALISTIC, believable idea of how to
    attack and hopefully decrease its $27 billion in debt? If TVA does have
    an updated plan to better manage its debt, please share that plan with
    the Committee.
        Response. As stated in the GAO report, TVA's revised timeframe for
    reducing the debt by one-half is now 2009. TVA plans to formally update
    the plan during fiscal year 2000.

        Question 9. Some estimates of TVA's waiver from pre-payment
    penalties of bonds issued to the FFB have put the cost to the Federal
    taxpayer at $1 billion. Now that TVA has been allowed this waiver, has
    TVA reviewed the impact of this waiver on the Federal deficit and U.S.
    taxpayers against the benefit to TVA? Were the benefits of this waiver
    passed directly on TVA ratepayers? If so, how and in what form will the
    benefits accrue to ratepayers in the Valley? If not, why not?
        Response. From the time of the enactment of the Self-Financing
    Amendment to the TVA Act in 1959 until 1974, TVA sold its bonds to the
    public. When the FFB was established in late 1973, Congress expressly
    stated its intent in section 2 of the Federal Financing Bank Act that
    one of the FFB's central purposes was ``to reduce the costs of Federal
    and federally assisted borrowings.'' Initially, TVA was hesitant to
    rely on financing through the FFB because it questioned whether those
    financings could be more economical than financing in the public debt
    markets. Eventually, TVA began selling all of its bonds to the FFB.
        The FFB had always earned a ``margin'' on its financing
    arrangements with borrowers, including TVA, in the form of a one-eighth
    of 1 percent adder above the U.S. Treasury's comparable cost of money.
    However, as interest rates rose dramatically in the early 1980's, the
    FFB became unwilling to agree to provisions which would allow TVA and
    other borrowers to refinance the FFB debt at face value in exchange for
    the payment of a ``call premium.'' As interest rates began their
    dramatic decline in the late 1980's, the FFB's focus turned away from
    its original mission to reduce Federal agency financing costs and
    instead became a revenue generator for the Federal Government,
    receiving interest payments from TVA that over the years were far in
    excess of the U.S. Treasury's own cost of money. As a result, TVA
    discontinued any future borrowings from the FFB in 1991.
        Beginning in the late 1980's and continuing throughout the 1990's,
    TVA and various Members of Congress requested the FFB to provide TVA
    with the right to redeem this debt at its principal value. However, all
    such requests to the FFB were refused until Congress granted permission
    to TVA in October 1998 to refinance its FFB debt at its principal
    value. Significantly, this action by Congress with respect to the FFB's
    policies was not something unprecedented. It was consistent with
    earlier actions taken by Congress to provide relief to rural electric
    cooperatives and various foreign governments from having to continue to
    pay excessive interest to the FFB.
        With regard to the impacts of this legislation on the Federal
    deficit and the U.S. Treasury, the Federal Government had, of course,
    benefited from the additional revenues it received over a number of
    years due to TVA's payment of interest well in excess of market rates.
    The FFB transferred these TVA bonds several years ago to the Civil
    Service Retirement and Disability Fund and presumably received the
    appropriate financial value of those bonds in exchange at the time of
    the transfer. Due to the enactment of this legislation, the FFB
    received the full $3.2 billion principal value of those TVA bonds from
    TVA and an appropriation of $1.2 billion to compensate for the
    calculated amount of premium that TVA would have otherwise had to have
    paid to be allowed to refinance these bonds early. The total amount was
    then transferred to the Civil Service Retirement and Disability Fund to
    make it whole because of the transfer of the TVA bonds out of its
    investment portfolio. We also note, as commented by Senator Thompson at
    this Committee's October 6 hearing on TVA, that Congress had decided to
    discontinue providing appropriations to TVA to carry out the same
    navigation, flood control, and resource management missions in the
    Tennessee Valley that continue to be funded with appropriations
    elsewhere in the Nation and that one purpose of this refinancing
    proposal was to help mitigate the financial impacts of the
    approximately $50 million in added annual expense that the electric
    power customers in the Tennessee Valley will have to bear in the future
    due to Congress's decision to stop further appropriations to TVA for
    these essential stewardship activities under the TVA Act.
        Under the provisions of the Omnibus Consolidated and Emergency
    Supplemental Appropriations Act, 1999, which authorized TVA to
    refinance the FFB debt, TVA is obligated to use the savings it realizes
    from this refinancing, as calculated using a statutory formula, to
    reduce TVA's debt. The lower total annual interest expense that TVA
    incurs as a result of this refinanced and reduced debt benefits TVA's
    ratepayers.

        Question 10. Recently, the Department of Justice initiated an
    antitrust action against Rochester Gas & Electric for requiring the
    University of Rochester to buy power from it or lose certain research
    and development grants. This sounds a lot like what TVA did to 4-County
    Electric Cooperative and has threatened to do to other distributors who
    give notice of termination of TVA's contracts. How, if at all, are
    TVA's activities in this regard different from activities of Rochester
    Gas & Electric?
        Response. The two situations are fundamentally different. There are
    significant differences between: (1) threatening to withdraw certain
    things or services of value that were being provided under agreements
    entered into separately from a proposed agreement ``not to compete''
    and (2) only offering certain things or services of value prospectively
    to those customers who agree to purchase power in the future under
    certain terms and conditions which do not involve an agreement ``not to
    compete.''
        The Rochester situation involved the former. The utility had
    threatened to cutoff certain research grants unless the university
    signed a new agreement not to compete against the utility for the
    utility's customers. The university had otherwise planned to replace an
    old generating facility, that was meeting part of the university's
    needs, with a new plant from which the university would also sell
    surplus power in competition with the utility.
        On the other hand, the 4-County situation involved no such
    agreement ``not to compete.'' At issue was the TVA Growth Credit
    Program, which was offered up-front to TVA distributors as a benefit in
    exchange for continuing to be long-term TVA customers. The long-term
    commitment on the part of the distributor was and continues to be
    necessary for TVA to derive the corresponding benefits of this program
    (increased power sales to that distributor over a period of time due to
    the new or increased loads) to justify the expense of providing such
    additional benefits to those distributors who elected to participate in
    that program. When 4-County sued TVA to be allowed to continue
    participation even though it might discontinue being a long-term TVA
    customer by giving its termination notice, the court determined that
    there was no basis for 4-County to claim a right to continue in a
    program for which it no longer met the program's eligibility criteria.

