Summary: Pursuant to a congressional request, GAO provided information on the Tennessee Valley Authority (TVA).
GAO noted that: (1) because of TVA's high fixed interest charges, GAO concluded that TVA lacked the financial flexibility it would need to compete in a deregulated environment; (2) interest expense on outstanding debt has been about one-third of TVA's total expenses in recent years; (3) reducing debt and the corresponding interest expense are key to TVA's ability to increase its financial flexibility to respond to competitive pressures; (4) TVA's 10-year plan recognized this and established a goal of reducing debt by one-half to about $14 billion by 2007; (5) the year 2007 was key in TVA's plan because that was when TVA expected to face greater competitive pressures and when many of its long-term contracts with customers could expire; (6) TVA's high fixed financing costs consist of interest expense on TVA's outstanding debt, which totalled about $26 billion as of September 30, 1999; (7) deferred assets totalled $9.1 billion as of September 30, 1999, $6.3 billion of which represented the cost of nonproductive nuclear plants that have not yet been included in TVA's rate base; (8) compared to other utilities with which it may have to compete, TVA's fixed financing costs and deferred assets are high; (9) if legislative protections were removed and TVA was required to compete at a time when wholesale prices are falling, its high fixed costs and deferred assets compared to neighboring utilities would be a significant disadvantage; (10) GAO does not think TVA will fully meet the debt reduction goals in its 10-Year plan because of expenditures on environmental compliance and its subsequent decision to spend more money than originally planned on new generating assets; (11) TVA's predictions about the future market price of wholesale power are not out of line with predictions made by other knowledgeable parties; (12) based on TVA's predictions about the future price of power in its service region, it is not unrealistic for TVA to project that it could increase spending on generating capacity and environmental compliance and remain on a path to offer competitively priced power by 2007 without fully meeting its debt reduction goals; (13) however, TVA's plan for preparing for competition has not been formally updated to show the impact that changes in certain goals and assumptions will have on TVA's ability to offer competitively priced power; (14) the federal government does not guarantee TVA's bonds, and the bonds explicitly state that they are not backed by the federal government; and (15) nevertheless, the investment community believe that TVA's bonds are implicitly backed by the federal government.
