The Tennessee Valley Authority: Competing in Markets for Capital and Electricity in Pursuit of Solvency

Abstract

The Tennessee Valley Authority, as a federal corporation governed independently by a three-person board, undertook excessive investments in the 1980s based on erroneous projections of technology and demand growth for electricity. These capital outlays have been financed to pay back loans on deferred depreciation by arbitrary price increases for electricity. Even with electricity markets now beginning to open up to competition, inside and outside the TVA regional monopoly fence, TVA still expects to keep solvent and reduce excessive debt. But financial analysis undertaken here indicates that TVA's solvency scenario holds only under very narrow assumptions, and an array of equally plausible, and perhaps more realistic, assumptions leads to projections of insolvency for TVA within a very few years. If insolvent, with realization of one of the more likely scenarios, TVA as a public enterprise would not go into bankruptcy. It might be able to generate increased revenues by price increases; if only in a limited range given newly competitive markets for power inside or adjacent to the fence. It could call for the Federal Financing Bank to redeem TVA bonds at full value even though these bonds would be redeemed at discounted value in the market for bankrupt securities. The impending threat of insolvency then makes a pressing case for determination as to whether the Federal Bank should bail out TVA from the consequences as of investment errors with taxpayer funds. The alternative would be to treat this company the same as investor-owned utilities that made erroneous large-scale capital outlays over the last two decades. This would call for bankruptcy proceedings, following privatization of the Tennessee Valley Authority.