TVA attempts to chain local power companies to longer contracts in effort to prevent defection risk

The Tennessee Valley Authority (TVA), the largest public power agency in the country, is attempting to quickly rewrite the power contracts it has with its local power companies in an effort to cement its monopoly control while locking the local utilities into lopsided agreements that would curtail their hopes of generating their own lower-cost renewable energy.

TVA is a federal agency that was founded to electrify Appalachia as part of the New Deal in 1933. It generates and transmits electricity to 154 LPCs, all municipally owned utilities and electric cooperatives, under all-requirements contracts. Those contracts prohibit the LPCs from buying electricity from anyone other than TVA. That prohibition is causing new tensions as, for the first time, options to generate their own energy or buy from other sources are becoming cheaper for LPCs than TVA’s rates. 

Some local power companies (LPCs) are exploring options to leave the TVA system, in part due to their own pressures from customers expressing a demand for renewable energy options that are increasingly cost competitive with TVA’s fossil fuel heavy electric mix. 

Larger LPCs leaving the TVA system would likely cause severe rate increases on the remaining LPCs, setting off a spiral effect that would encourage more defections, according to a study conducted by the Cooperative Finance Corporation and obtained by the Energy and Policy Institute via a public records request.

In response to the threat, TVA has, without alerting the public or the press, quietly undertaken a campaign to pressure LPCs to lock themselves into a new 20-year rolling contract. The new contract would further require the LPCs to give TVA a 20-year notice should they want to leave the TVA system. EPI obtained the contract offers via public record requests.The change would double the notification period for most LPCs in the Tennessee Valley, effectively eliminating any threat of LPCs defecting.

Additionally, for the first time, TVA will place a 3-5% cap on local choice in generation, such as rooftop solar and battery storage. TVA’s current all-requirement contracts do not allow LPCs any local choice in generation, so the 3-5% cap would, in a sense, represent a marginal improvement from nothing. But TVA is likely offering that small allowance as a way of preventing much greater unrest among its customers. Local electric cooperatives in the Rocky Mountain West have found the 5% caps placed on them by their own electric supplier, Tri-State Generation & Transmission Association, to be untenable due to the abundance of cheap, renewable energy.

86% of TVA’s LPCs currently have a 10-year notice period or less. Bowling Green Municipal Utilities General Manager noted that its 5-year rolling contract was “the only form of leverage to keep the TVA/LPC relationship in check,” in correspondence with TVA about the contract offering obtained by the Energy and Policy Institute via a public records request.

In exchange for the LPCs’submission to the far longer 20-year contract, TVA would provide LPCs with a 3.1% credit on their monthly bills and a vague commitment to “flexibility” on the issue of local choice in generation. 

The five largest LPC customers of TVA are all municipal utilities in Memphis, Nashville, Chattanooga, Knoxville, and Huntsville. Each has set or is setting greenhouse gas reduction goals. TVA’s contractual limitations on those municipalities creates challenges for reaching their carbon reduction goals. 

Cooperative Finance Corporation study shows risks for remaining with TVA

The Cooperative Finance Corporation (CFC), which provides credit and financial products to customer-owned electric cooperatives, analyzed the impact of TVA power supply contracts on electric cooperatives in a February 2019 study. 

CFC noted that TVA has to date operated “virtually free of competition,” in part by intentionally discouraging the use of its transmission assets by LPCs. CFC also said that TVA’s recent adoption of a “grid access charge” was “seen as a defensive action to discourage consumer investment in local renewable and DER investments.” Despite the barriers that TVA has erected to prevent defection, CFC’s study found that at least some LPCs could achieve significant savings from leaving.

TVA charged its LPCs 20-25% more than peers Kentucky Utilities, Duke, or MISO-South, according to the CFC analysis. 6 of the 27 LPCs studied by CFC could leave TVA, build new transmission, interconnect to a new supplier, and pay for it in less than five years from the power savings alone. 16 of the 27 LPCs could pay for it from the savings in less than 15 years.

