ML20211K763

Summary of 861126 Meeting Between Chairman Zech & WO Doub of Southern States Energy Board Re Board Initiatives Concerning Tva.Viewgraphs Encl

ML20211K763
Person / Time
Issue date:	11/26/1986
From:	Humenansky D NRC
To:	NRC OFFICE OF THE SECRETARY (SECY)
References
NUDOCS 8612150138
Download: ML20211K763 (20)

Text

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loDR MEMORANDUM FOR: SECY FROM: David F. Humenansky Technical Assistant

SUBJECT:

SOUTHERN STATES ENERGY BOARD 1.

Mr. William O. Doub in his capacity as President Regan's U.S. Federal

' Representative to the Southern States Energy Board (SSEB) met with Chaiman Zech on November 26, 1986 to discuss the SSEB initiatives with respect to TVA. Mr. Doub is required to keep the Chairinan of the NRC informed of SSEB activities in the fulfillment of his duties as the Federal Representative.

2.

Mr. Doub indicated during the meeting that the SSEB wants to address the TVA problem to see how it can function to assist TVA. In order to accomplish this objective, the SSEB is establishing a Blue Ribbon Panel to look into the issue. He gave the Chairman the attached list of panel members during the meeting.

3. Mr. Doub also gave the Chairinan the attached " White Paper" of potential options of how to deal with TVA that was prepared for the SSEb. Mr. Doub did not prepare this paper.

4. Mr. Doub had no objection to distribute these handouts to the Comission. He stated that, in essence, he considered he was delivering these to'the NRC. **

• 5.

SECY is accordingly directed to distribute this memo and the attached papers to the Commissioners, the EDO, and the NRC TVA senior management team. SECY is also directed to place a copy of this in the PDR.

Enclosures:

As stated 8612150138 861126 PDR C TOPRP EUTTVA PDR

50'J' DERM STATES ENERGY BOARD A0f ts04f Comt!!!E ON TwE TEMESSFE VAL.EY AFHCR!?f THE HCNCAABLE GERALD 1..

BAL!LES, GOVERSCR OF VIR'J!s!A AN3 CHA!4M.4 0F rE 50a!,ERN 57A!E5 (NE U f 30AR:) Wiu. SERVE AS CetAlaMN OF THE C0Hx; rgg, NEMBER$ GF T'4. 00'WMTEE, A;00!NTE3 37 THE GOVERN 0R ARE At FOLLukS:

M. R. MICWAEL BROWDER serves as sencral Manager of the Bristol Tennessee Elec-tric Systen and is President of Association. the Te.inessee Municipal Electric :ower

_v. WILLIAM 0. BURKE is President and CEO of Reynolds Metals Corporation and a former~ Executive Vice President of Ford Motor Company.

3R. MARK (00PF.R is Energy Director of Cne CCasurer Federation of Ancrica a93 served of for foJr yetes as Research Director for the Ccoss.er Energy Council America.

wa. JACK H. FERGLSON is President and CEO of Virginia power.

A mechanical engineer, house. ne nas hcid management positions at General Electric and Westing.

M. VICTnR anc nasGILIMKY served aspositions nelo management a mer.ber at of tne U.S. Nuclear RegulatJcy Corrtf ssion Atomic Energy Cowitssion. the RAM Cceporation and tne U.S.

,4.

MATTHEW HCLDEN t s a fomer meaur of the Fe:cral Energy Regulatory Comis.

5109 and tne Wisconsin Public utilities Ccratssion, <

i MS. ELIZABETH 3. LACY is a Comr11ssioner cf tre Wrgi,ta State Cor;oratico cannission, a romer deputy Attorney "w eral 'or the Virginia Judicial Affairs General.Division and a former Special Assistant to the Tesas Attorney MR. W!Lt.!AM 5. LEE is Gnair1 nan ano Chief Executive Officer of

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and past Cnairman of tee Institute of % clear Power Operations.ke Pcwer Corapany MR. C94LES cole.an ofL9CE is a Oregon.

