New report affirms that TVA, public power work best for serving region

by Paul Ciampoli
APPA News Director
February 12, 2021

The Tennessee Valley Authority’s business structure and the public power model continue to provide the greatest value to the ten million people in TVA’s seven-state service area, according to an independent assessment presented to the TVA Board of Directors at its quarterly business meeting.

Building on an earlier strategic review in 2014, the board commissioned Lazard to reassess TVA’s business performance through 2020 and determine if its current business model is a reasonable approach to fulfilling TVA’s mission in the future.

Lazard’s new report notes that TVA’s financial performance has been notably strong against both its own plan and the performance of other utilities, including reducing operating and maintenance budgets by $800 million and reducing debt below the $21.8 billion target three years ahead of plan, TVA said.

In addition, TVA’s improved business performance has enabled a reduction in effective wholesale power rates from those 10 years ago, a higher level of renewable energy production than its southeastern U.S. peers and stronger partnerships with local power companies that allowed for a rapid community response to the COVID-19 pandemic.

“Just as it did in 2014, Lazard’s assessment concluded that the public power model works and continues to provide the best value to the communities and customers we are privileged to serve,” said Jeff Lyash, TVA’s president and CEO, in a statement. “This independent report validates the effort and focus of the entire TVA team, as well as public power partners across the region.”

Lazard believes that its previous conclusions in the 2014 strategic assessment with respect to the benefits and considerations of alternative business models versus the public power model are still valid today.

“Under the investor-owned utility model, TVA would likely charge higher rates as equity investors would require a return on investment,” the report said. “It would also be unclear how TVA’s non-power mission and activities would logically fit within such a structure — any reductions in the scope of the non-power mission and activities could have a negative impact on TVA’s service area,” Lazard said.

TVA also said that the effectiveness of its business model was supported as part of an independent review of CEO compensation discussed at the Feb. 11 meeting. 

The review by the FW Cook firm concluded that the board’s compensation process is best practice and, with expanding inclusion of government agencies and non-profit entities, uses the most relevant market data to be consistent with requirements of the TVA Act.

Reviewing Lyash’s performance and leadership during the challenges encountered in Fiscal Year (FY) 2020, the board approved the FY21 CEO total direct compensation granted resulting in an increase from 37% to 28% below the market median of CEO compensation.

Nearly two-thirds of the CEO’s total direct compensation is performance-based and at risk, which is an increase from 65% in FY20 to 66% in FY21.

TVA said that its first-quarter base revenue and net income remained favorable to budget even as revenues were lower than a year ago, in part due to the TVA pandemic relief credit that began in October and returns 2.5% of the base wholesale rate each month to local power companies, their large commercial and industrial customers and TVA directly-served customers. Nearly $49 million was returned in the first quarter, and the credit will continue through the end of FY21.

On Feb. 12, TVA reported $2.3 billion in total operating revenues on 36.7 billion kilowatt-hours of electricity sales for the three months ending Dec. 31, 2020.  

Sales of electricity to local power companies were not significantly impacted by the ongoing COVID-19 pandemic but were slightly lower compared to the same period of the prior year due to milder weather. Sales to directly served industries and others increased.

Total operating revenues decreased about 11% over the same period of the prior year, driven primarily by lower demand volume, lower effective base rates, and lower fuel cost recovery revenues.