[Senate Hearing 107-980]
[From the U.S. Government Publishing Office]
S. Hrg. 107-980
THE TENNESSEE VALLEY AUTHORITY
AND FINANCIAL DISCLOSURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
THE TENNESSEE VALLEY AUTHORITY AND THE FINANCIAL DISCLOSURES THE
AUTHORITY MAKES FOR THE BENEFIT OF BONDHOLDERS AND POTENTIAL INVESTORS
__________
SEPTEMBER 17, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
89-115 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Dean V. Shahinian, Counsel
Steve R. Patterson, Republican Subcommittee Staff Director
Michelle R. Jackson, Republican Counsel
Daris Meeks, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, SEPTEMBER 17, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 2
Senator Enzi................................................. 3
WITNESSES
Skila Harris, Director, Tennessee Valley Authority............... 5
Prepared statement........................................... 35
Alan L. Beller, Esq., Director, Division of Corporate Finance,
U.S. Securities and Exchange Commission........................ 7
Prepared statement........................................... 39
Craven Crowell, Chairman, GCW Consulting; former Chairman,
Tennessee Valley Authority..................................... 22
Prepared statement........................................... 42
Allan G. Pulsipher, Executive Director, Center for Energy
Studies, Marathon Oil Company Professor of Energy Policy,
Louisiana State University..................................... 25
Prepared statement........................................... 44
Daniel Gates, Managing Director, Moody's Investors Service....... 28
Prepared statement........................................... 46
Additional Material Supplied for the Record
Letter to Chairman Paul S. Sarbanes, from Mitchell E. Daniels,
Jr., Director, OMB, dated September 16, 2002................... 49
Revised letter to Chairman Paul S. Sarbanes, from Mitchell E.
Daniels, Jr., Director, OMB, dated September 16, 2002.......... 50
(iii)
THE TENNESSEE VALLEY AUTHORITY
AND FINANCIAL DISCLOSURE
----------
TUESDAY, SEPTEMBER 17, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:37 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
This morning, the Committee meets to hold a hearing with
respect to the Tennessee Valley Authority and the financial
dis-
closures the Authority makes for the benefit of bondholders and
potential investors.
During the Committee's markup of the accounting and
investor protection legislation, Senator Bunning offered a
proposal to make the TVA subject to the Securities Act and the
Exchange Act.
At the time, and since we were really focusing in a
different direction, I indicated to Senator Bunning that I
would be happy to hold a hearing on this issue. Therefore, we
did not address it in the course of that markup. Other Members
of the Committee have also expressed an interest in this issue,
including Senator Miller, and others.
The TVA, of course, is a Federal corporation created by
Congress in 1933, pursuant to the Tennessee Valley Authority
Act. Today, TVA is the Nation's largest public power company
and has operating revenues of over $7 billion. Its power
service area covers 80,000 square miles in the southeastern
United States, including almost all of Tennessee and parts of
Kentucky, Georgia, Alabama, Mississippi, North Carolina, and
Virginia. I hope I have them all.
Ms. Harris. Yes, you do.
Chairman Sarbanes. Unlike public corporations, the TVA is
owned entirely by the U.S. Government. In other words, it has
no public shareholders. It is governed by a three-member Board
of Directors, each of whom is appointed by the President and
confirmed by the Senate. TVA funds itself by selling
electricity to customers, as well as by selling bonds and
raising capital through other nonequity financing. It has
approximately $25 billion of debt outstanding and securities
are held by over 200,000 individuals and institutions.
The TVA published annual and quarterly reports, information
statements, offering circulars, of course, press releases, and
other data for the benefit of investors. Its financial
statements are certified by a major accounting firm and it is,
of course, subject to the oversight of the Congress, the
Comptroller General, and an internal Inspector General.
TVA is not required, however, by Federal law to make
specific disclosures for investors or file prospectuses or
periodic reports with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The Committee looks forward this morning to hearing
testimony about the extent of the disclosures that TVA provides
for the benefit of investors, to look at the question of
whether TVA should provide additional disclosures, and the
further question of the pros and cons of requiring by Federal
law that the TVA should provide specific disclosures, such as
those that would be required if they were subject to the
Securities Act of 1933 and the Securities Act of 1934.
We have a number of, we think, distinguished witnesses with
us this morning. It is our intention to proceed with two
panels.
The first panel will be Ms. Skila Harris, a Member of the
TVA Board of Directors. She was confirmed by the Senate in
November of 1999, for a term that extends to May of 2008.
Previously, Ms. Harris worked at private engineering and
management consulting firms, held positions with the U.S.
Synthetic Fuels Corporation and the U.S. Department of Energy.
She serves on the boards of the Knoxville Area Chamber
Partnership and the East Tennessee Foundation.
I will defer introducing the second panel until they come
to the table, but our other witness on this panel is Alan
Beller, Director of the Division of Corporate Finance of the
SEC. Mr. Beller has increased the frequency of the Division's
review of disclosure filings, implemented regulatory
initiatives that improve the filings of public companies. Of
course, the SEC is very much in the spotlight nowadays,
including, amongst the other Divisions, the one that Mr. Beller
directs. Mr. Beller is an expert on corporate and securities
law and previously was a partner of the law firm of Clary,
Gottlieb, Steen, and Hamilton.
We had invited the Office of Management and Budget to
testify. But they apparently found themselves unable to send a
witness, so we will not hear directly from the OMB this
morning.
Before I turn to the witnesses, I will yield to my
colleagues.
Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman. I would like to
thank you for holding this very important hearing.
I hope Members remember that back during the markup of the
Sarbanes-Oxley Accounting Standards bill, I had an amendment to
place the Tennessee Valley Authority under the jurisdiction of
the SEC. The Chairman was kind enough to agree to hold a
hearing on this matter and I appreciate his doing so so
quickly. He and his staff--and there are a bunch of them, so, I
want to thank them for their hard work for setting this up--
have done their usual professional job. I also appreciate the
witnesses coming today very much.
Although it is called the Tennessee Valley Authority, it
means a lot more to many of my constituents in Kentucky. I know
some here may be wondering what in the world does the Banking
Committee have to do with the TVA? The fact of the matter is
that the TVA has no regulatory body oversight of any kind by
anyone, except the Congress of the United States. So it is up
to us to keep an eye on what is going on with the TVA.
In the context of the Banking Committee, TVA has a
tremendous amount of publicly-traded debt, about $20 billion
worth. And it has a Aaa rating. But this rating is largely due
to the fact that TVA is owned by the Federal Government and can
unilaterally raise its electricity rates. There are investors
all over the country that have bought TVA bonds because it is
owned by the Government. But nobody really oversees TVA.
In light of all the recent problems we have seen in
financing of private-sector companies, it only seems fitting
that Congress makes sure that someone is watching out for the
TVA investors. Right now, they do not have all of the same
consumer protections that most other bondholders enjoy. We do
not need an Enron in the middle of the Tennessee Valley.
To help protect against any problems at TVA, I proposed
extending the SEC's oversight to TVA. If it is good enough for
the private sector, I think we need to closely look at imposing
the same accountability to quasi-government groups like TVA.
I would like to see more disclosure. I would like to see
more accountability. For all we know, everything might be going
just fine at TVA, but we do not know right now.
Mr. Chairman, to be fair, I do not think we should ask TVA
to do anything more than private-sector companies do. But I do
not think we should ask them to do less, either. Too many
investors have too much money invested here for us not to be
sure and not to exercise fair and thorough oversight.
At the very least, I would like to see the TVA follow
Fannie Mae and Freddie Mac's lead and voluntarily register with
the SEC. I cannot understand why that would be an unnecessary
burden. For instance, if they trade securities on the New York
Stock Exchange, which they do, they should have to follow the
same rules as others who trade on the Exchange.
Mr. Chairman, I am not here to bash TVA. Everybody knows
what they have done for the southeastern United States and
appreciate the long legacy of their service to our part of the
country. But given some of the problems that they have had in
running up debt, and given the disputes that they have had with
OMB over some of their financing, I am concerned that we have
not been keeping a close enough watch on TVA. I think it is
time to change that, and today's hearing is a good start.
Thank you again, Mr. Chairman, for holding this hearing. I
am looking forward to hearing from our witnesses.
Chairman Sarbanes. Good. Thank you, Senator Bunning.
Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. And I thank you for
your willingness to hold this hearing today.
I would like to thank the witnesses for agreeing to testify
and to Senator Bunning, who has raised this important issue
several times and recognized the need for this Committee to
evaluate the status of the Tennessee Valley Authority.
In looking at some of the statistics on the Tennessee
Valley Authority, it was kind of a surprise to me to find out
that their service area is 20 percent less than the size of the
State of Wyoming. However, it serves six times as many people
and has an incredible amount of more water, as Senator Bunning
knows from having visited my State just recently.
But it provides a tremendous service, and I would like to
begin by commenting that I believe this hearing is very timely,
with the problems in corporate America. It also coincides with
the focus of the Congress, Federal and State regulators, and
the Exchanges have placed on the need for greater transparency.
This Committee, for one, has led the way in working to
provide assurances to investors that we will work to assure
them that they are given the information they need and deserve
to make appropriate investor decisions.
Recent passage of the Sarbanes-Oxley Act has transformed
the disclosure and independence requirements of corporate
America. No longer will corporate insiders have the information
to make informed decisions, while average investors are left in
the dark. I am proud that Congress acted as expeditiously as
possible and the bill is being implemented by the appropriate
regulators as we speak. I would also like to commend the TVA
for agreeing to adopt many of the requirements imposed by the
Act and being adopted by the Commission.
While companies who list securities must be registered with
the Securities and Exchange Commission, the TVA is left
entirely unregulated by the SEC because they are a Government-
owned corporation. I find this very troubling and hard to
believe that they exist without direct supervision by a
specific Federal regulator. The primary mission of the SEC is
to protect investors. Investors in TVA are left without this
Government watchdog protecting their investments. The SEC has
the background and experience to evaluate the disclosures of
companies and should be able to watch these books as well.
I know that, historically, other companies have enjoyed
exemptions from registration with the SEC. However, these
companies have recognized the need for their investors to have
the same information as other companies.
I was very pleased when Fannie Mae and Freddie Mac
voluntarily registered with the SEC a few months ago, and they
are to be commended for their actions. I believe this
initiative may need to be imposed on the TVA. We must work to
retain integrity in the debt markets to protect investors and
to provide uniformity in disclosure statements so that they can
be interpreted accurately.
Again, Mr. Chairman, I thank you for holding this hearing.
I appreciate your diligence with this issue and I look forward
to hearing from our witnesses.
Chairman Sarbanes. Well, thank you very much, Senator Enzi.
We will now turn to our panel. We will hear from both of
our distinguished witnesses before we turn to questions.
Ms. Harris, why don't we start with you, please.
STATEMENT OF SKILA HARRIS
DIRECTOR, TENNESSEE VALLEY AUTHORITY
Ms. Harris. Thank you, Chairman Sarbanes, Senator Bunning.
Chairman Sarbanes. If you pull that microphone closer to
you and speak directly into it, it will be helpful to us.
Ms. Harris. Thank you, Chairman Sarbanes, Senator Bunning,
and Senator Enzi. It is a pleasure to be here.
My name is Skila Harris and I am one of the three Directors
of the Tennessee Valley Authority. On behalf of my colleagues,
Chairman Glenn McCullough and Director Bill Baxter, and the
employees of TVA, I thank you for this opportunity to speak
with you about TVA's financial disclosure and oversight. I
would also like to tell you, as Senator Enzi mentioned, about
plans that TVA has to uphold the spirit of the landmark
Sarbanes-Oxley Act of 2002.
TVA exists to serve the public good. The standard that we
hold ourselves to for leadership is to achieve excellence in
business performance and in public service, for the good of the
people throughout the Tennessee Valley. TVA improves the
quality of life of the citizens of the Tennessee Valley in
several different ways--through integrated management of the
Tennessee River system, through environmental stewardship, and
by supporting sustainable economic development throughout the
area.
Through its local power distributors, TVA supplies power to
8.3 million people, as Senator Sarbanes mentioned, over an
80,000-mile square area. TVA accomplishes all of this with no
Federal-
appropriated funds and finances 100 percent of its programs
with power revenues.
As a corporation of the Federal Government, TVA does not
issue stock, and therefore, its business goals are not oriented
toward earnings. Instead, our decisionmaking is focused on
adding value to the customers and to the communities across the
Tennessee Valley. And that value is defined in the TVA Act.
Recognizing this difference, the oversight Congress put in
place for TVA is different from the oversight provided for
publicly-traded companies. But make no mistake--as a Government
agency, TVA is subject to oversight.
TVA is managed by a three-person Board, as I mentioned.
That Board is nominated by the President and confirmed by this
body, the U.S. Senate. It can also be removed by the President.
Like many other Government agencies, TVA has an independent
Inspector General. And I have with me today, Mr. Don Hickman,
who is TVA's Acting Inspector General. TVA's Inspector General
conducts audits of the TVA's financial systems, its business
decisions, its operations, and its contracts. The Office of the
Inspector General reports to Congress and to the public on a
regular basis the results of its audits and its investigations.
TVA's Inspector General performs many of the functions that
have been identified in the Sarbanes-Oxley Act as functions of
the internal audit committee. But it does so with much more
authority and many more professional resources.
For example, the Inspector General's staff that reviews and
audits TVA's financing statements includes 19 certified public
accountants. The Inspector General can investigate not only
financial matters, but also any matter which might relate to
criminal or ethical violations at TVA. Also, by Federal
statute, the Office of Inspector General is independent of the
TVA Board. TVA also has an external independent auditor--
PricewaterhouseCoopers. The TVA Office of Inspector General
provides oversight of that firm's work and maintains the budget
for PWC's annual audit of TVA.
PricewaterhouseCoopers audits TVA's financial statements in
accordance with Government auditing standards and provides an
opinion on whether those statements are presented in conformity
with generally accepted accounting principles. TVA's financial
results are also included in the Federal Government's
consolidated financial statements, which are audited by the
General Accounting Office.
In addition, Congress, as we see today, functions in an
important oversight role for the Tennessee Valley Authority.
The General Accounting Office frequently performs audits of
TVA, and its activities, and its programs often at the request
of Members of Congress. GAO is authorized to audit TVA's
financial statements.
TVA also files reports with the President, the Congress,
the U.S. Treasury, and included in these annual reports
contains financial statements and a complete record and report
on TVA's business activities. And TVA submits an annual budget
to the President.
Furthermore, before TVA can issue bonds with maturities of
1 year or more, the Secretary of the Treasury must approve the
time of issuance, as well as the maximum interest rate to be
charged. And since most of TVA's bonds are traded either on the
New York Stock Exchange or bond exchange, and they must meet
all of the New York Stock Exchange's through its listing
requirements.
By law, all TVA employees must adhere to the standards of
ethical conduct for Federal employees. This requires all
officers of the Tennessee Valley Authority to complete ethics
training and file very detailed financial disclosure statements
annually. In addition to these requirements, and consistent
with the Sarbanes-Oxley Act, TVA will develop a special code of
financial standards of conduct for all officers and business
managers, and will provide associated training with those new
standards.
Also beginning in 2003, which is only weeks away, TVA's
Annual Report will be certified by the TVA's Board of Directors
and CFO (the financial statements and the related information
for the previous years.) In addition, the Information
Statement, which is TVA's primary disclosure report to the
public financial markets, will also be certified.
Because TVA is wholly owned by the U.S. Government and does
not issue stock, there are no stock options to provide to TVA
Directors and Officers. In addition, TVA does not presently
provide loans to its officers or Board of Directors and plans
to make this its practice in the future.
In terms of auditor independence, beginning next fiscal
year, TVA will not enter into any new contracts with its
external auditor and TVA will phase out all of its existing
consulting and actuarial services currently performed by PWC.
TVA is taking several other steps to ensure auditor
independence comparable to those in the Sarbanes-Oxley Act. TVA
will require rotation of the leading audit partners and TVA
also will prohibit the hiring of the CFO, Controller, or Chief
Accounting Officer, from an independent auditor within a year
after working on the TVA contract.
As I mentioned, TVA issues quarterly financial reports and
an Annual Report that include audited financial statements.
These are similar in content and in timing to the SEC's 10(k)
and 10(q) forms. We also provide information statements and
offering circulars similar to those prospectuses for publicly-
traded corporations. TVA also issues news releases and we have
a system for automatic notification by e-mail of any material
events that take place relative to our financial conditions.
This is similar to, I believe, the SEC form 8(k).
Also, I must say that uniquely among companies that I know,
TVA board meetings and all of our decisions are made in a
public setting where even the media is present.
To further comply with the Sarbanes-Oxley Act, TVA is
forming a Disclosure Committee to document procedures for
reporting
material events and occurrences on a more timely basis and to
improve the information flow to the public and specifically our
investors.
