September 10, 2008
The nation's largest publicly-owned utility is telling its customers that their electric rates will rise by 20 percent beginning in October. The price jump is the combination of a long-lasting drought and escalating natural gas and coal prices. The increase is the utility's biggest in 30 years, although it says they remain comparatively low.
It's a sign of the times. Electricity prices are swelling around the United States, largely because the cost of underlying fuels is moving up. And while TVA says that it is unlikely to expect such prices to fall back to where they have traditionally been, it says that its aim is to stabilize them. The fix, it adds, is to be implemented over time and involves the wider use of conservation and nuclear energy.
"We recognize that the increased costs TVA is experiencing are also driving up costs for the families and businesses we serve," says TVA's chief executive Tom Kilgore. "The last thing we want to do is tell customers that our product is going up in price, but we have no alternative for paying for fuel." The change is expected to increase rates for average consumers who use 1,300 kilowatt-hours about $15-$20 a month.
TVA is working to slow the current rate of growth in the region's power demand by providing opportunities for residential, business and industrial consumer groups to use energy more efficiently. In the short term, TVA's goal is to reduce the growth in peak demand by up to 1,400 megawatts -- more than the amount generated by one nuclear power unit -- by the end of the 2012 fiscal year. The utility will increase the amount it allocates for efficiency from $22 million a year to $99 million annually.
The utility is also emphasizing nuclear power. Last year it spent $1.8 billion to restart Browns Ferry Unit 1, which added 1,000 megawatts to the system. It also plans in 2010 to increase production at Browns Ferry by 300 megawatts. By 2013, it expects to expand generating capacity by 1,100 megawatts with Watts Bar Nuclear Unit 2. Altogether, it will spend $1 billion to augment production.
It's a function of supply and demand. More people are moving into the region and consuming more energy. But the utility's supply is stretched. It imports much of its coal from China, which is now a scarce resource. Price increases for fuel, including coal, natural gas and purchased power are driving TVA's costs up by more than $2 billion in fiscal year 2009, compared to fiscal year 2008.
At the same time, TVA has been able to generate only about half as much inexpensive hydropower this year as it would generate in an average year. When TVA cannot generate that hydropower -- about 1,000 megawatts -- it must buy replacement power at market prices. Those power prices are much greater than hydropower costs and were even higher this summer, averaging 63 percent higher than last summer.
Capital Allocation
Critics take aim at TVA on a number of fronts. Some say that it is larded with fat and that it must be forced to reduce its massive debt before it starts hammering its customers for money. Others say that its focus is misdirected and that instead of plowing billions into nuclear energy, it needs to put that same money into sustainable fuel forms.
The federal government created the TVA in 1933 to tame the Tennessee River and to bring economic development to an impoverished region. Over the years, it increased its generation and transmission of electric power in the Tennessee Valley's seven-state region, until today, when it has 30,365 megawatts of generating capacity. TVA provides power to large industries and 158 power distributors that serve 8.8 million consumers.
For its part, TVA recognizes that its $23 billion debt level is too hefty. In response to congressional oversight, TVA recently issued a formal blueprint that says it will accelerate its debt reduction to give it more financial flexibility. The plan recommends a target reduction of $3 billion to $5 billion over the next 10 years.
Other observers, meanwhile, say that the capital allocation involved with building new coal and nuclear plants is not just astronomical but also environmentally harmful. While the greenhouse gas emissions associated with coal plants are well documented, many environmental groups say much less is known about nuclear production and that mining uranium is a toxic process. "It leaves a horrible legacy," says Sandy Kurtz, an environmental education director for Blue Ridge Environmental Defense League.
"To say you will spend money on nuclear is to say you won't spend money on something else," she adds. "We would be able to get as much energy -- and more rapidly -- from conservation, wind and solar. We just have to set our minds to it."
TVA says that it is listening, noting that its goal is to have at least 50 percent of its generation portfolio be from low-carbon and zero-carbon sources by 2020. But the preponderance of its fuel comes from traditional sources, which are cost effective and which must be in line with regulations. Along those lines, its 2009 budget includes $232 million in clean-air projects to reduce emissions at six coal-burning plants.
The utility emphasizes that its true role is to deliver low-cost power and to promote economic development in the seven-state southeastern region it serves. "We must generate and deliver the electricity that our customers depend on, and we must maintain our generating and transmission equipment so we can continue to provide a reliable power supply," says CEO Kilgore. "Unfortunately, the cost of providing fuel to operate the power system reliably has increased sharply."
Higher prices are not unique to TVA. But as the nation's largest wholesale distributor of electricity, it must remain accountable. It is now weighing reliability and economic considerations with environmental factors. The objective is to get to an optimal generation mix that can balance the concerns of all its stakeholders.
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