[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
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001


            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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ Pub. L. 107-204, 116 Stat. 745 (2002).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\ See Item 601 of Regulation S-K, 17 CFR 229.601.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.