TVA meets regularly with its largest investors. We also
hold an annual investor and financial analyst meeting where we
provide substantial information, and we are there to respond to
their questions. I brought with me to submit to the Committee a
sampling of the reporting that TVA provides to not only the
public, but also to our investors, in addition to the Congress
and to the President.
In conclusion, as I have described, TVA has in place a
number of mechanisms that ensure that we conduct business in an
open and forthright manner. And we are committed to doing even
more to ensure that we earn your confidence, your support, and
the continuing trust and commitment of our investors, our
customers, and the citizens of the Tennessee Valley.
I look forward to addressing your questions later.
Chairman Sarbanes. Good. Thank you very much.
Mr. Beller.
STATEMENT OF ALAN L. BELLER, ESQ.
DIRECTOR, DIVISION OF CORPORATE FINANCE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Beller. Thank you, Chairman Sarbanes, Senator Bunning,
and Senator Enzi.
I am Alan Beller, the Director of the Division of Corporate
Finance at the U.S. Securities and Exchange Commission. I am
pleased to have this opportunity to testify before you on
behalf of the Commission regarding the application of
disclosure and reporting requirements of the Federal securities
laws to the Tennessee Valley Authority. From its creation in
1933, incidentally, the same year that the first of the Federal
securities laws was enacted, TVA has been wholly owned by the
U.S. Government and is considered an agency and instrumentality
of the United States.
TVA is currently authorized to issue only debt and to
borrow up to $30 billion. Until 1959, any indebtedness incurred
by TVA was backed by the full faith and credit of the United
States. In 1959, Congress eliminated this full faith and credit
backing.
TVA has stated that it issues bonds in a variety of
structures and sells its bonds to institutional and individual
investors on a global basis. Many of TVA's debt securities are
listed and traded on the New York Stock Exchange.
Since TVA is an agency and instrumentality of the United
States, the offer and sale by TVA of its debt securities are
exempt from the registration requirements of the Securities
Act, and its securities are within the definition of exempted
securities and Government securities under the Exchange Act. In
addition, as part of the 1959 legislation, Congress explicitly
exempted the issuance and sale of TVA bonds from the
requirements or limitations of any other law, including the
Federal securities laws. Therefore, TVA does not register the
offerings of its debt securities under the Securities Act, and
its debt, including debt that is listed on the New York Stock
Exchange, is not subject to registration under the Exchange
Act. TVA is also not subject to the provisions of the recently-
enacted Sarbanes-Oxley Act, although they have indicated this
morning, that they intend to comply voluntarily with a number
of those provisions.
Congressional action would be required to eliminate the
various statutory exemptions. TVA is subject to general
antifraud restrictions prohibiting false or misleading
statements of material facts.
In 1992, the Commission participated with the Department of
the Treasury and the Board of Governors of the Federal Reserve
System in a joint report on the Government securities market.
As a Government agency, TVA was excluded from the
recommendations of that report regarding Government-Sponsored
Enterprises, or GSE's. The Commission has not considered the
status of TVA since that time.
Our area of interest as an agency involves disclosure to
investors in TVA debt and not other aspects of Federal
regulation. TVA, while a unique Federally-owned corporation,
has many of the same disclosure issues as publicly-held
utilities. We believe that investors in TVA's debt securities
deserve the same type of information as that provided by other
issuers of public debt. We further believe that the
Commission's detailed disclosure rules and filing requirements
and the staff review and comment process provide the best
framework for disclosing information which investors deserve.
Disclosure regarding TVA itself is, of course, more
relevant because TVA bonds are not legally backed by the full
faith and credit of the United States. Disclosure should give
the holders of TVA's debt a materially complete and accurate
picture of TVA's financial and operational situation to permit
them to evaluate their investments and their investment
decisions.
In preparation for this testimony, the staff of the
Commission has considered certain recent disclosures by TVA
available on its website. This overview does not represent a
full review of those documents, has not involved a typical
comment process with TVA, and does not attempt to cover all of
the comments that the staff might issue in a full review. TVA's
disclosures in its most recent information statement and annual
report, in its quarterly reports, offering circulars, and other
materials generally include most of the same disclosures as
companies that file reports with the Commission, and these
disclosures appear on their face to be responsive to our
important disclosure areas and concerns. There are certain
areas where we believe TVA's disclosures would be enhanced if
the Commission's line item disclosure requirements and staff
review and comment applied.
Based on the work done, we would identify possible
enhancements in the areas of management's discussion and
analysis of
financial condition and results of operations and in an area of
market risk disclosure. Our rules would also require disclosure
in the areas of executive compensation and, to the extent they
exist, related party transactions.
There are other areas relating to the descriptions of TVA's
business and property where we might, depending on the comment
process, seek additional disclosure.
Finally, under our rules, TVA would be required to file and
make public specified exhibits, including certain material
contracts made outside the ordinary course of business.
There is a tension between TVA's status as a Government
agency and instrumentality and the resulting statutory
exemptions, on the one hand, and the desire for disclosure that
meets Commission standards on the other hand. Unlike the GSE's
addressed in the 1992 report discussed previously, including
the Federal National Mortgage Association, Fannie Mae, and the
Federal Home Loan Mortgage Corporation, also known as Freddie
Mac, TVA is not a profit-making corporation and does not have
private shareholders or publicly-held equity securities. As
such, a different statutory regime may be appropriate.
There are a number of ways that a disclosure system could
be applied to TVA. One way would be to change the statutory
scheme to eliminate the Securities Act and/or the Exchange Act
exemptions. Removing either of these exemptions would result in
TVA becoming subject to the reporting requirements of the
Exchange Act. Its disclosures would then have to comply with
the Commission's detailed line item disclosure requirements and
would be subject to the staff review and comment process.
Because TVA is a Government agency and instrumentality and
does not share many of the characteristics of the GSE's
previously mentioned, and because the Commission has not
considered TVA since the 1992 report, where it was excluded
from our GSE recommendations, we are not advocating a change in
TVA's statutorily-exempt status.
In particular, we believe that the Commission's objective--
disclosure that meets Commission requirements and standards--
can be achieved by alternative means. One possibility would be
voluntary compliance or registration under the Exchange Act, a
course of action recently taken by Fannie Mae and Freddie Mac
and which achieves effectively the same results insofar as
disclosure is concerned as eliminating the statutory
exemptions.
In conclusion, the individual and institutional investors
who hold TVA's debt securities depend for repayment on TVA's
net power proceeds and refundings and not a Government
guarantee. We believe that applying the Commission's disclosure
requirements and processes is the preferred method of ensuring
that these investors receive the disclosure they deserve. TVA's
status and exemptions from the registration and reporting
requirements of the Federal
securities laws are not necessarily an obstacle to that result.
As
previously indicated, there are a number of courses of action,
including voluntary action by TVA, to achieve the desired
standard of disclosure.
Thank you very much for the opportunity to testify before
you this morning and I would be pleased to answer any questions
that Members of the Committee may have.
Chairman Sarbanes. Well, thank you very much, Mr. Beller. I
have just a couple of questions, then I will yield to my
colleagues.
Just so I am clear in my own mind, does the Tennessee
Valley Authority Act define the geographical jurisdiction in
which the TVA may function?
Ms. Harris. Yes, sir. A 1959 amendment to the TVA Act
defined what we generally call the fence. It is the area in
which we can sell power and the area that is excluded from
other suppliers providing power in that region.
Chairman Sarbanes. And how is that defined in the statute?
By river basin or by actually setting out States and counties?
Ms. Harris. It is a geographical description--the river
basin does not necessarily mirror our service territory. So
there are two different areas--we have the area of the
watershed of the Tennessee River, which is actually larger than
our service territory.
Chairman Sarbanes. Now, second, I understand that you are a
not-for-profit organization. Is that correct?
Ms. Harris. We are not in the classic definition of
501(c)(3). That is not what renders us a not-for-profit. As a
Federal Government corporation, and as specified in our Act,
our motivation is not to create a profit. What we do is
basically generate revenues to fulfill our business functions,
and obviously, includes paying down debt, operations and
maintenance. And then, any left over, we simply reinvest back
into the corporation.
Chairman Sarbanes. So any, what in the private sector would
be considered to be profits, you in effect put back into the
operations of the TVA.
Ms. Harris. Yes.
Chairman Sarbanes. Is that correct?
Ms. Harris. It is a closed loop.
Chairman Sarbanes. Now did I understand you to say that all
of your meetings of the three-member Board of Directors are
open to the public?
Ms. Harris. Any decisionmaking meetings are open to the
public. The public attends, the media attends.
Chairman Sarbanes. Is that required by statute, or is that
a voluntary policy of the TVA?
Ms. Harris. Yes, sir, by statute.
Chairman Sarbanes. Your own statute or broader, Freedom of
Information, Federal statutes?
Ms. Harris. You are testing my memory here. But my memory
tells me that the TVA Act requires us to conduct our meetings
in public. I could be corrected on that, possibly.
Chairman Sarbanes. I think some people behind you----
Ms. Harris. That is correct. I got it right.
Chairman Sarbanes. Mr. Beller, you, of course, hear from
investors. I do not know whether you hear from investors in TVA
debt securities. But as a matter of information, have you
received complaints at the SEC about the information available
and the disclosures from investors, or would-be investors, in
TVA bonds?
Mr. Beller. I cannot say that we have a completely
scientifically perfect way of knowing that.
We did check in connection with preparing for this
testimony with our investor education office, and, going back
several years, we do not appear to have had any such complaints
relating to TVA disclosure.
Chairman Sarbanes. Okay.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
The main reason that they wouldn't have any complaints, Mr.
Chairman, is the fact that they are Aaa-rated bond and the
Federal Government owns the company.
So there wouldn't be--unless you know the intricacies of
how TVA works, like the fact that their money is reinvested in
the company, and the fact that they have X-amount of debt,
generally speaking, the more sophisticated investor looks at
the rating of the bond and who owns the company. There wouldn't
be any complaints at all because the Federal Government owns
the bond.
Chairman Sarbanes. Well, that may well be. But I get
complaints all the time from people about things that the mayor
or the governor are doing----
Senator Bunning. Me, too.
[Laughter.]
Chairman Sarbanes. And I do not need jurisdiction over
that. So, I am just trying to inquire because, presumably, if
there is a lot of discontent, the SEC might well have heard
about it.
If I were an investor and wanted to complain, the first
place I would think of going to would be the SEC. I think the
SEC likes to think that that is the case.
Senator Bunning. That is certainly correct. I will get to
my
questions, then.
Ms. Harris, do you know any other entity other than TVA
that does not have a Federal regulator?
Ms. Harris. Well, sir, I might disagree with your premise
that we do not have any regulator at all. Certainly, the
Nuclear Regulatory Commission is very much a part of TVA's----
Senator Bunning. Only in regards to your nuclear power
plants.
Ms. Harris. Yes, sir. That is a very important part of our
business. The Environmental Protection----
Senator Bunning. I am talking about the conducting of your
business, not just an entity within the TVA. Is there any
overall Federal regulator for the Tennessee Valley Authority?
Every Government agency that I know has an Inspector General.
Ms. Harris. Yes, sir.
Senator Bunning. So the fact that TVA has an Inspector
General is to be expected.
Ms. Harris. Yes, sir.
Senator Bunning. So can you answer my question?
Ms. Harris. To say that there is an entity that has the
scope and the authority to regulate overall business activities
of TVA, I would say, no.
Senator Bunning. Thank you.
You correctly stated that the Environmental and Public
Works Subcommittee on Clean Air, Wetlands, and Climate Change
has
jurisdiction over TVA, in your written statement.
Ms. Harris. Yes, sir.
Senator Bunning. My guess is that they have as much
expertise on financial disclosure as has this Committee on the
power generation. Why not disclose with the financial
disclosure experts at SEC?
Ms. Harris. As we heard today, I think that there are some
real opportunities through collaboration with the SEC to
develop some--Mr. Beller, I think you used the term,
alternative means, for TVA to enhance the information that it
does provide.
I was also pleased to hear that you generally find that the
information that we are providing now to investors is more or
less like what everyone else provides to investors.
I think that investor relations and the confidence that our
investors have, and possibly new investors in TVA, their level
of confidence in TVA is very important to us. And we certainly,
it is in our business interest to improve our disclosure. And I
think that we have shown our commitment to do that, sir.
Senator Bunning. Well, if you are going to change your
cooperation governance to bring it more in line with Sarbanes-
Oxley, why not take the next step and voluntarily register your
bonds with the SEC, as other GSE's are doing?
Ms. Harris. And this probably exhibits my own
misunderstand-
ing here. But my understanding was that the agreement that
Fannie Mae and Freddie Mac had entered into really went to the
question of their equities, not their debt securities. And I
would appreciate it if anybody could expound on that because if
it could be clarified, I would appreciate it. But my
understanding was that they had only agreed to register their
equity securities.
Chairman Sarbanes. I think that is correct.
Senator Bunning. That is accurate, but insignificant,
because
everything is reflected in the disclosures that they are now
voluntarily disclosing as far as their equity is concerned.
Ms. Harris. I think that the same is very true for us, but
I am looking forward to working with the SEC to get their
response to how we can improve and enhance our disclosures to
the point that we would be able to elevate the confidence of
investors.
It is my understanding that you already have said that the
SEC said that you should voluntarily register. That is one of
the conclusions, I think that that is one of the alternatives.
Senator Bunning. That he came to.
Ms. Harris. Right. I think it was, and my understanding, I
certainly do not want to misstate your testimony, but I thought
that the door was open for some discussions of alternative
means for TVA to increase and enhance the kinds of disclosures
that it now provides to the public and to our investors.
Senator Bunning. Well, if you want me to read it word for
word, I refer you to the conclusion in the SEC's testimony
about voluntary disclosure of TVA's securities to the SEC. And
it is pretty clear that that is one of their highly recommended
alternatives to changing all of the legalese that we have in
the laws now. Given the SEC's testimony, is TVA willing to go
and take a look? Do you have any flexibility as far as
voluntarily registering with the SEC?
Ms. Harris. What I am looking forward to is pursuing the
various alternatives that were raised today. And I think that,
as we sit down, there are certain aspects of our governance
structure--I certainly find the role of oversight, the watchdog
role that our Inspector General plays for TVA, to be a very
powerful protective mechanism for us.
So there are some other types of structural differences
that I think that I would look forward to working with the SEC
to find out how we can better disclose and build the
confidence, not only of this Committee, but also of investors.
Senator Bunning. Let me just finish up by asking you two
more questions.
Ms. Harris. Sure.
Senator Bunning. Why is it more costly inside the fence for
electricity than it is outside the fence?
Ms. Harris. It depends on where you are near the fence,
sir.
Senator Bunning. I understand that. But why is it if your
mission is to provide the lowest cost electricity possible, why
are in-
vestor-owned and rural electric co-ops producing electric cost
less
outside the fence than inside?
Ms. Harris. As you well know, I was raised in the region of
Kentucky that TVA serves. So, I am very familiar with the
situation that you are talking about.
One of the things is that TVA has a different fuel mix than
most of the utilities. If we are specifically speaking to
Kentucky utilities and how they generate their electricity,
they are very fortunate. They have mine-mouth coal plans. That
is a very efficient way to generate electricity. We have one
located in Paradise, Kentucky. That is a very efficient, low-
cost plant.
We think that TVA has value because we do have a fuel mix.
We have coal. We have solar. We have geothermal. We have
nuclear. We have gas combustion turbines. So, we believe that
mix, it does mean that, in part, our costs are higher because
of past investments TVA has made. But we believe, and one of
our six objectives is to continue to reduce the delivered cost
of power. And we are committed to being competitive with those
other utilities in the Commonwealth of Kentucky.
Senator Bunning. Well, Ms. Harris, I am not going to get
into a dispute with you on TVA's ability to sell outside the
fence because I happen to agree that they should have the
ability. But I also agree that it should be a two-way street.
Ms. Harris. I agree, sir.
Senator Bunning. That the people should be able to come
within the fence and sell and be competitive with TVA inside
the fence.
Ms. Harris. We are certainly in agreement on that, sir.
Senator Bunning. Last, but not least, you mentioned the
fact that you are complying now with the separation of
function.
Ms. Harris. Yes, sir.
Senator Bunning. Even though you are not covered by the
law. In other words, you are exempt from Sarbanes-Oxley.
Ms. Harris. Yes.
Senator Bunning. Do you think if you did not comply with
the
law, that somebody would be coming down and descending on you
rather rapidly if you weren't doing it voluntarily?
In other words, you have decided to separate the two
functions, the auditing function and the advising function, as
the law states.
Ms. Harris. Let me just say, in 1995, our Inspector General
identified as an issue the fact that our independent auditor
was also doing consulting work with TVA.
