VQK.Communications -- The Power Company Next Door -- TVA

Spring 1991
Georgia Power Perspective

The Power Company Next Door
Interview with Marvin Runyon, then chairman of the Tennessee Valley Authority

Since becoming chairman of the Tennessee Valley Authority in January 1988, Marvin Runyon has drastically restructured the organization. In 1988, TVA reduced its workforce by 11,000 employees, down to today's 26,000, and the company recently changed its structure to provide increased emphasis on customer service. In 1988, Runyon pledged that the company would not raise rates for three years--and now TVA's going for four years without a rate increase. By the end of the fiscal year in September, TVA's cumulative savings are expected to reach $1.7 billion.

Runyon, a former Ford Motor executive who began his career on the assembly line, achieved national recognition as president and chief executive officer of Nissan Motor Manufacturing Corp., U.S.A.

When he took over the federal utility, critics were dubious about its future. TVA is the nation's largest public power producer, with 7 million customers in parts of seven states. After numerous fines by the Nuclear Regulatory Commission, TVA took its five licensed nuclear units out of service in 1985 to solve management and technical problems. TVA's ambitious program of nuclear plant construction had driven its industrial rates higher than those of the investor-owned private utilities on its borders. TVA's rates had gone up 500 percent (an average of 10.4 percent a year) between 1967 and 1988.

In a recent interview, Runyon said the gamble of taking a large pay cut to take on what many viewed as a thankless task is paying off. "It's a job I wanted to do because I considered it a tremendous challenge to move into a government job and see if you could apply management practices used in private industry in government. My personal opinion was that they would work the same in government as they do in industry--and my finding is that that's absolutely true, especially at TVA" TVA's original mandate in 1933 was to be "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise" – and Runyon believes TVA has gone a long way toward achieving that flexibility and initiative.

The new focus at TVA is competitiveness. Said Runyon, "I think that the utility industry, because it's regulated and also because, in certain ways, most utilities are protected from competitors by their boundaries, has not been as competitive as it is going to have to be in the future."

TVA is not protected by its boundaries, he points out. Under law, TVA can only serve its original territory – but part of that original territory does include northwest Georgia and northern Alabama, and Oglethorpe Power Corp. recently signed an agreement to purchase TVA power. Customers in TVA's original territory can, however, contract with anyone for their power. "We've got a lot of competitors out there. We've probably got 17 or 18 companies around us who would like to have some of our customers" Runyon said. Of course, those include Georgia and Alabama Power, which Runyon referred to as "friendly competitors"

Memphis Light, Gas and Water, TVA's largest customer, has a contract with an escape clause--and had made noises in recent years about looking elsewhere for its electricity supply. Following the changes TVA made to become more competitive, Memphis did decide to continue with TVA, after evaluating all potential suppliers. In December 1988, Duke Power bought Nantahala Power and Light, which had purchased half its power from TVA. Bristol, Va., has given TVA notice for 1995 and is accepting bids from other power companies.

TVA's reorganization, announced early this year, creates posts for a senior vice president for quality improvement and a senior scientist. It creates a Generating Group to manage all fossil, hydro and nuclear power; a Customer Group that includes power delivery operations; and a Resource Group to offer natural resource and economic development programs. The idea is to reduce levels of management and make people more accountable.

Said Runyon, "The purpose for the reorganization was to emphasize service, quality and change" In announcing the new structure, he said TVA underwent major changes in 1988 "to become more competitive and survive. This time we're building on our accomplishments and focusing on success through quality customer service"

The major changes in 1988 included reducing the workforce and overhead costs by a third. The effect on employees was buffered by what Runyon believes was one of the largest outplacement programs in American corporate history. TVA found 14,000 jobs at more than 1,300 companies all over the country to offer its employees. It offered early retirement and double severance pay to people who were laid off, including the people who volunteered to leave. There were job counseling programs and job fairs. The result was that out of the first 7,800 people who were given notice, 6,000 left voluntarily. Said Runyon, "We did everything we possibly could to help employees make that adjustment. These weren't bad people. They were not incompetent people." TVA just didn't need what they were doing because it changed the way it did business--for example, getting rid of its fleet of planes.

Part of helping employees make the adjustment included a communication program about the reduction in force that was remarkable for its candor and openness. "When you're going through such massive changes, you have to communicate" Runyon said. "And it's not like you can really keep any secrets from employees"

Despite the layoffs, he contends TVA's service continues as good or better than ever--and says employees have a new pride in their work. "We had people who didn't want to be identified as working for TVA. They wouldn't wear their badges out on the street. But nowadays when I walk out on the street I see TVA badges everywhere. People are proud of that badge, I think. At least they're not so ashamed of it that they take it off."