Portland, partner in t.re inw fim of Preston, thergriwson, Eilis and CEO of Consolidated He is the reticac Cnaircan of tne Board and of tne U.S. Departant of the laterior. Edison af New York and nas serves as 'ind

~MR. suf N150L5 is Chairwan of tee Boars, woods , ole Oces agra;nic lettitute and *etired Chafman and CEO of tne New England Electric Syster.).

v. ALEt 4ADIN headed tne American Puotic Power Ass:ciation7,forore than 33 years and has served as Chatraan of the Consumer Energy Couccil of Aoerica.

Page 2 SCf-Eh 5*ATES ENERGf BOARD ANIS 04f OWMIEE ON TME TE'.NESSEE VALLI ( A'J7404 Ty MEMSF45 0F THE OCE"EE (co-ti%ed):

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[ 2R. CLIFFORD 5. N!SE'L J:!aco Varaerofit '#f eersity in Janaary 1966 as 31 ec.

e t:r of tne Bstitete fo- Daotic Polic/ Studies. Previc'Jsly he was Director h

of two Enstrocental Civision at Resources For The F ture, l MR. *Cri S. 5MIT4 15 senior attorney in ene Was9taston. 3.C. offices of Broad-

' nu rst, 3rcot. Mae,;M m ano Marty.

Ne has servad as VI:e Chainran of tee Taceral Eners/ Regalatory Correi s sion ar.d tre Federal Power Commi:sfoa.

' i. SD SM*TH r aeraer ofisthe Cnaleman Boar: and Onief Execetive Of'icer cf Federal Express in:t

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ef 31*ectars of General Mills.

' AW >,t ..EffGEM P. " DENNIS WILXIMSON, (Red,) was the first commanding officer

tr,e first .'.5.

af ear smarine, " Nautilus." .it has served as 31rettor o tne Institute of Destgo Laboratories.

% clear Power 0;erations anc / ice President of Oata 1 MR. WILLIAM 5tates Energy0. 000B Board(en ac:officloi is Federal Representative to the Southern represents the President of the United States in tnat capa:lty. He is tne 'J.S. representatise ta *.he World intriy Congress and was a Mencer of the ').S. Atwic Energy C:entssion, I

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7- . . - -

IVA BRIEFING

3. THE CURRENT SITUATION:

TVA'S DIFFICULTIES ARE SERIOUS AND WILL TAKE YEARS TO CORRECT.

TVA REQUIRED JMPORTS FOR 30 PERCENT OF ITS s

)

• ALL FIVE NUCLEAR UNITS ARE OUT OF SERVICE

-- AND FOR AT LEAST THREE OF THEM THE OUTAGE WILL

{

CONTINUE THROUGH 1987 AND BEYOND.

THE THREE NUCLEAR

UNITS AT BROWN'S FERRY -- WITH ABOUT 3500 MEGAWATTS OF CAPACITY --

FACE A HUGE BACKLOG OF NRC REQUIREMENTS RELATED TO THE TMI ACCIDENT, FIRE PROTECTION AND THE ABILITY OF EQUIPMENT TO WITHSTAND EARTHQUAKES AND ACCIDENTS. TVA'S ABILITY TO FULFILL 1

THESE REQUIREMENTS IS HAMPERED BY A SERIOUSLY INADEQUATE HISTORY OF PREVIOUS CHANGES IN THE PLANT. THE MAJOR

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- MODIFICATIONS AND TESTING THAT ARE REQUIREC -

WILL RESULT ,,

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IN LONG DELAYS BEFORE THE UNITS CAN RESUME OPERATION AFTERWARDS IN MORE FREQUENT AND MORE EXTENDED OUTAGE i

- . - . - - - - , - - , - - - - - - - - = , . - .,--.-._~-,%-- - . - - , - - - - - - - - - - - - - - . - _ . - , ,--

