TVA Customers Penalized by Bank Inflexibility
By Craven CroweIl
January 26, 1996
The Federal Financing Bank was created in 1973 with the mission of reducing the costs of borrowing for government enterprises, but it has since lost its way.
Today, the FFB is making it more difficult for federal corporations like the Tennessee Valley Authority to operate more efficiently, and it is costing the people of the Tennessee Valley millions of dollars.
TVA has made major strides in past few years to improve its performance in preparation for deregulation of the electric utility industry. For example, we bare held rates stable for nine consecutive years, ended a 28-year commitment to nuclear construction, and made plans to cap our debt. Aggressive management of TVA's debt in recent years has saved more than $300 million in annual interest expense,
In an effort to build on our success, TVA is seeking to refinance $3.2 billion it borrowed from the FFB in the 1980s when interest rates were much higher than today. This would save an additional $120 million per year, reducing TVA's need to borrow in the future and strengthening our financial position.
But officials of the FFB have rebuffed every effort to find an equitable way for TVA to repay the debt without penalty. This is surprising considering that the federal government is looking for innovative ways to raise money to avoid defaulting on government bonds.
In recent meetings with FFB officials, and in a subsequent written request to Treasury Secretary Robert E. Rubin, TVA presented these facts:
1. TVA began borrowing from the FFB in 1974 at the urging of the Treasury, based on representations that the program would be more flexible and more cost effective than public bond markets.
2. Under protest by TVA, the FFB In 1985 unilaterally refused to issue further debt with call provisions which allow early payment of debt.
3. Since 1993, many FFB borrowers have been allowed to have call protection on their loansthe very feature TVA has sought but was denied in 1985.
4. Many rural electric cooperatives and foreign governments have prepaid their FFB debt without penalty. If foreign governments such as Korea, Pakistan, Morocco, Thailand, El Salvador, Turkey and Sudan are allowed to pay off their debt, so should TVA, a wholly owned government corporation whose power program is entirely self-supporting.
The last point to be made, and certainly the most compelling financial argument on TVA's behalf, is that the FFB had already earned a profit of $1.5 billion on its TVA loan portfolio over the years, Including $250 million in administrative fees.
TVA is not the only government corporation having difficulty dealing with the FFB's policies.
Last month, the U.S. Postal Service sent strong signals its confidence was eroding when it began laying groundwork to sell bonds in the public debt market.
Although TVA has offered to pay a fee to the FFB to reconstitute its loans as callable, the suggestion has not received the attention it deserves. Treasury officials claim the fee would not represent adequate compensation for the $1 billion in penalty interest the FFB would receive over the remaining 12-year life of the debt.
These same officials also refuse to acknowledge that the $1.5 billion in profit the FFB has made from TVA since 1974 should be counted as compensation in determining the adequacy of TVA's proposal.
In the meantime, TVA customers continue to be penalized at the rate of $300,000 a day as the result of the inflexibility of a government entity that has strayed from its mission and become a profit center with little regard for making government more efficient.
Craven Crowell is Chairman of the Tennessee Valley Authority
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