Report Says TVA Headed for Financial Ruin

November 24, 2003

KNOXVILLE (WATE) -- A report published Monday says the Tennessee Valley Authority is heading for financial ruin amid growing competition and climbing costs.

The report is in the Journal of Strategic Management Education. It's written by Dennis Logue, dean of the University of Oklahoma's Price School of Business, and Paul MacAvoy, professor at Yale's School of Management.

According to the report, the only thing keeping TVA in the black is the inflated assets on its books.

The report says that TVA's poor financial performance, based on gross investment errors, have resulted in operations going forward in a virtual insolvent state.

TVA insists that its accounting statement accurately portrays its financial condition.

In an official statement Monday, TVA officials said, "TVA follows generally accepted accounting principles applicable to electric utilities, which includes regulatory accounting practices."

The statement also says, "TVA is audited annually by an independent certified public accounting firm and complies with financial disclosure regulations."

And the statement notes that targets set in 1997 did not include costs for new technology and to comply with the clean air act. It also says there are no plans to sell any major power assets.

TVA management says they follow generally accepted accounting principles that apply to electric utilities.

Stephen Smith, executive director of the Southern Alliance for Clean Energy, a TVA watchdog group, said "...what these guys are saying is, they're running a fine line and there's not a lot of room for error and the consequences are pretty significant if they fail. And I think we would concur with that."

Smith agrees there needs to be a long-range plan to solve the problems and admits that partially privatizing TVA and raising rates could be part of the solution.

"I think even with some rate increases, we're still going to have some of the lowest rates in the country," Smith said. "But I think it's naive for us to think that we can continue to carry the $24 billion debt and continue to operate an aging fleet of power plants and not going to have raise rates. So I fully expect that to happen."

"This report, I think, is another sign that some of the real underlying financial issues at TVA are not being dealt with," Smith said. "Are they compensating? Yes. Are they maintaining it? Yes. But are they dealing with the real challenges that we and future generations are going to have to deal with in the Valley? No, they don't have a comprehensive plan."

Logue and MacAvoy's report looks into TVA's financial figures, whose debts are backed the federal government. The professors concluded that TVA's liabilities exceed its assets, according to the Barron's article.

They said TVA's accounting statements show a net worth of $1.07 billion, only because of excessive values placed on old, unfinished nuclear plants that may not ever operate.

According to the report, TVA could be unable to pay debts within a few years.

If that happens, several results could follow. One, as a public enterprise, it's unlikely that TVA would go into bankruptcy. The report says one option is to make more money with rate increases and selling off some of its operations to private companies.

TVA is the nation's largest public power authority. It was formed in the 1930's by Congress and sells power to 158 local distribution utilities.