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.. y 2

TWO NUCLEAR UNITS UNDER CONSTRUCTION WATTS AT BAR HAVE QUALITY VERIFICATION PROBLEMS OF THE SAME TYPE --

I ALTHOUGH PERHAPS NOT At WIDESPREAD --

AS THOSE THAT FORCED YNE ABANDONMENT OF ZIMMER AS A NUCLEAR UNIT. THE THOUSANDS OF EMPLOYEE CONCERNS Aho ALLEGATIONS ABOUT EQUIPMENT AND CONSTRUCTION PRACTICES AT WATTS BAR ARE REQUIRING ATTENTION TO THE POSSIBILITY OF SIMILAR PROBLEMS AT TifE COMPLETED PLANTS. THE OFFICIAL COMPLETION DATE FOR WATTS BAR 1 WAS SEPTEMBER, 1986 WHILE UNIT 2 WAS SCHEDULED FOR APRIL, 1988. TVA NOW SEEMS TO HAVE NO CLEAR IDEA WHEN THOSE UNITS WILL BE COMPLETED.

TWO NUCLEAR UNITS AT BELLEFONTE ARE NOT DUE FOR COMPLETION UNTIL 1993 AND ]995. THE UNITS ARE NOMINALLY 85 AND 60 PERCENT COMPLETE, BUT CONSTRUCTION

! ACTIVITY IS " MINIMAL" AND CARRYING COSTS CONTINUE TO PILE

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UP ON AN INVESTMENT THAT ALREADY EXCEEDS $3.5 BILLION.

EIGHT NUCLEAR UNITS HAVE BEEN CANCELLED WITH ABOUT $2.5 l, BILLION TO BE WRITTEN OFF.

-. . - . . _ _ - = _ _ _. __

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TVA's CURRENT RATES ARE RELATIVELY LOW FOR RESIDENTIAL CUSTOMERS.

BUT IVA NEEDS SUBSTANTIAL ADDITIONA AND THE REQUIRED RATE INCREASES MUST FALL CHIEFLY ON RESIDENTIAL CUSTOMERS FOR TWO REASONS. TVA'S BILLS TO LARGE INDUSTRIAL USERS ARE ALREADY HIGHER THAN THOSE OF VIRGINIA POWER AND SOME OTHER

. SOUTHEASTERN UTILITIES.

AND TVA'S INDUSTRIAL USERS, WHICH WERE ATTRACTED INITIALLY BY LOW RATES, ARE ESPECIALLY SENSITIVE TO PRICE ,

INCREASES AND LIKELY TO RESPOND WITH SELF GENERATION OR FLIGHT.

LEADERSHIP, PERSONNEL AND ORGANIZATIONAL PROBLEMS CLEARL ABOUND.

2. AS A PRACTICAL MATTER, TVA ISN'T ABLE TO BE A SUBSTANTIAL SELLER OF ATTRACTIVELY PRICED POWER.

ABOUT HALF 0F ITS CAPACITY WAS UNAVAILABLE AT THE 86 PEAK.

E' II UNIT AVAILABILITY' PROBLEMS, WHICH CAN'T BE CORRECTED FOR SOME YEARS, SHOULD MAKE TVA RELUCTANT TO COMMIT TO SALES AND WOULD MAKE BUYERS WARY BECAUSE Ch RELIABILITY CONCERNS., FURTHER, ALL NEARBY COMPANIES ARE PROJECTED TO HAVE ADEQUATE CAPACITY THROUGH THE EARLY 90s.

IF THE AVAILABILITY PROBLEMS ARE CURED, TVA SALES IN THE LATER 90S WOULD DEPEND ON COMPLETION OFTHE FOUR UNITS UNDER CONSTRUCTION -- WHICH IS DOUBTFUL. .

IF THESE UNITS ARE COMPLETED, THEIR LIKELY COSTS WILL MAKE THEt1 UNCOMPETITIVE --

AT li CENTS OR MORE PER KILOWATTHOUR VERSUS 5 TO 6 CENTS FOR OTHER PURCHASES, C0 GENERATION AND COMBINED CYCLE.

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3. AS A MATTER OF FAIRNESS AND ECONOMIC EFFICIENCY, TVA SHOULD NOT BE A SELLER UNLESS IT IS IN THE MARKET ON REASONABLY

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EQUAL TERMS -- AND THAT WILL BE DIFFICULT TO ACHIEVE.