        Question 11. Has TVA ever evaluated its generation market dominance
    in the wholesale and retail markets in the Tennessee Valley region?
    Assuming for the purposes of your response, that TVA had generation
    market dominance, how would TVA propose to mitigate that dominance? If
    by compliance with open access requirements, how does TVA address the
    exemption it has under the Energy Policy Act from having to wheel power
    to distributors located in its service territory. Is that true open
    access?
        Response. For decades, TVA has been the sole source of power supply
    for the 159 municipal and cooperative distributors which serve the
    Tennessee Valley, as well as for dozens of industrial and governmental
    retail customers with large or unusual loads. It is no surprise,
    therefore, that a substantial majority of total generating capacity in
    the Valley presently belongs to TVA, although that has begun to change
    this decade as independent power producers are constructing new power
    plants to seek to capture the more lucrative sales opportunities in the
    Eastern United States. TVA does not view its continued ownership of its
    generating resources and its construction of new generation capacity as
    in any way impairing wholesale competition in a future restructured
    marketplace.
        As part of the Administration's electric power industry
    restructuring bill, while the TVA ``fence' would be removed, TVA would
    only sell power that is excess to the needs of the Valley outside the
    ``fence'' and only at wholesale. In addition, TVA's wheeling exemption
    under the Energy Policy Act of 1992 would be repealed at the same time
    that the ``fence'' is removed, thereby enabling other suppliers to use
    the TVA transmission system to compete for loads as wholesale
    competition comes to the Valley. Moreover, unlike any other utility in
    the country, TVA would be required to renegotiate its wholesale power
    supply contracts with all 159 distributors, with regard to the contract
    term, length of termination notice, ability to purchase from other
    suppliers on a partial requirements basis, and stranded cost recovery.
    At present, no distributor in the Valley could purchase power from
    another supplier earlier than September 30, 2007--and TVA would give
    distributors opportunities to do that earlier in exchange for
    satisfactorily providing for stranded cost recovery.
        With regard to retail markets, TVA would be prohibited from selling
    power at retail outside the Valley and to sell power at retail within
    the Valley only to existing customers or under circumstances within the
    control of the local distributors.

        Question 12. Standard & Poor's credit rating agency recently stated
    that ``were Congress to enact the (Administration's) bill, it may be
    construed as indicative of diminished Congressional support of TVA debt
    and could have implications for TVA's rating.'' This tells me that if
    Congress were to let you outside the fence today, without a truckload
    of Congressionally mandated protections and artificial competitive
    advantages, TVA would swim like a rock and sink rapidly. The S&P
    statement combined with what GAO recently said, that: ``TVA could fully
    achieve all of the goals and objectives outlined in (its Ten Year
    Business Plan) plan and still not be positioned to offer competitively
    priced power in 2007 and beyond.'' This makes me wonder who is going to
    ultimately pay for TVA's lack of accountability and lack of
    responsibility. How do we legislate around a $27 billion black hole? If
    we leave the fence up, the ratepayers in the valley will not be happy
    without customer choice. If we remove the fence and allow TVA to
    compete, but on a level playing field, TVA will certainly not be able
    to offer competitively priced power. And we simply cannot remove the
    fence and allow TVA to compete with all its unnatural and artificial
    competitive advantages and without any oversight, accountability or
    responsibility--that would be like allowing the U.S. Air Force to open
    up terminals and new routes to compete with Continental, US Airways,
    United, American, and all other airlines across the country.
        Response. With all due respect to Standard & Poor's, TVA fully
    supports the provisions of the Administration's electric power industry
    restructuring bill that address TVA's future role in a restructured
    marketplace and believes that TVA would continue to be a viable market
    participant in that new marketplace. TVA is equally confident that it
    is taking the steps necessary to enable TVA to continue to offer
    competitively priced power in 2007 and beyond. TVA further believes
    that, given that it is a part of the Federal Government, the
    appropriate forum for oversight is Congress itself--more specifically
    this Committee and the House Transportation and Infrastructure
    Committee--and that such oversight should not focus on how to make TVA
    look and act like an IOU, but on whether TVA's performance in carrying
    out its responsibilities under the TVA Act is serving and advancing the
    public interest.
        Allegations of TVA's ``unnatural and artificial competitive
    advantages'' (1) are not supportable, (2) are actually directed toward
    public power suppliers generally (TVA is not unique), (3) ignore that
    IOUs and public power suppliers each have their own different
    advantages and disadvantages, and (4) ignore that a diversity of
    suppliers has made, and will continue to make, the reliability and
    affordability of electric power supply in the Nation among the very
    best in the world.
        In a restructured marketplace, it is important to stress that,
    under all major restructuring proposals being considered by Congress,
    TVA would only be free to sell power outside the ``fence'' if that
    power were in excess of the Valley's needs and only at wholesale--
    primarily for the purpose of mitigating any stranded costs that might
    result as wholesale competition was introduced in the Valley. The
    amount of any such excess power, of course, would depend upon the
    future power supply decisions made by Valley distributors--since TVA
    cannot unilaterally revise its contractual obligation to meet all of
    their demands until they exercise whatever rights may be available to
    them to purchase power from other suppliers. And TVA strongly opposes
    any legislative proposal that would effectively force any distributors
    wishing to continue to purchase power from TVA to have to purchase
    power from other suppliers.
        In addition, if comprehensive electric power industry restructuring
    legislation is enacted which enables TVA to sell excess energy outside
    the current ``fence,'' TVA has agreed with the Tennessee Valley Public
    Power Association (TVPPA) to give distributors ``Most Favored Nation''
    status with regard to the terms and conditions of contracts with new
    wholesale customers for the supply of firm power for a term of 3 years
    or longer. By doing so, TVA would hardly be free to engage in the type
    of competitively unfair pricing of wholesale power outside the Valley
    that some suggest it might attempt in a restructured market. It is
    significant that a provision to this effect has been included in H.R.
    2944, the comprehensive electric power industry restructuring bill
    introduced by Chairman Barton of the House Commerce Committee's Energy
    and Power Subcommittee.