So, I must say, this is a perfect example how our Inspector
General--at that time, in 1995, when that was identified as a
potential issue, long before it was an issue in the minds of
anybody else across the United States, that was identified and
the decision was made because that was the common practice
throughout the private sector.
Senator Bunning. The private sector.
Ms. Harris. Right.
Senator Bunning. Not the public.
Ms. Harris. Absolutely. Private sector, that we would
continue to do that.
This has been an issue that TVA has been aware of for quite
a while. And so, we believe it is the right thing to do. I do
not think that we made this decision because we thought
somebody was going to come down and get us. I think we did it
because we think it is the right thing to do.
Senator Bunning. One question for Mr. Beller. Do you
believe that voluntary registration of the SEC, such as Fannie
Mae and Freddie Mac, would be undue, costly, or burdensome to
TVA?
Mr. Beller. I think, Senator Bunning, that the one-word
answer to that question is, no, I expect it probably would not,
based on a couple of assumptions that we are not 100 percent
sure of.
The principal cost of compliance with our registration and
reporting requirements is generally the expense of an external
audit in accordance with GAAP and generally accepted auditing
standards.
TVA already incurs that cost, I expect in full. I do not
believe that there would be much, if anything, additional that
they would have to do there. There would probably be some
additional advisory expenses. But I do not think, given the
amount of disclosure they currently provide, there would be, I
expect, some incremental costs. I would be surprised if it were
significant in comparison to what they incur now in terms of
disclosure and reporting.
Senator Bunning. Thank you.
I have some additional questions, but go ahead, Mike.
Chairman Sarbanes. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. I did not know that
this was going to be such an opportunity for Wyoming today.
[Laughter.]
The county that I come from in Wyoming is the largest
producer of coal in the United States. We produce a third of
the Nation's coal there. One of the things our State has been
looking at from an economic development standpoint is having
some power plants at the mine mouth.
Ms. Harris. Yes.
Senator Enzi. We would invite you to take a look at having
one of your power plants in Wyoming and you wouldn't have to
ship all that coal clear out there.
Ms. Harris. I will let you and Senator Bunning resolve
that.
[Laughter.]
Senator Bunning. We will work on that together.
[Laughter.]
Senator Enzi. I am hoping that you just use some good
accounting, look at the numbers, and of course, I know what the
result will be then.
[Laughter.]
Chairman Sarbanes. Well, mine mouthing, you produce the
electricity right at the mine mouth, don't you, and then
transit it?
Ms. Harris. Yes.
Chairman Sarbanes. That would be pretty costly. How much of
it would be left if you tried to transmit it from Wyoming?
[Laughter.]
Senator Enzi. Plenty. What we do is we put it in at the
grid and that moves some electricity over a little ways. This
electrical stuff is fascinating.
[Laughter.]
When I was mayor, our municipality owned their own
electrical generating and power system.
But getting back to the main issue here, Congress is
supposed to provide the oversight over TVA, as well as all of
the Government agencies. In looking at it, I have to tell you,
we are not very good at oversight over accounting or oversight
over disclosure.
I have a lot of confidence that TVA is doing better than
the Government agencies because we have had the opportunity to
audit some Government agencies. And in the audits that I saw, I
think that the Forest Service did the best job. They were $200
million out of balance.
So, I am not sure that the TVA wants to associate
themselves with the oversight and the accounting that we
provide. It may well want to take a look at kind of separating
it as Fannie Mae and Freddie Mac did by going under some SEC
jurisdiction. And of course, the easy way to do that is the
voluntary method because, as Mr. Beller explained, we would
have to do quite a bit of legislating in order to be able to
change the system. I am not sure that changing the system is at
all necessary.
I did hear your comments about the Inspector General. But I
think the Inspector General, from the perspective of people who
are now paying a bit more attention in the financial markets,
would be more of a relationship to a chief legal counsel within
a corporation, that the ties are a little bit closer there.
Whereas, the SEC is looked at as more of absolutely outside
oversight with different capabilities than there might be by an
Inspector General. And in a moment I will ask you for your
reflection on that. But a couple more specific questions before
I get to that. Does the TVA follow already all the rules on
GAAP consistent with other utilities?
Ms. Harris. Yes, sir.
Senator Enzi. I thought that was the case. Now does the TVA
have any additional off-balance sheet or off-budget
arrangements of which we might not be aware?
Ms. Harris. No, sir. The TVA Act limits the business
activities that we can engage in. We cannot have
subcorporations that are separate. A lot of the things that
have raised suspicions over the last few months, TVA, by its
own statute, is prohibited from engaging in those activities.
Senator Enzi. And so, you do not have off-balance sheet
transactions or off-budget arrangements.
Ms. Harris. No.
Senator Enzi. In your testimony, you spoke extensively
about the disclosure requirements you currently perform. And of
course, in your testimony, which will be part of the record,
your complete testimony, it is even more extensive that you go
into that.
Ms. Harris. Right.
Senator Enzi. So that gets back to this original question--
why wouldn't you just adopt the SEC registration requirements,
such as Fannie Mae and Freddie Mac, on a voluntary basis?
Ms. Harris. What I want to do, and I think that we are
going to be able to benefit from this, is to work with the SEC
to see exactly how we can improve and in whatever form,
whichever one of the alternatives that was listed, which one
that we feel most comfortable with and that we feel like that
will bring about, instill the most investor confidence. That is
what I would like to do as a result of this hearing and I
appreciate the fact that this has brought TVA and the SEC
together.
I was not around in 1992 when the last report was done, so,
I think that this is an opportunity for us to work together to
get to whatever is best, given the circumstances of TVA. And I
think as we talk, we are going to be able to identify what
scenario is best to get to what you are talking about, that
full disclosure.
Senator Enzi. What is the downside to doing this voluntary
registration?
Ms. Harris. I do not think that we fully understand what
that all entails. It is hard for me to define right now what
the downside is because I do not know exactly what that would
fully entail. And until we go through that exercise, I do not
think I can say, this is why we would not want to do it because
I do not know the full extent of that.
Senator Enzi. Okay. And I would rather talk to you about
coal sales, anyway.
[Laughter.]
Thank you, Mr. Chairman.
Chairman Sarbanes. I wanted to ask a couple of questions
here.
First of all, I want to commend the TVA for moving to put
in place various provisions in the recently enacted corporate
accountability and accounting responsibility legislation. There
was an effort there, of course, to define some best standards,
or at least best minimum standards, so to speak. And I think
your report on the steps that TVA is taking are important in
that regard.
Ms. Harris. Thank you.
Chairman Sarbanes. Second, this is a very informative
hearing, at least for me. I never realized until I came here
this morning and we got into this, that there was this problem
about electricity rates inside the fence and outside the fence,
which seems, I gather, to be a pressing issue, particularly in
the Commonwealth of Kentucky.
Ms. Harris. That is right.
Chairman Sarbanes. So, I am gaining some additional
knowledge, which I heretofore had not had.
Now, Mr. Beller, I want to be sure I understand your
position.
As I understand it, if the TVA were to move in various ways
to additional disclosures, and you mentioned some areas where
you thought attention could be paid--market risk disclosure,
executive compensation, material contracts, and so forth--that
would meet the disclosure question. The disclosure question is
separate from the registration question. It is not necessarily
encompassed within it. Isn't that correct?
You could come in here today and say, well, the TVA is
disclosing everything we can think of that they ought to
disclose. Now that is not your position. You think that there
are some additional things that they could do. But that could
be done without reaching to the issue of whether they should be
required to register with the SEC. Isn't that correct?
Mr. Beller. Senator Sarbanes, that is a very interesting
question. There are two separate issues. Disclosure and
registration do not necessarily go hand in hand.
We could not, on the face of TVA's documents, because we
would not have had the benefit of a review and comment process,
reach definitive conclusions about their disclosure. But we
could go through a review, or the equivalent of a review and
comment process with them on a voluntary basis.
Chairman Sarbanes. I am not sure we should be so quick this
morning to simply cross over the threshold of the unique
institution which the Tennessee Valley Authority is, and the
basis on which these decisions have been made in the past. In
other words, in 1992, they did not bring TVA under when they
were doing this
review.
How many companies do you have that have to register with
the SEC where the directors of the company are appointed by the
President of the United States and are then confirmed by the
U.S. Senate?
Mr. Beller. I know that when we moved to voluntary
registration of Freddie Mac and Fannie Mae, a portion of their
boards
are appointed by the President. But entire boards, I am not
aware
of any.
Chairman Sarbanes. Of course, they are profit-making
organizations, aren't they, and they issue equities?
In fact, I thought we established here that the agreement
they have entered into with the SEC involves their equity and
not their debt. Is that correct?
Mr. Beller. It is true that what they are registering is
their
equity securities. The consequence of registration, as I
believe
Senator Bunning pointed out, is basically full disclosure that
is
for the benefit of all, the holders of both their equity and
their
debt and other fixed-income securities. Whether they were to
regis-
ter equity or whether the TVA were to register debt, would
result
in the same disclosure requirements with very few exceptions
applying.
Chairman Sarbanes. You say you are going to get full
disclosure from Fannie Mae and Freddie Mac of their debt? Is
that right?
Mr. Beller. That is correct.
Chairman Sarbanes. But not by it being registered with the
SEC. Is that correct?
Mr. Beller. No. By virtue of their registering any
securities with us, they have to disclose information that is
material to all of their security-holders.
Chairman Sarbanes. Of course, not all of their directors
are appointed by the President. In fact, I think only a
minority.
Mr. Beller. I think it is a third.
Ms. Harris. A third, yes.
Chairman Sarbanes. Yes.
Mr. Beller. To my knowledge----
Chairman Sarbanes. This is a rather unique institution
isn't it, the Tennessee Valley Authority?
Mr. Beller. It is, indeed. I hope we are cognizant of that.
In our testimony, we would not propose the same recommendation
that was proposed in 1992 with regards to Fannie and Freddie,
which was registration. I think we are looking for an
alternative solution. Whether that solution is voluntary
disclosure or voluntary registration, is something that I
believe we would need more of an interaction to know.
Chairman Sarbanes. Well, if the purpose of the
registration, whether compulsory or voluntary, would be to get
disclosure, and if you get the disclosure without either the
compulsory registration or the voluntary registration, then the
objective has been accomplished, has it not?
Mr. Beller. Yes, it has, sir.
Chairman Sarbanes. Senator Bunning.
Senator Bunning. Yes, thank you, Mr. Chairman.
Ms. Harris, I believe you, in answering Senator Enzi's
question, misstated some positions as far as TVA is concerned,
and I want to bring up a couple of them.
Ms. Harris. Sure. Go right ahead.
Senator Bunning. TVA and OMB, in a highly-publicized
disagreement about whether or not TVA's lease-back--lease/
lease-back arrangements----
Ms. Harris. Right.
Senator Bunning. --Should be counted toward TVA's debt cap.
It is my understanding that TVA has continued to lobby OMB to
reverse the decision that it made. Is this an attempt by TVA to
continue to do these types of lease transactions, and have
these and future lease transactions off budget, rather than to
treat these lease transactions properly as part of its debt or
part of TVA's Congressionally-mandated debt cap?
Ms. Harris. With regard to the lease/lease-backs which we
are using for combustion turbine units, we address those lease/
lease-backs on our financial statement according to GAAP. How
we treat those, we are driven, how we put them on our financial
statement, by generally accepted accounting practices.
There is a line that says what our debt is and then below
that, it says, other financial obligations. And then, based on
GAAP, we list those on our financial statements as other
financial obligations.
First of all, I am not sure if I agree with the
characterization that we were in some hotly contested battle
with OMB.
Senator Bunning. It seems that you are because you continue
to lobby OMB to change their decision that they made.
Ms. Harris. I haven't been aware of that. It doesn't fee--
--
Senator Bunning. That is why we needed our gentleman from
OMB here today that did not show up.
Ms. Harris. The requirement that OMB has for categorizing
for the purposes of the Federal budget, how it characterizes
how we do our financings, what our debt is, is a totally
different function than how we report our financial statements.
For us to be inconsistent with GAAP in this particular
situation I think would be the basis for us to be criticized to
be out of sync with the GAAP only on that particular item.
Basically, where I think TVA and OMB ended up is OMB feels
like it needs to list that on the Federal budget, and the way
it does--and my understanding is that it is not listed as part
of our debt. There is a separate line that says something like,
other financial obligations. So, they even separate it from the
overall debt. Now, the cumulative total adds to the Federal
debt ceiling. And TVA certainly does not have a quarrel with
how OMB characterizes for its own purposes the cumulative total
toward the Federal debt ceiling. That is not part of our
business. That is OMB's responsibility.
Senator Bunning. Well, there is a disagreement between you
and OMB because if there weren't, you would have accepted the
fact that they are using those transactions and that that debt
is being counted toward the Congressionally-mandated debt cap
that you have.
Ms. Harris. I certainly do not feel that we have a
disagreement with them.
Senator Bunning. Okay.
Is any maintenance or scheduled repairs or replacements of
the facilities being or will be deferred as a result of the
obligation it has taken to restart Brown's Ferry?
Ms. Harris. Are you asking if other things are being
delayed to finance----
Senator Bunning. Is any maintenance or scheduled repairs or
replacements of the facilities being or will be deferred as a
result of your trying to restart Brown's Ferry?
Ms. Harris. And I assume you are talking about our overall
fleet of generation.
Senator Bunning. Absolutely.
Ms. Harris. Okay. All of our units. As a matter of fact, we
are spending just about the same for maintenance and repairs--
--
Senator Bunning. You are not deferring anything because you
are trying to restart Brown's Ferry?
Ms. Harris. Let me say, in the upcoming budget, 2003
budget, the largest expenditure that we have is $528 million
that we are spending on pollution control equipment. If
anything, that so overshadows what we are spending on Brown's
Ferry 1 restart, that we are on a track so that we can burn
more good Kentucky coal in compliance with environmental
standards. What we are doing is balancing our business. Next
year's expenditure, the bulk of it is going to be for
environmental pollution control equipment. Brown's Ferry 1 does
not dominate the budget next year.
Senator Bunning. I am not asking if it dominates it.
Ms. Harris. Okay.
Senator Bunning. I am just asking you the simple question
of
whether you are deferring or changing your maintenance
schedules on other plants because of the restart of Brown's
Ferry?
Ms. Harris. I think that what we are doing is we are
maintaining our plants as they need to be maintained. We are
not changing the practices of our maintenance and----
Senator Bunning. So, you say that you are spending the
extra money to restart Brown's Ferry.
Ms. Harris. Yes.
Senator Bunning. As part of your overall expenditure.
Nothing else is going to be changed. That is what you are
saying.
Ms. Harris. Right. But I guess I am a little confused by
isolating out an expenditure for Brown's Ferry 1 when----
Senator Bunning. I want to know if anything else is
suffering because of the restart.
Ms. Harris. Okay. We are not failing to invest in the
infrastructure of TVA for any expenditures this year, whether
it is Brown's Ferry 1 or pollution control equipment.
Senator Bunning. Okay. If we could pass an energy bill,
there would be $2 billion extra for clean coal burning
technology. So maybe you should get some of your lobbyists up
here to help us pass the energy bill that we have before the
Congress of the United States right now.
Ms. Harris. Sir, by law, we are prohibited from lobbying.
Senator Bunning. I am kidding.
[Laughter.]
You said in 1995, your IG decided to split your auditing
and your consulting.
Ms. Harris. That recommendation was made.
Senator Bunning. Then why did it take 7 years for you to do
it?
Ms. Harris. Well, I wasn't here. But if I could defer to
Don, Don was here.
But, basically, what happened is, when the recommendation,
my understanding is, came out, everyone said, well, this is not
how they do it in the private sector. Do you want to comment on
that?
Senator Bunning. You can step right up. Don't be bashful.
Mr. Hickman. Senator Bunning, I am the Acting Inspector
General. In 1995, my office did report that the TVA should
split its nonaudit services from its financial audit services,
in view of the fact that the same firm was performing those
same duties.
We reported that to TVA. And management's response to us at
that time was that this practice is in keeping with the normal
business practices in the private sector, and at that time,
they did not see it as a problem.
We contended that there was the possibility of a perception
that there was an inappropriate amount of independence by the
audit firm performing those same duties.
We did report that to the Congress as a part of our
semiannual report.
Senator Bunning. It just took us 7 years to get to it.
Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Enzi.
Senator Enzi. I have no further questions.
Chairman Sarbanes. We did receive a letter this morning
from--in fact, just a little while ago--from the OMB, who did
not come in to testify, which just very briefly touches on some
of these issues. Actually, they say something in that letter,
though, that concerns me. I would call this to the attention of
my colleagues.
``TVA is similar to the GSE's in that both TVA and the
GSE's issue debt securities, although TVA's are backed by the
Federal Government and those of the GSE's are not.''
