Mixed Response to President’s Proposal to Privatize the TVA

Mixed Response to President’s Proposal to Privatize the TVA
May 16, 2013

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)

President Obama wants to privatize one of the nation’s largest government-owned companies, a proposal that is bringing pushback from some unlikely sources: politicians who ordinarily promote themselves as favoring smaller government and more free enterprise.

In his 2014 budget, President Obama called for a strategic review of the Tennessee Valley Authority (TVA). The budget stated that selling or privatizing the TVA could result in a significant cut in the federal debt (at least $25 billion) and “put the nation on a sustainable fiscal path.”

Born during the Great Depression of the 1930s as part of President Franklin Roosevelt’s New Deal, the TVA is a federally owned corporation that was created to provide electricity, navigation improvements, flood control and economic development in the Tennessee Valley, an area that was particularly hard hit during the Depression. The TVA’s service area covers nearly all of Tennessee and portions of Alabama, Mississippi, Kentucky, Georgia, North Carolina, and Virginia. 

Mixed Response, Even in Tennessee

The initial response to the privatization proposal has been mixed, with some local Republican leaders coming out against the plan.

“This is one more bad idea in a budget full of bad ideas,” said Tennessee Senator Lamar Alexander (R) in a statement. “There is today no federal taxpayer subsidy for TVA, period. There is by law no federal taxpayer liability for TVA debt. And after deducting its debt, selling TVA would probably cost taxpayers money.”

The Chattanooga Times Free Press newspaper declared in an editorial that opposing TVA privatization is a mistake and noted the disconnect between some Tennessee politicians who declare they favor free enterprise and limited government yet oppose privatization.

“The only real argument for keeping the TVA's assets in government hands are weak arguments like, ‘people like the TVA how it is’ and ‘that's how we've always done it.’ Sadly, that stale mindset has overtaken area Republican lawmakers who claim to oppose government control and socialist programs,” the newspaper’s editors wrote.

Little Chance of Happening

Privatization expert Leonard Gilroy of Reason Foundation said he sees lots of institutional opposition to privatization.

"Despite being an utterly nonessential federal asset, there appears to be no political will in Congress whatsoever to authorize a TVA privatization," he said. "Senator Alexander, Senator [Bob] Corker (R) and other Tennessee congressmen of both political parties have already condemned the proposal to merely study privatization, which is all the President has proposed. This just goes to show how difficult it is in real life to shut down government agencies and enterprises once they spring to life and build constituencies."

Nonetheless, he said privatization ought to be studied.

"There's nothing inherently governmental about running a power business, so privatization could provide an opportunity to bring in a businesslike approach and more efficient operations and management compared to what's seen today as a government-owned enterprise," he said. "However, there would be some very thorny implementation issues to work out, not the least of which being how to handle the divestiture of the TVA land and power assets that were originally seized from private hands to begin with."

Monopoly Power, High Debt

The TVA is the primary provider of electricity in the markets it serves and has developed a strong monopoly in these areas. Despite its market dominance, the TVA has developed serious debt issues. In the 2012 fiscal year the TVA recognized only $60 million in net income off operating revenues of more than $11 billion while its debt grew to $24 billion, just short of its statutory cap of $30 billion.

The TVA also faces high future liabilities to maintain its power plants and other facilities. Its capital expenses are expected to be as high as $25 billion in the next 10 years. Much of these future costs come from mandated upgrades. The TVA must retire at least 18 of its 59 coal-fired units by 2017, and it must install “scrubbers” in several others or convert them to cleaner-burning fuel to reduce air pollution.

Federal Exemptions, Statutory Protections

The TVA has several statutory protections that give it advantages that other businesses do not have. First, the TVA has been exempted from scores of federal laws, including several covering hydroelectric power. In addition, the TVA has greater control over its electric rates than other power companies, being mostly exempt from oversight by the Federal Energy Regulatory Commission.

The TVA's chief executive officer, Bill Johnson, told Ken Wells of Bloomberg News the Authority receives no direct federal funding and that being forced to justify its existence was “unexpected.”

"But we are a creation of the government and this is within the owner's prerogative,” Johnson said. “And actually, in the private world you do this all the time. It's not a surprising idea to justify our existence by demonstrating the value we create every day."

While the TVA no longer receives direct taxpayer-funded subsidies, it is exempt from federal, state, and local taxes that private businesses must pay.

The Washington Post argued in an editorial “the TVA has long since accomplished its original purposes of economic development and rural electrification. Nowadays, the cheap power the TVA provides may help Southern states compete with others for business investment, but it's unclear why that's a legitimate federal goal. Yes, the TVA covers its costs through power sales and borrowings, not federal outlays. But it can do that only because its unique federal connection enables it to borrow at favorable rates."

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)