News Column

TVA Dodges Debt Crisis

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Congress will have to again raise the U.S. debt ceiling next month for the United States to pay its debts, but the debt cap for one federal agency appears to no longer be a problem -- at least for the foreseeable future.

The Treasury Department estimates the federal government will max out its borrowing authority by mid-October as the U.S. debt hits its $16.4 trillion limit. But the Tennessee Valley Authority, the federal utility which has its own $30 billion debt cap, won't be asking Congress to raise its borrowing authority for at least the next decade.

The debt cap Congress put on the TVA a generation ago probably won't be the problem agency officials worried it would be just a few years ago. With the growth of electricity demand slowing, TVA should be able to reduce its net borrowing within a couple of years and shave nearly $5 billion off its debt over the next decade.

TVA's debt is projected to peak in 2015 about $3.5 billion below the $30 billion limit and then begin to decline, according to spending plans adopted last month by the TVA board.

"We have a window now of four or five years where we can finish our big capital projects and then turn that statutory debt line down," TVA President Bill Johnson said. "If we have a fairly accurate projection of the future and we tend to our business well, we should be well under that debt cap for at least the next decade."

That's far different from the warnings a few years ago from both TVA's inspector general and the White House's Office of Management and Budget, which scolded TVA for not having a better debt reduction plan.

In a 2011 assessment of TVA's debt, TVA's internal inspector general said the agency "faces a challenging financial situation in the near future" and warned that the $30 billion limit on borrowing was "a major impediment to making needed investments."

TVA Chairman Bill Sansom, who recalls how board members in 2006 worried about how they would pay the agency's bills without more borrowing authority, said the fiscal needs of America's biggest government utility have changed. The effort six years ago to try to convince Congress to raise TVA's debt cap may not be necessary.

"We spent a lot of time in the past trying to figure out our debt cap and working with OMB and others about what to do with our debt limit," Sansom recalls. "We managed to put in some formula like you would in your own personal lives to manage our debt stream. Now all of that has changed."

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The slowdown in power demand and adherence to TVA financial principles adopted seven years ago helped change the debt direction for the utility.

TVA expects to end fiscal 2014 with a debt of $25.9 billion and cap its debt at no more than $26.5 billion a year later.

The current ceiling on TVA's authority to issue bonds, set in 1979, stands at $30 billion. When adjusted based on historical consumer price indices, this debt ceiling is equivalent to more than $90 billion in 2010 dollars. In other words, since 1979, inflation has reduced the purchasing power of the debt ceiling by almost two-thirds, to about $10 billion in 1979 dollars.

"I personally think the debt cap is wrong," Sansom said. "That was put on in 1979, and we're a lot bigger and we've invested a whole lot more since then."

But convincing a debt-wary House of Representatives to raise TVA's debt ceiling may have been difficult, Sansom said.

Capital spending and TVA's overall debt will rise over the next two years as TVA works to finish its new Watts Bar Unit 2 reactor and installs scrubbers and other pollution controls at its Gallatin coal plant, among other major projects. But with the expected completion of a second reactor at Watts Bar in fiscal 2015, TVA's new borrowings are projected to fall in subsequent years until, and unless, TVA decides to finish its Bellefonte nuclear plant, build new small modular reactors at Oak Ridge or build more gas-fired generation.

"We're approaching the end of this capital investment period that we have been in," TVA Chief Financial Officer John Thomas told the TVA board last month.

Johnson said the debt cap was more onerous when power demand was still rising and new generation had to be added.

"When you look at the demand projections we had five years ago and the amount of capital spending that you could envision, there was a rightful concern about whether you could do it under the debt cap," Johnson said. "The picture has changed dramatically in just the past 24 months."

TVA has spent $12 billion in capital projects over the past six years, but TVA's debt has risen only $1.2 billion. That's because the board adopted a new approach in 2006 to finance its major new capital projects with less debt and to make sure the debt is paid down on power plants and other major capital investments over their useful life.

The slowdown in new borrowing from previous estimates also reflects the drop in power sales for TVA brought on by improved energy efficiency and the Great Recession and its aftermath.

TVA's electricity sales peaked in 2006 before the recession and have remained well below that level. The loss of TVA's biggest industrial customer in May with the shutdown of the U.S. Enrichment Corp. uranium reprocessing plant in Paducah, Ky., cost TVA about 5 percent of its sales and will help reduce the agency's overall power sales in the next fiscal year by an estimated 4.6 percent below this year's level.

TVA's peak power demand also has been cut by the utility's change in the way it bills the municipalities and cooperatives that distribute TVA's power. TVA switched in 2011 from end-use pricing that billed distributors simply on how much electricity was sold every month to a demand-and-energy pricing approach that bills distributors based upon both overall consumption and the peak demand for each period.

That switch has encouraged distributors to do what they can to shift load off of peak demand periods to stabilize it. TVA estimates that change cut the peak demand by 3.5 percent from among just EPB and the four other biggest TVA distributors in the past couple of years.

"We do not expect to get back to the historic peak level [reached in 2006] until 2024 -- and that's before we apply the energy and demand programs that could further limit the growth in demand," Thomas said.

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340.

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(c)2013 the Chattanooga Times/Free Press (Chattanooga, Tenn.)

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