[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

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                                                                   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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