Hearing on the Tennessee Valley Authority and Financial Disclosure

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 1980s. 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.

1. 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.

2. 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:

1. TVA’s unfinished nuclear plants are likely to go on to the accounting hall of fame’s top ten 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.

2. 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 non-auditing services exceeds the $2.69 in non-auditing services for every $1 in auditing services average cited by Mr. Bevis Longstreth in Testimony before this committee on March 6, 2002.

3. 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.

3. These accounting and investor protection issues are more serious for 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 nine-year terms manages TVA.

1. 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.

2. It is useful to keep in-mind; TVA sort of “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.

3. 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.

4. 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.

1. 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^th 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 non-auditing work; he advised requiring the auditor to be hired by the Board’s auditing committee as a pragmatic compromise.

2. In TVA’s case, of course, the Board has no external members, there is no audit committee, and, in fact, its is the consequences of the Board’s own managerial decisions and policies that the audit ought to accurately and comprehensively document and evaluate.

3. The more fundamental relevance of 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 1970s but has been closed because of safety concerns since 1985. This effort will add about $1.7B to TVA 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.

4. 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, independent 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 inherently contradictory organizational structure that is long over due for a fundamental redesign.

I want to thank you again for the opportunity to state may views and will be happy to answer any questions you may have.

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