March 1996
FEDERAL POWER: The Case for Privatizing Electricity
by
Douglas A. Houston
Table of Contents
II. U.S. ELECTRICITY SUBSIDIES AND FEDERAL POWER ENTERPRISES
B. Two Studies of Government Electricity Subsidies
C. Interest and Capital Subsidies to the PMAs
E. Problems with Public Power Enterprises in the United States
III. PRIVATIZING ELECTRIC POWER: A Worldwide Revolution
B. Reasons for Worldwide Electricity Privatization
C. Electricity Privatization: A General Framework for Success
IV. PRIVATIZATION OF FEDERAL POWER ENTERPRISES
APPENDIX: Survey of Nations That Have Privatized Electric Utilities
EXECUTIVE SUMMARY
The federal government is the nation's largest producer of electric power, via the Tennessee Valley Authority (TVA) and the five power marketing administrations (PMAs). These electricity businesses, along with the numerous federally subsidized cooperatives and municipal utilities, are poorly managed, inefficient, and at considerable risk in the emerging environment of electricity competition.
Two dozen other countries recognizing similar problems with government electricity provision have launched ambitious electricity privatization programs. Participating countries include highly developed nations such as Australia, Britain, Canada, and Germany; developing nations such as Argentina, Brazil, Taiwan, and Thailand; and former communist countries such as Hungary and Poland. In 1995 electricity was the largest category of privatization worldwide, with $13 billion in sales volume. Over the past decade over $35 billion of government electricity corporations have been privatized worldwide.
Other countries have privatized electricity for two main reasons: 1) to improve the efficiency and performance of their electric power industry, particularly as competition in this sector emerges, and 2) to raise capital to reduce their national debts. Both objectives are equally applicable to the United States, but the U.S. federal government has yet to divest a single electric power asset. The Clinton administration's FY 1996 budget called for the privatization of the four smallest PMAs, but this initiative stalled in the 104th Congress, and congressional calls for privatization of the larger TVA and the Bonneville Power Administration (BPA) also have been rebuffed.
Privatizing federal electricity and ending current subsidies would have the following benefits:
Privatization and the end of electricity subsidies could be a win-win proposition. First, existing subsidies are grossly inefficient; about half of the subsidies that flow through various government-owned utilities and co-ops don't reach the final consumers. Thus, a well-crafted privatization which provides these consumers with modest transitional protection from rising prices might push aside remaining consumer resistance. Second, environmental interests are not well served by government involvement in the electric power industry. Below-market pricing increases energy consumption and pollution; privatization legislation also offers an opportunity to reconsider the licenses on environmentally sensitive federal hydro facilities. Third, opening up all transmission access to competitive power delivery will expand price competition, benefiting electricity consumers nationwide.
At a time when President Clinton acknowledges that the era of big government is over and that government cannot solve all our problems, it would be sensible to begin this transition by eliminating the federal government's damaging role in our nation's power markets. In particular, the continued government ownership of the TVA and the PMAs outdated legacies of the era of big government can no longer be justified in the context of the president's framework.
Five years ago, few would have predicted that over two dozen previously government-owned power enterprises (SOEs) would be in private hands by 1995. Yet since 1990, governments have privatized over $35.6 billion of power assets, partly in response to ongoing poor performances of SOEs and partly due to competing demands for scarce government funds. The pace of privatization, industry restructuring, and regulatory reform will remain brisk outside the United States which, by comparison, has resisted privatizing federally owned electric power assets. The Clinton administration's modest fiscal 1996 budget proposal to privatize four of the federal Power Marketing Administrations (PMAs) Southeastern, Southwestern, Western, and Alaska has not been well received by Congress or by interest groups. The largest federal power entities the Bonneville Power Administration (BPA) and the Tennessee Valley Authority (TVA) were not even considered as privatization candidates by the administration in light of anticipated political resistance.
Electricity privatization has limited interest to the general public in America. As a result, well-organized political constituencies opposing privatization, such as the American Public Power Association (APPA) and the National Rural Electric Cooperatives Association (NRECA), have effectively protected subsidies to their clients, overriding the weakly articulated but more important concerns of efficiency and fairness to taxpayers.
The case for privatization and elimination of subsidies to government-owned power providers and cooperatives merits serious consideration. The estimated annual dollar value of subsidies to government-owned utilities and cooperatives in the United States is $7 $10 billion per year. These subsidies simply transfer wealth to a set of lucky citizens who are no less affluent than their fellow citizen-taxpayers. These subsidized individuals are continuing to benefit from the public policy of the 1930s to develop rural America, a task long ago completed. To retain these subsidies interest groups mount massive political strategies (lobbying, campaign contributions, advertising, etc.) that are direct economic waste. Additional waste occurs when public power enterprises perform inefficiently; the predictable foibles of government enterprise are magnified as the power industry shifts to increasing market competition.
The purpose of this paper is to explore the probable effects of privatizing federal power enterprises and the elimination of subsidies in the electric power industry.
II. U.S. ELECTRICITY SUBSIDIES AND FEDERAL POWER ENTERPRISES
The federal government owns extensive electric power assets: dams, power plants, transmission lines, and equipment. The TVA and the PMAs reflected book values of over $43 billion in 1990. The government's assets range in size from the very large TVA and BPA to the very small Alaska Power Administration (see Table 1). While federal utilities sell only 2.1 percent of total electricity to the ultimate consumer, they generate approximately 9 percent of our power (the rest of which is sold to cooperatives and state and municipal utilities at below-market rates). Another 16 percent is generated by those state, municipal, and coopertive utilities (see Table 2).
Prices received at wholesale (indicated in Table 3) ranged, in 1990, from Western Area Power Administration's (WAPA's) 1.51 cents per kwh to 4.42 cents per kwh for TVA. These prices are set on a cost-plus basis for all, and a number of subsidies, both explicit and implicit, keep many costs from being translated into price (as discussed below). TVA's prices are much higher than the PMAs' because of TVA's partial recovery of costs related to its massive nuclear construction projects, many of which now are deferred or discontinued.
|
|
|||||
| Federal Utility |
(millions $) |
(millions $) |
|
|
(dollars/kwh sold) |
| Alaska Power Administration |
|
|
|
|
|
| Bonneville Power Administration |
|
|
|
|
|
| Southeastern Power Administration |
|
|
|
|
|
| Southwestern Power Administration |
|
|
|
|
|
| Western Area Power Administration |
|
|
|
|
|
| Tennessee Valley Authority |
|
|
|
|
|
| Others |
|
|
|
|
|
| Total |
|
|
|
|
|
NA = Not available. Interest rate not available because no interest payments were reported.
