TVA's biggest customer eyes split with federal utility; Memphis agrees to solicit power proposals to consider future options

The Tennessee Valley Authority building in downtown Chattanooga is shown in 2016. / Staff file photo
The Tennessee Valley Authority building in downtown Chattanooga is shown in 2016. / Staff file photo

The Tennessee Valley Authority will have to compete with other wholesale power suppliers to keep its biggest customer beyond 2025.

Memphis Light Gas & Water, the biggest purchaser of TVA power among the 153 municipalities and power coops that buy and distribute TVA electricity in the 7-state Tennessee Valley region, will solicit proposals from power suppliers this fall to see if the city-owned utility can get a better deal than what TVA has provided Memphis for the past 81 years.

MLGW directors Wednesday agreed to solicit power supply offers to test the market after a consultants' study estimated MLGW could save an estimated $122 million a year by leaving TVA.

"We believe now we need to move forward with a power supply RFP (request for proposals) that we will undertake to confirm the projected savings," J.T. Young, president of MLGW, told the utility's board Wednesday. "Before we make a formal recommendation to you the board whether we stay or go (with TVA), we think we need to take this step to validate those savings."

A study done by the Siemens consulting group found that the Memphis utility could save up to $1.9 billion over the next two decades by generating its own natural gas and solar power and joining a nearby regional transmission organization- the Midcontinent Independent System Operator (MISO) - to replace the electricity now supplied by TVA to MLGW's 421,000 customers.

Memphis Light Gas & Water, the city-owned utility that now pays TVA about $1 billion a year for power, commissioned the Siemens consulting firm to analyze its power supply options for the future after four previous studies suggested that MLGW could save anywhere from $100 million to $450 million annually by splitting with TVA.

TVA responds to Memphis

TVA cautions that leaving from the federal utility could jeopardize the reliability of power service and limit the economic development services and tax-equivalent payments TVA now provides.

"We are excited about the opportunity to engage in the RFP process – put the facts on the table – and prove that TVA in partnership with MLGW is the best option for the people of Memphis and Shelby County," TVA President Jeff Lyash said in a statement Wednesday. "We believe the people of Memphis deserve a partner that cares about serving their needs and addressing real issues like energy burden and the revitalization of the city's core communities."

Memphis has the third lowest electricity prices among America's 100 biggest markets. But because so many homes in Memphis are energy inefficient and low income, a quarter of low-income households in Memphis spend more than 25% of their income on their energy bills.

Environmental groups that have been pushing MLGW to replace TVA power with new solar and wind generation welcomed the move by Memphis to solicit other energy providers.

"This historic decision sets up MLGW to provide more value to customers in Memphis and be a national leader on clean energy," said Dr. Stephen A. Smith, executive director of the Southern Alliance for Clean Energy. "By seeking bids on alternative power supplies, the people of Memphis and Shelby County will lock in lower cost and cleaner more efficient energy-giving Memphis more control of its own future. This also serves as a significant "shot across the bow" to TVA that MLGW is setting the stage to break loose from TVA's dictatorial long term contract arrangements."

Powerful choices ahead

TVA has pledged not to raise its base electricity rates for the next decade and has offered a 3.1% rebate to distributors that sign 20-year contracts with TVA for their power. TVA also outlined plans earlier this summer to expand its energy efficiency programs in Memphis to help address the energy burdens faced by many households in energy-inefficient homes.

Lyash said MLGW could end up having to spend up to 20% more over time if Memphis splits with TVA due to unanticipated expenses for building or buying more power generation, higher-than-expected fuel costs, and making up for other TVA transmission and development services.

But the Siemens study suggested that other power suppliers would still meet the reliability standards of the North American Electric Reliability Corp., (NERC) and the consultants recommended that Memphis move ahead with soliciting power supply bids to test the market.

As solar, wind and other new sources have gotten cheaper and natural gas prices have declined over the past decade, other utilities and independent power producers are often generating power at a lower average cost than TVA, which still generates much of its power from its nuclear reactors and older coal and gas plants. TVA also has more than $20 billion of debt it has incurred to build its generating and transmission capacity.

"There are now opportunities to take advantage of the market that are out there, but reliability and economic growth is important," Young said. "This has been a very deliberate process because we want to make sure we get it right."

Young said Memphis rates are lower than the national average, but new power suppliers may be able to offer even lower rates for Memphis electricity customers than what TVA now provide. Siemens considered 10 power supply options rather than relying entirely upon TVA.

MLGW Vice Chairman Mitch Graves urged the utility's management to move quicker to getting bids and replacing TVA to enjoy savings from cheaper sources. But Young said MLGW wants to hire a consultant to gather and assess the power supply options to ensure the utility makes the best choice for the long run.

"We don't want to, for the sake of moving fast, move wrong," Young said.

Others also eye TVA split

Any decision to split with TVA would require approval by both the MLGW board and the Memphis City Council and TVA requires a 5-year notice before MLGW could turn to another power supplier.

Memphis is TVA's biggest single customer and is at the western edge of TVA's 7-state region. MISO officials said MLGW could join the MISO market to gain access to needed power, beyond what the municipal utility may decide to build or buy on its own.

Two other TVA distributors in the eastern half of TVA's service region - Volunteer Energy Corp., in Decatur, Tennessee and North Georgia Electric Membership Cooperative in Dalton, Georgia - are also soliciting power supply proposals and may split with TVA in the future to get cheaper power from other power sources. Neither of those distributors signed the new long-term power purchase agreements with TVA, but they also have yet to give TVA notice of terminating their existing contracts.

Most of the 153 municipalities and power coops that distribute TVA, including EPB in Chattanooga, have signed new 20-year power purchase contracts with TVA during the past year.

To entice distributors to stay with TVA for the long term, TVA last year began offering a 3.1% rebate for those signing the 20-year agreement, but a group of environmental groups this week sued to block those agreements. The Southern Environmental Law Center, Protect Our Aquifer, Energy Alabama and Appalachian Voices joined in the lawsuit claiming the 20-year contracts with TVA hurt the ability of local power companies to use renewable power from sources outside the TVA.

Under the new 20-year contracts, TVA is offering local power companies the flexibility to generate or buy 3 % to 5% of their power from sources other than TVA, including solar, wind and other renewable power. But the new contracts still require that local power companies served by TVA must buy the vast majority of their power from TVA and their rates will continue to be regulated by TVA.

Since TVA's creation in 1933, several local power companies have previously left TVA to buy power elsewhere. Bristol Virginia Utilities left and later returned to TVA and three Kentucky utilities - Paducah Power System, Princeton Electric Plant Board and Monticello Electric Plant Board - permanently split with TVA a decade ago.

Contact Dave Flessner at or at 423-757-6340.