CFC believes there is a “strong chance” that TVA’s largest customer, Memphis Light Gas and Water (MLGW), will give a “5-year notice” to leave TVA. MLGW leaving TVA would create havoc, raising rates by 7-7.5% for the remaining utilities, according to the analysis. Large rate increases on LPCs could lead to a death spiral for TVA, where the rate increases lead to more customers defecting, leading to still higher rates and more defections.

CFC’s study implicitly encouraged electric cooperatives to look to potential alternatives, especially for those LPCs located on the periphery of TVA’s territory.

TVA’s “wholesale credit” is a prisoner’s dilemma

TVA’s new offer is likely an effort to shore up the defection threat by luring LPCs into a longer-term contract with the promise of immediate bill reductions. The biggest carrot that TVA is dangling is a 3.1% “wholesale credit” for LPCs that sign the new “flexibility contract”. 

TVA’s “wholesale credit” is especially pernicious because it pits LPCs against each other. As LPCs sign the contract and secure their “credit”, non-signatory utilities will be responsible for paying the lost revenue into the system. 

Should all utilities sign the new contract, TVA would have 3.1% less revenue. In such a case, TVA would be forced to raise rates or fees to compensate for the newly lost revenue, thereby eroding the original value of the partnership credit. As a public agency, TVA does not have shareholders available to pay for the “wholesale credit,” and it does not receive appropriations from Congress. 

The LPCs who signed on would be left with a 3.1% credit on rates that TVA would be 3.1% higher, eroding the entire value of the original credit. TVA would still win in that scenario, since it would have enticed the LPCs into longer contracts.

In other words, TVA has trapped its LPCs into a classic “prisoner’s dilemma”. 

LPCs who have signed the new contract are best served by encouraging the remaining utilities not to join them, in order to ensure that others will be available  to pay for the credit without raising rates. However, the pressure on the non-signatories to sign the contract will increase once a critical threshold of LPCs has signed. Non-signatories may recognize the poor deal and be wary to lock themselves into 20-year contracts, but feel forced to sign the contract in order to not be left holding the bag to pay the wholesale credit for every other utility that’s signed. Once enough of the non-signatories cave, rates and fees would have to go up for all LPCs to make up for lost revenue.

TVA’s offer stated that the 3.1% credit will start on the first full month after signing the contract, adding pressure to LPCs to sign quickly.

Contract limits local power companies’ pursuit of renewable energy and storage 

As part of their current all-requirements contracts with TVA, local power companies are currently barred from buying energy from anyone except TVA or from generating their own. That ban is likely to become an area of conflict soon though, if it has not already, as the LPCs eye solar and battery technologies whose costs have plummeted in the past decade. The same issue has caused a massive rift to open between local cooperatives in the Mountain West and their generation supplier, Tri-State. 

Under the proposed contract, TVA will allow LPCs some minor say, or “flexibility,” about how 3-5% of their energy is generated. TVA did not explain how it can offer a new “flexibility” contract that is still an all-requirements contract that prohibits LPCs from buying energy outside of TVA.  TVA says only that it “commits to collaborating” to “develop and provide enhanced power supply flexibility” but does not provide any detail about what the “flexibility” options are or indications about how pricing and contracts will be structured. 

Further, the 3-5% “flexibility” may not come to fruition if either party does not agree to the terms, something neither party is obligated to do, even after signing the new contract. That offer may look like progress to LPCs who currently have no ability to procure energy outside of their current contracts, but it would preclude the LPCs from pursuing much more ambitious renewable energy or battery portfolios for at least 20 years.

TVA’s perverse incentive structure continues with the use of a provision describing how LPCs can terminate the agreement. Three factors are at play simultaneously:

1. LPCs must give TVA a 20-year notice to leave the system, double the current notification period for most LPCs;
2. If an LPC wants to terminate the agreement, its “wholesale credit” is immediately reduced every month and;
3. If an LPC and TVA cannot come to terms regarding “flexibility” around efforts for the LPC to pursue distributed resources, the LPC would need to pay 50% of all its “wholesale credit” back to TVA.

