Eighty years after its founding, the Tennessee Valley Authority is once again in the cross hairs of politicians who ask why the government should be generating electricity and worrying about trout. But the people in its (red state) territory like it just fine.
The Tennessee Valley Authority is the largest public power company in the U.S., a vast and sprawling bureaucracy that provides electricity to 9 million Americans in a part of the country where people like their government small, where the words “deeply” and “conservative” go together like “ham and biscuits,” and where the irony of who keeps the lights on is acknowledged with an ambivalent smile.
It is a corporation owned by the federal government, which is just as confusing and contradictory as it sounds. The TVA is both populist and insular. It has the power of eminent domain and sets its own prices. It files 10-Ks. The interest paid on its bonds is taxed. It can’t issue stock. TVA directors are nominated by the President and confirmed by the Senate. The process can take years. Its CEO has become the highest-paid federal employee, with a salary and bonus last year of $4 million, which is more than twice the combined pay of all nine Supreme Court justices.
Along with its 29 dams, 11 coal plants, 13 gas-fired stations, and three nuclear power plants, the TVA controls the Tennessee River — all 650 miles, from tip to tail — and manages 11,000 miles of shoreline. It is a platypus, part utility and part public-works project. The water that turns the turbines also helps cool the reactors, fills the shipping channels, and keeps the fly-fishermen happy. It’s business and it’s personal. One dam manager said that if the water isn’t flowing on Saturday morning to move the fish, people start calling their congressmen to complain.
The TVA turned 80 this year, and there was plenty of celebrating the storied successes of this New Deal program, how it tamed the river, provided the power to help win World War II, and brought prosperity to what was one of the poorest regions of the U.S.
But heritage gets you only so far. The TVA of today is no longer a beloved symbol of innovation and the derring-do of an activist government. It is a victim of outdated rules and its own poor decisions. Its generating fleet is too old and still too dependent on coal, and its ability to build new nuclear plants is hamstrung by a federal debt limit that has been frozen for more than 30 years. Its board of directors has become just one more political football in Washington. A coal-ash spill five years ago that was blamed in part on inadequate maintenance is costing more than $1 billion to clean up. The list goes on.
The icing on the cake: President Barack Obama tucked a paragraph into his 244-page budget request on April 10 calling for a strategic review of the TVA with an eye toward divestiture. “Reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation,” the request said, “can help put the Nation on a sustainable fiscal path.”
On the day that the President released his budget proposal, Bill Johnson was exactly 100 days into his job as the TVA’s new chief executive, still walking the few blocks from a rented condo to the agency’s headquarters in downtown Knoxville. He played football at Penn State under Joe Paterno, so he understands how to follow orders from the top. With no trace of insubordination in his voice, Johnson says that he welcomes a review and the chance to remind people that the TVA does more than just make electricity. “Our job is to serve the public, and if there’s a better way to do this, we should be open to it,” he says. “That said, there are all kinds of impediments to someone doing this more efficiently and more cheaply, I’ll tell you that.”
This notion of the government’s picking winners and losers has gotten a bad rap of late, and nowhere more so than in the energy sector, so it’s instructive to look at the creation of the TVA in 1933 and marvel at the audacity of its architects, President Franklin D. Roosevelt and Republican Sen. George Norris of Nebraska. Their idea was simple: Piecemeal development led to piecemeal results. The government needed to control the entire Tennessee River, from the tributaries as they tumbled out of the western flank of the Appalachians all the way to where it joined the Ohio River near Paducah, Ky. The TVA would be a national laboratory for economic vitality and planning. There would be dams for flood control and a system of locks and channels for the barges. At Muscle Shoals, Ala., the government would produce fertilizer and work with farmers to help them reclaim their depleted fields. And, by the way, the TVA would also make and sell electricity, which was listed as 12th out of 14 permitted activities.
Despite that ranking, many people saw where things were headed. The power companies sued. So did their bondholders. It is said that even the icemen cried foul. Bringing electricity to the valley would eventually mean a freezer in every house, and freezers were to icemen what Model T’s had been to the wagon trade. But Roosevelt’s courts sided with the TVA, and by 1940 it had built six dams and bought a dozen or so others. Then came the war. The TVA kept building, and its dams powered the aluminum factories in eastern Tennessee and the Manhattan Project at what would become Oak Ridge National Laboratory, just west of Knoxville.
The TVA did more than make fertilizer and electricity. It also changed lives, destroying some communities with its reservoirs while also making new towns for the construction crews who needed a place to live.