Note: Federal appropriations are treated as long-term debt and interest payments on Federal appropriations as interest on debt.
Source: Form EIA-861, Annual Utility Report, and sources cited in Table 2.
|
Sales to Ultimate Consumers, by Type of Utility Ownership, 1990 |
|||||
| Type of Utility |
|
|
|
|
|
| Investor-owned Utilities |
|
|
|
|
|
| Municipal/State Utilities |
|
|
|
|
|
| Rural Electric Cooperatives |
|
|
|
|
|
| Federal Utilities |
|
|
|
|
|
| Total |
|
|
|
|
|
* billion kilowatthours + cents per kilowatthour
Table 2: Electricity Revenues and Revenues per Kilowatthour from
Sales to Ultimate Consumers, by Type of Utility Ownership, 1990
Source: Form EIA-861, Annual Utility Report, as reported in Energy Information Administration, Financial Statistics of Selected Publicly Owned Electric Utilities and Financial Statistics of Selected Investor-Owned Utilities (December 1991). Also annual reports of Power Marketing Administrations, Alaska Power Administration's Divesture Summary Report: Sale of Eklutna and Snettisham Hydroelectric Projects (April 1992), and USDA/REA, 1990 Statistical Report, Rural Electric Borrowers, IP 201-1 (August 1991).
Several types of subsidies affect the cost structure of government-owned utilities and rural electric cooperatives. These include:
|
|
||
| Federal Utility |
|
|
| Alaska Power Administration | 0.4 | 2.21 |
| Bonneville Power Administration | 56.4 | 2.27 |
| Southeastern Power Administration | 8.6 | 1.58 |
| Southwestern Power Administration | 6.7 | 1.29 |
| Western Area Power Administration | 28.0 | 1.51 |
| Tennessee Valley Authority | 65.4 | 4.42 |
| Others | 0.1 | 0.72 |
| Total | 195.7 | 3.18 |
kwh = kilowatthour.
Source: Form EIA-861, Annual Utility Report, and other sources cited in Table a.
B. Two Studies of Government Electricity Subsidies
Two estimates of subsidies, one done for the Edison Electric Institute by Putnam, Hayes, and Bartlett, and the other, by the Energy Department's Energy Information Administration (EIA) make clear that the magnitude of the giving is substantial at approximately $9 10 billion per year. (Hereafter these studies are referred to as the Edison and EIA studies; for comparison, they are shown side by side in Table 4.) The categories of subsidies are: income taxes not paid; other taxes not paid; below-market cost of capital; and below-market federal hydro. Note that the year of analysis for the Edison report is 1992, while that of EIA is 1990; no attempt was made to revise these numbers to account for inflation.
Among the subsidy categories shown in Table 4, income tax estimates are not directly comparable because the EIA study did not estimate foregone income taxes for nonfederal entities (the primary recipients of the subsidy), while the Edison study estimates total income tax dollars foregone for all government-owned utilities and cooperatives. Dollar estimates for other taxes, which are generally state and local taxes foregone, with adjustments for contributions made by the government-owned utilities and cooperatives, are similar for the two analyses. Subsidy estimates for federal hydro sales at below-market prices also are similar for both studies. Most federal power is sold to government-owned utilities and rural electric cooperatives at prices below prevailing regional wholesale market prices. These organizations can pass subsidies along to their own retail consumers.
|
to Publicly Owned Utilities, Cooperatives and Others ($ Millions) |
||||||
| Subsidy Source |
|
|
||||
|
|
|
|
|
|
|
|
| Income Taxes (Federal & State) |
|
|
|
|
|
|
| Other Taxes |
|
|
|
|
|
|
| Cost of Capital |
|
|
|
|
|
|
| Federal Hydro |
|
|
|
|
|
|
| Total Subsidies to Publicly
Owned Utilities & Co-ops* |
|
|
|
|
|
|
| Federal Sales to Investor Owned Utilities : $98g
Federal Sales to Final Consumers: $1,084g Total, All Uses: $9,897* |
||||||
* Rounding accounts for totals not adding
Sources:
a Edison Electric Study, p. B-25.
b These numbers do not include a market return on capital.
c EIA Report, footnote 94, p. 55.
d EIA Report, Table 14, p. 57 and pp. 68 69.
e EIA Report, Table 14, p. 57 and p. 67.
f EIA Report, Table 14, p. 57, Table 19, p. 62, Table 20, p. 65
and pp. 61 65.
g Edison Electric Study, Table C-1, PC-7.
Federal power preference sales serve as an important benefit to government-owned utilities and co-ops, totaling $2.0 2.1 billion measured at market prices according to the EIA and Edison reports. Another study estimates this subsidy, using the market benchmark approach, as $1.6 billion for 1993. Table 5 breaks out preference power subsidies by four PMAs (Alaska is excluded) for this study. Fifty-four percent of all preference power subsidies go to BPA customers and another 34 percent to WAPA customers. But the total subsidy at risk, while suggesting a powerful motive for political action to defend the status quo against privatization, is an incomplete predictor. For example, Southwestern receives the greatest subsidy as a percentage of total estimated market value of power sold (60.7 percent). As a result, the average Southwestern customer has a relatively more powerful incentive to invest heavily in defending the status quo, compared to the customers of Southeastern, whose subsidy constitutes only 37.6 precent. All such estimates clearly are sensitive to the selection of the market price chosen as a benchmark. For a broad range of such market prices however, preference power in the United States would continue to be a major income transfer from taxpayers to a small group of customers, most located in the Pacific Northwest region.
Perhaps the most controversial component of the Edison and EIA subsidy analyses is the treatment of missing cost of capital. Often, advocates of public power have described their avoidance of an opportunity cost of capital as an important cost-saving advantage of public power entities over investor-owned utilities (IOUs). This is incorrect. Capital cost denotes a return on scarce capital invested, and no useful commercial evaluation of public power can be done without including the cost of capital.
|
|
|||||
| Federal Power Marketing Administrations |
|
|
|
|
|
| Bonneville |
|
|
|
|
|
| Southeastern |
|
|
|
|
|
| Southwestern |
|
|
|
|
|
| Western |
|
|
|
|
|
| Total |
|
|
|
|
|
Source: The Facts on PMAs, Public Utilities Fortnightly, March 15, 1995, p. 11.