I did not think that was the case. The TVA Act, I thought,
said that the Federal Government does not guarantee the bonds.
Don't you put a no-guarantee language in your bonds, the TVA?
Isn't that correct? I ask our panel.
Ms. Harris. First of all, that would differ from everything
in my understanding because since 1959, the decision was made
by the Federal Government no longer to back TVA bonds and we
became self-financing in 1959.
Mr. Beller. That is our understanding from a review of the
legislation.
Chairman Sarbanes. I am quoting the letter that has the
Director of OMB's signature on it, Mitchell E. Daniels, Jr.:
``TVA is similar to the GSE's in that both TVA and the GSE's
issue debt securities, although TVA's are backed by the Federal
Government and those of the GSE's are not.''
Mr. Beller.
Mr. Beller. I do not want to speak for the TVA with respect
to what its Government backing is.
I can tell you that the offering circulars that we reviewed
in connection with preparing for this testimony are very
explicit and it is very prominent that there is no full faith
and credit backing.
Chairman Sarbanes. I know that the bond-rating agencies are
influenced by the fact that they think that there may be some
implicit guarantee since TVA is a wholly-owned Government
corporation and therefore, the Government would support them if
their solvency were seriously impaired. Of course, the same
argument is made to some extent about the GSE's. But there has
been a big
effort to get away from the idea that there is a Government
guarantee, behind these bonds. It is hard enough to sell the
idea because everyone assumes there is an implicit guarantee.
Ms. Harris. Right.
Chairman Sarbanes. But at least there is an effort to get
away from that.
For the OMB then to come in here with this letter and lend
considerable credence to this notion that there is a guarantee,
it seems to me is completely counter to what, previously, OMB
and others have been trying to do. But so much for the OMB
letter, if I may say so.
[Laughter.]
I do not have any further questions.
Senator Bunning. I believe if you have a prospectus of your
bonds, that there will be a significant bold print that it is
not guaranteed by the Federal Government.
Ms. Harris. Absolutely.
Chairman Sarbanes. I see it right here on the face of it.
Senator Bunning. That is correct.
Chairman Sarbanes. Well, maybe we should send this down to
OMB in response to their letter.
Senator Bunning. We will do that.
Chairman Sarbanes. We thank the witnesses very much for
coming.
Senator Bunning. Thank you very much.
Ms. Harris. Thank you very much.
Chairman Sarbanes. And now we will go to our next panel, if
they will come forward.
[Pause.]
Our second panel this morning consists of Craven Crowell,
who is Chairman of GCW Consulting. Mr. Crowell served as
Chairman of the Tennessee Valley Authority, subsequent of
course to his nomination by the President and confirmation by
the Senate, from 1993 to 2001. He is the former Chairman of the
Electric Power Research Institute, has served on the Board of
the Nuclear Energy Institute, and prior to becoming Chairman of
the TVA, worked closely with our former colleague, Senator Jim
Sasser of Tennessee.
Mr. Crowell. Right.
Chairman Sarbanes. Dr. Allan Pulsipher--have I pronounced
it correctly, Doctor?
Mr. Pulsipher. You have.
Chairman Sarbanes. Executive Director and Professor of
Energy Policy in the Center for Energy Studies at Louisiana
State University. Dr. Pulsipher actually was a Chief Economist
at the TVA in the 1980's. He has also worked with the
President's Council of Economic Advisers, and has also been at
the Southern Illinois University and Texas A&M.
And then the concluding panelist is Daniel Gates, the
Managing Director of Moody's Investors Service. He leads there
the analyst team that follows issues in the power, energy, and
infrastructure sectors, and has been the global coordinator for
syndicated loan ratings for Moody's.
We are very pleased to have all three of you here with us
this morning. Your full statements will be included in the
record. We would obviously appreciate it if you could summarize
it.
Mr. Crowell, we will begin with you and then we will just
move right across the panel.
STATEMENT OF CRAVEN CROWELL
CHAIRMAN, GCW CONSULTING
FORMER CHAIRMAN, TENNESSEE VALLEY AUTHORITY
Mr. Crowell. Thank you very much, Chairman Sarbanes. And
Senator Bunning, it is good to see you again, and for the
Committee to invite me here.
I was going to say good morning, but I think it is already
afternoon. So, I will say, good afternoon to all of you. My
name is Craven Crowell and I served for 8 years----
Chairman Sarbanes. That only underscores the point that we
are going to include your full statements in the record.
[Laughter.]
Mr. Crowell. Thank you. I served 8 years as Chairman of the
Tennessee Valley Authority, and I had the distinct pleasure of
serving at TVA for a total of 17 years, first as a member of
the Senior Management Team and then, as I have said, as
Chairman of the Board of Directors. I retired last year after
25 years of Federal service, and as you mentioned, Mr.
Chairman, I served part of that with Senator Jim Sasser in the
U.S. Senate. I now serve as Chairman of GCW Consulting, which
is an energy and aviation consulting firm located in Arlington,
Virginia.
TVA has played a vital role in creating prosperity for
people of the Tennessee Valley since its creation in 1933. It
brought opportunity and hope to thousands of people who lived
mostly in rural areas and who had few prospects for enriching
their lives and the lives of their children.
I can remember as a small child when TVA electricity first
came to the farmhouse where my grandparents lived and the
excitement electric lighting created in the rural community of
Fairview, Tennessee, where they lived. There is no doubt that
TVA contributed greatly to the quality of life in the Tennessee
Valley and it is my fervent hope it will continue to play a
vital role in creating opportunity for many generations to
come. I can say with certainty, of course, that the TVA has
played an important role in my life and career and I shall
always be grateful for having had the opportunity to serve the
people of the Tennessee Valley.
Mr. Chairman, the Committee has asked me to address two
questions: whether the TVA should be required by Federal law to
disclose financial and operational information to debt-holders
and prospective investors, and, if so, whether the TVA should
be made subject to the requirements of the Securities Act of
1933 and the Securities and Exchange Act of 1934. I want to
express my appreciation to the Committee for its interests in
my views on this important matter. I would, however, like to
make a few preliminary comments about TVA's debt that I believe
are relevant to our discussion this morning.
In 1959, Congress gave TVA the authority to issue bonds to
raise capital for expansion and other related activities and
subsequently set a debt limit of $30 billion. For the next 38
years, TVA continued to increase its debt until it reached
$27.7 billion. In 1997, TVA realized that not only was the size
of the debt coming dangerously close to its borrowing limit,
but also the interest expense as a percent of revenue at 34
percent was having a negative impact on TVA's competitiveness.
As a result of concerns about the size of the debt, TVA
developed a 10-year plan in 1997 to reduce the debt and create
a stronger financial position in preparation for deregulation
of the electric power industry. Since 1997, TVA has reduced its
indebtedness by almost $2.5 billion and has reduced the
interest expense as a percent of revenue to 21 percent--
producing a savings of nearly $500 million per year in interest
expense.
I might say, Mr. Chairman, that I am pleased that the
current TVA Board of Directors has continued to focus on
reducing the debt. In all likelihood, TVA's debt is greater
than the market value of its total assets in today's market,
although the agency's book value remains higher than its
indebtedness. It is my hope that the TVA board will continue to
reduce the debt in the years ahead.
Now, if I may, let me speak to the issue you invited me
here to address.
During my tenure as Chairman, TVA undertook a significant
expansion of its finance program in order to lower interest
costs. The collective result of those efforts over the last few
years has resulted in TVA being recognized for its innovation
and responsiveness to investors.
TVA entered the global bond market for the first time in
1995 and the same year issued its first bonds targeted to
retail, or individual, investors. The retail bonds were
enormously successful and resulted in a large increase in the
number of TVA investors. With this came the recognition that
TVA would need to increase the opportunities to further
disclose and communicate information about the agency that was
of significance and importance to the investment community.
So in 1996, TVA created a staff of investor relations
professionals to ensure that investors in TVA bonds had
information they needed to make informed investment decisions.
The broad responsibilities of this group were to ensure the
adequacy and accuracy of disclosures in TVA's annual report,
quarterly reports, information statements, and periodic
offering circulars.
Additionally, the investor relations department routinely
handled hundreds of inquiries from investors. The TVA Board
also became more active with the investment community and began
hosting meetings in New York with major investors and began
meeting with investors in other countries.
In every meeting I attended, the TVA was viewed as a
stable, well-run Government corporation that offered a sound
investment opportunity. In no instance did any investor ever
express to me
the slightest concern about the business standards of the TVA,
the soundness of the business or the adequacy or timeliness of
our
disclosures.
I might add that stable rates are a very important signal
to investors of TVA's business stability. But there are other
significant signals as well. Investors have taken note of the
outstanding operating performance of TVA's power system.
Capacity and efficiency are continuing to increase and, during
my tenure, TVA's nuclear program was recognized by the industry
for its high level of performance.
In this discussion, we also should recognize that the TVA's
operations and bond indebtedness are already subject to
significant oversight to guarantee proper and complete
disclosure. Two examples which have already been mentioned this
morning include an independent auditor in the form of an
Inspector General who will be appointed by the President with
Senate confirmation, and the General Accounting Office that has
full and complete access to all documents and information in
TVA's possession.
TVA routinely provides information about its finances and
operations in many other ways. TVA board meetings are conducted
in public with opportunities for the public and news media to
ask questions on any subject; press releases are issued anytime
an event occurs of interest to the citizens of the Tennessee
Valley or members of the investment community; public meetings
on a variety of subjects are conducted throughout the TVA area;
and, perhaps of most significance, TVA's operations and
activities come under the jurisdiction of Oversight Committees
in both the Senate and the House.
It is my opinion, Mr. Chairman, that the TVA already
exceeds the reporting requirements that would be expected of
any other corporation in similar circumstances. But let us not
forget a key element in this discussion. TVA is a Government
corporation--100 percent owned by the U.S. Government. It
exists for the sole purpose of serving the citizens of the
Tennessee Valley. Its mandate is to provide services at the
lowest possible cost and it does not seek to enrich
shareholders or corporate executives, since it has only one
shareholder--the U.S. Government. In other words, TVA is a
unique and vastly different organization than you will find
anywhere else in the United States.
Now, we are all aware that bonds act differently in the
marketplace than equity ownership through stocks. Stock prices
can change depending on the vagaries of the marketplace and,
therefore, are subject to manipulation as all of us with
401(k)'s have painfully experienced in the past few months.
Bonds, on the other hand, are priced at the time of issue, and,
while liquidity and interest rates can contribute to some
changes in value, they are a stable and predictable investment.
TVA does not issue stock.
In response to the Committee's question about whether the
TVA should be made subject to the requirements of the
Securities Acts, I would hope the Committee would review
carefully the disclosures TVA already makes before acting on
legislation that, in my view, would simply add another layer of
bureaucracy to TVA's operations and result in additional cost
and a decrease in flexibility. In managing its debt, TVA needs
the ability to move quickly and take full advantage of
refinancing opportunities without being encumbered by another
layer of process.
I wish to thank you, Mr. Chairman, and the other Members of
the Committee for permitting me to appear here today and I
would be happy to answer questions.
Chairman Sarbanes. Thank you very much, sir.
We will hear from the other two panelists before we go to
the questions. Dr. Pulsipher, we would be happy to hear from
you.
STATEMENT OF ALLAN G. PULSIPHER
EXECUTIVE DIRECTOR, CENTER FOR ENERGY STUDIES
MARATHON OIL COMPANY PROFESSOR OF ENERGY POLICY
LOUISIANA STATE UNIVERSITY
Mr. Pulsipher. Thank you, Mr. Chairman, for the invitation
to testify before the Committee. I have a short statement with
four main points that I will just summarize.
First, TVA is a large electric power system. It is not a
regional development agency that executes Government functions.
Operationally, technologically, functionally, and financially
it is the same thing as the other large power systems that
operate in the Southeastern United States. And it has worked
hard to transform itself into that type of an organization over
the last two decades.
The exemption of TVA's securities from provisions of the
Securities Act of 1933 and the Exchange Act of 1934, to the
extent that it is derived from the exclusion of the
registration requirements given to securities of municipal,
State, and Federal Governments, has no cogent rationale with
respect to TVA today.
Second, as other people have said, the accounting and
investor protection issues that this Committee has spent so
much time on this past year are as relevant to TVA as they are
to its competitors.
To illustrate, TVA's unfinished nuclear plants are likely
to go on to the accounting hall of fame's top 10 list of most
write-off-resistant, unproductive assets, probably ranking just
below the Empire State Building's mooring tower for dirigibles.
TVA's current outside auditor has been retained by the
agency for at least over two decades, and I think it probably
goes back further than that, and that firm has been the
principal consultant to the agency on its accounting,
informational technology and financial systems, as well as many
other managerial issues. I am glad to hear that the TVA is
going to change that arrangement and I think it is time that it
did come to an end.
I share Senator Bunning's skepticism that anything would
have been done had it not been for the concern that the
Committee has expressed and acted on.
The lease/lease-back arrangements for the peaking turbines
have been discussed, I think that most people would look at
them as an effort to keep the financing for the turbine from
showing up on TVA's books as debt and being subject to the
Congressional limit. And there are other issues of this sort
that you can easily find.
Third, these accounting and investor protection issues are
more serious for TVA than for its competitors or other
corporations because the agency lacks these even minimal
mechanisms for corporate oversight, disclosure and control,
whose adequacy is under consideration by the Committee. As we
have heard, TVA is run by a unique but widely un-imitated,
full-time, three-person board appointed by the President for 9
year terms.
Many of those who have been appointed during the past have
had no experience or specialized knowledge of the electricity
business before their appointment. A few board members have
been very effective leaders and strategists, but these have
been the
exceptions.
It is useful to keep in mind that TVA ``backed into'' the
electric power business. The three-person board arrangement was
specified at its inception, well before the time that TVA
transformed itself into a large regional power system.
The rationale for the initial arrangement was that TVA
needed to be protected from hostile political and economic
interests in the region that would be threatened by this,
frankly, experimental initiative of the Federal Government.
There were no arrangements in the initial organization at TVA
and none have been inserted since that time to allow for
regional participation or regional review or oversight of TVA's
activities.
My fourth and final point is that every independent study
of TVA has concluded that this three-member board is an
antiquated, contradictory, paternalistic arrangement that
should be replaced by an independent, expanded, regionally-
based, part-time board. Regardless of politics, every study has
made this recommendation and, just as consistently, and also
regardless of politics, every TVA board has dismissed the
recommendation out of hand.
The relevance of this unique arrangement to the problems of
accounting accuracy and auditing that this Committee is
concerned with can be made clear by considering some of the
solutions to the problems that have been identified.
For example, requiring more independence of audit
committees, making audit committees responsible for the audit,
and other proposals like that. Of course, in TVA's case, TVA
has no external board members. It has no audit committee.
Sometimes in its history, it has been lucky to have somebody on
its board that had accounting experience.
The relevance of TVA's outdated double-duty board to its
problems of inadequate disclosure is well illustrated by the
dialogue
between the Office of Management and Budget and the TVA
board over the board's reticence to provide a basic business
plan
to explain its decision to resuscitate a nuclear unit at its
Brown's
Ferry site. The unit was licensed to operate in the 1970's but
has been closed because of safety concerns since 1985. This
effort will add eventually somewhere around $1.7 billion to
TVA's debt. The effort seems inconsistent with the movement
toward the use of smaller, more decentralized generating
technologies which entrepreneurs and large industrial energy
users are willing to build on their tab in many other parts of
the country.
While I commend OMB for asking these questions. During my
experience at TVA no one, including OMB, asked these sorts of
questions. Under the regulatory arrangements, TVA's competing
power systems operated with, such a request would come from a
public utility staff. It would be open for additional comment
and analysis by other interested parties and there would be no
question about the need for or desirability of responding to
it.
In summary, should the Tennessee Valley Authority provide
timely, accurate, and objective information about its
operations,
finances, and performance to its investors and customers and
the public? Should the information be provided in the same
format, use the same definitions, terminology, and conventions,
cover the same time period, provide the same degree of detail,
meet the same standards for auditing and timely disclosure, as
is required of its competitors in its primary line of business?
Would using SEC standards and procedures help progress toward
those goals?
My answer to these questions is, of course. Why doesn't TVA
do this? I have heard the answer to this question several times
this morning but I am still not certain I understand it.
However, TVA and its customers and its investors have a
more serious problem of corporate governance and control that
is the result of an obsolete and inherently contradictory
organizational structure that is long overdue for a fundamental
redesign.
I want to thank you again for the opportunity to state my
views and will be happy to answer any questions you may have.
Chairman Sarbanes. Thank you very much, sir.
Mr. Gates.
STATEMENT OF DANIEL GATES
MANAGING DIRECTOR
MOODY'S INVESTORS SERVICE
Mr. Gates. Good morning, Mr. Chairman, and Senator Bunning.