AT A MINIMUM, ACCESS TO PREFEPENTIAL FINANCING THROUGH i

THE FEDERAL FINANCING BANK WOULD HAVE TO BE ELIMINA

5 l OTHER CHANGES TO REMOVE OR COMPENSATE FOR TVA'S FREEDOM FROM INCOME TAXATION AND ITS SPECIAL CAPITAL STRUCTURE WOULD BE NEEDED TO CREATE A TRULY LEVEL PLAYING FIELD -

WHICH WOULD BE STRONGLY RESISTED BY TVA SUPPORTERS.

WITHOUT SUCH CHANGES, INVESTOR-0WNED UTILITIES INCLUDING VIRGINIA POWER WOULD RESIST REMOVING THE PROHIBITION ON TVA SALES. THAT ACTION W0VLD BE UNFAIR AND LIKELY TO FOSTER INFFFICIENCY SINCE SALES WOULD NOT NECESSARILY TO THE LOWEST COST PRODUCER.

WITHOUT A LEVEL PLAYING FIELD, REMOVING THE RESTRICTION ON TVA WOULD SET BACK THE PROGRESS THAT'S BEEN MADE TOWARD A MORE COMPETITIVE, MORE EFFICIENT WHOLESALE ELECTRICITY MARKET.

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4. IT IS IN THE INTEREST OF THE REGION, AS WELL AS OF THE PEOPLE AND INDUSTRY OF THE TVA AREA, THAT TVA BECOME CONSISTENTLY SELF SUFFICIENT IN MEETING ITS LOAD AND NOT A DRAIN ON THE GENERATING RESOURCES OF THE REGION,

. , . . _ . ._.,_,,,.____,___._,._.,.-.._..,.___._,,__,,,m..

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6 THIS IS A PRACTICAL AND WORTHY OBJECTIVE TO WHICH THE I

SSEB CAN MAKE A VALUABLE CONTRIBUTION.

REMEDIES FOR TVA'S PROBLEMS CAN BE IDENTIFIED, BUT THIS IS FRUITLESS UNLESS THE NECESSARY CORRECTIVE CAN A BE IMPLEMENTED.

5. CORRECTION OF TVA'S PROBLEMS REQUIRES STRONG LEADE FLEXIBILITY IN OPERATION TMAT ARE NOT POSSIBLE UNDER ITS PRESENT STRUCTURE AND GOVEPNANCE.THE KEY PROBLEMS ARE:

THE THREE MEMBER BOARD COMBINING MANAGERIAL, POLICY-MAKING AND (SELF) REGULATORYFUNCTIONS TENDS TO PREVENT STRONG AND DECISIVE LEADERSHIP WHILE PLACING MANY RESPONSIBILITIES IN ONE PLACE. THE RECENT CREATION OF A

• NUCLEAR CZAR" IS THE LATEST OF NUMEROUS OVERCOME THE ILL-EFFECTS OF THIS ARRANGEMENT.

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THE FEDERAL PAY CAP APPLYING TO TVA PREVENTS IT FROM RESPONDING TO MARKET FORCES TO HIRE AND RETAIN EXCELLEN PEOPLE IN KEY POSITIONS. THE ARRANGEMENT FOR STONE &

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7 WEBSTER 70 "L OAN" ADMIRAL WHITE TVA, TO THE USE OF PERSONAL SERVICE CONTRACTS AND OTHER EXPEDIENTS SUCH AS LARGE RELOCATION PAYMENTS ARE BEING USED CURRENTLY TO ATTEMPT TO CIRCUMVENT THE PAY RESTRICTIONS. HOWEVER, TVA'S ARRANGEMENT WITH ADMIRAL WHITE AND HIS USE OF CONTRACT PERSONNEL 70 ADDRESS TVA'S NUCLE R PROBLEMS ARE UNDER STRONG CHALLENGE.