Another way to look at this is to consider the matter from a household perspective. Assets that are not working (earning a market-based, risk-adjusted rate of return) are being diverted from higher-yielding activity. By accepting a lower than market return, say on a bank deposit, worthwhile purchases perhaps taking a vacation or buying a home computer are foregone. This loss is precisely what happens to the federal government and by extension to the taxpayers who fund government power enterprises when they fail to receive a market return on invested capital. Higher taxes or reduced services follow. The view taken by government enterprises that they can evade capital costs also underscores a missing commercial sensibility in government enterprise. What would be impossible for private business is offered as reasonable public policy for government enterprise.
Total explicit subsidies to government-owned utilities and co-ops are in the range of $7 9 billion per year, according to the Edison and EIA studies. According to the Edison study, removing the subsidies would lead to a 1.43 cents per kwh increase in municipal utility rates and 1.85 cents per kwh in coop prices, increases of 24 percent and 29 percent, respectively. As a rough measure, without these subsidies the ultimate consumer prices shown in Table 2 would become 7.33 cents per kwh for municipals and 8.15 cents per kwh for co-ops. These prices are well above the 6.8 cents per kwh for the average IOU (using 1990 data).
Ironically, much of the subsidy evaporates before it reaches the final consumer. For example, using the pricing data in Table 2, final consumers of the munis and the co-ops, if they received the full value of subsidies (1.43 and 1.85 cents per kwh), would have paid an average electricity price of 5.37 and 4.95 cents per kwh respectively. In fact, as the table shows, these consumers paid 5.9 and 6.3 cents per kwh. Approximately $2 billion to muni customers and $2.7 billion to coop customers $4.7 billion in total vanishes. This leakage is about half of all gross subsidization. If public policies are intended to redistribute income to these consumers, the mechanisms for doing so appear to be highly ineffective.
This analysis of government-owned utilities and co-ops confronts the claims of the APPA and the NRECA that they are doing quite well. For example, using 1990 data, the APPA estimates the amount of subsidy public power receives would account for only a small impact, pushing public power prices up by only 3.7 percent if removed. In other words, APPA claims that municipal and cooperative prices would still be far below the IOU rates, and that the lower prices reflect economic efficiencies of public power relative to IOUs. That conclusion is not supported by evidence. The APPA simply did not account for all of the subsidies received, as we have seen.
If their prices were higher than those of nearby IOUs, government-owned utilities and co-ops would face widespread, negative consumer responses. Because they depend on the political protection given by an extensive grass roots constituency, APPA's and NRECA's intense political campaign against privatization is understandable. A further response by public-power interests to charges that they are heavily subsidized is that IOUs, too, are subsidized. In particular, they point to the IOUs' use of deferred taxation and accelerated depreciation as special tax breaks which the munis and co-ops cannot take advantage of. Indeed, utilities do use such tax law to their advantage, as can any U.S. firm filing income tax returns. If the government entities were paying income taxes, the amount they would pay also could be reduced in a similar fashion.
Public power advocates also voice the opinion that the federal preference power sales by the PMAs are economically sound because they cover all operating and maintenance costs and return capital expenditures plus interest coverage to the federal government. This steady stream of revenue, they suggest, would be jeopardized by privatization. Quite the opposite is true. Revenues to the U.S. Treasury have been reduced for many decades by underpricing PMA power. Selling the assets of the PMAs would correct this situation. A shift to more market-sensitive pricing would occur and, as a result, the value of assets sold by the government would incorporate the anticipation of a larger profit flow. Additionally, privatization would expose the several fallacies embedded in the accounting practices of the PMAs, as described below.
C. Interest and Capital Subsidies to the PMAs
PMA accounting practices have long reflected interest and capital subsidies. First, interest rates used in recovering capital costs often have been set lower by law than the long-term borrowing rate the government actually faced when construction was begun. Table 6 compares PMA and Treasury interest rates for 20 selected projects. For example, the Bonneville dam project begun in 1981 was charged an interest rate of 3.25 percent. At that time, the average long-term Treasury rate was 12.87 percent; the difference is a large loss to the government, and, by extension, to taxpayers. On average, these 20 projects were charged only 39 percent of the Treasury borrowing rate.
Second, the general practice of the federal government has been to set the interest rate at the inception of a project and apply it to later stages of construction, even when these are separated by many years. This practice is inconsistent with private lending practices; it permits a PMA to lock in a low rate even when it is unclear when future construction will occur.
Third, prior to 1983, simple rather than compound interest was used for computing interest during construction stages of projects. This ignored the interest costs in succeeding years on each year's interest charges and is inconsistent with normal private business practice.
Fourth, and most importantly, the PMAs have not amortized their federal loans and have extended old, highly subsidized borrowing long beyond the normal amortization schedules that would be required of a private company. Repayments are allowed to vary based on each year's water flows and the demands for electricity. As a result, repayment to capital often has fallen short of what a fixed repayment schedule would call for, often for several sequential years. These large past due capital payments are permitted to remain on the books for long periods (they are the lowest priority repayment item) and are repaid at historical interest rates, which typically are lower than the current government borrowing rates. As a result, the PMAs often have been financially unsound by normal private business accounting standards. As an example, a 1983 General Accounting Office (GAO) report found that the BPA had repaid only $638 million of a federal investment of $7.9 billion, and had, over the prior 10 years, paid neither interest charges nor principal in three of those years. Those PMAs that today claim positive net revenues apparently have been able to do so largely as the result of not following generally accepted accounting principles. For example, a Deloitte & Touche review found that WAPA was not operating profitably as claimed but should have reported losses of $130 million in 1992 and $250 million in 1993.
|
Treasury Interest Rates for Selected Projects |
|||||
| Project | Power Administration |
|
|
|
|
|
Pick Sloan
|
Western
|
|
|
|
|
|
John Day
|
Bonneville
|
|
|
|
|
|
Keystone
|
Southwestern
|
|
|
|
|
|
Lower Monumental
|
Bonneville
|
|
|
|
|
|
Ozark
|
Southeastern
|
|
|
|
|
|
Hartwell
|
Southwestern
|
|
|
|
|
|
The Dalles
|
Bonneville
|
|
|
|
|
|
Washoe
|
Western
|
|
|
|
|
|
Dworshak
|
Bonneville
|
|
|
|
|
|
Millers Ferry
|
Southeastern
|
|
|
|
|
|
Carters
|
Southeastern
|
|
|
|
|
|
Aspinall
|
Western
|
|
|
|
|
|
Central Valley
|
Southeastern
|
|
|
|
|
|
Harry Truman
|
Southeastern
|
|
|
|
|
|
Fryingpan Arkansas
|
Western
|
|
|
|
|
|
Libby
|
Bonneville
|
|
|
|
|
|
Clarence Cannon
|
Southwestern
|
|
|
|
|
|
Chief Joseph
|
Bonneville
|
|
|
|
|
|
Bonneville
|
Bonneville
|
|
|
|
|
|
R. B. Russell
|
Southeastern
|
|
|
|
|
Source: U.S. Office of Management and Budget, Fact Sheet on Reform of the Federal Power Marketing Administrations' Debt Repayment Practices (Washington, D.C., 1990).
