by Craven Crowell, Chairman
Thank you, Sissy.
I am extremely gratified to see many of the same people who joined us at last year's meeting. Last year, our goal was to introduce you to TVA, to let you know who we are, what we are about, and where TVA is heading. Your feedback indicates that many of you now have a good understanding of the Tennessee Valley Authority.
You know that TVA, a government-owned corporation, is the largest single electric-power generator and wholesaler in the nation, and one of the most efficient.
You know about the legislative "fence" that surrounds TVA's service area and that TVA's power program is 100% self-financing.
But TVA is more than simply a large and efficient utility. TVA is an influential participant in the utility industry restructuring debate, which will ultimately define the competitive landscape. This year, we want to discuss how the strength of TVA's relationships position TVA to succeed in a competitive marketplace. TVA's relationships -- not only with our customers in the Tennessee Valley, but also with our investors worldwide, with our IOU neighbors, and with Congress -- are the key to TVA's success today and in the future.
II. TVA Report Card: Financial Flexibility and Operational Excellence
First let me update you on TVA's achievements.
Five years ago, when I assumed the Chairmanship of TVA, TVA was building four nuclear units, its debt was increasing at about $1 billion a year and there was no strategic plan for the future.
My focus has been to position TVA as well as possible for the onset of a fully competitive energy marketplace. TVA ended its nuclear construction projects, reduced its workforce and raised productivity, achieved a ten-year price freeze resulting in a 15% average price decrease, and capped and aggressively refinanced its debt.
A year ago, I told you that TVA's strategy moving forward was to ensure financial flexibility and maintain operational excellence in preparation for competition.
Let's take a look at the TVA report card.
A. Financial Flexibility
In 1996, TVA completed its nuclear construction program, permitting us to significantly decrease our capital expenditures and cap the debt.
In fact, last year, for the first time in thirty-five years, TVA reduced its debt by $350 million. I am pleased to report that TVA is on target to reduce its debt, cumulatively, by $1 billion by the end of this fiscal year. Debt reduction is a key feature of the 10-year Business Plan approved by the TVA Board in July 1997. Our 10-year Plan is designed to ensure that TVA remains financially sound and fully competitive in a restructured marketplace. CFO David Smith, in his remarks, will highlight the 10-Year plan and TVA's progress against it to date.
B. Operational Excellence
Thanks to the dedication and hard work of TVA's 14,000 employees, TVA's power system is operating better and more efficiently than at any time in TVA's history.
TVA is generating more power. Our total generation from coal, hydro, and nuclear has increased 66 percent over the past decade.
Capacity factors are up. TVA's net nuclear capacity factor was 86% last year. And even with this high capacity utilization, TVA's nuclear plants continue to be rated among the industry leaders in INPO Performance and SALP Ratings, and have achieved some of the best refueling outage records in the U.S. Ike Zeringue, our Chief Nuclear Officer, has been a member of TVA's nuclear team since 1989. His leadership has been instrumental in achieving this record, and I am confident that he and his team will set new records for us again next year.
In 1997, TVA improved the availability of its fossil plants, which again provided over 60% of TVA's generation.
And, of course, our hydro system, the envy of every utility in the nation, continues to operate at near 100 percent availability. While TVA plants are setting continuous operation and reliability records, our production costs still place TVA among the lowest-cost utilities in the nation.
In 1997, TVA's nuclear plants generated 19% more electricity than in 1996, while TVA's average cost of nuclear production decreased.
In 1997, the average production costs of TVA's fossil and hydro plants also decreased.
One of the most important elements of industry restructuring, as we have seen over the past year, will be to ensure reliable service. We improved system reliability 26 percent in 1997, achieving the least amount of interruption time ever measured on our transmission system. We also completed several new capital projects to strengthen the reliability of the system.