        Question 13. In TVA's forecasts for future consumption among its
    customers, how much electricity does it project will be needed to
    satisfy its customers for the next 5, 10, 20 years?
        Response. The consumption of electricity in the existing TVA
    service territory is projected to reach approximately 162,800 GWh in 5
    years, 177,500 GWh in 10 years and 189,300 GWh in 20 years.

        Question 14. In TVA's forecasts, how does it anticipate meeting
    this future load growth?
        Response. This future load growth will be met by a number of
    sources of supply to include greater utilization of existing TVA
    generation assets, new TVA generation, generation from Independent
    Power Producers and power distributors, co-generation by large power
    users, generation by other utilities sold into the region, bulk power
    marketers, etc.

        Question 15. How much of your current capacity do you sell outside
    the fence, for exchange power or for other reasons?
        Response. The only power that TVA sells outside the fence is sold
    to the 14 utilities that were grandfathered under the 1959 Self-
    Financing Amendment. Those ``grandfathered'' utilities have since
    merged into 12 companies. The vast majority of TVA's off-system sales
    to these utilities are intermittent sales of exchange energy from TVA
    generation and other resources that is surplus to the needs of the
    Valley at any given time. At different times, depending upon the needs
    of the Valley and the availability of TVA generation and other
    resources, TVA either has surplus energy to sell to the
    ``grandfathered'' utilities or needs to purchase power from other
    suppliers.
        TVA's off-system energy sales in Fiscal Year 1999 totaled about 8.3
    billion kilowatt hours or 5.3 percent of TVA' total energy sales.
        However, during Fiscal Year 1999, TVA purchased about 9.3 billion
    kilowatt hours of energy, making it a net importer of energy during the
    year.

        Question 16. If the valley needs more generating capacity and TVA
    cannot afford any more debt, would TVA be amenable to allowing
    distributors to own any new generation that may be required? If so, how
    much?
        Response. As TVA renegotiates its existing power contracts to
    provide for partial requirements, then it follows that TVA would be
    amenable to distributors owning new generation in order to meet that
    portion of their requirements that they acquire from sources other than
    TVA. However, because under partial requirements distributors could
    choose to supply a portion of their load from a variety of sources,
    including other wholesalers as well as their own generation, there is
    not necessarily a one to one correlation between the amount of power
    not supplied by TVA and distributor-owned capacity. The important
    consideration is for TVA and distributors to reach agreement on partial
    requirements in order for TVA to be able to plan properly for the power
    that distributors will purchase from TVA in the future. In any case,
    TVA will always focus on working with distributors for the good of the
    ultimate consumers of TVA power.

        Question 17. How would TVA's potential stranded investment be
    determined? By whom? How would it be calculated?
        Response. TVA supports the provisions of the Administration's
    electric power industry restructuring bill that provide for FERC's
    approval of an appropriate stranded cost recovery plan for TVA that
    does not unfairly shift costs among customers. FERC would and should
    have the flexibility to make decisions on TVA stranded cost recovery
    that reflect the unique nature of wholesale power supply by TVA to the
    159 distributors who serve the Tennessee Valley. One possibility is
    that FERC may elect to apply its current ``lost revenues'' calculation
    formula in TVA's case. That formula is based upon the price at which a
    utility is able to market capacity ``freed up'' by customer decisions
    to purchase from other suppliers. Under FERC's approach, no particular
    ``investment'' is stranded per se. TVA stranded ``costs'' would only
    come into existence under FERC's ``lost revenues'' formula if
    distributors discontinued purchasing certain amounts of power from TVA
    prior to October 1, 2007, and TVA were unable to obtain an equal or
    higher price for such power from new wholesale purchasers in sales of
    such power prior to October 1, 2007.
        While the final judgment should be FERC's, it appears at this point
    in time that fairness to all customers would dictate that TVA's
    stranded cost recovery be addressed on a system-wide basis by making
    the ``lost revenues'' calculation on the basis of the total revenues
    lost by TVA as a result of the cumulative decisions by distributors to
    purchase power from others within the same general period of time
    (recognizing that individual distributors may be making their decisions
    months apart). Under such an approach, each distributor deciding to
    purchase power from a source other than TVA would bear its
    proportionate share of that total amount as its own stranded cost
    liability.

        Question 18. Will the formula that determines that amount be the
    same for all distributors who leave the TVA system in the future?
        Response. That, of course, is a decision that FERC would make under
    the provisions of the Administration's electric power industry
    restructuring bill--which TVA supports. TVA believes that the stranded
    cost recovery plan approved by FERC should not unfairly shift costs
    among customers. In addition, TVA and TVPPA have expressed interest in
    the possibility of a ``true up mechanism'' that would help avoid the
    creation of ``winners'' and ``losers'' in this process. TVA also
    supports the Administration bill's provision that TVA could not recover
    stranded costs from any distributor after September 30, 2007, without
    that distributor's approval.

        Question 19. What type of notice has TVA provided to each of its
    distributors about its plans to seek stranded cost recovery if a
    distributor attempts to leave the TVA system?
        Response. TVA has had informal discussions with some distributors
    individually as well as with various TVPPA committees such as the
    Restructuring and Rates & Contracts Committees regarding stranded
    costs. Beginning in 1997, distributors have had the option to move to
    the ``five and five'' contract in lieu of the 10-year rolling term
    contract. The ``five and five'' contract contains language which States
    that stranded cost obligations will be fulfilled as long as the terms
    of the contract are fulfilled. TVA has also agreed that it would not
    seek any stranded cost recovery from those distributors who moved to
    the ``five and five'' contract beyond September 30, 2007, unless
    otherwise agreed to between TVA and the distributors.