In sum, numerous subsidies make their way to the government-owned utilities and cooperatives in the forms of below-market preference power, tax advantages, and various cost of capital (interest) subsidies. Although these benefits are only partly reflected in lower prices to the ultimate consumer, the subsidization places IOUs at a competitive disadvantage as reform and deregulation in the power industry make competition plausible.
Despite the foregoing points, public power advocates' argument that IOUs also are subsidized has some validity if all power firms are viewed in the context of the more competitive power industry that is emerging in the United States. From this perspective, all utilities have received implicit subsidies due to exclusive franchises which shield them from competitors entering and consumers exiting. These barriers, however, are falling, and this implies that the context for electricity privatization will be an ongoing competitive process, the most likely emerging scenario for the future American power industry.
In such a competitive framework, the subsidies presented in Table 4 are somewhat misleading. For example, some subsidies (such as those related to foregone income tax payments) may be reduced as greater competition brings lower prices and lower profits (hence, lower taxable income) for all utilities. On the other hand, there are large implicit subsidies missing from the analysis done in both the Edison and EIA studies. These are the rents, extra profits due largely to exclusive franchised territories which protect suppliers from direct competition. These implicit subsidies are unsustainable in the coming competitive power market. Moody's Investors Service predicts stranded investment costs for the IOUs alone in the range of $50 300 billion. Industry consensus is that large losses in utility capitalization cannot be avoided, only redistributed among consumers, shareholders, or taxpayers.
Because a competitive market in electric power will cause losses to any supplier whose survival depends upon subsidies, the government-owned utilities and co-ops have much to fear. So, too, do some investor-owned utilities. But the advent of competition in the power industry will be particularly threatening to firms that are slow to strategically reposition themselves or have poorly suited physical assets for this new environment. How the federal enterprises could most effectively be privatized can be judged, in part, by evaluating how various combinations of these assets would fare in the emerging competitive industry.
E. Problems with Public Power Enterprises in the United States
The TVA's current head, Craven Crowell, believes that the TVA can become a powerful competitor as a government-owned corporation. As a result, he opposes all recent attempts to privatize it, such as the bill sponsored in Congress by Rep. Scott Klug (R., Wis.). Although Crowell argues that a government-owned power corporation is well suited to deregulation, public power enterprises generally have been unable to remake themselves into bona fide competitors for two basic reasons.
First, a state-owned corporation would still remain shielded from some market forces. As discussed above, under competition protection vanishes for all suppliers. Technological change and entrepreneurial initiatives lead to the by-passing of moribund monopolies, and legislation, such as the Energy Policy Act of 1992, offers very limited safe harbors to utilities from competition. But a government-owned TVA would sail into these competitive waters with many subsidies unavailable to IOUs subsidies that would shield them from having to reduce their costs to competitive levels.
Second, these competing government enterprises still would fail to have an ownership structure that permits strong accountability. This failure is the primary economic motivation for privatization. Shareholders generally have equity prices and yield data available to them which permits a continuous appraisal of a firm's performance. For an investor-owned firm, poor financial results signal shareholders and other financial claimants that changing management or selling the firm could be profitable. By comparison, taxpayers' equity stakes in federal power enterprises are not transferable. No shares are held by or for them, nor do they see any other measure of market values. Not only are taxpayer-owners fundamentally ignorant about such performance, they have no direct way to respond even if they were knowledgeable. Therefore, they cannot function as true residual claimants, a vital role of capitalists. As Richard Zeckhauser and Murray Horn have put it:
In private corporations, the shareholders' ability to sell their stocks or to vote out management creates incentives for those who control the enterprise to serve the interests of owners. The very diffuse, nontransferable shareholding that characterizes government ownership, by contrast reduces these incentives. Consequently, those who control the public enterprise pay less attention to the interests of their taxpayer shareholders, and groups with more concentrated interests, such as suppliers, consumers and employees, can influence management to favor them over the taxpayers.
Because financial market discipline is lacking for government enterprises compared to private enterprises, a far greater burden logically should be placed on government to independently audit and control the management of the public organizations. But government monitoring is made more difficult for several reasons:
With no market signals (such as a change in the cost of capital), poor performance can easily go undetected.
Politicians are placed in an uncomfortable position if they vigorously investigate a public enterprise. On one hand, the value of ferreting out problems is slight because voters generally have little interest in the arcane doings of the government enterprises. However, interest groups gaining substantially from a government enterprise predictably will exert strong efforts in defense of the status quo. Without political entrepreneurs willing to buck seemingly poor odds, the defenders of the status quo typically dominate politically. This describes public power politics in America for many decades.
Pay-for-performance incentives are less useful tools within government enterprises because the measurement of performance is not closely tied to financial success or failure. The government owns the stock in the firm; thus financial incentives that are widely applied in private enterprises, such as stock options, are missing. Other output statistics are poor measures of market value and are easily manipulated to the interests of those ostensibly being incentivized.
A substantial part of good performance by a government electricity firm may relate to noncommercial demands, such as providing for recreation or irrigation; when these are stirred in with commercial objectives for power, the performance of the electricity enterprise component is obfuscated.
Thus, it is not surprising that stringent oversight has not been exercised over the federal power enterprises, even though economic common sense strongly suggests that more supervision is required than for private enterprises to attain the same level of control. Paul MacAvoy and George McIssac, writing about several federal enterprises (including the TVA), stated:
"..management has had greater discretion to serve particular purposes and respond to influence group problems at the expense of the more broadly conceived market for final goods and services. But discretion when applied has led to forms of behavior which have been detrimental to the basic public purpose of the organization. Strategic decisions on service offerings, on the level of investment, and on the matching of labor supply to service demand have all proceeded without an adequate economic discipline. The mechanisms used to substitute for such market-based discipline oversight and inspection do not work to a satisfactory degree as a substitute."
Indeed, Congress acted to avoid facing substantial questions regarding the TVA and the PMAs. In 1986, after a Reagan administration initiative to sell the BPA, Congress took preemptive action against those who might again ask hard questions by prohibiting the federal government from funding any study that looked at privatization of the PMAs or the TVA.
