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The Tennessee Valley Authority: Competing in Markets for Capital and Electricity in Pursuit of Solvency
JSME vol 1 issue 1
Author(s): Dennis Logue (University of Oklahoma, USA) and Paul MacAvoy (Yale University, USA)
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. The required capital outlays financed by private debt, could not be recovered by sales revenues from plants not in operation; instead recovery has been achieved by arbitrary price increases for electricity. With electricity markets now beginning to open up to competition, inside and outside the TVA monopoly "fence," TVA cannot set prices as if it had a monopoly, but still expects to keep solvent and reduce excessive debt. 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, after realization of one of the likely scenarios, TVA as a public enterprise would not go into bankruptcy. It might be able to generate increased revenues by price increases; only in a limited range given newly competitive markets for its power. Instead it may have to 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 of investment errors. 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, write downs of debt and ultimate de facto privatization of the Tennessee Valley Authority.
We offer this case as an example of strategies of corporations both private and public (government owned) in their financial operations. These strategies can involve access to competitive advantages of both, even though they were meant to be exclusive to on or the other. In the TBA experience, straddling such a fence may be the worst result.
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