The Role of the Public Power Company in the Deregulated 21st Century
by Craven Crowell, Chairman
Thank you for that very kind introduction, and good morning, ladies and gentlemen. It is indeed a great pleasure and an honor to be here today, and I'm grateful for this opportunity to discuss some of the issues surrounding deregulation of our nation's power industry, and how those issues impact the Tennessee Valley Authority.
TVA's headquarters, and my main office, is in Knoxville, Tennessee, which is lately known across the nation as the home of the college football champion University of Tennessee Volunteers and the defending champion Lady Vols basketball team. We're very proud of both teams. I understand that the Crimson women's ice hockey team is number one in the nation, which is a great accomplishment. I don't think UT will be competing with Harvard in that sport any time soon. But you never know.
Earlier today I met with some of the Nieman Fellows here at Harvard, which was a special pleasure for me. I was once the city editor of the Nashville Tennessean newspaper... in an earlier life... and during my years there I had the pleasure of knowing some distinguished Harvard alumni, including the famous Times reporter and historian, David Halberstam, and although he's not a Harvard alum, I had the privilege of working with Bill Kovach, a truly great journalist who's now curator of the Neiman Foundation.
Back in the early 1970s I also had a young reporter from Harvard named Albert Gore, Jr., whom many of you here might remember as one of the models for the Ryan O'Neal character in Love Story. I'm very pleased that I always gave him very good performance evaluations. Of course he always deserved them... He was a very good worker, as he still is.
This morning I'd like to talk about the role of public utilities, like TVA, in a deregulated economy. I'll try to keep my remarks general. Still, I'm most familiar with TVA, so I hope you'll forgive my spending a little time talking about TVA. I hope most of you are familiar with the Tennessee Valley Authority. But for any medieval and classical scholars who might have wandered in here this morning, let me offer a brief sketch of TVA's history -- or at least that part of our history that's relevant to the issues we're discussing today.
We're a public utility, 100 percent government owned, and we're the largest supplier of electricity in the United States. We're also a major employer, with 13,600 employees. We were created by the U.S. Congress in 1933 during President Franklin Roosevelt's first term. In fact, TVA was created just 37 days after FDR took office, so I think it's clear that the mission of TVA had a high priority for the newly elected president. FDR said that the Tennessee Valley Authority was to be "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise." So you can see, from the start, that TVA had something of a dual identity -- public ownership and public responsibilities, but the expectation that the company was to be fast on its feet, nimble and flexible, like a private corporation.
TVA was created at a time when America and much of the world faced enormous hardships. The Great Depression -- remember, this was 1933 -- was challenging whatever optimism remained after the catastrophe of the Great War. But leaders like FDR believed that human will, properly channeled, and organized on a grand scale, could conquer hardship and adversity.
Human will, harnessed by large-scale government works programs could -- the New Dealers believed -- reclaim the land, rebuild the shattered economy, and restore hope. These bureaucrats -- I guess that's what we'd call them today -- believed that a public corporation like TVA could save the poor and the destitute of the Tennessee Valley. So TVA was not created principally to provide electric power to the Appalachian farmers who lived in the remote hills of the Tennessee Valley. In fact, electric power was not even part of its original mission. TVA was created to rebuild a broken society, and that's exactly what it did.
Farmers needed to learn new methods of conservation so they could restore fertility to their barren farmland. Agricultural experts from TVA taught them. The rivers, prone to flooding and hazardous to navigate, needed to be tamed so they could serve the people who lived in their valleys. TVA engineers tamed the rivers.
TVA trained tens of thousands of poor farmers and gave them new skills. They built huge hydroelectric dams and sent electric power lines into parts of America that had never seen an electric light or used an electric appliance, and when electricity became a part of everyday life, experts from TVA helped teach energy conservation to the consumers of the power TVA produced. Think about that.
Long before conservation became fashionable, TVA was teaching people how to use less of what we make, not exactly part of a standard commercial business plan, but part of what we see as our public responsibility. Back in the '30s, TVA served the public good in thousands of ways and, most people would agree, helped break the stranglehold of the Great Depression. I like to think that TVA played a significant part in creating the modern economy of the United States and the prosperity we've enjoyed in the second half of this century.