It is this bitter with the sweet, the balance between the past and the future, between the needs of groups and the rights of individuals, that has defined the TVA through the years, woven it into our culture, and made it a symbol of the government’s often contradictory intentions. In Wild River, Elia Kazan’s syrupy movie about the TVA, the U.S. marshal charged with removing a fiercely independent widow from her land before her whole world is flooded says flatly, “I guess it all goes under the general heading of progress.” There are folk songs that praise the TVA for bringing work and opportunity while castigating politicians for their eagerness to do unto others what they wouldn’t do unto themselves. Here is what Cleatus Burnett wrote in his “Song of the Cove Creek Dam”:
Is there no such thing as a river
Up there in Senator Norris’ home.
If there is, oh why couldn’t he
Have built a dam of his own.
Harry Welch moved to the remote mountains of North Carolina in 1942 when his stepfather was hired as a carpenter for Fontana Dam on the Little Tennessee River. Welch was 15 and worked there afternoons as a gofer, receiving school credit instead of a paycheck. “We were all in it together,” he said, and the pride in what he and the other self-described “dam kids” accomplished has stayed with him all these years. Of President Obama’s proposal, he says, “I don’t know why they can’t just leave well enough alone.”
The TVA’s territory covers 80,000 square miles of cities and towns, broad valleys, and rolling hills in Tennessee and parts of six surrounding states. Power deregulation is well under way in many parts of the country, but not here. The reason is a policy known as “the fence,” created in 1959 as part of a deal that allowed the TVA to issue bonds, which it needed to build coal plants to meet demand. While there’s no sign marking entry into TVA land, the fence is a fact of life for everybody who flips a switch here. Inside the boundary, the TVA has no obligation to provide transmission lines for other utilities wanting to provide power.
And, of course, the fence works both ways. What keeps others out keeps the TVA in. With minor exceptions, the TVA can’t sell power outside the fence, limiting its flexibility and ability to spread costs and use its fleet at maximum efficiency. Unlike investor-owned utilities, it can’t set up an unregulated merchant power business or build wind farms in Kansas that sell into the grid. And it can’t merge with another provider. Johnson says, “Because you don’t have an option, you really have to focus on managing what you’ve got and executing your model the best you can.”
After the TVA’s coal rush, it turned to nuclear with the same zeal, and that’s when the agency’s modern problems started. During the 1970s and into the 1980s, the TVA struggled with enormous cost overruns and regulatory issues over operations and maintenance. In addition, its project planners missed the mark on demand. The TVA ended up abandoning 10 nuclear units, writing off billions in expenses, which customers are still paying for today. (It completed six units.) At investor-owned utilities, risk is offset by the chance for reward. Shareholders get dividends but are on the hook for at least part of management’s mistakes. The TVA has no shareholders, so customers — and customers alone — pay dearly for errors.
The TVA’s rates used to be the lowest in the nation — its power was said to be too cheap to meter — but that’s no longer the case. Its own figures place it 38th when compared with 100 investor-owned utilities. But a more relevant metric is how it competes in its own backyard. Measured against prices in Southern states, the TVA’s rates are in the middle on consumer prices, but in the top third on industrial prices. Some of that is by design. The law creating the TVA says that the sale of electricity to industrial customers “is a secondary purpose” that should be used to build load and keep rates low for residential users.
Peter Mattheis is an attorney with the Tennessee Valley Industrial Committee, which represents 50 major customers, including Nucor, Alcoa, and DuPont, that buy their power from the TVA. The TVA is listening and trying to bring down its costs, he says, but the digestion of these scuttled nuclear plants takes a long time. “We’re paying for a lot of stuff that’s not, in the parlance, ‘used and useful,’ ” he says. “Back in the day when TVA started, they had all that hydro, and then there was coal. How could they screw it up? Those days are long gone. They could be very competitive without being very good at what they do.”
Unlike an ordinary federal agency, the TVA doesn’t receive an annual appropriation from the government; it funds its operations from selling power. But revenues are flat: They dipped from $11.8 billion in 2011 to $11.2 billion last year, in part because of the lingering effects of the recession and in part because customers are more sensitive about price and getting smarter about using power. At the end of May the TVA’s largest customer, a uranium-enrichment plant in western Kentucky with a 2012 power bill of more than $500 million — yes, $500 million — began transitioning to a less-power-intensive technology and will eventually move all operations out of the valley to Ohio.
