TVA agrees to increase rates, borrowing; cut costs

The Tennessee Valley Authority agreed to increase electric rates, borrow up to $3 billion over three years and slash spending to pay for a massive coal ash spill, court-ordered clean-air improvements and a pension fund shortfall amid a historic slump in power sales.

Because fuel costs continue to decrease, most consumers will actually see their bills drop rather than increase, at least for now, despite the rate change.

"In the last nine months, I have never seen an industry that has had the number and severity of challenges that TVA has had to confront," said TVA director Dennis Bottorff, a venture capitalist from Nashville.

Yet Bottorff and the rest of the TVA board of directors praised management of the country's largest public utility for their plans to address those issues in a $10.2 billion budget for fiscal 2010.

"I am really encouraged... to see some light at the end of the tunnel," he said.

TVA saw electric sales, its primary source of revenue, collapse this year due to the poor economy, particularly among large industrial customers — only 20 of 200 counties in the TVA region had jobless rates below 10 percent.

Power sales fell 8 percent — the sharpest drop ever for the 76-year-old agency. TVA expects sales to slip a bit more in the coming year before they improve.

Chief Financial Officer Kim Greene said neighboring utilities have also seen declines, including Southern Co., Duke Energy Corp., American Electric Power Inc. and Florida Power & Light Co., and most are raising rates.

TVA will raise base rates by 8 percent effective Oct. 1, but an 11 percent decline in fuel adjustment charges should offset that at least initially. The decision will impact about 9 million people receiving electricity from TVA in Tennessee, Alabama, Mississippi, Kentucky, Georgia, North Carolina and Virginia.

For the typical residential household using 1,000 kilowatt hours a month, the bill will go from $66.61 now to $64.77 in October. The rate increase would add $5.52 to the bill, and the drop in the fuel adjustment charge would equal $7.36.

Under a new policy, TVA will adjust fuel charges every month instead of every fiscal quarter beginning this fall. TVA is making no promises about what will happen to prices through the year.

"Fuel is a major component of our customer bills and fuel costs continue to come down," TVA Chairman Mike Duncan said. "This means that overall, customer electric bills are likely to stay about the same for the coming year and perhaps even go down in some cases."

TVA plans to borrow up to $3 billion to pay a portion of the $1 billion cleanup of the Kingston, Tenn., coal ash spill in December.

It will also cover some of the $1.2 billion to $2 billion to be spent over the next eight years to convert all of TVA's coal-fired power plants from wet-ash to dry-ash storage to prevent another spill like Kingston.

This would also help finance the $2.5 billion completion of the Watts Bar Unit 2 reactor in Tennessee by 2012 and some clean-air smokestack improvements ordered by a federal judge in a lawsuit brought by the state of North Carolina against TVA.

The plan will effectively erase more than a decade of efforts by TVA to pay down its long-term debt, which now stands at $25 billion and is congressionally capped at $30 billion.

Greene said, however, that without that borrowing, the rate increase would have doubled.

TVA will make a $1 billion infusion into the pension reserves for its 24,000 retirees. The move will help the fund recover from stock market investment losses and underfunding from past years.

"They didn't just wake up at the beginning of this year and see the investments were bad and they had to do something. The system was intentionally starved for cash for 20 years," said Leonard Muzyn, an employee-elected member of the TVA pension board.

TVA's decision to freeze or cut retiree cost-of-living increases over the next four years angered pensioners. But Greene said such increases were never guaranteed.

She also noted benefits reached the point that under certain conditions TVA employees can retire as young as 45 and the average retirement age is 56, compared to a national average of 62.

TVA President and CEO Tom Kilgore said the drop in fuel costs and the apparent end of the drought in the Southeast, which has boosted hydroelectric generation, were the two bright spots in the past year.

The budget plan will require TVA to come up with $1.9 billion in savings over the next three years.

Greene said savings would come from deferred capital projects, including some clean-air upgrades.

"We asked for a rate increase, put off some things and curtailed our costs, and then used this borrowing capacity," Kilgore said. "We think that is a judicious balance given the economic times that we are in."