Bowling Green Municipal Utilities signs contract despite skepticism

Bowling Green Municipal Utilities (BGMU) General Manager Mark Iverson responded to TVA’s new contract offer with skepticism in a July 30 letter to TVA management.

Iverson expressed concerns that TVA was not sharing risk and responsibility fairly, nor describing benefits to LPCs with enough specificity. 

Iverson levied his most pointed criticism against TVA’s proposed contract length, stating that its “5-year rolling WPC [wholesale power contract]” was “the only form of leverage to keep the TVA/LPC relationship in check,” adding he would “have to think long and hard about a 20-year rolling WPC.”

BGMU offered to forego its 3.1% “program [wholesale] credit” in order to secure more favorable contract terms, such as having access to TVA’s transmission system after the contract ended, which would pave a smooth route for BGMU to defect. TVA, as a quasi-federal entity, is not subject to federal regulations that require other utilities to allow fair access to their transmission systems. Those regulations were instituted to encourage competition, but TVA is exempt. Iverson’s plea for access to TVA’s transmission system would allow BGMU to procure energy from other parties, such as Kentucky Municipal Energy Authority (KYMEA), after ending a TVA contract.

In spite of Iverson’s “anxiety” about the deal, BGMU signed the new contract with TVA on September 9, according to the Bowling Green Daily News. 

Options for leaving the TVA system

LPCs located near the periphery of TVA’s system have the most cost effective options for leaving. Memphis Light Gas and Water has been exploring options for leaving the system. Memphis could save as much as $333 million per year if it left TVA, according to a study from the Brattle Group. Other studies put MLGW’s savings as high as $817 million per year.

BGMU’s board of directors received a competing power supply proposal from the Kentucky Municipal Electric Agency (KYMEA). Ironically, KYMEA itself was created out of a dispute with a larger utility, Kentucky Utilities, over higher costs and refusal to let local utilities buy “their share” of renewable energy.

KYMEA offered significant benefits relative to TVA’s offer, such as a 1-year-notice period for termination of the contract. KYMEA also claimed it could offer energy for 1.3 cents per kilowatt hour cheaper than TVA, representing an annual savings of $12.3 million for BGMU.

Flexibility contract not consistent with local climate goals

TVA’s five largest municipal customers have set or are in the process of setting greenhouse gas (GHG) reduction goals. Knoxville, Tennessee’s 80% community-wide GHG reduction by 2050 is the most aggressive goal established in TVA’s service territory.

TVA’s so-called “flexibility contract” would preclude Knoxville’s municipal utility, Knoxville Utilities Board (KUB), from owning or buying from local generation assets, such as solar, for anything beyond 5% of its energy mix. The remainder of KUB’s energy, or 95%, would be derived from TVA’s larger energy mix, which TVA projects to remain reliant on natural gas and coal.

While TVA claims it is targeting a 70% GHG reduction by 2030, TVA’s 2019 integrated resource plan recommended at least 2 GW and as much as 14 GW of new natural gas by 2038. TVA’s “current outlook” called for approximately 6 GW of new natural gas. The burning of natural gas emits greenhouse gases. 

Utilities generally expect to run natural gas plants for 30 years, and adding them as late as the mid-2030s could result in their operation through the 2060s. TVA’s addition of new fossil fuels, coupled with the contractual restrictions it is forcing on LPCs, would frustrate the ability of any municipality trying to achieve its GHG reduction goals. 

TVA also canceled its Green Power Providers program, leaving residential and business customers without a program to compensate them for selling renewable energy except for receiving payments at TVA’s avoided cost rate, normally around 2 cents per kilowatt hour or approximately one-fifth the retail rate.