The financial records of the TVA offer little information of timely interest to Congress or the GAO. Even in the face of an accumulation of evidence of severe problems facing the TVA, congressional oversight of TVA remained weak. When, in March 1994, the House of Representatives held a hearing on the TVA's nuclear program, it was the first in six years, although TVA's nuclear program continually has been beset with problems. Neither the Office of Management and Budget (OMB) nor the Treasury ever reviewed the basis for lending to the TVA to further this nuclear program. While investor-owned utilities also made some poor investments in nuclear plants in the 1970s, by the early 1980s financial market indicators coupled with state regulators' actions had closed down additional lending for IOU nuclear expansion. By contrast, the Treasury's Federal Financing Bank continued to make loans to the TVA totaling $17 billion until 1989, when TVA began financing in private bond markets.
Whenever the TVA and the PMAs undertake new business ventures requiring financial capitalization, the risks fall heavily upon ratepayers and taxpayers. They are placed in the position of unwittingly underwriting risky actions in which they have no authority to intervene. Thus, the TVA's current desire to compete in regional power markets suggests that more business risks would be shifted to taxpayers and ratepayers.
Another example of undesired risk shifting occurred in the Washington Public Power Supply System (WPPSS). WPPSS is a municipal corporation owned primarily by the public utility districts (power distributors) and municipalities supplied by the BPA. It began construction of nuclear power plants in the Pacific Northwest in the 1970's, with BPA's ostensible backing. BPA was blocked by law from directly investing in such power facilities. In a scheme known as net billing, BPA lent its financial position as a major marketer of hydro power to implicitly underwrite the construction projects. Preference utilities (those legally receiving BPA power at below market prices) were given the right to offset their construction costs in the nuclear power plants against their obligations to buy power from the BPA.
WPPSS ran into difficulties similar to the TVA's, and, in July 1983, servicing of bonded debt of $2.25 billion was halted, signaling the worst municipal bond default in U.S. history. Because the BPA was obligated by law to generate revenues sufficient to cover expenses, it was not able to bail out the WPPSS. The legal assessments of losses among various parties, including bondholders, was a prolonged and contentious affair. Ratepayers served by BPA were not immune from the fallout, which came in the form of higher prices. Ironically, WPPSS's misfortune makes the sale of the BPA today a bit easier the remaining problems of nuclear power rest with WPPSS, and would not affect a private buyer of the BPA assets.
III. PRIVATIZING ELECTRIC POWER: A Worldwide Revolution
Overseas privatizations serve as object lessons for future sales of America's government-owned electric power enterprises, and for that reason are worthy of study. A worldwide revolution in the power industry is underway away from government ownership to investor control, generally accompanied by significant market reforms encouraging entry and competition.
|
|
|
| Country |
|
| Argentina |
|
| Australia |
|
| Austria |
|
| Belize |
|
| Bolivia |
|
| Brazil |
|
| Canada |
|
| Chile |
|
| China |
|
| Czecholslovakia |
|
| Germany (East) |
|
| Germany (West) |
|
| Grenada |
|
| Honduras |
|
| Hungary |
|
| Malaysia |
|
| Peru |
|
| Philippines |
|
| Poland |
|
| Spain |
|
| Thailand |
|
| Trinidad/Tobago |
|
| Turkey |
|
| United Kingdom |
|
| Total |
|
Source: Data supplied by Fin Mark Research, Inc
Even five years ago, such a shift would have been unthinkable because of the widespread acceptance of two key presumption about electric power:
These assets were seen as part of national infrastructure, with government control essential to achieving key planning objectives;
Electric power was believed to be a natural monopoly, and therefore enterprises should be operated as vertically integrated entities, subject to close government control.
Today, the actions taken by many nations developed, developing, and post-communist challenge these presumptions. In 1995, electric power led all other industries in terms of assets privatized at $12.9 billion, and this trend should continue. Consider, for example, that large nations such as Australia and Brazil are in the middle of large, ambitious privatization programs, while many former socialist nations, such as Poland and Hungary, are only beginning to move into asset divestiture, and many other countries (virtually all of Africa) have yet to do much, but are being urged to do likewise by the World Bank. Thus, another $20 billion of power assets privatized in 1996 is a likely forecast.
For most purposes, asset divestiture (sale) is the meaning applied to the term privatization, although incremental private capital can be considered a form of privatization, too. Table 7 shows annual dollar magnitudes of electric power asset divestitures for the 24 nations that have taken action since 1988. Much of the financial capital, technology, and managerial know-how has come from foreigners a surprisingly liberal approach to apply to an economic sector often considered sacrosanct infrastructure.
Table 8 indicates the top independent power producers (IPPs) in the world, ranked by equity investments in 1995. The equity portions held by these companies may not necessarily indicate long-term asset holdings, as some of these assets will be transferred back to government upon the expiration of their long-term franchises. But in many cases the ownership will remain private. The investments in Table 8 can be termed spontaneous privatization, injection of new private capacity into a nation which retains its existing state-owned power firms. These spontaneous privatizations are in addition to the figures in Table 7; hence, Table 7 understates the extent of private ownership in electricity. For example, New Zealand is not shown in Table 7, but it currently is privatizing through incremental investments of this type. A shift to greater consumer choice and market entry has been explicitly coupled with spontaneous privatization in New Zealand and Norway, and the results have been promising a 16 20 percent reported price decline.
|
|
||||
|
|
|
|
|
|
|
|
||||
|
|
National Power** | 4,465 | 2,612 | 2 |
|
|
Con. Elec. Power Asia | 4,391 | 1,460 | 7 |
|
|
PowerGen** | 3,955 | 1,977 | 4 |
|
|
Mission Energy | 3,463 | 2,741 | 1 |
|
|
Enron Development | 2,638 | 2,039 | 3 |
|
|
AES | 2,316 | 1,663 | 6 |
|
|
Sithe Energies | 2,045 | 1,761 | 5 |
|
|
U.S. Gen./InterGen | 1,909 | 1,100 | 11 |
|
|
Destec Energy | 1,846 | 1,291 | 8 |
|
|
Southern Electric Intl. | 1,615 | 723 | 15 |
|
|
CMS Generation | 1,455 | 1,112 | 10 |
|
|
British Gas | 1,402 | 1,231 | 13 |
|
|
Cogen Technologies | 1,364 | 1,072 | 12 |
|
|
Cogentrix Energy | 996 | 840 | 13 |
|
|
NRG Energy | 982 | 293 | 33 |
|
|
Midlands Electricity | 971 | NA | NA |
|
|
Tractebel | 928 | 506 | 20 |
|
|
Electricite de France | 898 | 404 | 27 |
|
|
Tenaga Nasional | 879 | NA | NA |
|
|
Dominion Energy | 872 | 811 | 14 |
|
|
California Energy | 835 | 176 | 55 |
|
|
Endesa (Chile) | 795 | NA | NA |
|
|
Wheelabrator | 727 | 713 | 16 |
|
|
GE Capital | 715 | 143 | 67 |
|
|
Energy Initiatives | 633 | 182 | 54 |
*Does not include China Light & Power with net equity of 4,611 MW of hybrid utility capacity or its joint-venture partner Exxon Energy, with 5,911 MW; Huaneng Power International, with 3,500 MW of net equity in largely inherited capacity from state-owned entities; the 1,575 MW held by China's Shandong Huaneng Power Development, which is 70 percent state-owned; or Mobil Power, with 1,500 MW of in-house generation.