In addition to TVA's efforts to retain its existing customers through improved service, Runyon said, "Today we're finding out that if you want new customers, you'd better be competitive with where else they can go to buy their power--and by new customers, I'm talking about industrial customers. That's where the real competition comes into play. The homeowner doesn't normally make a decision to move to a state or a city based on utility rates. What they do they get moved and then say, 'Gosh, my rates are twice as much as they were' or 'My rates are only half as much, isn't this wonderful!"' Industries, though, look at electric rates in deciding where to locate.

This focus on what the customer needs and wants is new to TVA-and to most utilities, Runyon said. "We were very arrogant. We said, 'We are the power company. We are the authority. The Tennessee Valley Authority. If you want power, talk to us: We've changed some of that. That's not the way the world is. We've got to be customer driven, because the '90s are the decade of the customer, not just in the power business, but in everything"

Runyon discounts the idea that TVA has an unfair advantage over investor-owned electric utilities. "In 1959, the federal government said, 'Listen, we've got some new rules for you. We're going to stop paying for your power plants.’ All the plants up until then, the dams and the fossil plants, were paid for with government funds from taxes. The government said, 'We're out of the power business now. You've got to pay us back every penny we've ever put into TVA for power production-plus interest: So we're paying the federal government every year part of the 81.2 billion that they charged us for the facilities we had in 1959. Last year I think we paid back $88 million. We're doing that every year to pay that debt off."

A number of observers have contended that Runyon's efforts to restructure TVA are part of a larger effort to move the federal agency toward being a private company. Runyon has vigorously denied this. "I don't see that there's any benefit for anybody for TVA to go private. TVA does not have any stockholders. We pay no dividends. In effect, the real stockholders in TVA are our customers. We don't pay taxes because we don't make a profit--we also don't pay taxes because we're a government agency--but the fact that we don't make a profit is the bottom line of why we don't pay taxes. So what's the advantage! We operate as a private corporation right now. Taxpayers don't pay a penny for TVA's operating costs. The only people who pay for it are our customers," he said.

"If somebody had wanted TVA to go private, then they should have just left it alone, and then it would have gone private. The way it would have gone private is that, the way rates were going up in 1988, rates would have been 30 percent higher by now. With those rates, Memphis would have gone to another power company -- a private power company. Then after Memphis went, TVA would be faced with raising the rates another 7 or 8 percent to cover fixed costs and make up for that lost revenue. About that time, I would imagine, Georgia Power would have made a better offer to Chattanooga, so we'd lose another 7 percent. Now rates are up about 45 percent. Before you know it, we've got rates so out of line that all the big cities close to the edge of our territory, like Knoxville, Chattanooga, Huntsville and Memphis, go with other suppliers. What do we have left? Residential. And who's going to take care of them? At that point, what happens to TVA? I guess the federal government comes in and assumes all the liability and someone comes in to run it, but is that going to help the people of the Tennessee Valley! I don't think so"

'Don’t worry about those little trucks'
Expecting change and learning to deal with it is one of the Tennessee Valley Authorities three objectives. "Services, quality and change are the three things we think we need to be working on from now on," says TVA chairman Marvin Runyon.

Runyon gave his favorite definition of change: "One 10th of 1 percent of the people in the world make change happen, 9.9 percent of the people in the world watch change happen and 90 percent of the people, after change has taken place, ask ‘What happened?’ You have to be up there in that small percentage making things happen. If you have to ask ‘What happened?’ in the business world, you don’t have a job. You need to be out looking for where the next change is gong to take place.

"We weren’t looking too closely when we started to build these nuclear plants. TVA had 17 nuclear plants under construction. We looked at that consumption curve going up, and there was good reason to start those plants. But when that curve started gong flat, nobody noticed that. It finally ended up costing us, I believe it was $4.6 billion., before we stopped. That’s the write-off we had to take. If we’d been a little more aware of the change taking place, we could have cut back. I wasn’t here, so it’s easy for me to say that. But my point is, when that happens to us again we’d better be smart enough to notice it. We’d better be on the cutting edge of the change and see it coming and do something about it."

Mitsubishi is now building a power plant in Virginia whose total output will be sold to Virginia Power, and Runyon says, "People are saying, ‘Hey, don’t worry about that, that’s just one little plant.’ Well, these little plants have a way of becoming big plants. That’s what happened in the automobile business here.

"I remember when I was at Ford 30 years ago. I traveled out to California and saw these little trucks. I came back and said, ‘They’ve got these little bitty trucks out there. Japanese trucks. They’ve got a little pickup box and a little cab. They’re so small the gas mileage has go to be good, and they’ve got to cost less, and you know, people are buying them.’ They said, ‘Don’t worry about those little trucks,’ Twenty years or so later I personally was responsible for building those little trucks – for Nissan. So these little things have a way of growing.

"When I look out and see this Mitsubishi plant, it kind of bothers me, because I wonder,’ What are they after?’ I know what they’re after. Somebody asked them to build that plant for them and they built it cheaper." But, says Runyon, that might just be the beginning.