My name is Daniel Gates and I am a Managing Director with
Moody's Investors Service. I am pleased to be here to discuss
the credit ratings process, and the role of disclosure
requirements in that process, particularly for the Tennessee
Valley Authority. I hope that Moody's views add to the
consideration of this issue, though I also appreciate that our
views represent only one perspective on this matter. To begin,
I will give a brief overview of what we do.
Although Moody's rates a wide range of debt obligations,
the heart of our service lies in rating long-term bonds, for
which we have nine primary debt rating categories. Investment-
grade ratings range from a high of Aaa, down to a low of Baa.
Overall, Moody's ratings are designed to provide a relative
measure of risk, with the likelihood of credit loss increasing
as the rating decreases. The lowest probability of default is
expected at the Aaa level, with a higher expected default rate
at the Aa level, and so on down through the rating scale.
It is equally important to note what our work at Moody's
does not include. A rating is neither a buy nor a sell
recommendation, nor is it a seal of approval; rather, our
ratings reflect Moody's opinion of the relative
creditworthiness of a fixed-income security. Furthermore, just
as we do not insure the bonds we rate, we do not audit the
financial information provided to us. Accordingly, our ratings
rely heavily on the completeness and veracity of both the
public financial statements and any proprietary information
that may be provided to us by issuers.
In order to analyze a company's ability to meet its debt
obligations, Moody's analysts rely on a variety of information
sources, including publicly-available information that is filed
with regulatory authorities or is otherwise available, audited
financial statements, third-party analyses of the company and
the industry sector, and information provided by the company
directly to our analysts.
In an ideal world, the rating agencies always would have
access to complete and accurate financial and operational
information. We strongly believe that in the United States, the
Federal securities laws add to the reliability of that
information because they carry with them civil and criminal
penalties for inaccurate reporting. However, outside the United
States, and for some issuers like
TVA, within the United States, Moody's and the other rating
agencies for many years have rated companies not subject to SEC
reporting requirements. For these entities, Moody's relies on
the completeness and veracity of issuers' public and private
disclosure of information, along with industry-specific
knowledge and macroeconomic analysis.
We believe that the TVA has operated in good faith in
providing accurate and reliable financial information to
facilitate our rating analysis, though we do prefer that all
financial reporting, including by TVA, be subject to the
disclosure standards set forth in the 1933 and 1934 Acts.
Moody's analysts have a constructive working relationship with
multiple contacts at TVA, which provides additional background
on operational developments, industry news, or Government
proposals. We receive annual and quarterly reports from TVA and
regular briefing material.
As with any issuer, Moody's analyzes multiple factors when
rating TVA. Thus, we have considered TVA's protected service
territory, power costs, ability to set rates, and at the macro
level, the growth rate of the region it serves. We also
consider financial measures, including cash flow, balance
sheet, capital structure, and prospects for raising or lowering
debt in the near future. We have obtained all of this
information directly from the company or from third-party
sources. Finally, as a general rating approach to Government
Sponsored Enterprises such as TVA, Moody's uses an integrated
analysis of both the fundamental creditworthiness of the
enterprise as a business, and the enterprise's relationship
with the U.S. Government.
To conclude, Moody's supports steps to improve the quality
and reliability of the information that market participants,
including investors and our analysts, receive. This support for
higher quality information, however, should not be interpreted
as reflecting any particular concerns over the reliability of
the financial information we have received from TVA. Rather, as
a major consumer of financial data and SEC filings, Moody's
supports efforts to enhance
financial disclosure because these efforts improve the overall
reliability of financial information in the marketplace, and
thus contribute to more efficient capital markets. For that
reason, we commend the SEC for setting forth disclosure
alternatives and are glad to hear that TVA is willing to work
with the SEC to pursue those alternatives. We look forward to
the results of those discussions.
Thank you, Mr. Chairman. I would be very happy to answer
any questions.
Chairman Sarbanes. Thank you very much, Mr. Gates.
Mr. Crowell, I wanted to ask you, do I understand that the
TVA is paying out of its power revenues for nonpower
activities, and particularly for its river flood control
projects? You used to get a Federal appropriation. Is that
correct?
Mr. Crowell. Correct, right.
Chairman Sarbanes. Now that Federal appropriation has been
done away with. Is that right?
Mr. Crowell. That is right.
Chairman Sarbanes. As a conscious decision or simply
because of the workings of the budget process?
Mr. Crowell. Really, due to the workings of the budget
process. At the time, we undertook an effort to get away from
using tax funds to support projects in the Tennessee Valley. It
was a joint effort between the TVA Board and the Office of
Management and Budget. It was a proposal to do that that was in
the President's budget, the year before we did it.
Chairman Sarbanes. But you are now carrying burdens that
are not in any sense part and parcel of the power business. Is
that right?
Mr. Crowell. That is correct. These duties are public
responsibilities--river management, economic development.
Operations on navigation flood control, which normally would be
funded by taxpayers, are now being funded by the TVA out of
power revenues.
Chairman Sarbanes. You used to receive a Federal
appropriation for that. Is that right?
Mr. Crowell. That is correct.
Chairman Sarbanes. And did you also get a Federal
appropriation to do your power work, or did that all stop in
1959, when you were given the authority to issue bonds?
Mr. Crowell. It all stopped in 1959. You are correct, Mr.
Chairman. The change was made in 1959. Prior to 1959, the U.S.
Treasury financed TVA's operations, the power operations. After
that, TVA financed them independently.
Chairman Sarbanes. Right. But the nonpower operations, the
so-called stewardship activities, were still funded by the
Government. Correct?
Mr. Crowell. That is right. That is correct.
Chairman Sarbanes. What is the order of magnitude of those
activities, at least in recent years, if you know?
Mr. Crowell. In recent years, I would say that the cost of
doing them adequately would be somewhere around $80 to $90
million a year. I think the last year TVA received an
appropriation, it was in the 1970's, $70 million.
Chairman Sarbanes. Now, Dr. Pulsipher, I think I may have
misunderstood you. But I took something that you said to
suggest that providing electricity was not part of TVA's
original mandate. Is that correct?
Mr. Pulsipher. That is right. It was set up for flood
control navigation in a fairly broad, unspecified mandate. As a
consequence of those activities, it started to produce power
when it built dams. That grew under the leadership of David
Lillienthal into the power system.
Chairman Sarbanes. But I always thought it was part of the
original thinking of the Tennessee Valley Authority
legislation. Do you recall that?
Mr. Crowell. I think what Allan is trying to say--and I
might mention, the Committee probably does not know that
Professor Pulsipher and I worked together at TVA. We reported
to the same manager and I have always found him to be a very
bright and thoughtful person, although I do not agree with him
very often.
[Laughter.]
Chairman Sarbanes. That happens around here sometimes, too.
[Laughter.]
And we make exactly the same statement.
[Laughter.]
Mr. Crowell. But, anyway, rural electrification was part of
Franklin Roosevelt's campaign I think in 1932, to not only do
it for the United States, but also to do it for the area of the
Tennessee Valley. So electrification was a part of TVA's
mandate from the start. Allan is correct that, originally, more
of the effort went into navigation, flood control of the
Tennessee River because it flooded on an annual basis and
caused great economic damage and loss of life. But power was
always part of that. Electricity was to be sold to the people
in the Tennessee Valley.
Over time, with the recognition in 1959 in the Eisenhower
Administration that the electrification needed to continue,
there was a major change made and TVA was then permitted to
issue bonds in order to finance expansion.
Chairman Sarbanes. Senator Bunning.
Senator Bunning. Thank you very much.
Mr. Crowell, you talked about, and in your statement, you
reduced it down a bit, TVA's aggressively reducing debt.
Mr. Crowell. Yes.
Senator Bunning. If TVA continues to pay back debt at the
rate of $50 million, which is this last year's annual debt
which was repaid, it would take 250 years to do it. How does
TVA plan to restructure a debt repayment plan that would
eliminate its statutory debt of $26 billion? In other words, it
is supposed to be a 10-year plan that would end in 2007 to
reduce it in half. I wonder how we are going to do that if we
are going to do it at $50 million a year.
Mr. Crowell. Well, we are obviously not going to do it
based on $50 million a year.
The last budget I approved, the debt was reduced by $600
million. Now, the 10-year plan was always viewed as something
that would be revised on a yearly basis and make changes as a
result of market conditions and whatever.
But the reason I made that point in the statement is that
we are here discussing today before this Committee disclosure
issues, when personally, I think that the more serious subject
should be the size of the debt and the need to produce a plan
that will reduce it in the future, because I think that, as
competition occurs, the real threat to TVA's survival is going
to be the size of its debt. And that is the reason I made that
point. I think it is a very important issue and I know that you
have----
Senator Bunning. Well, that is my reason for examining the
debt and figuring out the best way to either register it or let
everybody know exactly what is going on with the debt, because
it jumps out at you when you look at TVA.
Mr. Crowell. Absolutely, it does. I would agree with you on
that. I guess the point I think I am trying to make, Senator,
is that I do not know that registration is going to get to the
heart of the problem that you just mentioned and your concern
is.
Senator Bunning. It may not. But something has to. And so,
I am having the hearing here to get ideas.
Mr. Crowell. Of course.
Senator Bunning. We had some on the first panel, the
exchange between the SEC and Ms. Harris, that may be a way to
work out something that we have not even talked about.
Mr. Crowell. Sure.
Senator Bunning. Mr. Gates, in your triple A rating of
TVA's
financial statement and corporate governance policies, do you
be-
lieve that they will be able to pay back their bonds because
they
have the implicit backing of the Federal Government and they
can unilaterally raise rates without worrying about approval of
State regulators?
Mr. Gates. As discussed before, the prospectuses and other
materials make clear that there is not an explicit guarantee.
We also do not view there being an implicit guarantee. However,
Government ownership does have certain things that go with it,
and those statutory factors together are the most essential
factors in the triple A rating, and that includes the protected
service territory, the ability to raise rates without
regulatory review, and the Government ownership.
Senator Bunning. So all the things I mentioned are a real
basis of fact for your triple A rating.
Mr. Gates. Those are the three most important factors in
the triple A rating.
Chairman Sarbanes. What do you make of the OMB letter we
received here this morning?
Senator Bunning. Wait a minute. I have someone here from
OMB that I am going to ask that question.
Is Jim Meatus here? Would you try to explain to us the
inconsistency of Mitch Daniels' letter, where the TVA's bonds
are guaranteed by the Federal Government? Or maybe I misread it
or the Chairman misread it.
Chairman Sarbanes. Here it is.
[Indicating.]
Senator Bunning. I have it, too.
Chairman Sarbanes. Okay.
Senator Bunning. I did not misread it. Could you explain
that to me?
Chairman Sarbanes. Sir, I think it would help if you took a
microphone and identified yourself for the record.
Senator Bunning. Identify yourself.
Chairman Sarbanes. We are happy to have you come forward to
the table at Senator Bunning's request.
Mr. Meatus. Thank you very much. My name is Jim Meatus. I
am a Budget Examiner for TVA at the Office of Management and
Budget. I am honored and pleased to be here today.
I think, if I were smart, I would go back to the office,
say little today, and check with the boss to be sure, 100
percent sure, exactly what he had in mind.
Senator Bunning. Did you see the letter?
Mr. Meatus. Yes.
Senator Bunning. Okay.
Mr. Meatus. But I have an opportunity here to perhaps add
some useful things for people to think about, and let me
proceed.
One of the presenters here today talked about reviews that
other utilities get. I am proud of the job I do at OMB, but we
do have one budget examiner looking at this $7 billion a year
utility, which is point one.
Point two, Senator, you mentioned that that does jump out
at you when you look at TVA. And people concerned about TVA's
customers have to be concerned about TVA's debt.
Point three, and more directly in answer to your question,
I participate in many discussions by thoughtful people about
exactly what the triple A rating means. For years I believed,
and I now think I am wrong, that the Federal Government,
Senator Sarbanes, like you say, would not back up the debt. If
TVA ran into problems, like any other business, TVA would pay
the consequences. But about 2 years ago, I discovered that I
was the only person at the staff level within OMB who believed
that, because it was TVA debt, because it was Government debt.
And that is really important. That is really important to come
to terms with, it seems to me, because how does a business make
decisions?
In part, it makes decisions based on the integrity of the
people involved, the character and so forth. And certainly, TVA
is staffed with talented people with integrity. But another
practical concern is the cost of capital. Frankly, I do not
have the numbers in front of me. The gentleman from Moody's
undoubtedly could answer the question.
Your planning horizon looks much different if you have a
triple A rating than if you have something else. I think that
it would be a useful exercise for people to--and perhaps the
gentleman from Moody's could answer the question. If you take
one of the rating agencies' rating templates and fill in the
blanks for TVA and forget about the Federal Government backing
up the debt, what would the debt, what rating would it be? I do
not know the answer. But I know people who have told me the
answer is somewhat less than a triple A. Now, I do not want to
overstay my visit and I appreciate your patience. I hope my
answer has made some sense to you.
Senator Bunning. Thank you very much.
Mr. Meatus. I will go back and check with the boss to see--
--
Senator Bunning. To see what he meant? Mr. Meatus, that
would really help us.
Chairman Sarbanes. Mr. Gates, that is a pretty direct
challenge to you.
Mr. Gates. Yes, I can respond to that.
Chairman Sarbanes. Yes, I think you ought to, maybe before
he leaves the table.
Mr. Gates. Well, the triple A rating is very heavily based
on the statutory factors. If those statutory factors were to be
changed or they were to go away, then certainly, we would
review the rating for downgrade.
We do not actually have a rating template. You can look at
the various financial ratios of any issuer, including the TVA,
but you have to put those ratios into the context of the
business risk of the enterprise. And given that TVA has the
Federal ownership, the protected service territory, the ability
to raise rates, and the statutory requirement that its rates be
set at a level that is sufficient to cover all of its
obligations and its debt, the business risk is perceived as
being very small. So, therefore, the financial ratios, which do
not alone look triple A, need to be viewed in the context of
the current status. If that status was changed, then the triple
A would go on review for downgrade.
Chairman Sarbanes. I take it, Mr. Meatus, it is not one of
your objectives this morning that we should walk out of here
with TVA's triple A rating downgraded, is it?
Mr. Meatus. I actually came to hear the hearing today, and
I am once again pleased and honored to be here. I may get
myself in trouble. I have no interest in downgrading the triple
A rating if it is deserved.
Chairman Sarbanes. All right. I am pleased to hear that.
Mr. Meatus. If it is deserved.
Chairman Sarbanes. Senator Bunning, I think you can go on.
Senator Bunning. Thank you very much.
Mr. Crowell, I just want to ask one last question because
it was brought out earlier in the hearing about the
recommendation of splitting the auditor's job in 1996 or 1995,
I forget exactly the year, by the IG. Is it true or false that
because or in spite of the fact that the IG made that
recommendation, that he was fired by TVA?
Mr. Crowell. Oh, no, no.
Senator Bunning. He was not fired by TVA?
Mr. Crowell. No, he retired from TVA.
Senator Bunning. He retired.
Mr. Crowell. But this is some years later. In 1995--let me
just answer your question. In 1995----
Chairman Sarbanes. You were Chairman, then, right?
Mr. Crowell. I was Chairman then.
Senator Bunning. That is why I asked.
Mr. Crowell. I think you make a good point because the IG
would have to be commended for making that recommendation in
1995. Now the fact that he made it to the TVA board and it also
went to Congress, and the fact that we missed it--if we had a
crystal ball, I certainly would have separated the functions in
1995. But in 1995, that was standard operating procedure for
all of corporate America and all of the Government.
Those are the kinds of issues, Senator, that you wish you
could go back and do over again, but that was not the case at
the time.
Senator Bunning. They did not report to me in the House,
and it was my fault because I was not on the Energy Committee
over in the House.
[Laughter.]
Mr. Crowell. No, I am simply making the point that it was
standard procedure then. Nobody at that time could have
predicted, in my opinion, the situation that has occurred over
the past couple of years. That is a situation where, if you had
a crystal ball, you could be a lot smarter.
Senator Bunning. I appreciate all of you testifying. Thank
you.
Chairman Sarbanes. Senator Carper.
Senator Carper. I have no questions, thank you.
Chairman Sarbanes. Well, this has been a very helpful panel
and we very much appreciate your coming and being with us today
and the time and effort that was put into both the written and
the oral presentations. We thank you very much.
Senator Bunning. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. The hearing stands adjourned.
[Whereupon, at 12:40 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF SKILA HARRIS
Director, Tennessee Valley Authority
September 17, 2002
Good morning, Chairman Sarbanes and other distinguished Members of
the Committee. My name is Skila Harris, and I serve as Director on the
Board of the Tennessee Valley Authority. On behalf of TVA's Chairman
Glenn McCullough and Director Bill Baxter and more than 13,000
employees, I would like to thank you for the opportunity to appear here
today to give testimony on corporate responsibility at the Tennessee
Valley Authority, as well as the breadth and depth of financial
disclosure and oversight at TVA. I would also like to discuss what TVA
will do in the future to uphold the spirit of the landmark Sarbanes-
Oxley Act of 2002. We at TVA commend you, Mr. Chairman, for your
leadership and perseverance on this important legislation.
