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Popular wisdom holds that safety concerns, fueled by the 1979 accident at Three Mile Island, Penn., eventually shuttered nuclear construction by the Tennessee Valley Authority—the most ambitious commercial nuclear power program in United States history. Not so, says David Freeman, the former TVA chairman largely credited with putting the brakes on the utility’s nuclear construction in the 1980s. “We had to shut them down, even though they were under construction, because they cost too much,” he recalls. “We didn’t shut those plants down on account of their being unsafe. That should have been a reason, but it was the economics.”

Some 20 years later, as TVA still carries most of the debt from its first nuclear program, the nation’s largest public utility is poised to incur further debt to launch a second wave of nuclear construction—less ambitious, to be sure, but with the same party bearing the financial risk: the ratepayer inside of TVA’s “fence.”

The fallout

Ratepayers on both sides of that fence paid for the past failures of nuclear power; Three Mile Island was just the final blow to an entire industry in meltdown. Nationwide, utilities that had invested in the promise of clean, relatively inexpensive nuclear energy instead faced spiraling cost overruns compounded by stricter federal regulation. But because of TVA’s unique political nature, the fallout from its first nuclear program was particularly heavy. Congress, charged with overseeing the nation’s largest public utility, did not have the will to cancel massive construction projects that, though financially disastrous, nonetheless translated into jobs for cash-strapped rural areas. The result was a $27.7 billion debt—most of which is still with TVA, and the cost of which has been shouldered entirely by the utility’s ratepayers, who don’t have stockholders to share the burden.

Freeman, now an outspoken opponent of nuclear energy, says it was the Tennessee Valley’s businesspeople, frustrated with debt-related rate hikes, who finally gave him the leverage to cease TVA’s nuclear construction. “It took a lot of political courage to shut down those plants with those thousands of construction workers put out of a job, and I’m very proud that we had the integrity to do it,” he says. “But if we hadn’t, TVA would be broke now.” In fact, numerous analyses—ranging from the halls of academia to the General Accounting Office—have depicted the utility as perilously close to “broke.” As recently as four years ago, economists Dennis Logue and Paul MacAvoy assessed TVA’s balance sheets through fiscal year 2000 and concluded that if TVA were a private utility, answerable to stockholders, it would be considered “virtually insolvent.”

Now, recent developments at TVA are inviting more overt comparison to private utilities, which in 2004 served as the model for legislation updating the governance of the 74-year-old, self-funded federal agency. “A committee of three should not be running an $8 billion-a-year business, which is what a utility is,” says Sen. Lamar Alexander, who was a strong supporter of the legislation crafted by then-Sen. Bill Frist. As of last year, TVA’s three-director board was replaced by a nine-member, part-time board, which oversees Tom Kilgore in the newly created position of CEO. As of March, that new governance was still hammering out details of a “strategic plan,” which Kilgore says will be “evolutionary, not revolutionary.” Revolutionary or not, the plan will depart from TVA’s more recent long-term strategies, which sought to reduce its debt (albeit with only marginal success). Board member Dennis Bottorff, a primary architect of the utility’s new financial strategy, says his 30-plus years as a Nashville banker give him a broader perspective on TVA’s debt, which he insists cannot be singled out as an indicator of the utility’s health. While its debt currently stands at some $25 billion, for example, its debts-to-assets ratio has declined—a truer measure of TVA’s financial viability, he says.

Recasting the debt in relative terms is essential to TVA’s nuclear future, which is set to begin this month with the restart of a long-idle nuclear reactor at TVA’s Browns Ferry plant in Athens, Ala. If the restart is successful, TVA hopes within a decade to finish a partly built reactor at its Watts Bar plant in Spring City, Tenn., and to build two new reactors, featuring as-yet-untested technology, at its Bellefonte site in Hollywood, Ala. While TVA paid for the $1.8 billion Browns Ferry restart out of operating revenue, Kilgore says TVA will incur new debt to help fund new nuclear construction.