Last year, as many of you know, we proposed that TVA's appropriated programs -- flood control, navigation, land and resource management, environmental research and economic development -- be zeroed-out by fiscal year 1999. Well, the trial balloon floated by TVA and the Administration was quickly deflated by members of the Tennessee Valley Caucus who wanted continued tax-funding for these programs. TVA learned that Congress and the people of the Tennessee Valley feel strongly that TVA should continue its historic stewardship of the Tennessee River. In fact, the people of the Tennessee Valley reassured us that they believe TVA can manage the river and other resource responsibilities better and more efficiently than anyone else.
TVA worked closely last year with the Administration to have funding -- $70 million -- restored in FY 98 for our appropriated programs. TVA is currently working with Congress to determine how TVA's appropriated functions -- less than two percent of TVA's total operating budget -- will be funded in the future. TVA and the Administration have requested continued funding from Congress for the Resource Group functions. I am confident that we will arrive at a workable solution with Congress.
III. TVA's Business Strategy
TVA's business strategy is still focused on preparing for competition. Ensuring financial flexibility and maintaining operational excellence are critical elements of TVA's transformation from a regulated to a market-driven business. Our 10-year Plan is designed to reduce costs and build customer allegiance and satisfaction for maximum flexibility in a competitive environment.
TVA will continue to exceed industry operating performance standards by making the basics a priority, continually looking for ways to streamline processes and lower costs, and ensuring that our workforce is well-trained.
TVA will continue to reduce costs by reducing operation and maintenance expenses, controlling capital expenditures, increasing the utilization of existing plants, and reducing its debt.
We recognize that the transition from a regulated monopoly to a competitive marketplace will require TVA to develop new proficiencies. TVA's management team will continually improve its organization in response to the changing competitive landscape. For example, over the past couple of years, TVA has established new marketing, risk management and investor relations functions to meet the needs of a more competitive marketplace. TVA has also implemented programs to reinvigorate TVA's culture to successfully compete in an increasingly deregulated environment. All TVA employees will participate in these programs by the end of FY 2000.
IV. TVA's Competitive Position
TVA's future success, built on a sound business strategy, will depend to a significant degree on TVA's ability to leverage its relationships in the Tennessee Valley.
TVA enjoys excellent partnerships with the 159 distributors of our power. TVA has launched a number of initiatives aimed at strengthening our relationships with customers.
TVA is committed to working with our customers to address contract issues and to achieve win-win solutions. Flexible pricing options and variable contract terms are being implemented. And last month TVA announced plans to partner with interested TVA distributors to reduce the cost of natural gas.
At the same time, TVA's 10- to 15-year contractual agreements with distributors provide a significant degree of stability in the face of uncertainty about the timing of full competition. Our distributors in Paducah and Monticello, Kentucky, and in Ft. Payne, Alabama, recently considered changing power suppliers. After thoroughly examining their options, all three signed a contract with TVA. TVA has very strong relationships with our customers, and we are working closely together to preserve the integrated power system we have built over the past 60 years.
Retail customer growth rates in the Valley continue to be strong. The "big 5" distributors increased their customer base by 2% over the past decade. All other distributors achieved a growth rate of 3.7 percent over the same period.
TVA's location -- a natural Southeastern transmission hub -- and our prices match up favorably with potential competitors. Based on these characteristics, TVA, last month, was chosen by the Chicago Board of Trade as an interface point for electricity futures trading.
Low-cost generators will succeed under competition. The average residential price for TVA power is 1 cent per kilowatt-hour cheaper than the regional average, and over 2 cents per kilowatt-hour cheaper than the national average.
And I'd like to point out that we are still quite competitive, even with the new price increase. TVA's goal is to ensure that TVA is the power producer of choice for distributors in the Tennessee Valley and for whatever markets become available to us.
V. TVA and Industry Restructuring
TVA's future success is unquestionably linked to how utility restructuring plays out on the political front. Fortunately, TVA is fully engaged in the national debate over electricity deregulation.