But what about the next century? What will be the role of a public utility like TVA and public power companies in general in the deregulated 21st century? Public power now supplies 24.4 percent of the kilowatt-hours consumed by individuals and industries in the US.
Will we continue to supply a quarter of the nation's electricity under deregulation? And what about rates? The cost of electricity in the United States can vary between 4 cents per kilowatt-hour in Kentucky, to nearly 12 cents in New Hampshire. Electricity costs Harvard University -- I looked this up -- 10 cents a kilowatt-hour here in Cambridge, Massachusetts.
With that much variation from state to state, and region to region, the political pressure to level the national rate structure will be enormous. What role should public utilities play in that debate? As we wrestle with all of these questions, I believe the challenge for the public utilities will be to continue to embrace the dual identity Franklin Roosevelt envisioned 66 years ago. Public in fact, private in behavior -- solid and responsible, yet creative and competitive.
In this way TVA, and public utilities like ours, will set a standard for public responsibility against which private companies can be measured, even as we continue to provide our core product -- wholesale electric power -- at competitive prices. What will this mean in practice? Well, if we've learned anything in the United States in this last decade it's that deregulation does not automatically mean consumer benefit.
We're currently in the process of deregulating our telecommunications industry and, while we hope new competition will bring lower rates, the results -- so far at least -- have been mixed. The same with banks. Deregulation has, theoretically at least, made it easier for new banks to compete with established banks. But while thousands of new banks have been created, many of the big established banks have merged, meaning, for many people, less consumer choice, not more.
I guess we shouldn't be surprised to find that the "law of unintended consequences" applies to deregulation, just as it applies to everything else. So, after about a decade of experience, we've learned, I think, to approach the whole business of deregulation very carefully. Rushing headlong into a deregulated economy can, we've found, usher in new problems, even as it solves some of the old ones.
The key to measuring the success of deregulation is, and will be, of course, the degree to which regulatory change benefits the public. But how will this benefit be measured? And what should we look out for?
I would suggest that one of the greatest services public utilities can provide in a deregulated marketplace is vision, especially in the context of the public interest. Now the independently owned, private utilities might say that they are the ones who bring "vision" to the utilities industry. But I would challenge that view. In fact, competition -- especially in this era of "just in time" delivery -- often breeds a corporate vision that sees no further than the next quarterly report, or today's closing share price on the New York Stock Exchange, and this lack of vision, especially in our industry, can have very serious consequences.
Public power's vision, on the other hand, starts and ends with public responsibility. Let me give you an example. Next summer, if we're unlucky -- and let's hope we're not -- we could find ourselves seriously short of power in one or more major American cities.
We had some shortages scattered across the U.S. last summer, and we could find ourselves in even worse shape when the warm weather returns in July and August of this year. The impact on computers, medical facilities, and transit systems -- especially in the big cities -- could be catastrophic. Now, private utilities know that the American economy is increasingly dependent on electrical power, just as TVA does.
But their bottom-line calculations don't allow for the generation of a whole lot of excess capacity just because we might, in a heat wave, find ourselves running short. Right now, they might argue, construction of another nuclear plant or coal-fired facility won't produce the return on investment their shareholders demand. Surplus capacity is unsold inventory. It's "inefficient." At TVA, of course, we don't have shareholders. We have the public. So, while TVA doesn't build facilities for power production greater than the requirements of our service area, we do operate with a surplus to avoid a power shortage to our customers.
At TVA, we see it as our public responsibility to continue to provide a power margin for the Valley as the load continues to grow. Which is not to say that we couldn't actually run short of power in the Tennessee Valley this summer, or the next. We could. There's no telling just how high the temperature will rise, and for how long. (Someone else is in charge of the weather). But at TVA, we think long and hard about these issues.It's our responsibility... because we're a public utility.