Kilgore and others at TVA are quick to differentiate this new nuclear program from its predecessor. TVA historically has blamed the failures of its first nuclear program on its magnitude—the near-simultaneous construction of 17 reactors. They say their second foray into nuclear construction will be far more modest and sequential than their first. And while Alexander has hailed the utility’s “willingness to be a pioneer in the area of nuclear power,” Kilgore rejects the use of the term “pioneer” to describe TVA, whose return to nuclear construction he considers relatively cautious.

Still, the restart of Browns Ferry 1 is significant: It is the first commercial nuclear reactor to come online in the United States since 1997, when TVA’s Watts Bar Unit 1 in Spring City, Tenn., started up $7 billion and 23 years after groundbreaking. And it represents TVA’s renewed investment in an industry once seemingly ruled by Murphy’s Law.

Digging a hole

The day the Three Mile Island story broke, Dennis Logue, then a professor of economics, watched the television coverage from a hotel lobby in Hanover, N.H. He was between meetings with the vice president of the board of General Electric, which held a number of fixed-price contracts to build nuclear plants. “He said, ‘I hope nobody’s hurt, but I’m glad we’re not going to have to build any more of these plants, because we’re losing money on them,’” Logue recalls.

Although no one was injured at Three Mile Island, it reawakened Americans’ long-simmering fear of nuclear energy and inspired tougher, costly Nuclear Regulatory Commission standards. The accident served as a catalyst to eventually shutter new nuclear construction in the United States. But as private utilities succumbed to financial pressures to stop nuclear investment, TVA lumbered along, unable to stop the momentum of projects running out of control. When Allan Pulsipher became TVA’s chief economist in 1980, Watts Bar 1 was in its seventh year of construction, and the project records he reviewed indicated that the number of man-hours to complete the project was actually growing each year. “It was your classic case of when you’re in a hole, don’t continue to dig,” Pulsipher says. By the time Watts Bar 1 came online 17 years later, TVA had dug itself into a hole nearly $28 billion deep.

“It was an unending situation of cost overruns,” Pulsipher says. “And then once it became apparent—at least to people in the agency—what was happening, and it became politically possible to question nuclear power, then the resistance to canceling those plans was not on TVA’s part. It was on the part of the political leadership that was in control.”

Whose agency is it, anyway?

According to Pulsipher, TVA’s money troubles began with internally generated, low-ball project cost estimates, and then were compounded by TVA’s relative exemption from government scrutiny. While its balance sheets are subject to review by several bodies, including the GAO and the Office of Management and Budget, TVA’s only actionable directives must come from Congress. And legislative oversight of the utility has been sporadic at best, say critics like Stephen Smith, executive director of TVA watchdog organization Southern Alliance for Clean Energy. Smith says the recent Republican-controlled Congress seemed especially reluctant to scrutinize the utility, so as a result, “TVA makes a decision, and then it regulates itself. It has no accountability.” In pushing management reform at TVA, Frist and Alexander implicitly acknowledged long-standing questions about accountability; their legislation in the 2005 Consolidated Appropriations Act required the utility to file its first 10-K with the Securities and Exchange Commission last December.

“I think they’re getting better in some of their reporting,” Smith says. “But who is holding them accountable? Who is taking those reports, scrutinizing them and then bringing the decision-makers at TVA to account for what they’ve done? Where is there an honest discussion about whether TVA could spend $3 billion and moderate demand over spending $3 billion and building a new facility?” “The SEC looks at [the 10-K] and sees that it complies with its format,” Kilgore says, “but if somebody’s going to be bothered, it’s probably going to be a congressman or a senator or someone like that.” Alexander says he’s unclear who’s charged with assessing the exhaustive financial report: “If [TVA] files with the SEC, I’d assume it’s the SEC. TVA would have to answer that question.”