        Question 20. Are distributors going to be freed of stranded costs
    if they provide TVA with early notice of intent to terminate their
    contract (i.e. Bristol)? How far in advance would notice have to be
    given and what kind of charges would TVA impose on distributors that
    give notice five, seven, or 10 years in advance?
        Response. For the 97 distributors who agreed to a modified
    wholesale power supply contract in 1997 (the ``five and five''), there
    will be no stranded cost liability as long as they fulfill their
    current contractual obligations to continue to purchase all of their
    requirements from TVA through September 30, 2007. Under present law,
    TVA would have the right to seek appropriate stranded cost recovery
    from any other distributor to the extent permitted under FERC's rules
    for recovery of stranded costs. Under the Administration's electric
    power industry restructuring bill, TVA has agreed that, under the terms
    of a FERC-approved stranded cost recovery plan, it will have no right
    to recover stranded costs from a distributor after September 30, 2007,
    unless that distributor approves of such recovery.

        Question 21. Would a Congressionally mandated sale of some or all
    of TVA's assets trigger a right for TVA's distributors to immediately
    cancel or terminate their power purchase obligations without liability
    for payment of TVA's stranded investment? If TVA's position is that its
    distributors would not be liable, please provide a detailed explanation
    of TVA's legal rationale for this position (referencing contract
    provisions and related law/statute language).
        Response. In such a circumstance, presumably the proceeds from the
    mandated sale of TVA assets would be applied to reduce TVA's
    outstanding debt.
        However, given that--(1) TVA has binding contractual obligations to
    supply all-requirements of the 159 municipal and cooperative
    distributors which purchase TVA power and (2) those distributors have
    the legal right to expect TVA to continue to fulfill those
    obligations--we find it difficult to imagine that Congress would
    mandate the sale of any TVA assets that are essential to enabling TVA
    to meet those supply obligations without also accommodating the
    distributors' contractual rights. In that regard, Section 29 of the TVA
    Act expressly states that no amendment or repeal of provisions of the
    TVA Act ``shall operate to impair the obligation of any contract made
    by'' TVA. While Section 29 would not preclude Congress from mandating
    the sale of TVA assets, it does seem to provide a basis for
    distributors to rely on the premise that Congress would take no action
    that would impair TVA's contractual obligations to provide power to
    them.
        To the extent that a congressionally mandated asset sale would make
    TVA unable to meet its contractual obligations to distributors,
    aggrieved distributors might have a claim against the U.S. Government
    for any financial damages that they incurred by having relied on TVA
    for their power supply and having instead to try to secure sufficient
    alternative suppliers of electricity due to that action by Congress.

        Question 22. If TVA's assets are sold to a third party and TVA's
    distributors are released from any obligation to take their
    requirements from that third Party and are not liable for TVA's
    stranded investment, who would bear the stranded investment? Would it
    be TVA's bondholders or the Federal taxpayers?
        Response. In such a circumstance, presumably the proceeds from the
    mandated sale of TVA assets would be applied to reduce TVA's
    outstanding debt. What is not clear from the question is whether TVA
    would be forced to try to meet all of its contractual supply
    obligations with power purchased from others or whether it is presumed
    that Congress would also discontinue TVA's role as a power supplier.
        In this regard, it is important to stress that: (1) all
    distributors currently have a contractual right for TVA to supply all
    of their power requirements; (2) a distributor's wholesale power
    contract with TVA can only be assigned to another supplier with that
    distributor's consent (another contractual right); and (3) the largest
    municipal distributors which have indicated the greatest interest in
    purchasing power from other suppliers recently testified before the
    House Energy and Power Subcommittee that, even if they have the ability
    to purchase power from other suppliers, they envision purchasing at
    least some of their total requirements from TVA for the foreseeable
    future.
        As such, at least some distributors might view such congressional
    action as an impairment of their contractual rights and might file
    claims against the U.S. Government for any financial damages that they
    incurred in obtaining the necessary power to meet their needs from
    other suppliers.
        Since all TVA capacity would have been sold in this circumstance,
    there would be no ``freed up'' capacity to trigger distributor stranded
    cost liability under FERC's ``lost revenues'' formula. To the extent
    that the proceeds from asset sales were insufficient to retire all TVA
    debt, the remaining bondholders might file claims against the U.S.
    Government for losses incurred due to an alleged impairment of their
    contractual rights.
        In the absence of any action by Congress, the U.S. Government has
    no legal obligations to either distributors or bondholders if TVA is
    unsuccessful in meeting its contractual obligations to those parties.
    However, by affirmatively taking actions which remove TVA's capability
    to meet those contractual obligations, Congress might be determined by
    the courts to have obligated the Nation's taxpayers to assume the
    financial consequences of any impairment of the contractual rights of
    those distributors and bondholders.

        Question 23. What is the status of current or ongoing contract
    negotiations between TVA and its distributors? What has been agreed to
    and on what issues are there disagreements?
        Response. In 1997, TVA began working directly with TVPPA,
    representing distributors, to develop a joint position for inclusion in
    a legislative proposal. TVA and TVPPA have now submitted a joint
    recommendation to Members of Congress from the Tennessee Valley region
    which represents a regional consensus and compromise on what TVA's
    future role would be in a restructured electric power industry. As part
    of that regional consensus and compromise, TVA has agreed with TVPPA,
    within 1 year of the enactment of comprehensive restructuring
    legislation, to renegotiate the following provisions of all wholesale
    power supply contracts with distributors: (1) remaining term of the
    contract; (2) length of the termination notice; (3) amounts and timing
    of partial requirements, and (4) stranded cost recovery. For stranded
    cost recovery by TVA from distributors, FERC would make the final
    decision. In the case of disagreement on one or more of the other three
    issues, distributors would have the right to terminate their contract
    with TVA upon 3 years' notice.

        Question 24. TVA has 10 year full requirement contracts with its
    distributors, complete with 10 year notice of termination provisions,
    does it not? What is the purpose of the 10 year notice provision? Can
    private utilities regulated by antitrust laws have similar long-term
    notice of termination provisions in their contracts?
        Response. TVA currently has full requirements contracts with all of
    its distributors. Beginning in 1989, all distributors, with the
    exception of Bristol, Virginia, opted for contracts with 10-year notice
    of termination provisions. The purpose of the 1 0-year notice provision
    was to provide TVA with the appropriate lead time to make decisions
    regarding base load capacity because, at that time, the planning
    horizon for new base load plants was approximately 10 years. Beginning
    in 1997, distributors can opt for ``five and five'' contracts in lieu
    of the 10-year rolling term contracts. 97 distributors have opted for
    the ``five and five'' which, beginning in October, 2002, provides for a
    5-year termination notice. Private utilities have wholesale power
    supply contracts with termination provisions with similar or longer
    advance notice requirements.

