December 30, 1999

Governor Don Sundquist
Office of the Governor
State Capitol
Nashville, TN 37243-0001

RE: Tax Reform in Tennessee

Dear Governor Sundquist:

First let me commend you for your heroic, albeit controversial and seemingly thankless, effort to reform the tax structure in Tennessee. As you have discovered, introducing an income tax in Tennessee is anathema. You indicated in one of your speeches that the tax structure in Tennessee has not been changed since about the 1920's, and that it is imperative that changes now be made to keep pace with the State's needs into the 21^st century. May I suggest to you that another sacred cow in Tennessee created about that same time also needs to be dramatically restructured to keep pace with the needs of the State into the 21^st century. Coincidentally, this change would also result in a significant increase in tax revenue at the State and local levels in Tennessee.

Attached is a June 1, 1939 letter written by Guy L. Smith, editor of The Knoxville Journal, warning of the loss of tax revenue "With acquisition by Tennessee Valley Authority of private utilities in Tennessee." While Tennessee Power Company readily acknowledges the world renown achievements of TVA in taming the Tennessee River, restoring the soil, and bringing economic prosperity to a severely depressed region, that job was completed by a much earlier generation of TVA officials and employees. Today Mr. Smith's letter has a prophetic ring to it with TVA becoming little more than a huge utility exempt from not only state and Federal regulation, but also exempt from local, State, and Federal taxes.

Yes TVA pays in lieu of tax payments of 5¢ on every dollar of revenue, and then spends hundreds of thousands and possibly millions of dollars on daily television and radio commercials and printed advertisements reminding us of the public good it does with this money. But this is less than half of the 12.3¢ in taxes typically paid by investor owned utilities on every dollar of revenue.

Legislation normalizing the utility industry in the State of Tennessee as suggested in my presentation to the Tennessee General Assembly Study Committee on Electric Utility Deregulation last year (copy enclosed) would not only breathe new life into the State's utility industry through competition, but would also dramatically increase State and local tax revenue.

It is our belief that it would be in the best interest of the citizens and ratepayers of the State of Tennessee for you to meet with our national legislators and formulate a strategy to introduce competition and put TVA's facilities into the hands of investors as taxable assets with taxable income. This would no doubt be more palatable to the voting public than a new income tax.

Sincerely,

Michael R. Knauff

Enclosures

cc:

Senator Bill Frist
United States Senate
567 Dirksen Senate Office Building
Washington, DC 20510

Senator Fred Thompson
United States Senate
523 Dirksen Senate Office Building
Washington, DC 20510

Congressman Zach Wamp
US House of Representatives
423 Cannon House Office Building
Washington, DC 20515

PUBLIC COMMENTS BY TENNESSEE POWER COMPANY

BEFORE THE TENNESSEE GENERAL ASSEMBLY STUDY

COMMITTEE ON ELECTIC UTILITY DEREGULATION

DECEMBER 3, 1998

My name is Michael Knauff and I am with Tennessee Power Company, a power marketing and consulting company out of Chattanooga, TN. We think it is essential that dramatic changes take place now in the electric business in the Tennessee Valley in order to ensure the Valley's future economic viability. We believe this can be done without any losers and without any degradation of reliability or obligation to supply, and would like to suggest the following scenario.

If congress were to pass legislation requiring TVA to divest itself of all non-nuclear assets, including its transmission system, and requiring the purchaser of the transmission system to form an independent system operator (ISO), similar to the New England ISO, with retail deregulation then:

1. The ISO would ensure reliability in matching generation with load on a continuous basis; ensure comparable, reliable transmission access to all suppliers; and provide a mechanism to establish hourly market clearing prices for default suppliers and buyers.
2. Generators/suppliers and retail buyers would be free to enter into bilateral arrangements, and distributors would continue providing distribution services; however, distributors would also be the default suppliers to all retail consumers not electing alternative suppliers. The default rates would be based on the ISO hourly market clearing price and subject to state regulation.
3. The ISO would be compensated for its services by all consumers under FERC regulated rates. Distributors would be compensated for distribution services from consumers within their respective service areas at state approved rates, with an obligation to be the default suppliers under state approved terms and conditions.
4. TVA's debt, less the proceeds from the sale of its non-nuclear assets, would remain a liability on its nuclear assets. TVA would then be free to compete in the generation market to obtain operating revenue and recoup the remainder of its debt over time.
5. TVA would lose its federal agency status and become a corporation like any other corporation, subject to the ISO and to all laws, taxes, and regulations to which other generators would be subjected.

Under such a scenario Tennessee Valley ratepayers would be relieved of any liabilities associated with TVA's massive debt, and assured of reliable power supply into the foreseeable future with the effect of choice and competition ensuring that rates remain as low as can reasonably be expected. TVA would receive significant revenue from the sale of its non-nuclear assets to pay down most of its debt, with the remainder of its debt being recovered over time in the generation market. There would be no losers and the State of Tennessee, together with the rest of the Tennessee Valley, would be postured for future prosperity in the competitive American way.

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