Obama and Reagan Agree: Divest the Tennessee Valley Authority

October 17, 2013

Buried in the Obama administration's fiscal year 2014 budget is a commitment to undertake a "strategic review of options for addressing the Tennessee Valley Authority's (TVA) financial situation, including the possible divestiture of TVA, in part or as a whole," says William Newman, senior adviser to HC Project Advisors in Washington, D.C.

The TVA's primary function is power generation and transmission, hardly a necessary federal function given the ubiquity of private sector power provision in this country. In addition, TVA provides navigation maintenance on and flood damage reduction from the Tennessee River and its tributaries.

The administration's rationale is eminently reasonable.

  • First, it notes that, "Reducing or eliminating the Federal Government's role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation, can help put the Nation on a sustainable fiscal path."
  • Second, the TVA already has $22.3 billion in debt outstanding and the administration estimates that its current capital investment plan includes more than $25 billion of expenditures over the next 10 years, which could result in it exceeding its statutory $30 billion debt limit.
  • As TVA notes in its most recent annual report, "TVA faces potentially large capital requirements to maintain its power system infrastructure and invest in new power assets, including generation assets using cleaner energy sources."

Divestiture, in whatever form, would bring two major benefits to taxpayers.

  • First, according to the Congressional Budget Office, a divestiture of TVA would avoid adding roughly $10 billion to the federal deficit over the next decade through additional capital outlays. Absent divestiture, TVA's increased capital expenditures are scored in the federal budget as increased outlays, thereby increasing the deficit.
  • Second -- and more importantly -- a divestiture of TVA avoids another bailout of a "Too Big to Fail" government sponsored enterprise. By law, TVA's bonds are not backed by the federal government; nonetheless they dropped in value on the day of the announcement of the administration's budget because investors believe that, regardless of the statutory language, the federal government would ultimately bail out the TVA if it were unable to honor its debts. A divestiture would make such a taxpayer bailout considerably less likely.

How then might the federal government divest TVA's power generation and transmission functions? Three options seem worth evaluating: a public offering, an asset sale and a divestiture to the states.

Source: William Newman, "Obama and Reagan Agree: Divest the Tennessee Valley Authority," Reason Foundation, October 8, 2013.

 

Browse more articles on Tax and Spending Issues