Ultimately, it’s hard to say whether Congress represents any more substantive oversight of TVA now than it did during the two decades the utility was digging its expensive hole. Alexander, who co-chairs the TVA Congressional Caucus, says TVA’s new governance clarifies the lines of accountability—from CEO to board to Congress—but warns that Congress should not “micromanage” TVA. There does seem to be an inherent conflict in Congress’s dual role as both enforcer and advocate, especially in the Tennessee Valley. During the interview for this story, Alexander both touted TVA’s “good strategic plan” and mentioned that he hadn’t yet seen it.

Liability or security?

Congress also serves as de facto advocate for another group—TVA’s ratepayers, who could end up paying for further debt service as well as any cost overruns involved in new nuclear construction. Unable to sell equity, TVA must sell bonds to finance capital projects; debt service it can’t absorb is passed along to its ratepayers, who have no equivalent of a utilities board to arbitrate rate-setting.

As a publicly elected body, Alexander says, Congress is accountable to and an advocate for TVA’s ratepayers. But he adds that legislators should stay out of rate-setting. “We don’t need 15 congressmen micromanaging individual decisions,” he says. That hands-off policy was especially painful for ratepayers in the wake of TVA’s first nuclear program, when the utility raised rates 88% in 10 years to recover capital costs of several cancelled projects, according to the Logue/MacAvoy report.

Fortunately for Congress and for TVA, rates lately have been an issue only in a relatively small part of the TVA utility area. Except in Kentucky, where a handful of distributors have debated jumping the TVA fence, the utility’s rates have fallen in line with rates just outside the fence. It has reduced the sting of debt service through modest debt reduction as well as refinancing its high-cost debt, thanks to recent, historically low interest rates. As a result, ratepayers’ share in the debt service has fallen from 34 to 14 cents per dollar since 1997. Jack Simmons, president and CEO of the Tennessee Valley Public Power Association (TVPPA) that represents TVA’s 158 distributors, says he’s not bothered by the level of TVA’s debt. In fact, he says, he regards the debt less as a liability than as security against a buyout, like the recent $45 billion takeover of utility giant TXU Corp. by private equity firms. But Freeman warns that new nuclear debt will end up costing TVA’s ratepayers: “The most important point you can make to the business community is that if they think their electric rates are too low, and they want to see them increase, this is a sure bet; they need to support this nuclear program.”

To the last watt

Freeman and Smith, along with other environmentalists, suggest TVA could save itself money and trouble by following the lead of California, which largely resolved its own energy crisis through demand-side initiatives. (Smith has called TVA’s “Green Power Switch” program little more than political window dressing.) “Perhaps we haven’t been as committed to that as we should have been,” Kilgore concedes, adding that TVA’s newly written peak-time conservation measures will be incentivized.

But even the most ambitious initiatives won’t fulfill TVA’s future generation needs, Kilgore says. Its five working nuclear reactors operate near capacity, its hydroelectric potential is finite, and according to TVA, the high ratio of cost to output doesn’t justify large-scale use of ultra-green solar and wind power. Clean-burning natural gas is currently triple the cost of coal, and Kilgore says clean coal gasification technology still needs to be refined. With 57% of its current generation from fossil fuel plants, TVA has spent $4.6 billion just to stay in line with the EPA’s tightening air pollution controls requirements and almost certainly faces more restrictive legislation in the future. While retrofit technology will stretch the lifetime of some coal-burning units by decades, Kilgore says, about 10 of TVA’s 59 coal units are candidates for decommissioning within the next 10 to 20 years. Already, TVA meets peak demand with $1 billion annually in purchased power, which in 2006 translated roughly to 1.26 million homes worth of power. (Kilgore says that cost necessitated its two most recent rate hikes.)

A successful restart this month at Browns Ferry, Kilgore says, would significantly relieve the pressure; TVA’s electrical output will increase by 3%, enough to serve 650,000 additional homes. And if the calendar and the budget can gauge success, Browns Ferry 1 looks good to go. Weeks before planned startup and five years after the project was approved, it appeared to be on schedule and reasonably close to its original $1.8 billion budget. The significance of that fact isn’t lost on Kilgore. “No nuclear project that I know of in the ’70s or ’80s went the life of the project without having to have several revisions,” he says. “We have all gotten a lot better at this.”