Several years ago it looked like industry deregulation would come quickly, before anyone was truly ready. Now the process is moving more deliberately. The industry continues to move in the direction of competition, and a number of states with high electricity rates are forging ahead, but it may be some time before a comprehensive law makes its way through Congress. In Tennessee, the state Assembly has begun to look at the issue of utility deregulation, but I do not anticipate any action in the near future.
Lawmakers are discovering that the $210 billion electric-utility industry is too complicated and too important to every facet of American life to risk making mistakes. Electricity restructuring is more complex than airline or telecom deregulation. And consumers have not benefited to the extent heralded before each of those legislative reforms were enacted. Comprehensive telecom restructuring took eight years to pass. The 1996 Telecommunications Act, however, has failed to promote meaningful competition in local phone or cable service to date and has prompted some phone companies to neglect rural customers in favor of more profitable urban and business markets. Markets fail, but there is little room for error in the market for electricity -- an essential service that must be universally accessible and affordable. Public power entities like TVA are ideally suited to be advocates for and to protect the fundamental public interest in electricity generation, transmission and distribution.
Let me briefly review the status of federal restructuring initiatives. Last year, the House held more than twenty committee or subcommittee hearings on restructuring issues. The House Commerce Energy and Power Subcommittee, led by Representative Dan Schaefer of Colorado has yet to reach a consensus on issues such as stranded cost recovery, a date certain for retail competition, and federal/state jurisdiction. On the Senate side, Senator Murkowski, chairman of the Committee on Energy and Natural Resources, held a number of workshops on restructuring issues in 1997 and plans to hold more this year, with the participation of the Administration, before convening any legislative hearings.
Congress has realized that electric utility restructuring is an extremely complex issue and must be approached carefully. Full retail open access is likely to result in a "leveling" of power prices across the U.S. This would result in a lower price of power for higher-cost states, but it would cause an increase in prices for lower-cost states. This obviously raises regional issues for legislators that will make it difficult to get agreement on national restructuring legislation.
The Clinton Administration has asked the Department of Energy to draft proposed restructuring legislation. DOE has convened a Tennessee Valley Electric System Advisory Committee of TVA stakeholders to make recommendations on TVA's role in a restructured competitive electric industry. Bill Museler, TVA's Executive VP of Transmission & Power Supply, represents TVA on the Committee, which is expected to have a report soon.
Two points about TVA's role in a restructured electricity market are clear: 1) TVA will remain a public enterprise -- owned by the government and possessing the flexibility and initiative of a private corporation -- and 2) TVA will continue to operate as an integrated whole -- with the river and power system working together. TVA and our distributors are also working closely with the TVA Congressional delegation, key Committee members, and the Administration to ensure that any comprehensive federal restructuring legislation is also fair to TVA and fair to the Tennessee Valley.
Fairness means, among other things, that 1) all TVA customers enjoy the benefits of retail competition; 2) that TVA's traditional fence is lowered in both directions; 3) that TVA be permitted to recover stranded costs from customers who choose to leave TVA's system; and 4) that TVA is permitted to operate under tax policies that give full and fair consideration to TVA's nonprofit operations and existing tax-equivalent payments.
TVA is actively engaged to make sure that any legislation, whenever or however it comes about, 1) is fair to public and private power; 2) is fair to all regions of the country; and 3) fosters all utilities' responsibilities to consumers for reliability, universal access, environmental stewardship and economic development. I am confident that any comprehensive restructuring legislation will address TVA's concerns.
One of TVA's first directors said, "TVA is controversial because it is consequential." TVA is justifiably proud of its 65-year history of managing the Tennessee River Valley and providing universally affordable, accessible and reliable power.
You know TVA is large and efficient. Now I hope you also realize that TVA is well-positioned through its strong relationships to compete successfully in the energy marketplace today and tomorrow.
Now David Smith, our Chief Financial Officer, will discuss TVA's competitive position in more detail. .
Craven Crowell is Chairman of the Tennessee Valley Authority
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