        Question 25. What sort of non-power resources, such as economic
    development assistance, does TVA make available to its distributors?
    Are these the sort of resources that TVA declines to provide if a
    distributor gives notice of cancellation or termination of their
    contract with TVA? If TVA's broader mission is to help develop the
    economy of the Tennessee Valley and to help develop all natural
    resources of the Tennessee Valley, why does TVA tie availability of
    such assistance to the purchase of power? Has TVA effectively abandoned
    its original mission?
        Response. TVA provides a variety of resources to power distributors
    and their customers including community development assistance,
    financing assistance, incentive rates and credits, technical assistance
    and marketing programs. It is important to stress that all of these
    resources are currently paid for with TVA power funds and, hence, there
    must be a commensurate benefit to the power system to warrant such
    expenditures of power funds.
        Certain of these programs constitute investments in economic
    development of distributors' service territory that take years in order
    to provide the level of benefits (in the form of increased distributor
    loads which would be supplied by TVA) necessary to justify the amount
    of power funds expended. Only if distributors agree to remain long-term
    customers of TVA does the TVA power system have the ability to recoup
    its investment, and distributors electing to participate in such
    economic development programs understand up front that that is what is
    necessary for them to qualify. Therefore, under the provisions of these
    programs, if a participating distributor chooses to give notice of
    contract termination, that distributor becomes ineligible to continue
    to participate in the program.
        The application of program benefits in this fashion in no way
    minimizes or contradicts the original mission of TVA, which includes
    the economic development of the Valley. Congress's decision several
    years ago to discontinue providing appropriations for TVA economic
    development programs has required that TVA limit itself to funding
    those economic development activities that are of value to the TVA
    power system, as well as to the Valley in general. The reliance on
    power funds to finance the economic development programs makes it
    necessary for TVA's power customers, who are paying for these costs in
    their electric power rates, to receive sufficient benefits in return.
    Expending funds for economic development that would only benefit non-
    TVA customers would not meet this test and would be unfair to TVA
    ratepayers.

        Question 26. During all of your discussions about the future of
    TVA,is there ever any discussion or attempt at valuation of the TVA
    assets? What is the current book value of all of TVA's assets, both
    generating and transmission, and what, approximately, would those
    assets yield if they were sold in today's market? Please include the
    assumptions used to derive this market value.
        Response. The value of generation assets is primarily dependent on
    the projection of the future market price of power. There is currently
    no consensus or market-transparent long-range projection upon which to
    base such a valuation. Therefore, any projection of market prices would
    be speculative at best. For example, a 1998 study by the Congressional
    Budget Office (CBO) stated that the ``market value'' of TVA's assets is
    highly uncertain. The CBO estimated that selling TVA's assets would
    produce a value that could range from a gain of $2 billion to a loss of
    $6 billion.
        TVA's net book value of property, plant and equipment as of
    September 30, 1999 was $28.4 billion and total assets were $33.4
    billion.

        Question 27. Has any independent regulatory authority ever found
    that TVA's $8.5 billion investment in non-producing power production
    capacity was prudent or was (or is) used and useful for the public's
    service? If not, then should not TVA undergo an initial fact-finding by
    FERC to establish a baseline of prudent investment by which FERC could
    then apply stranded cost principles? Would an investor-owned utility
    that has wasted $8.5 billion in a never-used or useful plant, that has
    never been recovered in rates, be allowed to recover that amount as
    stranded costs? If not, why should TVA be given special treatment?
        Response. While no independent regulatory authority per se
    evaluated the prudency of TVA's power facility construction decisions,
    it should be stressed that, in enacting legislation to increase TVA's
    bond ceiling by $15 billion in 1979, both the Administration (which
    proposed the bond ceiling increase) and Congress reviewed TVA's power
    supply and demand forecasts for the Valley and the proposals for all of
    those new generating facilities required to meet the Valley's projected
    needs for power. Included among those facilities were all of those
    which were later either canceled or placed in deferred status.
        Under FERC's ``lost revenues'' formula, there would have to be
    ``freed up'' capacity which TVA would have to market elsewhere as a
    consequence of a distributor's decision to purchase power from others
    before that distributor could have stranded cost liability. To the
    extent that certain investments were not being recovered in TVA's rates
    for the sale of the electricity from that ``freed up'' capacity at the
    time stranded cost liability was determined, those investments already
    would not have an impact on a distributor's stranded cost liability.
    However, to the extent that the costs of such investments were being
    recovered in TVA's rates, there is no fair or rational basis for
    artificially excluding that cost recovery from the TVA rate to be used
    in the ``lost revenues'' formula.
        Unlike IOUs, TVA has no stockholders to whom regulatory authorities
    typically allocate the financial burdens of uneconomic investments.
    Therefore, all costs incurred by TVA must be borne by TVA ratepayers.
    Using any hindsight-based prudency review of certain TVA
        investment decisions for the purpose of artificially excluding some
    costs from the determination of the stranded cost liability of
    departing customers would inappropriately and unfairly transfer those
    costs to TVA's remaining customers.

        Question 28. Does TVA follow ``least-cost planning'' when it
    evaluates the need to build or buy when planning to meet growth in
    demand?
        Response. Yes, in accordance with the requirements of section 113
    of the Energy Policy Act of 1992.

        Question 29. What redress, if any is available for retail and
    wholesale customers of TVA for alleged breaches of power sale
    commitments? Can TVA be take to court for breach of power sale
    contracts? Can customers complain to FERC? If there is no means for
    judicial or regulatory redress, what would be a good solution to give
    these customers certainty that TVA will stand by its contractual
    commitments?
        Response. While it is true that the TVA Board's determinations of
    wholesale power rates are not reviewable, there is no doubt that TVA
    retail and wholesale customers can take TVA to court for any alleged
    breach of a power sale contract and obtain appropriate remedies if the
    court determined that TVA had in fact breached its contractual
    obligations. FERC does not have jurisdiction over TVA power sales
    contracts, and--given the availability of judicial redress--no such
    jurisdiction is necessary or appropriate.