Largest five municipal buyers from TVA

	2017 Sales (MWh)	Municipal Share of TVA Total Sales*
Chattanooga, TN	5,734,000	3.8%
Huntsville, AL	4,926,203	3.2%
Knoxville, TN	5,400,000	3.5%
Memphis, TN	13,308,181	8.7%
Nashville, TN	11,882,000	7.8%
Total	41,250,384	27%

* TVA’s 2017 Total Sales (MWh) – 152,362,000

Largest five municipal buyers’ greenhouse gas reduction goals

	GHG Goals
Chattanooga, TN	80% reduction by 2050 from 1990 baseline
Huntsville, AL	50% reduction by 2033 from 2005 baseline (draft)
Knoxville, TN	80% community-wide reduction by 2050 from 2005 baseline
Memphis, TN	71% community-wide reduction by 2050 from 2016 baseline (draft)
Nashville, TN	80% community-wide reduction by 2050 from 2014 baseline (draft)

Long-term wholesale power contracts increasingly controversial in the West

TVA’s effort to extend its control over its local power company customers shares striking commonalities with the experience of electric cooperatives in the Rocky Mountain West, which could give pause to LPCs considering TVA’s blitz. 

Long-term contracts between Tri-State Generation and Transmission Association and electric cooperatives restricted those cooperatives’ ability to pursue local energy projects, becoming a source of growing conflict. As the economics of renewable energy and energy storage have improved, TVA now faces many of the same issues Tri-State confronted in the last few years.

Tri-State’s long-term wholesale power contracts extend to 2050, leaving the 43 local electric cooperatives that buy power from Tri-State with little leverage in negotiations, drawing parallels to Bowling Green’s concerns with TVA’s contract terms. 

Some of the largest co-ops that buy power from Tri-State have pushed to increase Tri-State’s 5% limit on local energy development, because they want to build solar and hydroelectric projects in their service territories. While changes to the Tri-State’s contract with its members have been proposed, limits on local energy development remain – and have actually become even more restrictive.

When Tri-State’s largest member co-op, United Power, pursued a Tesla battery project to manage its peak demand charges, Tri-State responded by changing its policies to include battery projects under its 5% cap – effectively derailing energy storage projects among all of its member co-ops. United Power raised concerns that Tri-State’s restrictive policies and high wholesale power costs are turning away large customers, such as data center operators, that have committed to use increased amounts of renewable energy to power their operations.

Tri-State has also repeatedly changed the pricing for the local renewable energy projects that member co-ops are allowed to pursue in ways that have discouraged those projects. That led to a stall in new renewable energy projects among Tri-State member co-ops last year, despite declining solar prices.

These restrictions have pushed some co-ops to pay tens of millions of dollars to buy out of their long-term contracts with Tri-State. Kit Carson Electric ended its contract with Tri-State in 2016, and Delta-Montrose Electric Association will leave early next year. La Plata Electric Association is studying alternative wholesale power providers; those studies have shown that the co-op could save money if it leaves Tri-State. 

At an event hosted by the Colorado Rural Electric Association last year, the keynote speaker remarked on the changes in the utility industry, and argued that “if we didn’t already have a G&T [generation and transmission association], we might not form one.” 

In an effort to prevent local utilities from leaving, both Tri-State and TVA have also resorted to marketing campaigns that bear uncanny resemblances to one another. Tri-State blitzed some of its member cooperatives’ customers with print and radio ads saying that the local utilities were “better together” with Tri-State. Some cooperatives protested, noting that Tri-State was advertising in their service territories, and used the local utilities’ logos in the ads without their permission. 

Tri-State ads told local cooperatives that “We are brighter, stronger, better together.”

TVA is pursuing an eerily similar advertising strategy to prevent Memphis from defecting. It has erected billboards in that city with the message “Together We Live Brighter.” 

A report last year by the Center for the New Energy Economy at Colorado State University summarized the problem facing Tri-State’s cooperative members, and now TVA’s LPCs:

The current relationship between Tri-State G&T and the local cooperatives forces some cooperatives to make a choice between: giving up independence, limiting energy management options, foregoing options for local economic development, achieving community priorities, and rate stability; or leaving Tri-State.

Header image source: YouTube
TVA “Together We Live Brighter” image source: Memphis Light Gas and Water
Tri-State “Brighter Together” image source: Clean Cooperative