The anticipated success of the Browns Ferry restart inspired TVA’s new governance to seek additional nuclear generation, Kilgore says. Last year, the board commissioned a study, due this summer, of the completion of the never-finished Watts Bar unit 2, anticipated to cost about $2 billion. Meanwhile TVA joined NuStart LLC, a consortium of utilities formed to test the Nuclear Regulatory Commission’s new, streamlined licensing for next-generation reactors. NuStart chose Bellefonte as a likely building site for two as-yet-untested Westinghouse AP-1000 units. NuStart would split with the Department of Energy the $50 million licensing cost, which TVA would pay back if the plants are built.

Assuming other generation sources remain constant, TVA could increase its percentage of nuclear generation from 29% to 41% of its energy portfolio within a decade. TVA’s stated goal is to have the largest nuclear generation capacity of any utility in the United States.

Risk vs. reward

Industry advocates point to heavily nuclear France and Japan as evidence that nuclear technologies can operate reliably and safely on a large scale. Currently, TVA’s nuclear generation is highly reliable, operating at about 90% capacity. Twenty years ago, Pulsipher says, 60% was considered optimal. “That makes a big difference,” he says. “When you’ve got that much money invested, you want to keep that running as much as you can. So granted, [they] know how to run the older generation plant. Now you’re talking about a much different situation. When they build new plants or complete old plants, do they know how to do that efficiently? I think that’s an area where the public needs some independent analysis.” TVA does seem to be shedding the exclusivity that by all accounts exacerbated its past nuclear headaches. While its old reactors were engineered and built in-house, TVA would likely contract out all but project management, Kilgore says. Still, contractors don’t guarantee against cost overruns. (“The people who are going to be doing this are Halliburton once removed,” Pulsipher says. “They don’t lose money on contracts.”) The Browns Ferry 1 restart has been largely outsourced, as well.

And while TVA once generated its own, famously inaccurate cost estimates for nuclear projects, it commissioned industry experts Bechtel Power Corp., Sargent & Lundy LLC and Washington Group to assess completion of Watts Bar 2.

Even with the best engineering and planning, though, there is heightened statistical probability of problems or accidents in the “infancy” stage of a nuclear reactor, especially one built with new technology, says Dave Lochbaum of the Union of Concerned Scientists. Kilgore notes that Browns Ferry 1 and Watts Bar 2 are technologically similar to other working reactors on site; and while TVA builds Watts Bar 2, he says, other large utilities will be the real “pioneers,” racing to build next-generation technologies to reap new government incentives not available to TVA. Still, as TVA’s portfolio is weighted more heavily toward nuclear generation, it buys into more of the risk unique to nuclear energy—that is, that a single safety or terrorist incident involving a reactor anywhere in the world would effectively sideline all commercial nuclear generation. Rep. Jim Cooper says he’s come to the conclusion that nuclear power appears to be TVA’s best clean-energy option right now. (Even some environmentalists quietly agree, he says.) But he has reservations: “TVA will almost single-handedly have revived the nuclear industry in America if this works. If it doesn’t, and we have another Three Mile Island, then the nuclear industry is dead in America for generations. So there is a tremendous amount at stake in Browns Ferry, and apparently soon at Watts Bar.”

Freeman questions the wisdom of investing in “a second nuclear era that has no legs to it. I can’t really fault the TVA organization for going nuclear the first time—but to go back there after TVA’s experience? The only thing new is the history we forgot.”

The debt redux

TVA’s failure to meet past debt-reduction goals is a bit of history board member Bottorff says he prefers not to revisit. “I would really rather focus on the future,” he says—and a nuclear future almost certainly precludes overall debt reduction.

