TVA’s Chief Financial Officer and Executive Vice President John Thomas
For more than 84 years, TVA has had one mission: to serve the people of the Tennessee Valley to make their lives better. As the largest public power utility in America, TVA is doing everything possible to keep more money in customers’ wallets.
To find out what the utility is doing to ensure low power rates, we sat down with TVA’s Chief Financial Officer and Executive Vice President John Thomas.
Why is keeping rates low important to TVA—and the people of the Valley?
First and foremost, low rates are in TVA’s statute. We are mandated by the Tennessee Valley Authority Act to keep rates as low as feasible.
From a practical sense, it is about improving the quality of life for the 9 million people of the Valley. Electricity is an essential service that everyone has to have. So, by reducing the price you pay, we can help improve quality of life.
From the business side, low power rates have a significant positive impact on economic development. Right now we have the lowest industrial electric rates among our peer utilities—this is a tremendous competitive advantage that makes the Valley an attractive place to do business. In the first three quarters of FY17, TVA’s economic development efforts grew or retained 60,800 jobs and stimulated $6.4 billion in capital investment in the TVA service area. Keeping rates low improves our ability to attract large industries and to bring in jobs—high-paying jobs—which creates prosperity.
Has TVA been successful with this low-rate mission?
Yes. Right now two-thirds of Americans pay more for electricity than we do here in the Tennessee Valley. And we are always looking for new ways to drive energy costs even lower.
For those not familiar with how TVA operates financially, can you explain how you allocate the money consumers pay?
TVA is public power. That means every dollar you pay is invested into the power system right here in the Valley. It goes back to you.
Let’s take a dollar bill and see where the money goes.
$.30 goes to fuel. It pays for things like coal, natural gas, nuclear fuel and purchased power.
$.30 goes to operations and maintenance (O&M). This is the cost of keeping our facilities staffed and operating.
$.25 goes to debt services. Think of this as the interest and principal on a home or car loan.
$.10 goes to capital investments that ensure the reliability of our assets. The new Watts Bar 2 nuclear unit and Allen and Paradise combined cycle plants are great examples of our investments to lower costs.
$.05 goes to taxes. This money is paid to eight states and is based on yearly power sales and property in that state.
What is TVA doing to keep rates low?
The simple answer is that we are driving costs out of our business at all levels. To do that, we created a 10-year long-range financial plan in 2013, and we are working the plan. The most significant success we’ve seen is that we’ve cut $800 million in O&M expenses, which is one of the two largest components in our rates. We have also improved our operational performance in part by creating more diversity in our generation portfolio. With the addition of natural gas to our generating portfolio, we have been able to reduce fuel costs by over $1 billion.
Between O&M and fuel costs, we have achieved almost $2 billion in savings.
Looking forward, does TVA have a strategy for continued low rates?
Absolutely. We are now about halfway through the 10-year financial plan. During the first five years, we focused on gaining efficiencies in our business as well as completing a very significant construction plan. We’ve managed to reduce O&M expenses by $800 million and invested $16 billion in large capital projects. At this point, we are at the tail end of the construction period. We have done very well in executing the first five years. We need to continue driving more efficiencies to help reduce rates now and into the future.
As we look toward the second half of our plan, in the next five years we will focus on debt reduction. Reducing debt is important because one of the items in our rates is the debt-services cost—the principal we pay on the bonds we borrow for construction and the interest we have to pay. It is no different than what you pay on your house mortgage. If we bring the debt down, we will have lower principal and interest payments. And, if we can pay off the money we borrowed faster, it will lower costs over the long run.
TVA and local power companies form a public power model. What is the value of public power?
From a financial perspective, we don’t have shareholders whose dividends are paid through rates. Every penny is reinvested into the power system.
But the true value of public power goes above and beyond finances. It goes back to TVA’s mission to serve the people of the Valley to make life better. Every TVA employee works each day to improve quality of life and meet our economic development goals of creating jobs and bringing capital investments to the Tennessee Valley.
We fulfill environmental stewardship activities and spend $100 million on recreational activities, such as campground and river preservation. As a result, a new study from the University of Tennessee shows that the annual value of recreation on the Tennessee River reservoir system for the region is nearly $12 billion and creates 130,000 jobs.
We are also investing $300 million in fiber optics to improve the reliability and resiliency of the transmission system. This initiative could assist with economic development opportunities for the Tennessee Valley. With a modernized fiber backbone for the transmission system, we have the potential to make fiber capacity available to help local communities and rural areas attract and retain jobs.
What the public power model provides goes far beyond the generation of electricity.
What part do TVA employees play in all this?
TVA is powered by people you know—your family, friends and neighbors who are the heart and soul of our mission. If you work for TVA, you signed up for a job where you committed to improving the quality of life for 9 million people by keeping rates as low as feasible. That is part of the deal when you come to work. Every employee is expected to improve what they do, which impacts the efficiency of TVA overall. And the more efficiently TVA runs, the lower rates our customers pay.
Part of what our employees contribute, of course, depends on where they work. If you’re working in a maintenance department at a plant, there are things you can do to make that plant run more reliably and more effectively to positively impact our fuel costs. As I mentioned earlier, we have reduced our fuel costs by nearly $1 billion. That is due to the hard work of the people in maintenance and construction crews who helped build Watt Bar 2 and our new gas plants. If you work in a corporate office, you can streamline and revamp processes for people in the field and our customers.
The bottom line: everyone at TVA has a part to play. Everyone can contribute. We’re seeing those contributions paying off in a very real way, helping the Valley, and every employee can be proud of what they’ve accomplished.