Jan. 6 (Bloomberg) -- The deluge of ash from a coal-fired power plant that buried 300 acres of eastern Tennessee is sparking new state and federal scrutiny of the Tennessee Valley Authority, the largest U.S. public power company.

A Senate panel in Washington has asked TVA’s Chief Executive Officer Tom Kilgore to testify Jan. 8 on whether more regulatory oversight is needed. A House committee chairman says he may seek federal rules for coal-ash storage sites. Tennessee Governor Phil Bredesen has ordered inspections of the TVA’s waste sites and a review of state environmental regulations.

The question is whether the TVA may have received “exaggerated deference,” said Bredesen, a Democrat, last week. The accident on Dec. 22 is also testing economic, political and social ties that go back generations in the seven southeastern states served by the Knoxville-based company.

“There are TVA employees all over here,” said Ray Riggs, 71, who lives across a lake from the Kingston Fossil Plant, where the billion-gallon ash spill happened. “We know them. They’re our friends. TVA isn’t some removed company. But the jury’s still out on this one.”

A wave set off by the collapse of a dump that held decades of coal ash ripped away Riggs’s boathouse and dock and tossed them down the shore. Three nearby homes were destroyed and 42 properties were damaged.

Water samples taken in rivers downstream from the waste spill showed high levels of arsenic, lead and mercury, Appalachian Voices, an environmental group based in North Carolina, said last week. The TVA and the U.S. Environmental Protection Agency have tested treated drinking water, which they say is safe.

Cussing the TVA

Kingston Mayor Troy Beets drank from a cup of local tap water last week at a press conference to ease concern that the drinking water posed risks. Beets, 65, said in an interview that residents have a deep yet straightforward relationship with the regional power company.

“We have a little joke here: We’re going to sit around the heat pump and cuss TVA,” he said. “What would we do if we didn’t have TVA? TVA has been a longtime partner to this whole area. Have they polluted the air some? Yes. But are they working to clean it up? Yes, they certainly are.”

The Tennessee Valley Authority, created by President Franklin Delano Roosevelt and Congress in 1933 as a “corporation clothed with the power of government,” is more than the local power company. TVA dams tamed the flood-prone Tennessee River, bringing electricity to the rural south.

The TVA provides power to industry and about 9 million people in the river valley that runs from southern Virginia to northern Mississippi.

Spread on Notes Widens

The federally owned company, which isn’t publicly traded, receives no government funds, according to spokesman John Moulton.

TVA’s 4.5 percent notes due in 2018 have fallen 3.35 cents since the spill on Dec. 22 to 107.2 cents on the dollar for a yield of 3.58 percent, or 101 basis points more than Treasuries of similar maturity, according to data compiled by Bloomberg. The spread, which was 101 basis points on Dec. 22, widened to 115 basis points on Jan. 2.

“There is less skepticism toward the TVA than would otherwise be due it when it comes to environmental matters because of this historical loyalty and belief that the TVA has had a positive impact,” said Robert J. Norrell, a history professor at the University of Tennessee in Knoxville, about 35 miles northeast of Kingston, in an interview.

The power giant also made enemies along the way. To build its dams, the company flooded land it acquired through the power of eminent domain, often from unwilling sellers, including one of Norrell’s grandfathers.

‘A Refugee Movement’

“They cleared out lots of people,” said Norrell, 56. “There was kind of a refugee movement in that area. My Daddy was full of stories about the anger and bitterness people had about the TVA.”

The TVA manages the Tennessee River system, the nation’s fifth-largest. It had revenue of $10.4 billion in the year ended in September, almost all from the sale of electricity, according to a regulatory filing by the company. About 62 percent of that power is generated by 11 coal-fired plants like the one in Kingston. TVA’s three nuclear plants produced most of the rest. The TVA employs 11,600 people and operates 49 dams.

Mike Duncan, chairman of the Republican National Committee, is among the members of the TVA’s board.

The Kingston plant started generating electricity in 1954 and was online fully a year later. Twin smokestacks 1,000 feet high (305 meters), about the size of the Eiffel tower, rise from the shore at the edge of the lake where the Clinch and Emory rivers meet. They’re a landmark amid the foothills of the Cumberland Mountains on Interstate 40.

TVA’s Comments

In a full-page advertisement in the Roane County News after the sludge spill, the TVA’s Kilgore said the company takes seriously its responsibility for environmental, economic and energy stewardship.

“The beauty of this valley and its rivers are special to all of us at TVA and you have TVA’s continued commitment that our environmental restoration efforts will continue in earnest to restore this area as the land and rivers you know, care for, and enjoy,” he said.

Stephen Smith, an environmentalist who has challenged the TVA for 15 years, responded to the spill by filing a notice of intent to sue the company under the Clean Water and Resource Conservation Recovery acts. Smith, executive director of the Southern Alliance for Clean Energy based in Knoxville, is scheduled to testify at the Senate hearing this week.

‘Least Accountable’

“The TVA is the biggest of the big when it comes to public power, and yet they are the least accountable of any utility that we run up against in the southeast,” Smith said in an interview. “That’s not to say they are the worst environmentally. The TVA at least attempts to do things right environmentally. But this is a real low point.”

The TVA may have been given too much leeway by states on environmental regulation because it is federally owned, Governor Bredesen said last week.

Representative Nick Rahall, the West Virginia Democrat who heads the House Natural Resources Committee, may offer legislation mandating that coal-ash storage sites meet federal standards similar to those already in place for storing waste from coal-mining, said Jim Zoia, the committee’s chief of staff, in a phone interview. Rahall’s state was the second-largest producer of coal after Wyoming last year, according to the Energy Department.

In Kingston, Riggs, who like his 58-year-old wife, Teresa, formerly worked for a contractor at the Energy Department’s facility in Oak Ridge, Tennessee, said the TVA has been helpful so far.

“You tell them what you need and they’re trying to be responsive, they’re trying to be a friend to us,” he said. “It’s going to be tough.”

To contact the reporter on this story: Mark Clothier in Harriman, Tennessee, at mclothier@bloomberg.net

Last Updated: January 6, 2009 11:09 EST