The utility’s most recent financial strategies were revised before they ran their course. A plan unveiled in 1997 aimed to cut the utility’s debt from $27.7 billion to $14 billion by 2007; currently the utility’s long-term debt stands at $23 billion, plus another $2 billion in financing obligations. But last year it announced a new strategy, with a goal of reducing its debt by nearly $8 billion—about a third—by 2016. Then, early this year, TVA told the OMB it would likely reduce its emphasis on debt reduction to focus on new power generation and pollution controls. Kilgore says TVA still plans to reduce its legacy debt—its latest pay-down estimates to the OMB were $529 million this year and an additional $553 million in fiscal 2008. At the same time, he said, TVA likely would incur new debt to help pay for completion of Watts Bar 2, and new construction at Bellefonte could necessitate a raise in TVA’s $30 billion debt ceiling, set in 1979.

“We’re paying down some of these older plants that are being depreciated, and we’re paying down some debt. If you look at how much debt we’re paying down, [within a decade] we may have generated enough headroom under our current ceiling. We’d have to have some new debt, but whether or not we’d have to have a new debt ceiling is still, I’d say, highly debatable.”

TVA’s willingness to publicly reverse course on the debt reflects the new governance’s strong conviction that previous strategies—and criticisms—have failed to assess TVA’s debt in its proper context. “We are beginning to talk about debt not in absolute terms, but in terms of the sound financial ability for TVA to be able to service debt—and of what the proper mix of equity to debt in an organization like TVA is,” Bottorff says.

TVA’s ability to service debt seems secure for now; as long as TVA operates essentially as an unregulated monopoly, with no equivalent of a utilities commission to deny rate increases, it will have the ability to pass the cost of debt along to ratepayers. Bottorff further notes TVA’s “cost of capital”—its ability, as a federal agency with a AAA bond rating, to incur debt at a relatively low interest rate. (It’s worth noting, however, that such a competitive advantage would be reduced commensurate with the scale of TVA's debt relative to that of other utilities.)

Most utilities are heavily indebted, with an acceptable debt load averaging 50% to 60% of assets, says economist Dennis Logue. And while changes in TVA’s reporting methods complicate a direct comparison of its 1997 and 2007 balance sheets, they indicate a decrease in the utility’s debts-to-assets ratio from 80% to about 73% over the past decade. From its 1997 high of $27.7 billion, TVA has cut its debt to just under $25 billion. During the same period TVA’s listed total assets have stayed relatively constant, at about $34.5 billion. (The increased value of Browns Ferry 1 has helped offset the 2001 write-off of the long-deferred Bellefonte and Watts Bar 2 projects.) Still, TVA is a highly leveraged business; with $31.6 billion in total liabilities, the utility has some $2.7 billion in equity. It’s hard to project how new nuclear construction would affect that mix, as increased debt would be accompanied by increased assets as new reactors come online—if all goes according to plan.

The Achilles’ heel effect

“If all goes according to plan”—in any analysis of TVA’s future, that’s the operative phrase. Kilgore and the new TVA board emphatically state their new strategic plan will facilitate their mission statement: “to provide reliable, low-cost, clean power to the Tennessee Valley.” The advocate for the Valley ratepayer, Bottorff says, “should be this board that raised its hand and swore to that mission statement.” Kilgore and the board’s dedication to ratepayer concerns seems genuine; Jack Simmons says while the utility’s former leadership treated TVPPA as “a necessary evil,” its new governance has been engaged and open—“not like political appointees at all.”

That new, voluntary openness—both to distributors and, increasingly, to independent counsel, suggest a true shift within the walls of TVA. But there has been no commensurate shift outside those walls, where the federal government appears content to let TVA regulate itself—shaky assurance for the ratepayer should things not go according to plan. For the TVA ratepayer—which includes virtually every business owner in Tennessee—the next few years should be ones of close attention, if not held breath, as TVA embarks once again into the nuclear arena. It’s a multi-billion-dollar endeavor that can be undone by one mishap—be it terrorist attack, human error or equipment failure. And whether deemed a necessary calculated risk or a regrettable retread of past mistakes, energy costs for an entire region are at stake.

Feedback: ruble@businesstn.com

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