TVA's Background
TVA has a proud heritage of service in the Tennessee Valley. TVA
exists to serve the public good, and our leadership standard is that
TVA will achieve excellence in business operations and public service
for the good of the people of the Tennessee Valley region. Created by
Congress in 1933, TVA serves the people of the Valley by producing
reliable, affordable electric power; supporting sustainable economic
development; and maintaining stewardship of the region's natural
resources. A
corporation of the Federal Government, TVA uses the best practices of
private
enterprise to achieve excellence in business operations and public
service.
TVA is entirely self-financing and receives no funding from
Congress. TVA's mission, set forth by the TVA Act, remains at the
cornerstone of TVA's day-to-day
activities in the Valley. TVA is charged primarily with providing
navigation, flood
control, and agricultural and industrial development, while providing
electric power to the Tennessee Valley region. At the core of TVA's
mission is creating value and delivering quality service for
stakeholders throughout the region.
Affordable, reliable electric power is the fuel of the economy in
the Tennessee Valley, and TVA's power system is setting performance
records as it keeps pace with increasing power demand. TVA's electric
power system has a winter dependable generating capacity of 30,365 MW
and operates 59 coal-fired units at 11 plants, five nuclear reactors at
three plant sites, 29 hydro power plants, and five combustion turbine
plants. Through 158 local power distributors and 62 directly served in-
dustrial customers, TVA supplies electricity for 8.3 million people in
the Tennessee
Valley. As the Nation's largest public power system, TVA reflects the
Nation's strengths and challenges in developing a strategy for
providing reliable, affordable, and environmentally sound energy.
The Administration has proposed a national energy strategy that
includes important efforts to restructure the electric power industry,
improving the Nation's energy infrastructure and encouraging
competition in the industry. TVA supports these policy reforms.
During this crucial time in our Nation's history, it is also
noteworthy that TVA's mission includes a role in national defense and a
long-standing history of support for U.S. national security
requirements--from the early days of making munitions in Muscle Shoals,
Alabama, and building dams to supply power for vital aluminum factories
during World War II, to TVA's current efforts to assist the Department
of Energy to obtain tritium.
In service to the region and the Nation, TVA manages the Tennessee
River system, the fifth largest river system in the United States.
Although similar responsibilities for resource management are funded
with taxpayer dollars elsewhere in the United States, TVA uses no
current appropriation dollars for this work. Fiscal year 1999 was the
last year in which TVA received appropriated dollars for these
activities. The 652-mile-long river, the 42,000 miles of streams and
tributaries, and TVA's 49 dams and 14 navigation locks are a vital part
of the Nation's navigation system, providing for the shipping of 45
million tons annually. TVA's other purposes in managing the river
system include reducing flood risk and producing hydro power. The river
and its 12 tributary watersheds touch 125 counties in portions of seven
States.
TVA's Board of Directors is committed to achieving excellence in
business operations and public service as the organization prepares for
the competitive marketplace of the future. The Board and the employees
of TVA are working to optimize the corporation's operational and
financial performance while remaining dedicated to economic development
in the Valley, environmental stewardship, integrated resource
management, and stakeholder communications. While there is still much
work to be done, I am confident that a bright future lies ahead for the
people we are charged to serve.
TVA's Business Practices
TVA is committed to conducting its business in an open and
forthright manner that instills confidence in Congress and the
Administration and in our investors, our customers, and our ratepayers
within the Valley and among Federal taxpayers and citizens who have an
interest in programs run by the Federal Government.
TVA's owners, investors, customers, and other stakeholders,
including taxpayers, already benefit from a number of protections. I
appreciate the opportunity to outline those protections and to share
with you today what TVA is already doing to ensure financial integrity
for our stakeholders.
For the future, TVA is also committed to doing even more, and TVA
is making specific commitments to corporate responsibility, auditor
independence, and increased financial disclosure that will enable us to
keep the continued confidence and support of our stakeholders.
TVA's Oversight
TVA's stakeholders, including investors in its bonds, benefit from
and can have confidence in the multiple levels of oversight to which
the TVA is subject, as a
corporation wholly-owned by the U.S. Government. Because TVA's mission
as a
Government-owned corporation is somewhat different from that of
publicly-traded companies, the oversight under which we operate is
different from that under which privately-owned, publicly-traded
companies operate.
As I noted earlier, the TVA's mission is to serve the public
interest by supporting
economic development of the Tennessee Valley, managing a thriving
Tennessee River system, and supplying low-cost, reliable power to the
Tennessee Valley region. TVA's mission is quite different from the
profit-oriented goals of an investor-owned company. In fact, far from
calling upon the TVA to maximize earnings, TVA's Congressional charter,
the TVA Act, calls for TVA to offer electricity at rates as low as are
feasible--balanced with an additional requirement that TVA charge rates
sufficient to meet, among other things, the annual principal and
interest payments on TVA's bonds.
Privately-owned, publicly-traded companies have a similar
responsibility to provide reliable goods and services to their
customers while earning a fair return on investment for their
shareholders. The U.S. Securities and Exchange Commission has the major
regulatory and oversight role with respect to securities of publicly-
traded companies; and its major focus, appropriately, is on ensuring
fairness in the issuance and trading of stocks.
Another difference between TVA and publicly-traded companies is
that the ownership interest in TVA is held by the Federal Government.
TVA has an interest in protecting the interest of its owner, the U.S.
Government and by implication the American people, although TVA does
not issue stock. Consequently, TVA does not have any incentive to
generate a return for shareholders, nor can TVA reward executive
performance with stock options. As a result, the oversight Congress has
put in place for TVA is different from the oversight for publicly-
traded companies.
But make no mistake, as a Government agency, TVA is subject to
considerable oversight.
TVA management is governed by a three-member Board of Directors
appointed by the President and confirmed by the U.S. Senate. Board
members are sworn to uphold TVA's Congressional charter, the TVA Act,
which bounds the range of business activities in which TVA can engage.
TVA, like many other Government agencies, has an independent
Inspector General (IG) with broad audit and investigative powers. TVA's
Inspector General was previously appointed by the TVA Board of
Directors but, pursuant to recent legislation, will be appointed in the
future by the President. TVA's Acting Inspector General, Mr. Don
Hickman, is here with me today.
TVA's Inspector General conducts audits of the TVA's financial
systems, business decisions, operations, and contracts. The Inspector
General is also charged with conducting investigations of possible
fraud, waste, and abuse within TVA. The Inspector General routinely
publicizes its hotline to employees and investigates reports of
financial or accounting irregularities, in addition to its other
responsibilities. The Inspector General provides semiannual reports to
Congress and to the public on the results of its audit and
investigative work.
In carrying out its audit responsibilities, the Office of the
Inspector General provides TVA with oversight that is much like that
provided by a publicly-held company's Audit Committee. The Office of
the Inspector General performs many of the same duties and functions as
those of an Audit Committee but does so with more authority and
professional resources. For example:
An Audit Committee must include at least one member with
financial expertise. The Inspector General's staff that oversees
audits of TVA finances includes 19
certified public accountants.
The Inspector General has greater access to TVA financial and
management information than would a company's Audit Committee
because the Inspector General has access to any information in TVA.
The Inspector General has the authority to investigate not
only financial matters but also any alleged ethics violation in
TVA, and the Inspector General is charged by Federal statute with
aggressively pursuing any such allegation.
Also by Federal statute, the Office of Inspector General is
independent of the Board of TVA. A publicly-held company's Audit
Committee is a committee of the company's Board of Directors.
The Inspector General has the authority to investigate any
impropriety and report expeditiously to the Attorney General
whenever the IG has reasonable grounds to believe criminal law has
been violated. This authority extends not only to investigations of
actions by TVA managers or employees, but also to actions by people
outside TVA, such as contractors and vendors, when an alleged
violation is related to TVA.
TVA also has an independent external auditor,
PricewaterhouseCoopers, which is appointed by the TVA Board. The TVA's
Office of the Inspector General provides oversight of the firm's work
and maintains the budget for the firm's annual audit of TVA. The
Inspector General also has the legal authority to determine whether
TVA's audit will be performed by the Office of the Inspector General
itself or by an independent external auditor.
PricewaterhouseCoopers audits TVA's financial statements in
accordance with Government auditing standards and provides an opinion
on whether those statements are presented in conformity with generally
accepted accounting principles, or GAAP. TVA's financial results are
also included in the Federal Government's consolidated financial
statements, which are audited by the General Accounting Office.
In addition, Congress exercises considerable oversight over TVA, as
exemplified by today's hearing. The U.S. Senate is charged with
providing oversight through the Environment and Public Works Committee
and its Subcommittee on Clean Air, Wetlands, and Climate Change.
The U.S. House of Representatives is charged with providing
oversight through the Transportation and Infrastructure Committee and
its Subcommittee on Water Resources and Environment.
The General Accounting Office (GAO) conducts frequent audits of
various TVA
activities and programs, often at the request of Members of Congress.
GAO is also
authorized by the TVA Act and the Government Corporation Control Act to
audit TVA's financial statements.
Under the provision of the TVA Act, TVA is obligated to
periodically provide Congress, the Federal Energy Regulatory
Commission, the Office of Management and Budget, and other interested
Federal and State agencies with detailed financial
and operational information on the generation, transmission, and
distribution of electric energy by the TVA system. The development and
submission of this information is a element of the ``yardstick''
function that TVA was intended by Congress to serve--to better enable
Congress to formulate legislative policy for the electric power
industry.
TVA also files various reports with the President, Congress, and
U.S. Treasury:
Under the TVA Act, TVA files an annual report with the
President and Congress, which contains financial statements and a
complete report of TVA's business
activities.
Under the Government Performance and Results Act, TVA submits
annual performance reports to Congress.
Under the Government Corporation Control Act, TVA submits an
annual budget to the President and TVA's proposed budget is subject
to review and approval by the President and his staff in the
Executive Branch as part of the normal budget preparation process.
In accordance with OMB Circular A-34, TVA reports on a
quarterly basis its
financial outlays from the previous quarter to the U.S. Treasury.
In addition, the U.S. Treasury frequently asks TVA to provide
a forecast of future receipts and disbursements.
Furthermore, before TVA can issue bonds with maturities of 1 year
or more, the Secretary of the Treasury must approve the time of
issuance and maximum interest rate of the bonds. Also, since most of
TVA's bonds are listed on the New York Stock Exchange and trade through
its bond exchange, TVA must meet the NYSE's listing requirements.
As you can see, TVA, as a Government agency, has a considerable
amount of oversight that provides significant assurance to our
stakeholders. Additional measures further ensure TVA's integrity in the
areas of corporate responsibility, auditor independence, and increased
financial disclosure.
Corporate Responsibility
By law, all TVA employees must adhere to the standards of ethical
conduct for Federal employees, which require that all Officers complete
ethics training and file financial disclosure statements annually. In
addition to that requirement, TVA will develop a code of financial
ethics consistent with the Sarbanes-Oxley Act for all Officers and
Business Managers, as well as a training program on full, fair,
accurate, timely, and understandable financial and nonfinancial
disclosure, TVA's corporate governance practices, and financial ethics
requirements for all employees who prepare TVA's financial and business
reports.
Beginning with the 2002 TVA Annual Report, TVA's Board and CFO will
certify the financial statements and related information for the fiscal
year ending September 30, as well as all future financial statements
and related information. The Information Statement, which is the TVA's
primary disclosure report to the public
financial markets, will be similarly certified. The certification
process will include signed certifications by all TVA Officers and
Business Managers of the information they provide for these reports.
Because TVA is wholly-owned by the U.S. Government and cannot issue
stock, TVA Directors and Officers do not receive stock options. In
addition, TVA does not presently make personal loans to its Directors
or Officers and does not plan to make any such loans in the future.
Auditor Independence
TVA has significant protections in the area of auditor
independence. The independent TVA Inspector General has broad audit and
investigative responsibilities. The Inspector General conducts ongoing
audits of TVA's operational and financial matters in accordance with
Government auditing standards. The Inspector General also conducts an
annual audit of the work of TVA's independent external auditor,
PricewaterhouseCoopers, to ensure compliance with Government auditing
standards. TVA's Office of the Inspector General itself undergoes a
peer-review audit every 3 years conducted by an Inspector General from
another Federal agency.
Beginning next fiscal year, the TVA will not enter into any new
contracts with PricewaterhouseCoopers for nonaudit services, and the
TVA will phase out all consulting and actuarial services currently
performed by PricewaterhouseCoopers.
In addition, TVA's Inspector General, Senior Vice President of
Procurement, and Chief Financial Officer have clearly defined the roles
of all parties with responsibilities related to the external audit of
TVA's financial statements in order to ensure auditor independence,
with the Inspector General being responsible for the technical
management of the audit contract with PricewaterhouseCoopers.
TVA is taking several other steps to ensure auditor independence,
comparable to those in the Sarbanes-Oxley Act. TVA will require its
external auditor to rotate the lead audit partner and the audit partner
responsible for reviewing the audit every 5 years. Also, TVA's CFO,
Controller, and Chief Accounting Officer will not be hired from its
external auditor if they have worked on the TVA audit during the
preceding year. TVA currently does not have a Chief Executive Officer,
but this prohibition will also apply to TVA's CEO if TVA has one in the
future.
The TVA Board will ensure an appropriate review of its external
audit through quarterly meetings with the Inspector General and the
external auditor.
Financial Disclosure
TVA is committed to fully disclosing all material financial and
business information to the public financial markets by providing a
steady flow of timely, comprehensive, and accurate information. TVA
currently issues quarterly financial reports and publishes an annual
report that includes a Management's Discussion and Analysis of
Financial Condition and Results of Operations and audited financial
statements prepared in accordance with generally accepted accounting
principles.
We provide Information Statements and Offering Circulars, similar
to pros-
pectuses for publicly-traded companies, to investors and the bankers
and brokers who sell TVA's bonds. TVA issues news releases on
significant events and conducts open Board meetings to ensure that
major decisions by TVA's Board are made in a public arena with
opportunity for input from the public we serve.
TVA also conducts an annual conference in New York for financial
analysts and investors and distributes a detailed Fact Book with
information on TVA's strategy, finances, and operations.
TVA is forming a Disclosure Committee to document procedures for
reporting material events and occurrences on a more timely basis.
Conclusion
In conclusion, TVA is committed to conducting its business in an
open and forthright manner that instills confidence in Congress and the
Administration and in our investors, our customers, and our ratepayers.
TVA already has a number of mechanisms in place for the protection of
its stakeholders, and we are committed to doing even more to ensure
that we earn your continued support and confidence.
Thank you. I look forward to answering any questions the Committee
might have.
----------
PREPARED STATEMENT OF ALAN L. BELLER, ESQ.
Director, Division of Corporate Finance
U.S. Securities and Exchange Commission
September 17, 2002
Introduction
Chairman Sarbanes, Senator Gramm, Members of the Committee, I am
pleased to have this opportunity to testify before you on behalf of the
Securities and Exchange Commission regarding the application of
disclosure and reporting requirements of the Federal securities laws to
the Tennessee Valley Authority (``TVA''). As you know, TVA was
statutorily created in 1933,\1\ the same year the first of the Federal
securities laws was enacted. It was formed to provide flood control,
navigation and agricultural and industrial development and to promote
the use of electric power in the Tennessee Valley region. From its
creation in 1933, TVA has been wholly-owned by the U.S. Government and
is considered an agency and instrumentality of the United States. As
such, the offer and sale of its securities has been exempt from
registration under the terms of the Securities Act of 1933
(``Securities Act'') and its securities are exempted securities and
Government securities under the terms of the Securities Exchange Act of
1934 (``Exchange Act'').\2\
---------------------------------------------------------------------------
\1\ 16 U.S.C. Sec. 831 et. seq.
\2\ See Securities Act Sec. 3(a)(2), 15 U.S.C. Sec. 77c(a)(2);
Exchange Act Sec. Sec. 3(a)(12) and 3(a)(42), 15 U.S.C. Sec. 78c(a)(12)
and (42).
---------------------------------------------------------------------------
TVA's Borrowing Authority and Types of Debt Issuances
TVA is currently authorized by statute to issue only debt. Until
1959, any indebtedness incurred by TVA was backed by the full faith and
credit of the United States. In 1959, Congress eliminated the backing
of TVA debt by the full faith and credit of the United States. Under
its current statutory authority, TVA may borrow up to $30,000,000,000
to finance its power program and to refund any outstanding bonds and is
permitted to repay the bonds only from its net power proceeds (and
proceeds of any bond refunding).\3\ The TVA is also obligated to repay
the Government for its original investment,\4\ also known as
appropriation investment, which payment was $55,000,000 in 2001. At its
September 30, 2001 fiscal year end, TVA continued to have an obligation
to repay the Government its remaining appropriation investment of
$508,000,000.