6. REFORMS OF TVA'S CURRENT STRUCTURE AND GOVERNANCE ARE i

. I ESSENTIAL AND SEVERAL OPTIONS ARE POSSIBLE.

THE FIRST OPTION IS PRIVAT]ZATION -- BY SALE TO PRIVATE COMPAN]ES OR BY SALE OF SHARES TO THE PUBLIC. THIS WOULD i ALLOW ESTABLISHMENT OF A CORPORATE l STRUCTURE AND MANAGEMENT AND WOULD PLACE i THE FORMER TVA DN THE SAME

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FOOTING AS OTHER COMPANIES IN A MARKET FOR POWER S IT WOULD ALLOW THE APPOINTMENT OF A CHIEF EXECUTIVE OFFICER WITH THE FREEDOM TO TAKE BOLD ACTION AND TO RECRUIT, AT MARKET RATES, THE KEY PERSONNEL NEEDED TO

8 LEAD A TURNAROUND OF TVA'S FORTUNES. IT WOULD ALLOW THE FORMER TVA, TRANSFORMED AND REVITALIZED, TO COMPETE FAIRLY FOR POWER SALES AND TO HELP, RATHER THAN HINDER, THE EMERGENCE OF COMPETITIVE POWER MARKETS. HOWEVER, THE PRESENT FINANCIAL CONDITION AND INCOME OF TVA DO NOT JUSTIFY A SALES PRICE EQUAL TO THE BOOK YALUE OF THE CORPORATION'S ASSETS. IT WOULD BE NECESSARY EITHER TO SELL AT A DISCOUNT OR TO IMPROVE THE VALUE OF THE CORPORATION BY INCREASING ITS INCOME THROUGH HIGHER ELECTRIC RATES. THERE WOULD SURELY BE STRONG OBJECTIONS TO SELLING THE ASSETS AT LESS THAN THEIR NOMINAL VALUE AND TO RAISING RATES. FURTHERMORE, THERE WOULD BE OBJECTIONS TO THE END OF FEDERAL OWNERSHIP ON IDEOLOGICAL l

GROUNDS AND BECAUSE OF THE RESULTING LOSS OF ACCESS TO LOW COST CAPITAL AND OF FREEDOM FROM FEDERAL INCOME TAXATION. THESE IMPEDIMENTS SEEM SO LARGE THAT PRIVATIZATION CANNOT BE CONSIDERED A POLITICALLY i ACCEPTABLE NEAR TERM SOLUTION TO TVA'S MANAGEMENT PROBLEM 1

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\____ . _ . _ . _ . - . _

.e ALTHOUGH IN ECONOMIC TERMS IT REPRESENTS THE BEST OPTION.

A SECOND OPTION IS TO REPLACETHE PRESENT THREE-MEMBER BOARD OF

. DIRECTORS BY A LARGER PART-TIME BOARD SINGLE CHIEF EXECUTIVE OFFICER, AND TO LIFT THE LIMITS ON PAY. THIS APPROACH IS REPRESENTED IN LEGISLATION (HR 4559) INTRODUCED BY REP. RONNIE G. FLIPPO OF ALABAMA.

HOWEVER, THE FLIPPO BILL WOULD CONTINUE (SELF) REGULATOR AS WELL AS POLICY MAKING FUNCTIONS IN A NINE-MEMBER TVA BOARD AND WOULD ONLY EASE RATHER THAN REMOVE FEDERAL RESTRICTIONS.

THE FLIPPO BILL WOULD CLEARLY NOT CREATE THE INCENTIVES AND PRESSURES FOR PERFORMANCE THAT APPLY TO INVESTOR-0WNED UTILITIES. A BILL BY I SEN. GORDON i

HUMPHREY OF NEW HAMPSHIRE WOULD MAKE TVA SUBJE REGULATORY AUTHORITY. HOWEVER, THERE IS OPPOSITION TO EVEN THESE LIMITED CHANGES FROM TVA TRADITIONALISTS AND FROM CONGRESSMEN OPPOSED TO NEW BREACHES IN PAY CEILINGS FOR ANY FEDERAL ENTITY.

