Free Market May Overload TVA Utility

THE nation's second-largest nuclear utility - the Tennessee Valley Authority - may face fiscal overload if Congress frees it to compete with neighboring utilities.

That's the bottom line of a new study by the US General Accounting Office (GAO).

For the more than 7 million people in the seven states TVA serves, this could mean higher electric bills. For American taxpayers and a deficit-conscious Congress, it could foreshadow a federal bailout. And for nuclear-safety advocates, this may mean safety measures will take a back seat to cost control.

TVA doesn't face an immediate cash-flow crisis, the draft study notes. But TVA is $26 billion in debt and has $14 billion worth of unfinished nuclear-power plants that aren't included in the utility's electricity rates. These and other long-term factors could help give TVA's potential rivals an edge, the study says, if they are allowed to compete in TVA's market - now a regulated monopoly - and TVA is allowed to compete in their markets.

Congress's watchdog agency is expected to release the report within the next few weeks.

The GAO's report comes at a time when states from coast to coast are deregulating utilities. By allowing industrial and residential customers to shop for the lowest-price power they can find, states hope to see energy costs fall - along with corporate threats to move to states with cheaper energy costs.

TVA officials are asking Congress to lift the statutory barriers so it can compete in this new environment.

Members of Congress called for the study following House hearings in March 1994. They were the first oversight hearings for TVA in years, says a congressional source. And they raised several concerns, he says. ''TVA was reaching its $30 billion debt ceiling. We were really concerned about TVA's management. It acted as if it was autonomous and didn't need oversight.''

Since then, several lawmakers have proposed eliminating all federal funding for TVA's nonpower activities, such as environmental research programs and flood-control efforts. Some members of Congress also have introduced amendments to privatize the utility.

When asked about the GAO's year-long effort, a TVA spokesman says his agency has nothing to add beyond its written comments to be included in the study.

Among them, TVA criticizes the GAO for comparing its financial structure with those of nearby investor-owned utilities, which can issue stock to pay for major projects. TVA says the result makes its financial position seem worse than it is. In addition, TVA says that once two trouble-ridden nuclear plants - Watts Bar 1 and Browns Ferry 3 - come on line by early 1996, it will have less of a need to borrow money to pay for such big-ticket construction.

The GAO's conclusions also contradict those of Palmer Bellevue, a division of Coopers & Lybrand. In April, the consultants reported that despite TVA's large debts and history of problems with its nuclear program, the utility can compete in a deregulated market.

But the GAO is not the only organization to question TVA's ability to compete. In May, Standard & Poors gave a $1 billion TVA bond issue a AAA rating. In doing so, however, S&P noted that the rating is not an indication of the utility's financial strength. Instead, it reflects the rating service's view that the federal government will back the debt, even though it is not legally bound to do so.

S&P also described TVA's electrical-generating operations as having a ''high fixed-cost burden,'' resulting from its debt, ''significant challenges remaining under its nuclear program, and higher marginal costs of production than surrounding competitors.''

TVA was started in 1933 as an independent, government-owned corporation. In 1959, Congress enacted measures that require TVA to be self-supporting. Congress also gave the utility the authority to borrow money and restricted its sales to its traditional geographic base.

Like other utilities, TVA built nuclear power plants in the 1960s to help meet energy needs. But the oil shocks of the 1970s and the accompanying recessions accelerated conservation efforts. Demand for electricity fell.

TVA has canceled eight of 17 plants it planned to build after investing almost $5 billion in them. TVA wrote off the costs and recouped the expenses through higher rates. Even so, TVA's current electric rates are lower than many of its competitors. Residential customers, for example, pay about 5.9 cents per kilowatt-hour; industrial customers pay 4.7 cents per kwh.

As of last March, three of the remaining units were operating, two were under construction, and four have been mothballed.

The GAO acknowledges that TVA has taken steps to try to improve its financial outlook. By mothballing the four plants, the authority has avoided punching through a $30-billion debt ceiling set by Congress. It has refinanced debt at lower interest rates and set an internal debt ceiling just below $30 billion. And it has slashed its work force over a six-year period by 50 percent, from 34,000 in 1988 to 16,500 in 1994.

Other factors, however, are weighing against those efforts, according to the GAO. Among them: looming costs of upgrading TVA's existing hydroelectric and coal-fired plants.

If the GAO, TVA, and Standard & Poors agree on anything, it is the importance to TVA's financial plans of bringing the two units under construction - Watts Bar 1 and Browns Ferry 3 - on line. Browns Ferry 3 operated for eight years before being shut down in 1985 for operating and maintenance problems. In 1985, TVA certified to the NRC that Watts Bar 1 qualified for an operating license. But it didn't get one. Employees filed more than 5,000 safety concerns dealing with management issues as well as construction problems. According to the report, numerous deficiencies remain.

Nor is TVA's record for operating nuclear plants good, the GAO says. Since their startups, the utility's five licensed nuclear plants have a combined average lifetime capacity factor of 38 percent. Figures compiled by the Nuclear Energy Institute in Washington are more generous. The NEI shows a combined lifetime capacity of 52 percent for the five plants. The industry average was 67 percent.

Moreover, design flaws in a cooling tower will automatically cap Watts Bar 1's summertime capacity factor at about 75 percent, says one former TVA official.

The draft does not make specific recommendations. But it does lay out several options. One is to raise electricity rates, although that would undercut TVA's efforts to be competitive. As for Congress, the GAO says lawmakers could tighten oversight of TVA's management, explicitly back TVA's bonds, forgive some or all of TVA's $4.2 billion debt to the federal government, lower interest rates on that debt, or remove the legal barriers to competition, as TVA asks.

The Tennessee Valley Authority doesn't face an immediate cash-flow crisis. But it is $26 billion in debt.

- Draft copy, GAO study