Moody's says selling TVA would drive up power costs

John Thomas is TVA Chief Financial Officer and Executive Vice President.

President Donald Trump's proposal to sell the transmission assets of the Tennessee Valley Authority and other federal power agencies faces a skeptical Congress unlikely to support divestitures of popular federal agencies.

But simply floating the idea in the White House budget plan, even if it is never accepted by Congress, could end up costing TVA extra to borrow money due to investor uncertainty about the future of TVA.

The credit ratings giant Moody's concluded that selling off the assets of Tennessee Valley Authority and other federal power agencies could be costly for those relying upon such transmission assets.

"Such a sale would be credit negative for each entity because it would reduce transmission-related revenue, a stable revenue source and weaken federal government support, key considerations that support their respective ratings," Moody's said in a report about the proposed sale of the transmission systems owned by TVA and the Bonneville Power Administration in Washington. "We also believe that any divestiture is likely to raise transmission rates for BPA and TVA customers because the new private owners would have higher capital costs that would need to be recovered in rates."

Trump's fiscal 2019 budget request to Congress and infrastructure plan said the ownership of the transmission line assets of TVA "is best carried out by the private sector, where there are appropriate market and regulatory incentives." TVA and other federal power agencies enjoy the implied backing of the federal government, giving TVA a top bond rating, even with more than $26 billion of debt and long-term financial obligations.

Other power utilities that are not government owned are rated less favorably and must pay higher interest rates to borrow money than does the TVA, because investors assume that if TVA failed that Uncle Sam would bail out the federal utility.

Moody's said the arguments for the change by the Office of Management and Budget "may be a fair consideration." But the ratings agency said TVA and BPA "have operated well from a reliability and cost standpoint" and do not justify a sale.

Trump wants to sell the federal power assets to help generate funds to pay for his proposed $1.5 trillion infrastructure plan.

But U.S. Sen. Lamar Alexander, the Tennessee Republican who backs TVA, denounced the proposal as "looney" and U.S. Sens. Maria Cantwell and Patty Murray, both Democrats in the state of Washington who support the Bonneville Power Administration, said "dismantling of power marketing authorities is simply not sound government policy."

During a TVA board meeting Friday, Tennessee Valley Public Power Association President Doug Peters said selling off TVA's 16,000 miles of transmission lines "would be blatantly wrong" and unfair to the 9 million residents in the Tennessee Valley who have paid for TVA assets through their power bills.

Similar proposals to sell federal power assets have been proposed in the past, including the outright sale of all of TVA's assets by President Obama in 2013. But such a sale "has never been seriously pursued by Congress, which has to agree to any such proposal and enact it into legislation," Moody's said.

TVA Chief Financial Officer John Thomas said Friday that the Trump proposal so far has not changed any credit rating for TVA. But when TVA goes to the bond market this spring for more than $1 billion of borrowing, the proposal could cause some investors to want a slightly higher interest rate premium for lending to TVA.

"There is no immediate impact, but what we don't know is whether this will change the investor appetite for TVA bonds and the interest rate we pay until we do another bond offering," Thomas said. "We're obviously worried about anything that might cause us to pay higher interest rates because those costs flow right through to create more pressure on our rates."

So far in trading of TVA bonds for most of the agency's $26 billion of debt and long-term obligations, the Trump proposal does not seem to have as significant of a market impact as earlier proposals to try to sell all of TVA have had on bond prices.

Five years ago, a proposal by President Obama to study selling all of TVA pushed up TVA's effective borrowing rates on new debt by a tenth of a parentage point, or 10 basis points, before the idea was ultimately scrapped, Thomas said.

Rising interest rates are likely to have an even bigger impact on TVA borrowing rates for TVA this year. TVA borrowing costs closely track the rate on 10-year treasury notes, which have risen in the past six months from about 2.2 percent to nearly 2.9 percent.

But Thomas said TVA rotates its long-term debt so that no more than $1 billion to $2 billion of long-term debt comes due every year.

Thomas said the 10-year bonds that TVA expects to replace this year with new bond offerings should be priced well below the 4.5 percent rate paid a decade ago. Combined with TVA's ongoing effort to cut its overall debt to to $21.8 billion by 2023, Thomas said TVA's borrowing expenses this year should end up being less than last year.

Contact Dave Flessner at [email protected] or at 757-6340