10 A THIRD OPTION IS TO ESTABLISH TVA AS A FOR-PROFIT CORPORATION BUT WITH ALL OF ITS STOCK INITIALLYBYOWNED THE FEDERAL GOVERNMENT.

-- IN THIS FORM, IT WOULD BE ORGANIZED LIKE CONRAIL WAS AT FIRST, JUT LIKE CONRAIL, A PORTION OF THE STOCK SHOULD PASS TO TVA'S EMPLOYEES. IN THE CASE OF TVA, THE EMPLOYEE STOCK OWNERSHIP SHOULD RESULT FROM THE t'

CREATION OF PERFORMANCE INCENTIVE PLANS AND PROFIT l 3 HARING PLANS DESIGNED TO BUILD ESPRIT AND COMMITMENT TO THE IMPROVEMENT OF TVA. LIKE CONRAIL, TVA WOULD BE FREE OF ANY PAY LIMITATIONS RELATED TO FEDERAL SALARY SCALES AND WOULD BE SUBJECT TO FEDERAL TAXATION.

i BECAUSE OF LARGE LOSS CARRYFORWARDS, CONRAIL HAS NEVER ACTUALLY PAID FEDERAL TAXES. AS A MEANS OF EASING THE

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TRANSITION OF TVA TO TAXABLE STATUS, A SPECIAL i

PROVISION COULD BE ENACTED TO ELIMINATE OR REDUCE ITS TAX LIABILITY FOR A NUMBER OF YEARS --

POSSIBLY BY t

IMPUTING A TAX LOSS RELATED TO THE CANCELLATION OF THE l

II EIGHT TVA NUCLEAR PLANTS. THE TRANSITION OF TVA TO A FOR-PROFIT STOCK COMPANY SHOULD ALSO INCLUDE A PHASE l OUT OVER SOME YEARS OF ITS ACCESS TO THE FEDERAL FINANCING BANK. IN ITS'NEW FORM, TVA'S RATES FOR ITS WHOLESALE SALES, WHICH REPRESENT ABOUT 80 PERCENT OF THE TOTAL, WOULD BE SET BY THE FEDERAL ENERGY REGULATORY COMMISSION IN THE SAME FERCWAY REGULATES ALL OTHER WHOLESALE TRANSACTIONS. TVA'S LIMITED RETAIL SALES WOULD BE REGULATED BY THE RELEVANT STATE PUBLIC SERVICE COMMISSION UNLESS TVA CREATED A SEPAPATE DISTRIBUTION COMPANY TO HANDLE THAT

-- RESTRUCTURING TVA ALONG THE LINES OF CONRAIL WOULD GIVE TVA IMMEDIATE FLEXIBILITY IN MANAGEMENT, COMPENSATION AND THE ABILITY TO CREATE PERFORMANCE INCENTIVES. AFTER THE TRANSITION PERIODS HAD PASSED, IT WOULD LEAVE TVA CLOSER IN STATUS TO A PRIVATE COMPANY WITHOUT ABRUPT EFFECTS ON ITS CUSTOMERS.

REGULATION BY FERC AND TVA'S GROWING RELIANCE ON

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32 MARKET FINANCING WOULD PROVIDE EXTERNAL DISCIPLINES THAT ARE LACKING AT PRESENT. THIS ABSENCE OF EXTERNAL DISCIPLINE IS ARGUABLY ONE OF THE IMPORTANT CAUSES OF TVA'S PRESENT DIFFICULTIES. AFTER A PERIOD OF TIME.

IT SHOULD BE POLITICALLY POSSIBLE TO CONSIDER THE SALE OF THE GOVERNMENT'S SHARE OF TVA'S STOCK TO THE PUBLIC.

THERE IS No GOOD ECONOMIC ARGUMENT FOR PUBL OWNERSHIP AND OPERATION OF EITHER RAILROADS ~ OR ELECTRIC UTILITIES.

