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Published by: Senate Hall Academic Publishing
Published in: "Journal of Strategic Management Education", 2003

Abstract

This case involves the Tennessee Valley Authority (TVA), a federal corporation governed independently by a three-person board, which undertook excessive investments in the 1980s based on erroneous projections of technology and demand growth for electricity. The required capital outlay financed by private debt, has been partially recovered by arbitrary price increases for electricity. With electricity markets now beginning to open up to competition, inside and outside the TVA monopoly ''fence'', TVA cannot still expect to keep solvent and reduce excessive debt. Financial analysis undertaken here indicates that TVA''s solvency scenario holds only under very narrow assumptions, and an array of equally plausible, and perhaps more realistic, scenarios leads to projections of insolvency for TVA. The impending threat of insolvency then makes a pressing case for determination as to whether the Federal Financing Bank should bail out TVA from the consequences of past investment errors. The alternative would be to treat this company the same as investor-owned utilities that made erroneous large-scale capital outlays over the last two decades. This would call for bankruptcy proceedings, write downs of debt and ultimate de facto privatisation of the Tennessee Valley Authority. We offer this case as an example of strategies of corporations both private and public (government-owned) in their financial operations. These strategies can involve access to competitive advantages of both, even though they were meant to be exclusive to one or the other. In the TVA experience, straddling such a fence may be the worst result. This case study has been peer reviewed by the editorial board of the Journal of Strategic Management Education (JSME).

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Abstract

This case involves the Tennessee Valley Authority (TVA), a federal corporation governed independently by a three-person board, which undertook excessive investments in the 1980s based on erroneous projections of technology and demand growth for electricity. The required capital outlay financed by private debt, has been partially recovered by arbitrary price increases for electricity. With electricity markets now beginning to open up to competition, inside and outside the TVA monopoly ''fence'', TVA cannot still expect to keep solvent and reduce excessive debt. Financial analysis undertaken here indicates that TVA''s solvency scenario holds only under very narrow assumptions, and an array of equally plausible, and perhaps more realistic, scenarios leads to projections of insolvency for TVA. The impending threat of insolvency then makes a pressing case for determination as to whether the Federal Financing Bank should bail out TVA from the consequences of past investment errors. The alternative would be to treat this company the same as investor-owned utilities that made erroneous large-scale capital outlays over the last two decades. This would call for bankruptcy proceedings, write downs of debt and ultimate de facto privatisation of the Tennessee Valley Authority. We offer this case as an example of strategies of corporations both private and public (government-owned) in their financial operations. These strategies can involve access to competitive advantages of both, even though they were meant to be exclusive to one or the other. In the TVA experience, straddling such a fence may be the worst result. This case study has been peer reviewed by the editorial board of the Journal of Strategic Management Education (JSME).

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