TVA prepares for market competition

By Abby Morris
Star Staff
amorris@starhq.com
The Tennessee Valley Authority announced Wednesday that it has developed a strategic plan to offer competitive market prices while maintaining the level of service and environmental sensitivity it currently supplies customers. Pending federal legislation that would remove limits on competition in the TVA service area is one reason TVA officials are considering alternatives.
"Under current law, which limits competition in the TVA service territory and which gives the TVA Board of Directors broad rate-making authority, TVA has enjoyed financial stability sufficient to fund large-scale investments and support all activities related to its broad mission," the strategic plan, released Wednesday, states. "In the future, it is likely that the laws restricting competition will be modified, putting pressure on TVA's current strategic and financial model. Increased competition will have a significant impact on how TVA finances and carries out its diverse mission."
According to Dr. Teresa Flaim, TVA senior vice president of strategic planning and analysis, this is not the first time TVA has considered the idea that regulations regarding competition in the valley may be lifted. "TVA has recognized the need to prepare for competitive pricing for some time," she said.
To prepare for a possible competitive market, TVA implemented a planning process which will analyze how the new market may function, what types of competitive pressures the energy provider will face and how TVA must prepare now for future success.
"This TVA Strategic Plan is based on a rigorous analysis of possible market conditions and gives us a quantitative basis for better decision-making as we move ahead," the report from TVA states.
According to Flaim, some customers and distributors who work with TVA have already expressed interest in purchasing energy from other agencies if the opportunity arises and the regulations on competition are lifted.
"I would say the larger distributors seem to be more interested in buying some power from other suppliers. A larger number of the distributors want the option," she said. "There is a significant part of our service load that wants to look at other options."
However, if competition regulations are lifted, not only will other suppliers be able to offer energy to distributors in the TVA service territory, TVA will be able to offer energy to distributors outside of the TVA region, something which is prohibited under the current law.
"We are assuming that if the fence comes down, it comes down both ways and we will be able to sell power to areas outside the valley," Flaims said.
Flaim discussed ways TVA may reduce costs and provide competitive pricing in the event that the energy provider loses its monopoly in the region. Among the options available is moving to a localized rate structuring system rather than the current system, which provides a single rate structure for the entire service region.
Flaim said TVA also wants to reduce debt. At the end of the 2002 fiscal year, the TVA had outstanding bonds and notes which put the authority into debt by $25.3 billion. According to the Bush administration, "That amount, however, gives an incomplete picture of TVA's debt position because it excludes $865 million in lease/leaseback arrangements", the Associated Press reported.
The Bush administration has said it is committed to identifying a debt-reduction target for the TVA within the "healthy" range, and having a plan by Sept. 30, 2003, the end of TVA's most recent fiscal year, to reach that number in a reasonable period of time.
In the 2002 fiscal year, TVA had a net expense on interest from debt of approximately $1.43 billion dollars according to financial statements from the authority. The announcement of the new strategic plan to make the energy provider ready to deal with market competition came on the same day that the TVA's most recent rate increase took affect.
The rate changes adopted by TVA on Aug. 27 included a 7.4 percent rate increase on wholesale energy as well as the discontinuance of some credits offered by the authority which forced many local energy distributors to also increase rates.
According to officials with TVA, the increase in rates will be used to offset the costs of complying with federal Clean Air regulations. "We're spending roughly $1 million a day which translates into $365 million a year, which is how much revenue we're going to generate with the rate increase," said TVA spokesperson Lucha Ramey.
According to TVA financial reports, the company drew in $6.83 billion dollars in revenue during the 2002 fiscal year while paying out $5.18 billion in operating expenses, leaving the authority with an operating income of approximately $1.65 billion.