**Excludes capacity inherited from U.K.'s Central Electricity Generating Board after privatization.
Source: Electric Utility Week, July 23, 1995, from analysis by Independent Power Report, New York, N.Y.
B. Reasons for Worldwide Electricity Privatization
What caused this dramatic reversal of widely held beliefs and government practices Figure 1 shows the aggregate data graphically and highlights several key events in this brief history. In particular, the British initiative to restructure its power industry, placing the majority of these assets in private hands over the last five years, has been the primary example studied in detail by other nations. Argentine and Australian electric power privatization, for example, share many features with the British. The British made clear that an ambitious electric power privatization could be accomplished in a democracy complete with a maze of contentious interest groups. And as shown in Table 9, they now have demonstrated that it pays off in increased efficiency that, in turn, has permitted lower consumer prices. The British also have sought to develop a way of regulating utility prices and services that does not inhibit efficient behaviors. These efforts have also influenced the course of power regulation worldwide. Last, the British provided a real-world laboratory in how to make the transition from government ownership to investor ownership.
|
Table 9: Privatized U.K. Electricity Price Changes |
||
|
|
|
|
| Domestic* |
|
|
| Small Sites |
|
|
| Medium Sites |
|
|
| Mod. Large Sites |
|
|
| Extra Large Sites |
|
|
* Different basis of calculation.
**Approximately 2% greater reduction if RPI measured from beginning rather than the end of 1989/90.
Source: U.K. Office of Electricity Regulation
The British electricity privatization model has been pursued so widely because most nations share an understanding that several objectives can be attained:
Reducing Government Debt. Many governments are concerned about high debt levels, which might cut them off from further borrowing or at least soak up a growing share of the government budget with debt-service costs. Member states of the European Community must reduce their national debt levels in order to meet the Maastricht criteria for economic and monetary union. Developing countries face pressures from the International Monetary Fund and development banks to reduce their indebtedness. Thus, in both developed and developing countries, privatization has become an important tool for raising cash to pay down accumulated national debts and reduce debt-servicing costs
Removing Constraints on Productivity and Economic Growth. Developing economy has often been synonymous with not developing. Many nations now attribute some of this failure to inferior and costly public power that has crippled the industrial and commercial sectors of their economies. They are privatizing and reforming their electric power sector as a means of enhancing economic productivity. In addition, developing nations generally seek high-quality telecommunications infrastructure, and reliable electric power supply is a basic factor in high-quality telecommunication services.
What are the sources of lagging electric power performance in state-owned power enterprises (SOEs) As with TVA and the PMAs, weak monitoring of management practices and disincentives to serve consumers well are endemic to SOEs; the use of these organizations as dispensers of political favors is predictable. A fundamental premise behind privatization, then, is that it will directly reduce the amount of these nonmarket (government) failures, and therefore lower consumer prices and raise quality of service.
SOE pricing practices also cause economic problems in many nations. Often, as with the PMAs and TVA, electric power is sold to favored consumer groups at far below its marginal cost. In India, for example, a kwh of electricity sold to an agricultural customer costs above 14 cents to produce and distribute, although the customer is charged less than 3 cents. Thus, revenues fall grossly short of costs. Charging higher rates to industrial consumers to cover the underpricing to residential consumers (as is also done by many U.S. municipal utilities) is rarely an adequate response, especially in struggling economies where the commercial/industrial sectors are small. Taxing one group of consumers by charging much higher prices to another group (cross-subsidization) also leads to socially inefficient (but individually rational) substitution measures by consumers.
Politicians everywhere clearly wish to avoid being held responsible either for rate hikes or economic despair. Thus, privatization is seen as a means of off-loading a problem that can no longer be finessed by cross-subsidization, borrowing money, or raising taxes.
Tapping External Markets for Resources. Many developing countries have found their internal capital markets inadequate to finance large public power projects. Obviously, devouring internal financial capital for electricity production means that this capital cannot be used for other public or private purposes. Since little international government lending is forthcoming these days without many strings attached, the primary source of financing is the private world capital market. International lending and assistance agencies now explicitly favor privatization or at least spontaneous privatization of electric power. Recently, the World Bank has reversed its policy course toward electric power infrastructure development. Where once they pressed for state controlled power monopolies, they now push for private ownership. According to a World Bank paper:
Both the World Bank and the IFC explicitly support a major role for the private sector in power supply. The private sector can be an important source of financing for power, a factor that is especially relevant for the financially pressed public sectors of many developing countries. Private power producers also tend to operate more efficiently than publicly-owned facilities, since they normally accept responsibility for project risks, such as construction cost overruns and efficient operation of the plant.
Restructuring (Deregulation) of Energy And Other Markets. Privatization often has been joined to deregulation, a fundamental rethinking about the role of energy markets within a country and region. Governments are moving away from their old role as central energy planners. For private investors, deregulation contains both good news and bad news. The bad news is that government-enforced monopoly status will not be given, making revenue flows more sensitive to the quality and cost-effectiveness of service provided, as judged by customers. The good news is that this openness, if not eroded by excessive regulation, permits the privatized firm to enter new markets and to respond flexibly to changes in its operating environment.
Some nations are privatizing without a great deal of thought about the market processes into which the privatized assets will be placed. Nations that privatize without reforming markets are unlikely to achieve desired efficiency improvements. Investors, aware of the unpromising long-term prospects for flexible market institutions, will be less willing to enter such a market. Thus, sound economic policy often ties market liberalization to privatization. This has been done in Argentina, Australia, Britain, Chile, and New Zealand.
