TVA offers rebates to local power companies that sign long-term contracts with TVA

TVA pares debt, spending enough to avoid plans for rate hikes for the next decade

The Tennessee Valley Authority building in Chattanooga is shown on Wednesday, Nov. 2, 2016.

KNOXVILLE - For the first time in 13 years, the Tennessee Valley Authority is offering cheaper power for the municipalities and power cooperatives that distribute its electricity if they agree to long-term purchase contracts with the federal utility.

TVA directors on Thursday approved a budget for fiscal 2020 that suspends further wholesale rate increases and offers a 3.1% monthly rebate to any of the 154 TVA distributors that agree to sign new 20-year contracts with TVA. TVA's $10.6 billion spending plan for next year ends the six-year-long pattern of base rate increases to pay down the agency's debt, which CEO Jeff Lyash said can now be managed without higher costs for consumers.

In his first budget proposal since becoming CEO of the nation's biggest public utility in April, Lyash also proposed a 10-year plan to keep rates stable and even hinted rate cuts could occur if TVA is able to pare more expenses in the future.

"Since 2013, we've been focused on strengthening our financial foundation to allow us to better meet future needs," Lyash said, noting that debt has fallen to the lowest level in 25 years. "Through hard work and dedication to that goal, we've achieved many of our 10-year goals in only six years, which allows us to keep our wholesale rates steady. With the improvements we've made, we believe we can deliver a decade of flat wholesale rates."

TVA distributors welcomed the prospect of stable rates, although an environmental group said the energy burden for many Tennessee Valley residents remains high because of higher power usage in the TVA region compared with most of the country. The Southern Alliance for Clean Energy said Tennessee households pay the 12th-highest energy bills in the nation, primarily because of higher per capita use of electricity due to the weather in the region (summer and winter peaks) and less insulation and weatherization in homes and buildings in the Tennessee Valley.

"While we welcome the lack of a rate base increase, we are concerned about the continued upward pressure on bills that negatively impacts our most vulnerable neighbors," said Dr. Stephen Smith, executive director for the Southern Alliance for Clean Energy. "Customers don't pay a rate, their energy consumption and fixed fees are key drivers of their total bill. TVA is misleading the public about what customers are really paying by trying to keep the focus only on rates while gutting energy efficiency programs."

TVA said its relative rates for residential customers are the 28th lowest among the top 100 U.S. electric utilities, compared with a 33rd ranking in 2013, and TVA's industrial rates rank the ninth lowest among the top 100 utilities, compared with being the 21st lowest utility seven years ago.

Lyash said he expects TVA to continue to improve its relative ranking among utilities, and he offered TVA distributors a way to further cut their power rates if they agree to buy TVA power under longer 20-year contracts.

Within hours of the TVA board approving the rebates for long-term contracts, four of TVA's 154 distributors, including Clinton Utilities Board and the Lenoir City Utilities in East Tennessee agreed Thursday to the new 20-year contracts.

EPB President David Wade, who is also chairman of the Tennessee Valley Public Power Association, said Thursday he "is glad TVA is projecting stable rates" and he said EPB will study whether to adopt a longer-term TVA contract to qualify for the new rebates.

"Because the proposed contract includes a 20-year rolling commitment, it's important to do our due diligence to ensure that EPB continues to provide the best energy solutions for our customers both now and over the long-term," Wade said.

In exchange for the longer-term contracts, TVA is offering more flexibility to its distributors, allowing them to generate or buy as much as 5% of their load, if needed, to meet consumer desires for renewable energy or other distributed energy options. Also, TVA is offering a 3.1% rebate to long-term distributors, which if all 154 municipalities and coops sign up could save distributors up to $225 million on an annual basis, according to TVA Chief Financial Officer John Thomas.

"This is an optional agreement for our local power companies that helps minimize risks, improves planning and offers more flexibility for funding and services," Lyash said.

He also said TVA is continuing to support energy efficiency measures, along with other nonprofit, government and business programs to encourage better efficiency. Lyash cited EPB's Home Energy Upgrade program in Chattanooga, which has helped pay for energy efficiency improvements at more than 250 homes in low-income neighborhoods.

"The public power model is particularly well suited to serving the needs of the Valley because our mission is to serve the Valley, not just to make money," he said.

Paying down TVA's debt

In 2013, TVA adopted a 10-year plan to raise wholesale rates every year for 10 years to pay down its debt, which peaked at $28.5 billion nearly a decade ago. By the end of the current fiscal year, Lyash said, TVA's debt will fall to about $23 billion and should continue to decline over the next decade to between $18 billion to $20 billion, which will be only about half the utility's overall net worth and put TVA's financial leverage more in line with most other utilities.

TVA is on pace to reach earlier than planned its 2023 target of getting the debt below $21.8 billion. TVA outlined plans to pare its debt more every year over the next decade, even though the agency will have to raise its capital spending in the next couple of years to build out its electric grid and to replace or rebuild aging combustion turbines.

Longer-term partnerships

TVA has historically had just a five-year notice for local power companies to leave TVA and get their electricity elsewhere, as cities such as Paducah, Kentucky, and Bristol, Virginia, have done in the past. Bristol later came back into the TVA fold.

Lyash said the average contract duration with local power companies in TVA's seven-state region is now 6.8 years, but he said TVA had 20-year agreements with its distributors in its early days.

Lyash, who has traveled thousands of miles in his first four months on the job visiting with TVA customers, said he worked on the new partnership proposal for distributors after hearing their desire for greater rate stability from TVA and more flexibility in arranging power agreements with their customers.

"This Tennessee Valley public power model has great potential, but at the heart of it has to be a long-term commitment between the parties and a level of collaboration on opportunities and problems that we haven't seen in some time," Lyash said. "For us to get the most out of this public power model, it has to be a long-term partnership with those local power companies engaged and helping TVA make the right decisions and the right resource allocations and to commit to the relationship long enough for those decisions to play out."

Lyash said longer-term contracts ensure TVA can make long-term commitments and investments with a guaranteed customer base. In exchange, he is offering those distributors who sign up for the longer-term contracts a slight drop in wholesale rates and more flexibility in how local municipalities and coops may opt for distributed power generation to meet particular customer needs.

"This is an option for our 154 LPCs (local power companies)," Lyash said. "If they like their shorter-term contracts, that's fine. I have no objective to drive them to a 20-year contract. But if they will do this, we believe we can engage them more in our decision making, give them more flexibility and be able to lower our rates."

Lyash said the move represents a needed shift from a supplier-customer relationship to more one of collaborative partnerships between TVA and its distributors.

The change in contractual offerings for local power companies comes as TVA's biggest customer, Memphis Light Gas & Water, considers leaving the agency and buying its power from another source. Lyash said he is trying to respond to the need and desires of the municipal power utility and power coops that purchase and resell most of TVA's power.

"But we didn't make this change specifically because of Memphis," Lyash said, although he said the future rate outlook and strategic plan is more favorable for Memphis and all other TVA distributors.

Contact Dave Flessner at or 423-757-6340.