In 2010 the TVA entered into consent agreements with the U.S. Environmental Protection Agency, four states, and several environmental groups over the pollution from its coal plants. It is now in the process of retiring 30% of its coal fleet and evaluating the cost of compliance for much of the rest. To replace that generation, it is investing in natural gas and doubling down on nuclear, with the goal of making splitting atoms its dominant power source by the end of the decade. Johnson likes to refer to nuclear power as clean energy. It’s semantics, of course, and a definition that infuriates the anti-nuclear crowd, who have taken to reading dictionary entries to TVA board members at their quarterly meetings. Unlike the board meetings of investor-owned utilities, the TVA’s regular board sessions are public; the first hour is devoted to a comments section, where people from across the valley can rattle off grievances large and small about how the TVA has let them down.
Lots of big utilities are trying to replace baseline coal generation with nuclear. As with its peers, the TVA’s challenge is in paying for the pivot. The price tag to complete the TVA’s Watts Bar Two unit has already jumped from $2.5 billion to more than $4 billion, and after the TVA completes that project, it is considering whether to finish construction at a nuclear plant in Hollywood, Ala., that it all but abandoned more than 30 years ago. The cost for that project is still under review.
That brings us to the TVA’s other management limit, which is not a fence but a ceiling. Since 1979 the TVA’s debt has been capped by law at $30 billion. It crested at just above $27 billion in 1997, then fell during the next 10 years to $23 billion, which is all well and good but still $10 billion shy of where its managers wanted to get. Now the debt is rising again, above $25 billion, with lots of new spending on nuclear and pollution controls in the pipeline.
Steve Smith, the executive director of the Southern Alliance for Clean Energy, says that the TVA should be focused on being an innovator in reducing demand rather than trying to build its way to prosperity. “The mythology is that energy efficiency equals lost revenues, but it can be a moneymaker,” Smith says. “You can’t solve the debt crisis and be into nuclear the way they want to go.”
The TVA is managing its debt — for now — by using a bag of financial maneuvers, including sale-leasebacks of natural-gas plants and prepayments from customers. It’s sort of like going to the pawnshop and the loan shark because the bank won’t let you borrow more. You still owe somebody, and the costs are greater.
The chairman of the TVA’s board is Bill Sansom. He runs a convenience-store supply company in Knoxville and is a close ally of Sen. Lamar Alexander (R-Tenn.). The TVA’s problems, he says, are not really any worse than other utilities’. “Big corporations aren’t the shiniest things in the world,” he says. “This is a pretty good model, but it needs to be run right.”
For most of the TVA’s history, it was run by three full-time directors, who appointed a general manager. In 2005, Congress moved it to a more corporate structure, with nine part-time directors, who hire a CEO. Those changes took effect in 2006, but last month saw the first full complement of board members. The turnover is constant, and the confirmation process is frequently stymied by politics. Last year, as the vacancies piled up, the TVA’s board was forced to institute emergency meeting provisions.
President Obama draws a good deal of his political energy from F.D.R., which makes him an unlikely assailant of the TVA way. Some of this is just the political Kabuki dance of Washington, a chance for the President to point out that disdain for big government is all relative and to take a slap at a program in a part of the country where he picked up few electoral votes. Rep. Jim Cooper, a Nashville Democrat, says, “It’s simply a shot across the bow to tell TVA to get its act together.”
Obama isn’t the first chief executive to wonder why the federal government is this deep into the power business. President Eisenhower famously called the TVA “creeping socialism” and tried unsuccessfully to loosen its monopoly on power generation in the region. Ronald Reagan was fired from hosting General Electric Theater in 1962 after he attacked the TVA. He lost a job but gained political traction. Two years later, while stumping for Barry Goldwater, he said, “Recognize that government invasion of public power is eventually an assault upon your own business.”
Despite those misgivings, public power is a fact of life for the nearly 90 million Americans who buy their electricity from some level of government or a cooperative. To sell the TVA assumes there’s a buyer and a price that covers the debt. That’s unlikely. In addition, there doesn’t appear to be any great sense of urgency to change or even discuss change. Six months after the President’s request, the TVA still hasn’t had to make a report to the administration.
Norris Dam backs up the Clinch River and was completed in 1936 as the TVA’s first project. The dam has been around so long that it’s easy to forget what was there before. The people upstream were forced to leave their soon-to-be-flooded farms. Below the dam, the government built the town of Norris, a rural utopia of cottages and dog-run houses with a handsome brick schoolhouse on the square.
The inside of its power plant is as much a museum as a factory, a workplace that has changed little in 77 years. The original crane hangs from the ceiling and is still used to pull the enormous turbines out of their housing.
In the bowels of the dam, I was shown a valve the size of a watermelon, imprinted with a swastika, which had been the logo of the Crane Valve Co. before the Nazis made it into something that stood for evil. The valve still works, too, a reminder of a time when people let the government take charge and making power was as easy as letting the river run.
This story is from the October 28, 2013 issue of Fortune.