B. Electricity Privatization: A General Framework for Success
The following lessons can be learned from international experiences regarding electric power privatization.
Government has shown no core competency in electric power. Government provision of electric power diverts scarce tax dollars from activities in which the government's role is unique and returns to investments are greater. The oft-used analogy that government's role in the economy should be to steer rather than the to row is apt with respect to the power market.
Long-term efficiency, not the dollar value of assets privatized, or debt reduction, should guide privatization. Privatization is often characterized as a means of overcoming immediate fiscal difficulties of government. When this objective dominates, a government's privatization strategy is unlikely to be well-conceived or well-executed. Although short-term debt reduction can often be achieved through privatizing, there need not be a direct correlation, and some nations have chosen to reinvest the proceeds from privatized assets directly back into the industry, or they have used the proceeds to directly enrich their citizens.
Political manipulation of state-owned public power is a fundamental hurdle to an efficient power industry. Government-owned power enterprises invariably have become massive subsidization machines, diverting resources away from their highest-valued market applications and stimulating wasteful political expenditures to influence subsidy flows exercises in rent seeking. In sum, political considerations have overwhelmed sound commercial operation and planning of the government enterprises over the history of the electric power industry in most nations. Eliminating political interference is perhaps the primary reason for privatizing.
Selling power assets to the private sector is complemented by strong property and contract law. The expectation that future government policies and regulations will interfere with private decision rights (in effect, taking private property), reduces interest in privatization from the start. Still, it is noteworthy that many nations with less-than-ideal legal climates have made headway with privatization. Possibly, investors anticipate an improving legal climate. This expectation may be predicated largely on the amount of a nation's economy that is being made hostage to capitalism due to hard-to-reverse commitments made to private ownership and free trade. Given America's relatively strong legal protection for property, privatizating our government electricity enterprises should be practically irreversible.
State-owned power assets often can be usefully restructured prior to privatization. As the British and the Australians have shown, this is done by separating assets in two ways. First, generation (and in some cases distribution) assets are separated from transmission. Second, generation and distribution assets often are split into many smaller holdings prior to sale, laying the groundwork for potential competition.
Deregulating the power industry complements privatization. Along with privatization, market-based regulatory reforms often are introduced to give choices to consumers. This is done by reducing barriers to entry and exit from the power market. In particular, the transmission grid, whether privatized or not, generally is set up to operate as an open network. Services of transmission firms often are unbundled to accommodate a variety of transactions, and entry to the transmission network by many sellers and buyers is permitted. These efforts echo the current attempts to open America's transmission pools to multiple users, such as the ongoing investigation by the Federal Energy Regulatory Commission (FERC) concerning transmission access.
Price regulations can be simple and need not be based on historical costs. Privatized firms generally remain regulated where they exercise considerable market power. However, there has been no shift to American-style (cost-plus) public utility regulation. Instead, simpler devices are employed. For example, price caps are used in Great Britain, and these do less to distort incentives for efficient performance. Since the British privatizations of power began in 1989, the increase in electricity prices has been considerably less than the retail price index. The most recent experience is even more promising. From the second quarter of 1993 to the second quarter of 1995, average industrial electricity prices have fallen by 6 percent, largely due to growing competitive pressures. Even for residential consumers, still captives of their local distribution monopolies, prices have fallen slightly since 1994, after adjusting for the imposition of a value-added tax. Worldwide, there is a greater willingness by governments to depend upon competitive market self-regulation and only to engage in regulation where there is strong evidence of an absence of competition.
Resistance to privatization from consumers can be overcome by applying price caps. Where politically essential to hold prices down, it is vital to do so in ways that do not check the incentive for producers to take cost-saving actions; these incentives largely are absent in United States under public utility profit regulation. Thus, the approach taken by the British of setting price caps, fixed for several years to be a few percentage points under the inflation rate, is an example worthy of consideration elsewhere. In terms of meeting political resistance, a price cap, held in place for a set number of years, is an easily understood notion, and a powerful tool for breaking the resistance of consumers who fear that the marketplace would inevitably yield higher prices with privatization.
Resistance to privatization from consumers can also be overcome by providing them with attractive opportunities for share purchases in newly privatized firms. The best examples of this approach come from the British privatizations of the 1980s and early 1990s. Smaller purchasers, and customers in particular, were given special treatment when shares were offered in the firms being privatized. For example, consumers and other small investors were given a loyalty bonus, meaning that at the end of three years they could obtain one bonus share for every 10 shares continuously held during that period. Consumers were generally given a priority over others in the allocation of shares during a secondary flotation. In addition, the British government permitted small purchasers to buy on installment in many of the utility privatizations, including all of those in the electricity field. They also permitted utility customers to buy shares via installment payments with their utility bills.
While there are costs to enouraging a large proportion of shares to be registered to small owners, the gains of using this scheme may greatly outweigh the costs. The British government viewed consumer share offerings as a minor issue, largely because consumers did not have the political force to block privatization initiatives under their parliamentary system. In the United States, by contrast, federal privatization legislation for the TVA and PMAs can be held hostage by regional consumer interest, now highly dependent on subsidized electric rates. Thus, when privatizing via share offerings, making attractive ownership offers to these entities' customers can play a larger role in the United States than it has in Great Britain.
Indeed, customer share ownership is more economically sensible than an extensive use of price caps to curry favor with customers. Supposedly transitional price ceilings may come to be regarded as permanent political entitlements, thereby hindering future market pricing. By contrast, consumer-owners have greater incentive to encourage market-based decisions by the newly privatized firm.
Resistance to privatization from employees and managers can be overcome by reserving shares in the newly privatized firms to these individuals. Again, privatization in Great Britain provides examples of how this approach can work as an incentive to gain support for privatization. At privatization, some free shares typically worth under $300 were given to workers, and additional shares were offered on a matching basis (e.g., the employee would buy one share and the Treasury would match it with one or sometimes two shares). Employees were sometimes given discounts on a specific number of shares and always were given priority in purchasing shares over other investors.
These shares were widely subscribed by employees and acted to reduce worker opposition to privatization in Britain. Share offerings to employees, as well as to consumers, have an additional positive effect of fostering general public support for a process that is viewed as disbursing benefits broadly. This technique has been used in Britain in nearly all the large-scale privatizations of the past decade, and has subsequently become almost standard practice in many other nations now privatizing electricity, telecommunications, and numerous other SOEs.
The view that the electricity industry can be mainstreamed to the discipline of the market is now shared by dozens of nations, as well as the World Bank and other major financial institutions. Their perspectives and experiences are useful for America as we contemplate shifting our federal power organizations into the private sector.