---------------------------------------------------------------------------
\3\ See 16 U.S.C. Sec. 831n-4.
\4\ See 16 U.S.C. Sec. 831y.
---------------------------------------------------------------------------
TVA has stated that it issues bonds in a variety of structures and
sells its bonds to institutional and individual investors on a global
basis. According to TVA, as of February 28, 2002, it had 49 long-term
public bond issues outstanding, including at least one specifically
designed for individual investors.\5\ Based on its 2001 annual report,
at September 30, 2001, TVA's long-term debt was $22,359,000,000, and
its short-term debt in the form of discount notes was $3,016,000,000.
At least two of TVA's debt securities, the putable automatic rate reset
securities and the Valley
inflation indexed power securities, are listed and traded on the New
York Stock
Exchange.
---------------------------------------------------------------------------
\5\ See TVA, Financing Program Highlights, undated.
---------------------------------------------------------------------------
Our area of interest as an agency involves disclosure to investors
in TVA debt and not other aspects of Federal regulation or incentives
in the power market.\6\ Because TVA is wholly-owned by the United
States and does not issue any equity securities, the most appropriate
way to evaluate its disclosure is from the standpoint of debt
investors. In 1992, the Commission participated with the Department of
Treasury and the Board of Governors of the Federal Reserve System in a
Joint Report on the Government Securities Market (``1992 Report'').\7\
As a Government agency, TVA was excluded from the recommendations
regarding Government Sponsored Enterprises (``GSE's'') in the 1992
Report. Further, the Commission has not considered the status of TVA
since that time.
---------------------------------------------------------------------------
\6\ TVA, as an agency and instrumentality of the United States, is
not subject to the Public Utility Holding Company Act of 1935, 15
U.S.C. Sec. 79b(c)(``PUHCA''). Even without this exemption, we
understand that TVA would not be subject to PUHCA since it is not
permitted to have subsidiaries and all the utility assets and
businesses therefore are held at the TVA level.
\7\ Department of the Treasury, Securities and Exchange Commission,
Board of Governors of the Federal Reserve System, Joint Report on the
Government Securities Market, January 1992.
---------------------------------------------------------------------------
Application of the Federal Securities Laws
As an agency and instrumentality of the United States, the offer
and sale by TVA of its debt is exempt from registration under the
Securities Act, and its securities are within the definition of
exempted securities and Government securities under the Exchange Act.
In addition, as part of the 1959 amendments, Congress explicitly
exempted the issuance and sale of TVA bonds from the requirements or
limitations of any other law, which includes the Federal securities
laws. Therefore, TVA does not register the offerings of its debt
securities under the Securities Act, and its debt, including debt that
is listed on the New York Stock Exchange, is not subject to
registration under the Exchange Act. Congressional action would be
required to eliminate these various statutory exemptions.
The effect of the exemptions from the Securities Act and the
Exchange Act is that disclosures by TVA are largely unregulated at the
Federal level. Financial statements are statutorily mandated under the
Tennessee Valley Authority Act of 1933.\8\ The staff of the Commission
does not review these financial statements or any other TVA disclosure
documents. However, TVA is subject to general antifraud restrictions
prohibiting false or misleading statements of material facts, including
the omission of material facts necessary to make the statements made,
in light of the circumstances under which they are made, not
misleading.
---------------------------------------------------------------------------
\8\ See 16 U.S.C. Sec. 831h.
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TVA is also not subject to the provisions of the recently enacted
Sarbanes-Oxley Act of 2002.\9\ For example, TVA will not be subject to
the independent audit committee requirements, the auditor independence
rules, the certification requirements or the code of ethics provisions.
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\9\ Pub. L. 107-204, 116 Stat. 745 (2002).
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Comparability of Disclosure
TVA, while a unique Federally owned corporation, has many of the
same disclosure issues as publicly held utilities. TVA bonds are sold
to the public in underwritten offerings. We believe investors in those
debt securities are entitled to the same type of information as that
provided by other issuers of public debt. We further believe that the
Commission's detailed disclosure rules and filing requirements and the
staff review and comment process provide the best framework for
disclosing information to which investors are entitled. Currently,
TVA's annual, periodic, and offering disclosures have been governed by
the demands of market participants and antifraud strictures, not by our
disclosure rules.
The effect of the lack of the full faith and credit backing of the
United States for TVA's bonds, of course, makes TVA's disclosure more
relevant. Because investors in TVA's bonds may look only to TVA's net
power proceeds (and refunding proceeds) for repayment of the bonds,
disclosures by TVA should give the holders of its debt a materially
complete and accurate picture of the TVA's financial and operational
situation to evaluate whether there may be sufficient net power
proceeds to repay their bonds.
In preparation for this testimony, the staff of the Commission has
considered certain recent disclosures by TVA available on their
website. This overview does not represent a full review, has not
involved a typical comment process with TVA, and does not attempt to
cover all the comments the staff might issue in a full review. While
TVA disclosures in its most recent information statement and annual
report, quarterly reports, offering circulars and other materials
generally include most of the same disclosures as companies that file
reports with the Commission, there are certain areas where we believe
TVA's disclosures would be enhanced if the Commission's line item
disclosure requirements and staff review applied.
Financial Statements. TVA provides audited annual financial
statements, prepared in accordance with U.S. GAAP. TVA includes in its
information statements and annual reports 3 years of Statements of
Income, Cash Flows, Changes in Proprietary Capital and Comprehensive
Income (Loss). TVA's presentation of the types and number of years of
financial statements appear to be generally consistent with Commission
rules and the financial statements that other public companies
provide.\10\ The staff did not conduct a complete accounting review, so
we are unable to state whether the financial statements meet all the
line item requirements.
---------------------------------------------------------------------------
\10\ See generally Regulation S-X, 17 CFR 210.
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Management's Discussion and Analysis. It would appear that TVA
provides more summary analysis and less trend information than the
Commission would seek, although all of the required categories of
information appear to be included.
Market Risk Disclosure. TVA provides more abbreviated disclosure
regarding
market risk, and in particular less quantitative disclosure, than a
public reporting
company would be required to provide.\11\ TVA presents a market risk
section that
briefly discusses risk policies, interest rate and foreign currency
risk, commodity and equity price risk and forward contracts. The
discussion does not quantify the effects of price risk for commodity-
based derivative instruments. In addition, there is very limited
quantitative disclosure on interest-rate risk or foreign-currency risk.
TVA presents no detailed quantified information surrounding its use of
derivatives, other than identification of the use of interest-rate and
currency swap contracts to hedge inflation-indexed and foreign currency
denominated debt issues, respectively.
---------------------------------------------------------------------------
\11\ See Item 305 of Regulation S-K, 17 CFR 229.305.
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Business and Property. TVA's discussion of its business is somewhat
less comprehensive than that which the staff would typically see in
disclosure provided by publicly-owned utilities. Some of the
differences in the level of disclosure provided may be attributed to
the different statutory provisions applicable to the TVA and to
regulated publicly-owned utilities that are subject to the strictures
of the PUHCA \12\ and other State and Federal laws utility, energy and
environmental laws. Notwithstanding the different regulatory
requirements that TVA is subject to, the staff might expect to see
somewhat more disclosure in a few areas, such as types and sources of
fuel and supply contracts, regulation and licensing requirements.
---------------------------------------------------------------------------
\12\ 15 U.S.C. Sec. 79a.
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TVA's description of its properties is also somewhat less detailed
than public
reporting utilities typically provide. For example, most owners of
power generation
facilities include more comprehensive disclosure regarding location of,
nameplate
capacity in Megawatts (MW) and number of generating units in, each
plant. TVA has included most of this information as it relates to its
nuclear plants. However, TVA includes only aggregate summary
information about its other plants.
Executive Compensation and Related Party Transactions. The staff
did not find any disclosure regarding executive compensation and
related party transactions. TVA is not organized in the same manner as
a private corporation--for example, the directors are appointed by the
President of the United States rather than
elected by shareholders. TVA's information statement and annual report
do not
include executive compensation information that would be required by
our rules. TVA's information statement and annual report also do not
describe any related party relationships or transactions.\13\ As a
Government entity, at least part of the information regarding
compensation of directors and executive officers is likely publicly
available from sources other than TVA's website.
---------------------------------------------------------------------------
\13\ See Items 402 and 404 of Regulation S-K, 17 CFR 229.402 and
404.
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Material Contracts. TVA does not publicly provide copies of the
types of contracts that are typically filed by reporting companies.\14\
These might include power purchase contracts and long-term supply
contracts with five key customers.
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\14\ See Item 601 of Regulation S-K, 17 CFR 229.601.
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Disclosure Alternatives
There is a tension between the TVA's status as a Government agency
and instrumentality and the resulting statutory exemptions on the one
hand, and the need for disclosure that meets Commission standards on
the other hand. As previously indicated, the 1992 Report did not
address TVA because it was a Government agency and instrumentality.
Unlike GSE's addressed in that report, including Federal National
Mortgage Association (``Fannie Mae'') and the Federal Home Loan
Mortgage Corporation (``Freddie Mac''), TVA is not a profit-making
corporation with private shareholders. As such, a different statutory
regime may be appropriate.
There are a number of ways that a disclosure regime could be
applied to TVA. One way would be to change the statutory scheme to
eliminate the Securities Act and/or the Exchange Act exemptions.
Removing the Securities Act exemption would result in registration of
public offers and sales of TVA's debt and Exchange Act periodic
reporting at least for so long as TVA had more than 300 holders of any
class of its debt.\15\ Because at least two classes of TVA's debt
securities are listed on a national securities exchange, without an
Exchange Act exemption TVA would have to register these classes under
the Exchange Act.\16\ Once TVA became subject to the reporting
requirements of the Exchange Act, it would have to file periodic and
current reports with the Commission under Exchange Act Section 13(a),
including an annual report on Form 10-K, quarterly reports on Form 10-
Q, and current reports on Form 8-K.\17\ If TVA registered its
securities and became a reporting company, its disclosures would have
to comply with the Commission's detailed line item disclosure
requirements.\18\ Given the Commission's integrated disclosure system,
the information available to investors would be virtually identical
even without registration under the Securities Act. In addition, TVA
would become subject to the provisions of the Sarbanes-Oxley Act
applicable to reporting companies. Further, TVA would have to qualify
its borrowing resolution as an indenture under the Trust Indenture Act
of 1939 \19\ and would have to engage an independent trustee. Since TVA
does not issue any equity, however, it is important to note that it
would not become subject to the proxy or ownership reporting
requirements of the Exchange Act.\20\
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\15\ See Securities Act Sec. 5, 15 U.S.C. Sec. 77e; Exchange Act
Sec. 15(d), 15 U.S.C. Sec. 78o(d).
\16\ See Exchange Act Sec. 12(a), 15 U.S.C. Sec. 78l(a).
\17\ Exchange Act Sec. 13(a), 15 U.S.C. Sec. 78m.
\18\ See Regulation S-K (17 CFR 229) and Regulation S-X (17 CFR
210).
\19\ 15 U.S.C. Sec. 77aaa et. seq.
\20\ See 17 CFR 240.3a12-11 and Exchange Act Sec. 16(a), 15 U.S.C.
Sec. 78p(a).
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Because TVA is a Government agency and instrumentality and because
the Commission has not considered TVA's status since the 1992 Report
(from which it was excluded), we are not advocating such a change in
the statutory arrangements under which TVA operates. In particular, we
believe that the Commission's objective--disclosure that meets
Commission requirements and standards--can be achieved by alternative
means. As one example, exemptions could be conditioned on TVA's
providing the same periodic disclosure as required for reporting
companies under the Exchange Act. Another possibility would be
voluntary compliance or registration under the Exchange Act, a course
of action recently taken by Fannie Mae and Freddie Mac and which
achieves effectively the same results in respect of disclosure as
eliminating the exemptions.
Conclusion
The individual and institutional investors who hold TVA's debt
securities depend for repayment on TVA's net power proceeds and
refundings, and not a Government guarantee. We believe that applying
the Commission's disclosure requirements and processes is the preferred
method of ensuring that these investors receive the materially accurate
and complete disclosure they deserve. TVA's status and exemptions from
the registration and reporting requirements of the Federal securities
laws are not necessarily an obstacle to that result. As previously
indicated, there are a number of courses of action, including voluntary
action by TVA, to achieve the desired standard of disclosure that is
consistent with the Commission's standards and requirements.
----------
PREPARED STATEMENT OF CRAVEN CROWELL
Chairman, GCW Consulting
Former Chairman, Tennessee Valley Authority
September 17, 2002
Good morning, Mr. Chairman. My name is Craven Crowell and I served
for 8 years as Chairman of the Tennessee Valley Authority. I had the
distinct pleasure of serving the TVA for a total of 17 years, first as
a member of the senior management team and then, as I have said, as
Chairman of the Board of Directors. I retired last year after 25 years
of Federal Government service and now serve as Chairman of GCW
Consulting, an energy and aviation consulting firm with offices in
Arlington, Virginia.
The TVA has played a vital role in creating prosperity for people
of the Tennessee Valley since its creation in 1933. It brought
opportunity and hope to thousands of people who lived mostly in rural
areas and who had few prospects for improving their lives and the lives
of their children. I can remember as a small child when TVA electricity
first came to the farmhouse where my grandparents lived and the
excitement electric lighting created in the rural community of
Fairview, Tennessee, where they lived.
There is no doubt that the TVA contributed greatly to the quality
of life in the Tennessee Valley and it is my fervent hope it will
continue to play a vital role in creating opportunity for many
generations to come. I can say with certainty that the TVA has played
an important role in my life and career and I shall always be grateful
for having had the opportunity to serve the people of the Tennessee
Valley.
Mr. Chairman, the Committee has asked me to address two questions:
whether the TVA should be required by Federal law to disclose financial
and operational information to debt-holders and prospective investors,
and, if so, whether the TVA should be made subject to the requirements
of the Securities Act of 1933 and the Securities and Exchange Act of
1934. I want to express my appreciation to the Committee for its
interest in my views on this important matter. I would, however, like
to make a few preliminary comments about TVA's debt that I believe are
relevant to our discussion this morning.
In 1959, Congress gave TVA the authority to issue bonds to raise
capital for expansion and other related activities and subsequently set
a debt limit of $30 billion. For the next 38 years, the TVA continued
to increase its debt until it reached $27.7 billion. In 1997, TVA
realized that not only was the size of the debt coming dangerously
close to its borrowing limit, but also the interest expense as a
percent of revenue at 34 percent was having a negative impact on TVA's
competitiveness.
As a result of concerns about the size of the debt, TVA developed a
10-year plan in 1997 to reduce the debt and create a stronger financial
position in preparation for deregulation of the electric power
industry. Since 1997, TVA has reduced its indebtedness by almost $2.5
billion and has reduced the interest expense as a percent of revenue to
21 percent--producing a savings of nearly $500 million per year in
interest expense.
I am pleased the current TVA Board of Directors has continued to
focus on reducing the debt. In all likelihood, TVA's debt is greater
than the market value of its total assets in today's market, although
the agency's book value remains higher than its indebtedness. It is my
hope the TVA Board will continue to reduce the debt in the years ahead.
Now, if I may, let me speak to the issue of the disclosure of
financial and operational information by the TVA.
During my tenure as Chairman, TVA undertook a significant expansion
of its finance program in order to lower interest costs. The collective
result of those efforts over the last few years has resulted in TVA
being recognized for its innovation and responsiveness to investors.
TVA entered the global bond market for the first time in 1995 and
the same year issued its first bonds targeted to retail investors. The
retail bonds were enormously successful and resulted in a large
increase in the number of TVA investors. With this came the recognition
that TVA would need to increase the opportunities to further disclose
and communicate information about the agency that was of significance
and importance to the investment community.
So in 1996, TVA created a staff of investor relations professionals
to ensure that investors in TVA bonds had information they needed to
make informed investment decisions. The broad responsibilities of this
group were to ensure the adequacy and accuracy of disclosures in TVA's
annual report, quarterly reports, information statements, and periodic
offering circulars.
Additionally, the investor relations department routinely handled
hundreds of inquiries from investors. The TVA Board also became more
active with the investment community and began hosting meetings in New
York with major investors and began meeting with investors in other
countries.
In every meeting I attended, TVA was viewed as a stable, well-run
Government corporation that offered a sound investment opportunity. In
no instance did any investor ever express to me the slightest concern
about the business standards of TVA, the soundness of the business or
the adequacy or timeliness of our disclosures.
