TVA proposes cutting debt to prepare for industry changes

CHATTANOOGA, Oct. 4, 2000 (Chattanooga Times/Free Press)—The Tennessee Valley Authority began pitching a new and more modest debt-reduction proposal this week, just days after publicly acknowledging for the first time that it 1997 plan had been overly ambitious.

TVA’s “Business Outlook 2000” is a draft proposal that now envisions cutting the federal utility’s $26 billion debt between $2 billion and $8 billion by 2007 in order to prepare TVA for anticipated restructuring of the electric utility industry.

Under the previous 10-year plan, TVA had hoped to cut $13 billion from its debt by 2007.

No rate increases are called for in the current, proposed plan. But critics contend that the interest payments on TVA’s debt — the biggest of any U.S. electric utility — may remain too high for TVA to compete with some of its neighboring utilities once the industry is deregulated.

In approving TVA’s new budget last week, agency officials acknowledged what the General Accounting Office said more than a year ago: The utility would not come close to meeting its debt reduction target.

“Unquestionably there has been a shortfall in the goals we set,” TVA Chief Financial Officer David Smith said Tuesday. “But the important thing is that the commitments we made to run our business smarter and more reliably and to remain competitive in our costs have been met.”

In the first three years of TVA’s debt reduction program, the utility pared its borrowings by $1.7 billion — only 58 percent of what the agency originally planned. Smith said milder weather limited TVA electricity sales and the utility ended up spending $426 million more than expected on new gas-fired peaking plants. TVA also spent an extra $280 million on air pollution controls.

“We shouldn’t be judged strictly on one measure: how we reduce our debt,” Smith said. “The most important measures are our reliability and our average costs, which for residential customers are 23 percent below the national average, and how well we promote the Valley and manage its resources.”

TVA officials stressed that their current proposal is still in the formative stages. TVA officials are soliciting input from its main customers — Tennessee Valley power producers — as well as members of Congress from the Tennessee Valley.

Reaction was mixed among some power distributors, whose trade group, the Tennessee Valley Power Association (TVPPA), was briefed on the proposal on Monday at a meeting in Franklin, Tenn., attended by all three TVA directors.

“I’m a little disappointed because they had put a lot of emphasis on the 10-year plan and reducing their debt and it doesn’t look like they are going to make it,” said Don Kohenski, president of Nashville Electric Service. “We would have liked them to do more, but conditions change.”

Distributors worry that a higher TVA debt could leave them paying more in “stranded costs” if they leave TVA or if deregulation forces other changes in the region’s electric market.

TVPPA Executive Director Mike McDowell said the group is glad TVA is working with members. But he noted members are still mulling over the general business plan and “generally, we’re going to reserve any kind of substantive comment on this until it becomes final.”

Still, McDowell acknowledged, “we’re disappointed in the apparent lack of significant progress on debt reduction and probably think there’s going to be a pretty severe reaction from members of Congress on that.”

Rep. Zach Wamp, R-Chattanooga, was briefed Tuesday on the proposal by TVA board members Skila Harris and Glen McCullough.

“The 10-year plan may not have been realistic,” said Rep. Wamp, a former chairman of the TVA Congressional Caucus. Rep. Wamp said he told Ms. Harris that while he supports debt reduction, he believes it may be more important that TVA boost its power generating capacity as Congress heads into electric utility restructuring sometime in the next several years.

“If you’re writing a business plan, remember that the real treasure in the future is going to be your ability to generate power in the future,” Rep. Wamp said.

“Well,” said Rep. Bob Clement, a Nashville Democrat who once served on TVA’s board, “No. 1, I’m pleased about their announcement to keep rates stable. I am concerned that has been some slippage in our plan and goal to cut the debt in half from $27.5 billion to $13 billion.”

Rep. Ed Bryant, a Henderson, Tenn., Republican, has taken a lead in the House Commerce Committee on trying to protect Tennessee Valley interests in restructuring proposals. “I had always felt that a $13 billion reduction was a little aggressive given the environment they’re in,” Rep. Bryant said of TVA. The new figures, he said, are “probably a more attainable goal.”

Margaret Camp, a spokeswoman for Sen. Bill Frist, R-Tenn., said Frist staffers were briefed on the proposal Tuesday and the new approach “was realistic considering the climate” TVA operates in.

But TVA’s retreat on the debt-reduction plan produced an I-told-you-so type response from one traditional TVA critic, TVA Watch.

“The debt has been a problem for TVA for years and it’s starting to attract increasing notice, and for TVA to back off its 10-year plan, it’s not a good sign,” said TVA Watch head John Howes, who heads the umbrella organization funded by investor-owned utilities.

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© 2000, Chattanooga Times/Free Press, Tenn. Distributed by Knight Ridder/Tribune Business News.