I -- THE ELEMENTS OF A PLAN TO REMAKE TVA IN THE CONRAIL MOLD CAN BE VAPIED IN NUMEROUS WAYS TO DEAL WITH POTENTIAL OBJECTIONS AND FEARS. NEVERTHELESS, THERE WILL BE OPPOSITION FROM THE ADVOCATES OF POWER PUBLIC AND THOSE CONCERNED ABOUT THE ULTIMATE LOSS OF FEDER I*

SUBSIDIES.

t A FOURTH OPTION IS FOR TVA TO CONTRACT FOR THE PRIVATE OPERATION OF SOME OR ALL OF ITS ELECTRIC UTILITY FUNCTIONS. THE CONTRACT COULD COVER TVA'S NUCLEAR

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13 FACILITIES, ALL OF ITS POWER GENERATION OPEPATIONS, OR i

ALL OF ITS ELECTRIC UTILITY OPERATIONS. IN ALL CASES, TVA WOULD CONTINUE TO OPERATE AS A FEDERAL CORPORATIO CARRYING 0;lT ITS NON-UTILITY FUNCTIONS, AND WOULD RETAIN OVERSIGHT AtlTHORITY AND RESPONSIBILITY FOR THE UTILITY OPERATION. IF THE CONTRACT COVERED ONLY ELECTRIC GENERATION ACTIVITIES, TVA WOULD ALSO CONTINUE TO HANDLE ITS POWER DISTRIBUTION AND ITS RELATIONS WITH WHOLESALE AND RETAIL CUSTOMERS. THE CONTRACT FOR PRIVATE OPERATION COULD BE FASHIONED TO PROVIDE STRONG INCENTIVES FOR EFFICIENT OPERATION. SUCH A CONTRACT COULD PROVIDE THAT THE CONTRACTOR WOULD BE REIMBURSED FOR ITS COST PLUS A MODEST FIXED FEE NOT RELATED TO ITS COST. IN ADDITION, THERE COULD BE SEPARATE INCENTIVE FEES THAT WOULD BE PAYABLE BASED ON THE CONTRACTOR'S ACHIEVEMENT OF SPECIFIC 60ALS SET BY THE TVA BOARD BASED ON A MULTI-YEAR PLAN, AND ON THE BOARD'S MORE SUBJECTIVE EVALUATION OF THE i

CONTRACTOR'S PERFORMANCE. THE GOAL.S FOR THE CONTRACTOR

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Ill WOULD CERTAINLY INCLUDE COST CONTROL AND UNIT PERFORMANC OBJECTIVES. FURTHER, SINCE THE CONTRACTOR WOULD NOT BE SUBJECT TO THE FEDERAL PAY CAP IN SETTING SALARIES, ASSURANCE COULD BE PROVIDED THAT ITS SALARIES WERE REASONABLE BY LINKING THEM TO AVERAGES FOR INVESTOR-0WNED COMPANIES AS DETERMINED BY NATIONALLY RECOGNIZED COMPENSATION CONSULTANTS. HOWEVER, THE CONTRACTOR WOULD HAVE THE RIGHT TO IMPLEMENT PAY INCENTIVE PROGRAMS BASED ON EMPLOYEES' PERFORMANCE.

TO ALLAY THE CONCERNS THAT WOULD BE FELT DY TVA'S CURRENT UTILITY EMPLOYEES, THE t

INITIAL CONTRACT SHOULD PROVIDE THAT THOSE EMPLOYEES WOULD BE H1 RED BY THE CONTRACTOR WITHOUT LOSS OF PAY, RANK, OR BENEFITS. THEREAFTER THEIR EMPLOYMENT AND COMPENSATION WOULD DEPEND UPON THEIR PERFORMANCETHE AND PERSONNEL hlEEDED BY THE CONTRACTOR FOR EFFICIENT

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OPERATIONS.