IV. PRIVATIZATION OF FEDERAL POWER ENTERPRISES
This section briefly examines the roles that the TVA, the BPA, and the remaining PMAs now play in the energy markets of the United States. Current proposals to change those roles are described, and ways in which the PMAs and the TVA might be sold are assessed. In aggregate, $15 30 billion could be realized from privatizing all these federal enterprises. This broad range is given because political choices, in particular the degree of protection offered to preference consumers and the conditions placed on hydroelectric licenses, will greatly affect asset values. These guesses are lower than some forecasts, reflecting a presumption that privatization will not occur without some operational constraints on the buyers. Specific proposals for privatization are left for the final Section V.
1. Background
Although neither the TVA nor the BPA were on the administration's 1995 list of privatization candidates, both are intriguing prospects. The two are by far the largest marketers of power, selling about 78 percent of all federal power. They also share two other features. Both have been involved in vast nuclear power projects that were substantial failures, and both would fetch far less than book value suggests in an asset sale, in contrast to the other PMAs that are likely to sell at above their book values. The TVA, unlike all the PMAs, has substantial operational and investment independence afforded it as a government corporation.
The TVA stands today as an anomaly in the American economy: the last, large symbol of government enterprise as the embodiment of heroic purpose. It was constructed in an era of grass roots democracy and New Deal activism as a way to lift up the people of an entire rural region. The TVA's early mission was clearly multipurpose: developing the Tennessee Valley region by generating and selling hydroelectric power, controlling flooding, improving navigation on the Tennessee River and tributaries, developing manufacturing of products like fertilizer, and providing recreation. The early TVA was run by individuals with a broad regional or federal viewpoint. Early on, politically savvy TVA managers realized the value of bringing local support to bear on issues related to federal funding, support for TVA projects, and defending against its numerous, pesky opponents, especially neighboring investor-owned utilities. In the 1930s, TVA Director David Lilienthal initiated a policy of bringing private, successful businessmen in communities served by the TVA into local support organizations. Abundant, cheap power became the goal around which support was built. These groups, now formally represented by the Tennessee Valley Public Power Association (TVPPA) and the Citizens for TVA, Inc. (CTVA), came to have great political influence.
The TVA gradually became more commercialized, and by the middle of the century was dedicated primarily to power production and marketing, building coal-fired plants to produce most of its electricity. By the 1970s, the shift from the earlier heroism to being a mere utility wore thin, according to Erwin Hargrove, and TVA searched for a new mission. It found it in technological grandeur. TVA planned and began building the largest system of nuclear power plants in the United States.
Subsequent nuclear failures have deeply affected the current TVA. Seventeen reactors were once planned; only two are now operating (Sequoyah 1 and 2). The rest are either canceled (eight); deferred or in rehab (six); and one is complete but unlicensed. To date, the TVA has written off only $4.6 billion of nuclear assets. Its 1994 balance sheet still indicates deferred nuclear generating units worth $6.2 billion and construction in progress at $9.5 billion. Thus, the necessary writeoffs to bring market realism to TVA accounting have not been completed. Figure 2 shows total assets and revenues and the ratio of total revenue to total booked assets for the TVA and three surrounding IOUs. The latter statistic is a rough measure of asset performance, and indicates that TVA's assets, at book value, are not particularly hard-working. For example, the Southern Company in 1992 produced $0.43 per dollar of asset; the TVA yielded only $0.17 per dollar.
The financial and political fallout from its nuclear failures has hampered TVA for the better part of a decade now. In the late 1980s, Marvin Runyon, as Chairman, began to make TVA a more business-oriented enterprise, and now Craven Crowell has taken on this role. Many TVA initiatives under the leadership of these two men have been appropriate and long-needed. Cost controls and accountability for results were emphasized and principles of private corporate management were applied.
In 1995, TVA's management requested the removal of the fence, the prohibition on its selling power outside its region. However, Crowell's quest for expanding TVA's marketing was put on hold in 1995, primarily because of the resistance of the TVPPA, representing 160 distributors of the TVA's power. These distributors fear that misadventures in nontraditional markets might lead to increased prices to them. Faced with this consumer resistance and understanding that, if this fence came down, crossing it probably would be a two-way street, Crowell still believes that deregulation is sweeping through the power industry, and that the TVA must aggressively compete in order to survive. In this regard, he echoes the views of Maurice Strong, Chairman of Ontario Hydro, the large Canadian SOE with similar nuclear woes. However, where Strong campaigns for privatization, Crowell remains steadfastly opposed to it, a curious position for someone to defend who zealously advocates the forces of capitalism in electric power.
2. GAO's Study of TVA's Long-Term Viability
The GAO in a recent report strongly disagreed with the TVA about the wisdom of full competition with surrounding utilities. The report indicates that TVA must eventually recover over $14 billion in debt tied to nonperforming nuclear plants through higher prices to its customers. The TVA now defers recovery of the costs of these nonproducing nuclear assets, and this has allowed them to hold prices down since 1988. According to the GAO:
Compared to other utilities, the dollar amount and length of time of TVA's deferral are unique. In contrast, IOUs absorb into their rates or write off in a much shorter time frame costs associated with uneconomic plants. If TVA began to amortize and depreciate its deferred assets according to its current amortization/depreciation schedules, its revenue requirements would increase by about $454 million per year for at least 22 years. If all of these costs had been included in TVA's electricity rates in 1994 ... TVA's rates would have been increased by 9 percent which would have decreased TVA's competitiveness compared to neighboring utilities.
The GAO suggests that, with continued protection from competition with regional investor-owned utilities, the TVA can begin a program of sunk cost recovery, and that a one-time rate increase of 10 percent would allow a reduction of $5 billion of debt in ten years. Still, the report paints a fairly bleak picture of the TVA's future, even if it follows this course. In particular, they foresee an eventual loss of TVA's distributor customers through their giving notice (10 year prior notification is legally required) or contract renegotiation, and also through a decline in TVA's industrial load as firms relocate plants, cogenerate electricity, or directly purchase power. As a result, the TVA would, if it followed normal utility pricing principles, be forced to raise rates to its smaller base of remaining customers. This regulatory death spiral is well understood by all utilities that have nonperforming assets and face a degree of competition.
Generally, the accounting response to this situation would be to write off assets, which simply reflects judgment that the federal government's TVA assets are less valuable than the books indicate. But the GAO report struggles to find another way around the facts. The government, indeed, does have strategic weapons that are not available to private enterprises. It can alter the economic environment (to