I might add that stable rates are an important signal to investors
of TVA's business stability. But there are other significant signals,
as well. Investors have taken note of the outstanding operating
performance of TVA's power system. Capacity and efficiency are
continuing to increase, and, during my tenure, TVA's nuclear program
was recognized by the industry for its high level of performance.
In this discussion, we also should recognize that the TVA's
operations and bond
indebtedness are already subject to significant oversight to guarantee
proper and
complete disclosure. Two examples include an independent auditor in the
form of
an Inspector General who will be appointed by the President with Senate
confirmation, and the General Accounting Office that has full and
complete access to all documents and information in TVA's possession.
TVA routinely provides information about its finances and
operations in many other ways. TVA Board meetings are conducted in
public with opportunities for the public and news media to ask
questions on any subject; press releases are issued anytime an event
occurs of interest to the citizens of the Tennessee Valley or the
members of the investment community; public meetings on a variety of
subjects are conducted throughout the TVA area; and, perhaps of most
significance, TVA's operations and activities come under the
jurisdiction of Oversight Committees in both the Senate and House.
It is my opinion, Mr. Chairman, TVA already exceeds the reporting
requirements that would be expected of any other corporation both
public and private.
But, let us not forget a key element in this discussion. TVA is a
Government corporation--100 percent owned by the U.S. Government. It
exists for the sole purpose of serving the citizens of the Tennessee
Valley. Its mandate is to provide services at the lowest possible cost
and it does not seek to enrich shareholders or corporate executives,
since it has only one shareholder--the U.S. Government.
We all are aware that bonds act differently in the marketplace than
equity ownership through stocks. Stock prices can change depending on
the vagaries of the
marketplace and, therefore, are subject to manipulation as all of us
with 401(k)'s have painfully experienced in the past few months. Bonds,
on the other hand, are priced at the time of issue, and, while
liquidity and interest rates can contribute to some changes in value,
they are a stable and predictable investment. The TVA does not issue
stock.
In response to the Committee's question about whether the TVA
should be made
subject to the requirements of the Securities Act of 1933 and the
Securities and
Exchange Act of 1934, I would hope the Committee would review carefully
the disclosures TVA already makes before acting on legislation that, in
my view, would simply add another layer of bureaucracy to TVA's
operations and result in additional cost and a decrease in flexibility.
In managing its debt, TVA needs the ability to move quickly and take
full advantage of refinancing opportunities without being encumbered by
another layer of process.
I wish to thank you, Mr. Chairman, and the other Members of the
Committee for asking me to appear here today.
----------
PREPARED STATEMENT OF ALLAN G. PULSIPHER
Executive Director, Center for Energy Studies
Marathon Oil Company Professor of Energy Policy
Louisiana State University
September 17, 2002
Thank you for the invitation to testify before this Committee. I am
the Executive Director of the Center for Energy Studies at Louisiana
State University. Previously I was the Chief Economist at TVA for most
of the 1980's. Other relevant experience includes serving as a Program
Officer with the Ford Foundation and as a Senior Staff Economist with
the Council of Economic Advisers under Presidents Nixon and Ford. I
have followed TVA's fortunes with interest both as an ex-employee and a
student of energy policy but my attention has become more sporadic than
systematic in recent years.
I have a short statement with four main points that I have outlined
as follows.
First, TVA is a large electric power system not a regional
development agency that executes governmental functions. Operationally,
technologically, functionally, and financially it is the same as the
other large power systems that operate in the Southeastern United
States. The exemption of TVA's securities from provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934, to the
extent that it is derived from the exemption from the registration
requirements given to securities of municipal, State, and Federal
Governments, has no cogent rationale today with respect to TVA.
Second, the accounting and investor protection issues that this
Committee has spent so much time on this past year are as relevant to
TVA as they are to its competitors. To illustrate:
a. TVA's unfinished nuclear plants are likely to go on to the
accounting hall of fame's top 10 list of the most ``write-off-
resistant,'' unproductive assets, probably ranking just below the
Empire State Building's mooring tower for dirigibles. To my
recollection, TVA is the only utility that still carries unfinished
nuclear plants as assets on its books. Despite the fact that it has
both cancelled and written off about four times as much nuclear
construction as its closest competitor in the cancelled nuclear plant
category.
b. TVA's current outside auditor has been retained by the agency
for over two decades, and also has been the principal consultant to the
agency on its accounting, informational technology and financial
systems, as well as other managerial issues. I could not find the
calculation or the required data in TVA's public reports, but my hunch
is that TVA's payment for auditing and nonauditing services exceeds the
$2.69 in nonauditing services for every $1 in auditing services average
cited by Mr. Bevis Longstreth in testimony before this Committee on
March 6, 2002.
c. TVA recently has executed lease-back arrangements for 16 peaking
turbines that appear to be designed primarily to keep their financing
from appearing on the agency's books as debt.
Third, these accounting and investor protection issues are more
serious for the TVA than for its competitors because the agency lacks
even the minimal mechanisms for oversight, disclosure and control,
whose adequacy is under consideration by this Committee and many
others. A unique but un-imitated, full-time, three-person board
appointed by the President for 9-year terms manages TVA.
a. Many of those who have been appointed have had no experience or
specialized knowledge of the electricity business before their
appointment. A few board members have been effective leaders and
strategists, but these have been exceptions
rather than the rule.
b. It is useful to keep in mind; TVA ``backed into'' the electric
power business. The three-person board arrangement was specified at its
inception, well before that time. The rationale for the arrangement was
that TVA needed to be protected from hostile political and economic
interests who would be threatened by this frankly experimental
initiative. There were no arrangements included in TVA's charter to
allow regional participation or review of its activities.
c. Thus the oversight, regulatory, disclosure, and auditing
functions that are performed by independent, external public utility
commissions for the electric power systems with which TVA competes, by
default, more than conscious design, are also the responsibility of
TVA's three person managerial board.
Fourth, every study of TVA, the well-known study by Alex Radin
former Executive Director of the American Public Power Association, the
study by Regan Transition Team, the study organized by the Southern
States Energy Board, have all concluded that TVA's three-member board
is an antiquated, contradictory, paternalistic arrangement which should
be replaced by an independent, expanded, regionally-based, part-time
board. Regardless of politics, every study has made this recommendation
and, just as consistently, and also regardless of politics, every TVA
Board has dismissed it out of hand.
a. The relevance of this arrangement to the problems of accounting
accuracy and auditing that this Committee is considering can be made
clear by considering some of the solutions to those problems this
Committee and others have identified. In testimony before this
Committee on March 14 of this year the Director of the Brookings
Institution's Economic Studies Program said: ``As long as management
continues to choose the auditor, the potential will always exist for a
conflict that could compromise the quality of the audit.'' After
reviewing a number of possible ways to strengthen the oversight of
audits, including; requiring that only external board members serve on
audit committees, charging the audit committee with the selection of
the auditor, making the selection of the auditor the responsibility of
a third party, prohibiting auditors from doing nonauditing work; he
advised requiring the auditor to be hired by the Board's auditing
committee as a pragmatic compromise.
b. In TVA's case, of course, the Board has no external members,
there is no audit committee, and, in fact, it is the consequences of
the Board's own managerial decisions and policies that the audit should
accurately and comprehensively document and evaluate.
c. The more fundamental relevance of the TVA's outdated double-duty
board to problems of inadequate disclosure is well illustrated by the
dialogue between the Director of the Federal Office of Management and
Budget and the TVA Board over the Board's reticence to provide a basic
business plan to explain its decision to resuscitate a nuclear unit at
its Brown's Ferry site. The unit was licensed to operate in the 1970's
but has been closed because of safety concerns since 1985. This effort
will add about $1.7B to TVA's debt and seems inconsistent with the
movement toward the use of smaller, more decentralized generating
technologies which entrepreneurs and large industrial energy users are
willing to build on their own tab. While I commend OMB for asking these
questions, under the regulatory arrangements TVA's competing power
systems operate, such a request would come from a public utility staff
and there would be no question about the need or desirability of
responding.
d. Another example is the implicit abandonment of TVA's strategy to
insure its survival and ability to compete in the future by reducing
its debt and interest cost by about a half by 2007. In 1997, this
strategy was spelled out and well received by both customers and
investors. Since that time TVA has reduced its debt modestly but is far
off the path to survival it laid out in 1997. Given this inconsistency
between plan and performance, I would expect most utility analysts to
predict that TVA would increase its rates to get back on the survival
track it articulated in 1997. However, TVA decided to leave its rates
unchanged other factors may have changed: (1) TVA may have developed a
new strategy for reducing costs and revenue requirements, or (2)
Revised its assessment of its competitor's positions, or (3) Decided
electricity markets will remain, isolated, monopolistic and regulated.
But there was no incentive, under current arrangements, to articulate
and document such changes or subject them to evaluation and questioning
by knowledgeable, informed, independ-
ent analysts. The same state of affairs exists about other important
issues facing the agency.
In summary, should the Tennessee Valley Authority provide timely,
accurate and objective information about its operations, finances and
performance to its investors and customers and the public? Should the
information be provided in the same format, use the same definitions,
terminology and conventions, cover the same time
period, provide the same degree of detail, meet the same standards for
auditing and timely disclosure, as is required of its competitors in
its primary line of business? Would using SEC standards and procedures
help progress toward those goals?
My answer to these questions is ``of course.''
However, TVA, its customers and its investors have a more serious
problem
of corporate governance and control that is the result of an obsolete
and inher-
ently contradictory organizational structure that is long overdue for a
fundamental
redesign.
I want to thank you again for the opportunity to state my views and
will be happy to answer any questions you may have.
----------
PREPARED STATEMENT OF DANIEL GATES
Managing Director
Moody's Investors Service
September 17, 2002
Introduction
Good morning, Mr. Chairman and Members of the Committee. My name is
Daniel Gates, and I am a Managing Director of Moody's Investors
Service. I am pleased to be here today to discuss the credit ratings
process, and the role of disclosure requirements in that process,
particularly for the Tennessee Valley Authority. I hope that Moody's
views add to the Committee's consideration of this issue, though I also
appreciate that our opinions represent only one perspective on this
matter.
Moody's Role in the Financial Markets
To understand the relationship between financial disclosure
requirements and our work at Moody's, a summary of Moody's role in the
financial markets may be helpful. For over 100 years, Moody's has
played an important part in providing independent credit analysis and
opinion to investors. Moody's assigns credit ratings to debt
instruments and to other obligations to reflect the relative
creditworthiness of those obligations. Moody's is the oldest credit
rating agency, founded by John Moody in 1900 to rate the
creditworthiness of railroad bonds. As early as 1924, Moody's was
rating nearly every bond in the United States market, as well as many
international bonds.
Today, Moody's is a leading global credit rating and research firm
with more than 800 analysts worldwide. Our credit ratings cover a broad
range of debt instruments totaling over $30 trillion, and our analysts
publish research that covers thousands of institutions. Moody's ratings
are valuable informational tools used by: (1) institutional investors
to analyze the credit risks associated with fixed-income securities and
other obligations; (2) issuers seeking access to the capital markets;
(3) regulators, for such purposes as measuring the capital adequacy of
banks, broker-
dealers, and insurance companies; and (4) governments, economists, the
media, academics, and other market observers.
Ratings contribute to efficiencies in financial markets by
providing credible and independent opinion forecasts of credit risk.
The predictive quality of our credit ratings is empirically verifiable,
and is evaluated by Moody's and by independent third parties. Our track
record is published annually in our default studies. We make our
historical ratings and default data available to subscribers,
interested scholars and regulators. Although Moody's rates a wide range
of debt obligations, the heart of our service lies in rating long-term
bonds, for which we have nine primary debt rating categories.
Investment-grade ratings range from a high of Aaa, down to a low of
Baa. Ratings from Ba to C are considered noninvestment grade or
speculative grade. Overall, Moody's ratings are designed to provide a
relative measure of risk, with the likelihood of credit loss increasing
as the rating decreases. The lowest probability of default is expected
at the Aaa level, with a higher expected default rate at the Aa level,
a yet higher expected default rate at the single-A level, and so on
down through the rating scale.
It is equally important to note what our work at Moody's does not
include. A rating of Aaa is neither a buy recommendation, nor is it a
seal of approval; rather, the Aaa rating, like all of our ratings,
reflects Moody's opinion of the relative creditworthiness of a fixed-
income security. Furthermore, just as we do not insure the bonds we
rate, we do not audit the financial information provided to us.
Accordingly, our ratings rely very heavily on the completeness and
veracity of both the public
financial statements and any proprietary information that may be
provided to us by issuers.
The Moody's Rating Process
Moody's takes a number of steps to ensure the rigor of our ratings
process. We assign ratings by committee. Rating committees vary in
size, and generally include senior and junior analysts and one or more
managing directors. A Credit Policy Committee (CPC) and credit standing
committees under the control of the CPC review ratings practices and
policies internally.
Moody's takes active steps to maintain the integrity of our ratings
process. Moody's analysts are not evaluated or compensated based upon
the revenues associated with their portfolios, nor are they permitted
to hold or trade the securities of the issuers they rate except in
diversified funds managed by professional managers. Moody's also does
not create investment products, or buy, sell, or recommend securities
to users of our ratings, or invest in securities for its own account.
Furthermore, although we derive 90 percent of our annual revenue from
the issuers that we rate, we recognize that the long-term value of our
franchise depends on our independence and objectivity, and ultimately
on the predictive value of our ratings, an analysis of which we publish
annually. The influence of individual issuers is further limited
because Moody's does business with over four thousand issuer groups.
The Role of Disclosure Requirements for Moody's
In order to analyze a company's ability to meet its debt
obligations, Moody's
analysts rely on a variety of information sources, including publicly-
available information that is filed with regulatory authorities or is
otherwise available, audited financial statements, third-party analyses
of the company and the industry sector, and information provided by the
company directly to our analysts. Moody's ratings are based primarily
upon the issuer's published financial reporting, and we believe that
SEC's disclosure requirements are strong enough that, in the great
majority of cases, we have sufficient public information to express an
opinion. In addition, as a Nationally Recognized Statistical Rating
Organization, companies are permitted to share material nonpublic
information with Moody's. Each Moody's analyst and managing director
has a portfolio of companies that he or she tracks. Moody's analysts
speak periodically with issuing companies to obtain additional
information, and all of these data are incorporated into the ratings
process.
In an ideal world, the rating agencies always would have access to
complete and accurate financial and operational information. The
disclosure requirements created by the Securities Act of 1933 and the
Securities and Exchange Act of 1934 (``1933 and 1934 Acts'') contribute
to the integrity of the financial information Moody's receives by
creating civil and criminal penalties for inaccurate or incomplete
reporting. As a general matter, our preference is that all financial
information provided to our analysts be complete and reliable. We
strongly believe that in the United States, the Federal securities laws
add to the reliability of that information. Outside the United States,
and for some classes of issuers within the United States, however,
Moody's conducts analysis without SEC-mandated disclosure by obtaining
information directly from the companies and other sources. Moody's and
the other ratings agencies for many years have rated companies not
subject to reporting requirements, such as foreign issuers and
Government agencies, including the Tennessee Valley Authority. For
these entities, Moody's relies on the completeness and veracity of
issuers' public and private disclosure of information, along with
industry-specific knowledge and macroeconomic analysis.
While we prefer that all financial reporting be subject to the
disclosure standards set forth in the 1933 and 1934 Acts, we believe
that the TVA has operated in good faith in providing accurate and
reliable financial information to facilitate our rating analysis of the
Authority's power bonds. Moody's analysts have a constructive working
relationship with multiple contacts at the TVA, and Moody's analysts
regularly call on these contacts to provide, for example, additional
background on operational developments, industry news, or Government
proposals. We receive annual and quarterly reports from TVA and regular
briefing material.
As with any issuer, Moody's analyzes multiple factors when rating
the TVA. To illustrate, we have considered TVA's cash flow, balance
sheet, capital structure, prospects for raising or lowering debt in the
near future, protected service territory, power costs, ability to set
electric rates, and at the macro level, the growth rate of the region
it serves. We have obtained all of this information from the company
directly or from third-party sources. Furthermore, as a general rating
approach to Government Sponsored Enterprises such as TVA, Moody's uses
an integrated analysis of both the fundamental creditworthiness of the
enterprise as a business, and the Enterprise's relationship with the
U.S. Government.
Conclusion
As I have stated, Moody's supports steps to improve the quality
and reliability of the information that market participants, including
investors and our analysts,
receive. This support for higher quality information, however, should
not be interpreted as reflecting any particular concerns over the
reliability of the financial information we have received from TVA.
Rather, as a major consumer of financial data and SEC filings, Moody's
generally supports efforts to enhance financial disclosure, because
they improve the overall reliability of financial information in the
marketplace, and thus contribute to more efficient capital markets.