THE TVA BOARD COULD REMAIN UNCHANGED OR BE REVAMPED ALONG THE LINES OF THE FLIPPO BILL. IN EITHER i

CASE, THE BOARD WOULD SET THE STANDARDS FOR THE l

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15 OPERATION 3, SELECT THE CONTRACTOR, AND EVALUATE ITS PERFORMANCE, BUT WOULD HAVE TO REFRAIN FROM INTERVENTION IN THE UTILITY OPERATIONS. CONTRACTS WITH PRIVATE COMPANIES ARE USED BY THE FEDERAL GOVERNMENT WITH REASONABLE SUCCESS FOR THE OPERATION OF THE OAK RIDGE, HANFORD AND SAVANNAH RIVER NUCLEAR FACILITIES. CONTRACT OPERATION OF TVA'S ELECTRIC UTILITY ASSETS COULD ALLOW TVA 70 REGAIN ITS ABILITY TO MEET ITS LOADS WITHOUT A CHANGE '

IN THE FUNDAMENTAL FRAMEWORK OF THE ORGANIZATION AND WITHOUT ELIMINATING THE PAY CAP APPLIED TO TVA 1 EMPLOYEES. FOR THAT REASON, THIS OPTION MIGHT BE MORE POLITICALLY ACCEPTABLE THAN SOME OTHERS. HOWEVER, IT WOULD NOT PROVIDE DESIRABLE INCENTIVES AND DISCIPLINES FOR THE TVA BOARD AND WOULD NOT NECESARILY INVOLVE THE l

REMOVAL OF TVA'S SUBSIDIES.

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CHOOSING THE BEST OPTION INVOLVES CONSIDERATION OF BOTH ECONOMIC ADVANTAGES AND POLITICAL FEASIBILITY. ALL OF I

l THE PROPOSED CHANGES WILL ENCOUNTER OPPOSITION. BUT 1

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16 CHANGE -- SUBSTANTIAL CHANGE -- IN THE GOVERNANCE OF TVA IS ESSENTIAL TO AVOID SERIOUS PROBLEMS AND LOSSES FOR THE ULTIMATE CUST0MERC 0F TVA POWER AND INDIRECT HARM TO THE SOUTHEAST. WE BELIEVE THE CONRAIL OPTION BEST PROTECTS TVA'S ULTIMATE CUSTOMERS NOW AND IN THE FUTURE. IT FOSTERS THE SALVATION AND CONTINUED EFFICIENT OPERATION OF THE TVA SYSTEM WITHOUT TRANSITIONAL SHOCK AND WITH ULTIMATE FAIRNESS FOR THE AMERICAN TAXPAYER AND FOR THE CUSTOMERS AND STOCKHOLDERS OF OTHER ELECTRIC SYSTEMS.

7. UNDER NEW ORGANIZATIONAL ARRANGEMENTS THAT MAKE EFFECTIVE REMEDIAL ACTION POSSIBLE, TVA NEEDS TO INSTALL STRONG AND EFFECTIVE LEADERSHIP, l SET WELL DEFINED, DEMANDING BUT ACHIEVABLE GOALS, i MAKE ORGANIZATIONAL CHANGES TO FOCUS MANAGEMENT RESPONSES ON KEY PROBLEMS, COMMIT THE MATERIAL AND HUMAN RESOURCES REQUIRED FOR

PERFORMANCE IMPROVEMENT INCLUDING REPLACEMENT OF l PERSONNEL UNABLE TO ACHIEVE HIGH STANDARDS, AND l

, 17 CARRY OUT MOTIVATIONAL PROGRAMS THAT ACHIEVE COMMITMENT TO CORPORATE GOALS AND PROGRAMS AT ALL LEVELS.

8. IN A TURNAROUND SITUATION PARTICULARLY, THE ESTABLISHMENT OF STRONG EXECUTIVE MANAGEMENT AND COMPLETE FLEXIBILITY IN PERSONNEL AND ORGANIZATION IS ESSENTIAL FOR TVA AS A WHOLE OR AT LEAST FOR ITS NUCLEAR OPERATIONS. THE SSEB CAN HELP TVA SOLVE ITS PROBLEMS AND IMPROVE THE REGIONAL ENERGY PICTURE BY DEFINING AND MOBILIZING SUPPORT FOR FEDERAL i

l ACTION TO ACHIEVE THOSE OBJECTIVES.

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