        Question 30. In an article September 17, 1999, in the Chattanooga
    Times/Free Press, it was reported that ``TVA expects to end the current
    fiscal year with a net income of $119 million and pay down its debt by
    $306 million.'' Is $306 million debt retirement for this fiscal year
    correct? Is this not way short of what is needed to be near the TVA Ten
    Year Plan or even GAO's suggested 10 now 12-Year Plan? What is TVA's
    revised plan to reduce its' debt in a timely manner, and is this plan
    sufficient for TVA to be competitive in the future?
        Response. TVA reduced its debt by $308 million for fiscal year
    1999. While this amount was below what TVA originally anticipated in
    its Ten Year Plan, the plan was designed to ensure that TVA would be in
    a position to deliver electricity to its customers at prices that would
    remain competitive in the future deregulated utility industry. Reducing
    the debt by half was a strategy to attain the goal, not the goal
    itself.
        As stated in the Chattanooga Times/Free Press article which is
    referred, ``. . . the debt will remain higher than forecast in the 1 O-
    year plan because of bigger-than-expected increases in spending for new
    generation and air pollution controls. Those expenditures should not
    hurt TVA's competitiveness, however. The extra generation reflects
    TVA's robust 4 percent growth in annual sales--a pace that is nearly
    twice the national average. Air pollution control measures are being
    required of all utilities under recent Federal amendments to the Clean
    Air Act.''
        The GAO report also stated that ``. . .since it is not possible to
    accurately predict what the market price of power will be in 2007, TVA
    could still achieve its objective of offering competitively priced
    power, even if it does not fully achieve the plan's other goals and
    objectives.''
        TVA remains on track in meeting the goal of providing competitively
    priced power in the future restructured electric power industry.
                                     ______

     Responses by Mark Medford to Additional Questions from Senator Inhofe
        Note. In responding to these questions, TVA is expressing its own
    views and is not speaking on behalf of the Administration.

        Question 1. Why doesn't TVA think that the stranded cost formula
    that FERC applies to public utilities should apply to its own stranded
    costs?
        Response. TVA's position, consistent with the Administration's
    comprehensive electric power industry restructuring bill, is that FERC
    should have the flexibility to consider the unique nature of wholesale
    power supply in the Valley when deciding the appropriate approach to
    awarding stranded costs to TVA. At present, FERC's rules are designed
    to address, on a case-by-case basis, the very discrete impacts of a
    decision by one wholesale customer to discontinue purchasing power at
    the end of a contract with a supplier.
        Because TVA would be required under the Administration's Bill to
    renegotiate, within a one-year period, all wholesale supply contracts
    with 159 separate distributors (none of which may otherwise purchase
    power from any other supplier earlier than September 30, 2007), there
    are several reasons why FERC should retain the flexibility to exercise
    its own judgment in this regard and why that flexibility is important
    to ensure fairness to all customers in the Tennessee Valley.
          Unlike in other regions of the country, the vast portion
    of power supplied in the Tennessee Valley is at wholesale, exclusively
    by TVA. Consequently, the financial impacts caused by numerous separate
    distributor decisions, potentially creating large amounts of ``freed
    up'' capacity on a cumulative basis, are far more profound for TVA's
    overall operations, and for those customers who continue to purchase
    power from TVA (who are likely to be small or rural customers), than
    they are for IOUs (which are substantially retailers and less impacted
    by wholesale customer decisions).
          Most TVA stranded cost issues would likely be presented
    to FERC in the context of partial requirements decisions made by 159
    different municipal and cooperative distributors of TVA over a period
    of time. FERC's consideration of the entirety of stranded cost recovery
    in the context of a plan--as opposed to numerous case-by-case
    determinations made at the time of individual decisions--would be the
    best approach for ensuring that all TVA customers are treated fairly,
    as well as being more administratively workable for all parties
    concerned. The rules FERC applies to IOUs do not make provision for
    such a system-wide plan approach--largely because no IOUs share TVA's
    overwhelming wholesale nature. For example, many IOUs sell less than 10
    percent of their power at wholesale, while TVA sells approximately 85
    percent of its power at wholesale.
          TVA and distributors have expressed interest in the
    possible implementation of a stranded cost recovery plan with a ``true
    up'' mechanism that would help prevent creating ``winners'' and
    ``losers'' as markets change during the stranded cost recovery period.
    There is no provision for such a ``true up'' mechanism in the rules
    FERC applies to IOUs. FERC should retain the flexibility to consider
    and approve such a plan if it deems it fair and appropriate.

        Question 2. Why don't you think that FERC should have jurisdiction
    over TVA's wholesale sales? TVA has argued that it makes no sense for
    one group of Presidential appointees to review the rates set by
    another, but isn't TVA the only Federal electric utility that is
    completely self-regulated? Why should TVA be subject to any less
    oversight than the Bonneville Power Administration? Isn't TVA already
    subject to Federal environmental regulations pursuant to the
    jurisdiction of the Environmental Protection Agency?
        Response. There is no obvious benefit for TVA's customers to be
    achieved by subjecting TVA's wholesale rates to FERC. It is TVA's
    perspective that such FERC jurisdiction risks higher electric power
    rates for the citizens and businesses of the Tennessee Valley Region,
    and TVA steadfastly opposes any proposal that would so unnecessarily
    increase Valley power rates.
        Unlike IOUs, TVA is a public entity dedicated to meeting the public
    good, rather than increasing the wealth of stockholders. Unlike BPA and
    the PMAs, TVA is not only headed by one Presidential appointee
    confirmed by the Senate, but by a Board comprised of three such
    Presidential appointees. The members of the TVA Board are expressly
    charged under the TVA Act to use their collective personal judgment to
    set power rates ``as low as are feasible''--a different standard from
    that which FERC is required to use in its review of wholesale power
    rates.
        It makes no sense, at a time when the industry is moving to less
    regulation, to subject the single most important decision to be made by
    one group of Presidential appointees to review by another--let alone
    one which is obligated to use a different standard from that which the
    TVA Board is obligated to use.