Let me offer another example of the vision of the public utility. As far back as 1933, when TVA was created, it was clear that the system of streams and rivers that feed the Tennessee River -- and the Tennessee River itself -- could be both friend and foe to the people in the valley.
TVA was charged with the responsibility of managing the river -- first as a natural resource... and second as a power resource. In fulfilling this responsibility, our public utility has helped reclaim thousands of acres of farmland and stem the tide of seasonal flooding. Private utilities count on other government agencies to handle land and river management -- usually the Army Corps of Engineers.
But in the Tennessee Valley, water resource management is the responsibility of TVA, a public utility. Our public utility has also helped industries in the Tennessee Valley grow and prosper. We've helped arrange loans for small businesses, we've helped locate industrial sites, and we've provided technical expertise to start-up companies and major corporations who've chosen to make the Valley their home.
But as the deregulation debate heats up in the months and years ahead, I'm sure that some will question whether TVA or any public utility should continue to manage such a broad portfolio of public service. "That was fine during the 1930s," some will argue, "but we're a long way from the Great Depression. We don't need a TVA for the 21st century."
I would argue, in fact, that we will need public utilities more than ever. Even if deregulation succeeds in lowering electricity costs for most Americans (and I think everyone agrees that it's unlikely to reduce electricity costs for all Americans), there are still questions about the overall benefits of deregulation to the public. But let me be clear here.
TVA is pro-deregulation and pro-competition. The U.S. Government, in a Comprehensive Electricity Competition Plan published by the Administration last year, calculated that retail choice deregulation will cut electricity costs by about 10 percent, or about $100 dollars per year for a family of four. That's a significant savings and, again, as a public utility, we're in favor of cutting energy costs for the American people.
Deregulation has the potential to save billions in energy costs for commercial customers, which will make American industries more competitive in the global marketplace. This will benefit the entire American economy and, as a public utility, we support lower energy costs for business and industry, and let me be clear about one more important point. Public responsibilities will not -- and should not -- absolve public utilities of the requirement to operate efficiently and to compete fairly in the deregulated marketplace.
At TVA, we're proud of the fact that our production costs are third lowest among the nation's top 50 utilities, and we're hard at work, every day, finding new ways to bring those costs down even lower. But lower electricity costs alone are not the sole measure of the public good. If energy companies degrade the environment to produce cheaper electricity, is that a net gain or loss for the people who use the power and live on the land?
If a regional power company chooses to neglect its responsibilities to its local customers so as to make a bigger profit wheeling power to a distant market, is that a net benefit or loss for the nation as a whole? These are difficult issues now, and they will become even more difficult in the deregulated future. Public utilities, which serve the interests of the people -- not just corporate shareholders -- will provide a benchmark by which the performance of all power companies will be measured.
They will help to define "the public good" as it applies to energy production and distribution, and for this reason alone, they deserve their place in the deregulated marketplace of the next century. The bottom line is this: Deregulating electric utilities should lower energy costs for our citizens and our industries and it is our responsibility to work together -- public utilities and independent providers, industry executives and political leaders -- to achieve this goal.
But if our experience is of any value, I would suggest that we approach deregulation thoughtfully, and with careful deliberation. Above all, I would suggest that we measure the success of our efforts in more than just pennies saved on our electric bills. I would suggest we measure our ultimate success against the higher standard of the public good.
A final thought. The political challenges of deregulation may cause some of us, at various points in the process, to question whether it is a course worth pursuing. I believe that it is... and that we must stay the course, and do it right. I take my inspiration, again, from President Franklin Roosevelt... a good Harvard man. The day before he died, FDR wrote remarks for a Jefferson Day lecture he was to deliver the following day. He wrote... "The only limit to our realization of tomorrow will be our doubts of today. Let us move forward with strong and active faith."
And as we move forward, ladies and gentlemen, let us remember to balance our commitment to the bottom line with a commitment to the people we serve and to the public good. Thank you all very much for your kind attention, ladies and gentlemen, and thank you for inviting me here to Harvard University. .
Craven Crowell is Chairman of the Tennessee Valley Authority
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