        Question 3. The Bonneville Power Administration has successfully
    renegotiated long-term power contracts with a majority of its existing
    preference customers. Why hasn't TVA been able to achieve similar
    results? Is there any real difference between a contract that requires
    10 years' notice of termination and a contract terminable on 5 years'
    notice only after a 5-year waiting period? Is this the kind of
    flexibility that TVA had in mind when TVA pledged, in its Ten-Year
    Plan, to work with customers that were seeking ``more flexible''
    contracts?
        Response. We are not familiar with the details of BPA's contract
    renegotiation efforts or the issues involved.
        In 1997, TVA offered an alternative contract arrangement to power
    distributors whereby they could elect to enter into a contract which,
    effective 5 years after the date of execution, could thereafter be
    terminated upon giving a 5-year notice (the ``five and five''). And 97
    of the total of 159 distributors of TVA power elected this option and
    are currently 2 years into the initial 5 year period.
        Additionally, under the Administration's bill, TVA would begin
    negotiating certain key features of all of its wholesale power
    contracts with distributors on the date of enactment of comprehensive
    electric power industry restructuring legislation. If TVA and a
    distributor failed to reach agreement on a contract within 1 year
    following enactment, that distributor would thereafter have the right
    to terminate its existing power supply contract with TVA by giving a 3-
    year notice.
        Most distributors who did not agree to the ``five and five''
    contract continue to purchase power from TVA under the 10-year
    contract, which is substantially different from the ``five and five''
    contract. The 10-year contract has a rolling 10-year term and,
    therefore, may only be terminated by giving a 10-year notice.
        The ``five and five'' contract was one of the efforts planned in
    1997 to accommodate customers seeking more flexible contracts. TVA has
    continued negotiations with TVPPA and its members over the last 2 years
    to address further contract options.

        Question 4. Can the cost of facilities not being used to serve
    TVA's customers truly be considered ``stranded costs''? Doesn't the
    term ``stranded costs,'' as used by FERC, refer specifically to costs
    stranded as a result of the transition to wholesale electric
    competition, and not simply to utilities' uneconomic assets and/or
    investments?
        Response. Under the present terms of TVA's wholesale power supply
    contracts with distributors, the earliest any distributor may
    discontinue purchasing all of its requirements from TVA is September
    30,2007. When TVA offered distributors shorter termination notice
    contract terms (the ``five and five'') in 1997, it was agreed that, for
    those distributors who signed the ``five and five,'' there would be no
    stranded cost liability after September 30,2007. This agreement
    presumed that each distributor would continue to purchase all of its
    power requirements from TVA through that date. TVA has also agreed, as
    part of the Administration's electric power industry restructuring
    bill, that distributors would not be liable for stranded costs after
    September 30,2007.
        In determining stranded costs, FERC does not examine the power
    supplier's assets. Under FERC's ``lost revenues'' approach to
    calculating stranded costs, TVA would only be entitled to recover
    additional amounts from a distributor as stranded costs if: (1) that
    distributor purchased some or all of its requirements from another
    supplier prior to September 30,2007, and (2) TV A were unable to market
    the capacity ``freed up'' by that distributor's decision at a price at
    least as high as the price that would otherwise be paid by that
    distributor.
        Consequently, irrespective of the quality or nature of TVA's power
    assets, if the two above factors are met, the distributor should be
    liable for stranded costs. If that distributor is not liable for
    stranded costs in such a case, those costs (in the form of lost
    revenues) would unfairly have to be borne by TVA's remaining customers.

        Question 5. Should TVA's wholesale customers and their retail
    ratepayers be required to finance TVA's activities overseas? If so,
    why?
        Response. TVA's overseas activities are either: (1) activities
    which benefit the power program (and, hence, benefit ratepayers); or
    (2) activities for which TVA's costs are reimbursed, at no expense to
    ratepayers, by others who benefit from such activities. The major
    example of an activity that benefits the power program and ratepayers
    are TVA's global financing activities--which reduce TVA's overall
    financing costs.

        Question 6. TVA's Ten-Year Plan called for reduced capital
    expenditures, including a self-imposed ban on capital expenditures for
    new generation. Last month, David Smith, TVA's Chief Financial Officer,
    told Congress that TVA would need to build new generation in order to
    meet its distributors' needs in the future. Given that capital
    expenditures reduce TVA's available cash and therefore reduce the funds
    available to pay down TVA's enormous debt, aren't there other ways of
    meeting distributors' power needs? Why couldn't TVA permit distributors
    to self-generate some of the power necessary to meet their native load
    growth? Further, if the statutory barriers to a competitive wholesale
    electric market in the Tennessee Valley were removed, couldn't the
    distributors maintain adequate power supplies by purchasing some of
    their needs, if it were necessary and economical to do so, from
    suppliers other than TVA?
        Response. TVA's Ten-Year Plan did not include a self-imposed ban on
    capital expenditures for new generation. On page 8, the Plan states ``.
    . . TVA will need additional power to meet the demand resulting from
    growth in the Valley over the next 10 years. The decision whether to
    purchase the power or increase existing capacity will be made at the
    appropriate time, based on the economics of the projects and the level
    of certainty surrounding the load forecasts.''
        TVA's Plan recognized that there would be economic choices to make
    along the way which could require additional capital investment to
    achieve a lower cost of power or to increase system reliability. The
    recent decision to add certain amounts of peaking capacity was one such
    example.
        TVA believes that the experience of the past two summers, where
    utilities reached all-time peaks and transmission constraints affected
    the ability of utilities to move power across the grid, which resulted
    in rolling blackouts in some areas, further supports the decision to
    place additional generating resources inside the Valley.
                                   __________
     Statement of Austin Carroll, on Behalf of the TVA Kentucky Managers'
                                  Association
        Mr. Chairman, members of the Committee, my name is Austin Carroll
    and I am General Manager of the Hopkinsville, KY Electric System. I am
    here today on behalf of the Kentucky Managers' Association, which is
    the group of 18 not-for-profit municipal and rural electric cooperative
    utilities in Kentucky that buy 100 percent of their power supply from
    the Tennessee Valley Authority. On behalf of the Kentucky TVA
    distributors I appreciate the opportunity to present our views on S.
    1323 as introduced by Senator McConnell and Senator Bunning.
        Let me begin by thanking Senator McConnell for the effort he has
    made to try to protect the interests of consumers in Kentucky and the
    Tennessee Valley. As consumer-owned utilities, our primary mission is
    to keep electric rates as low as possible for our consumer-owners and
    we appreciate the senator's openness to our views and concerns.
        The Kentucky Managers Association supports the intent of some of
    the provisions of S. 1323, but disagrees with others. We have discussed
    this thoroughly with Senator McConnell's office and he is aware of
    these concerns, which I will discuss in more detail in a moment.
        Fundamentally, however, we believe that many of the issues raised
    in S. 1323 are directly related to the question of the role of TVA in a
    ``restructured'' or more competitive electric utility industry and are
    best addressed in a comprehensive TVA title to a Federal restructuring
    bill. Therefore, we cannot endorse S. 1323 as it is presently drafted.
        The KY Managers, acting through the Government Relations Committee
    and the Board of Directors of our regional trade association, the
    Tennessee Valley Public Power Association (TVPPA), has been working for
    the last 3 years to develop a comprehensive set of policy
    recommendations on TVA restructuring. Those recommendations have been
    turned into a draft ``TVA title'' that could be incorporated into a
    Federal restructuring bill. A copy of that draft title is attached to
    my written testimony.
        In the process of developing that draft, TVPPA worked with TVA and
    with all distributors to try to reach consensus on a single draft
    title. While we still have a few areas of disagreement on policy and
    wording, we are in substantial agreement that changes are needed in the
    contractual relationship between TVA and the distributors and in the
    wholesale electric market in the region. We think this is a significant
    achievement.
        Specifically, we agree with provisions that:

          Take down the ``fence'' to allow TVA to sell excess power
    at wholesale outside the region. At the same time, the ``anti-cherry
    picking'' provisions of the Energy Policy Act of 1992 should be
    repealed to allow outside suppliers to sell power at wholesale inside
    the Valley;
          Allow current restrictive, long-term wholesale contracts
    between TVA and the distributors to be shortened and modified to give
    distributors the right to purchase all or portions of their wholesale
    power and energy from other suppliers;
          Subject the rates, terms and conditions relating to use
    of TVA's transmission system to regulation by FERC to ensure open, non-
    discriminatory access by distributors and others;
          Allow FERC to determine TVA's stranded costs, if any,
    resulting from shortened or canceled contracts prior to October 1, 2007
    using the same standards and rules that apply to other utilities but
    ensuring that costs are not shifted among customer groups;
          Eliminate TVA's retail ratesetting authority over
    distributors and allow those not-for-profit municipal and cooperative
    utilities to be regulated at the local level by local citizen boards,
    as they are in most States; and
          Apply Federal anti-trust laws to the TVA power program as
    they are applied to local governmental entities, without the financial
    penalties that would burden our consumers.
          Limit TVA sales outside the Valley to wholesale excess
    energy transactions; and
          Limit TVA retail sales inside the Valley to existing
    customers. Any new retail sales would be allowed only under
    restrictions agreed upon with distributors and if those sales would not
    bypass local distribution facilities.

        We hope it is clear from this description that TVPPA and the
    distributors are not burying our heads in the sand and pretending that
    utility restructuring will ``just go away.''
        We recognize that the utility industry is moving toward greater
    competition and that all utilities must adapt to the changing
    environment. We also know that Congress has the authority to require
    changes in TVA and hope that those in the Valley will be allowed to
    help shape the changes.
        At the same time, we believe that significant changes to TVA's
    operations or mission must be dealt with comprehensively, in the
    context of an overall Federal restructuring bill.
        Overall, we believe that TVA has been good for the Valley. For more
    than 60 years, TVA has provided reliable, reasonably priced power for
    consumers and has promoted the economic development of the Valley. We
    don't want to make piecemeal changes to TVA that result in higher costs
    for consumers or that undermine its ability to be a competitive source
    of power for the future.
        Let me turn now to the specifics of S. 1323:
          We think that the ``lynchpin'' of any TVA restructuring
    bill must be opening the Valley to wholesale competition through repeal
    of the ``fence'' and ``anti-cherry picking'' provisions of current law.
    S. 1323 is silent on these issues;
          We believe that for consumers to benefit from opening the
    Valley to wholesale competition, TVA must be allowed to develop new
    resources to meet electric demand in the Valley without restrictions
    that do not apply to other potential suppliers. Section 5 of S. 1323
    effectively makes TVA the power supplier of last resort, rather than a
    viable and reliable source of power for Valley. Further, it would
    require the distributors to sign long-term contracts for TVA power at a
    time when we are seeking more flexibility through short-term contracts.
    We think these limitations are incompatible with today's market and we
    cannot support them.
          We agree that TVA's transmission system should be subject
    to FERC jurisdiction but do not support FERC jurisdiction over TVA's
    wholesale rates. We support a position which would require TVA and any
    distributor that is unhappy with a proposed rate to participate in an
    alternative dispute mechanism in the Valley to try to resolve the
    dispute.
          We support application of Federal antitrust laws to TVA
    in the same way they apply to State and local governments and do not
    support assessing monetary damages against TVA. Those costs would be
    passed directly on to consumers and it is unfair to shift these costs
    to consumers who would ultimately have to pay for them in the TVA rate
    base.
          We support directing FERC to determine TVA's stranded
    costs, if any but do not think requiring ``Monday morning
    quarterbacking'' of past investments serves any useful purpose.
          We agree with the limitations proposed on future TVA
    retail sales inside the Valley and appreciate the inclusion of TVPPA's
    language on this issue.
          We agree that TVA should not be allowed to recover in
    rates any of those costs associated with off-shore ventures or that are
    not activities that benefit the distributor. The language needs to be
    clarified to make sure it does not apply to TVA's economic development
    activities inside the Valley.
          We support requiring full disclosure by TVA of
    information that other publicly owned power suppliers are required to
    provide.

        Mr. Chairman, Senator McConnell, I believe my statement covers the
    major provisions of S. 1323. I would be happy to answer any questions
    the Committee may have.

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