UPDATE: August 21, 2020: Memphis Light, Gas and Water (MLGW) staff recommended on Wednesday that the utility's Board of Commissioners issue a request for proposals this fall for energy supply alternatives to the Tennessee Valley Authority.

Dive Brief:

• After the May release of Memphis Light, Gas and Water's (MLGW) Integrated Resource Plan (IRP) exploring independent generation costs, the Tennessee Valley Authority released its own comments and proposal on July 7 to keep the city utility.
• TVA leadership says the IRP underestimated the cost of independent generation and greatly undervalued the nearly $1.5 billion in incentives available to Memphis should the city utility decide to accept the 20-year contract currently on the table.
• TVA has also planned an additional $500 million in incentives that would be available to Memphis only if the city decides against canceling its contract, according to the July announcement.

Dive Insight:

Before Memphis pulls the plug on its current generation contract in pursuit of a projected $120-$200 million annual savings, TVA wants to be sure the community knows the full value it has to offer.

The federally-owned, six-state corporation posted comments and offered to cut MLGW a deal earlier this month as discussion intensifies about whether the Memphis utility ought to find a new electric provider.

According to TVA CEO Jeff Lyash, MLGW's hypothetical IRP overstates the potential savings to be gained from independence. Memphis could actually see a 20% increase in electric costs if it cancels its current contract, per TVA's projections.  

The May IRP, authored by Siemens Power Technologies International, overestimated TVA's planned electric rates by more than $55 million a year, Lyash said. They also underestimated the length of cost recovery in capital investments and underestimated the cost and length of time required to build out necessary electric and transmission infrastructure, Lyash said.

"The assumptions used in their analysis were very optimistic," he said, adding that TVA expects the infrastructure planned would take three years longer to build and cost 20-50% more than the IRP anticipates.

The IRP also did not fully take into account the cost of benefits MLGW would lose, such as payment-in-lieu-of-taxes, if it chose to exit the TVA, Lyash said. 

Under its current contract, Memphis stands to receive $712 million in financial benefits from TVA, Lyash said. If they agree to the standing long-term contract TVA has signed with 141 other local power companies, Memphis would save an additional $750 million over the length of the 20-year contract.

TVA also has offered to pilot several new community initiatives it estimates would be worth $535 million to Memphis over 20 years. This partnership would make investments designed to improve service reliability in Memphis — which Lyash said was caused by MLGW's distribution system and not by TVA's service — by purchasing the city's transmission system for $400 million. It would also seek ways to reduce the "energy burden," or the high cost of electricity relative to local incomes, in Memphis, and invest in economic development in the city's urban centers.

The proposal indicates TVA would itself create as many as 100 new full-time positions in Memphis, and help expedite the development of the $5 billion Port of Memphis, so long as MLGW does not give notice that it intends to cancel its TVA contract.

Although the timing of the offer may look as though TVA hopes to sweeten the pot to avoid losing Memphis, MLGW is TVA's largest customer and accounts for 9% of the corporation's revenue, Lyash said. He has been working with Memphis on this partnership proposal for over a year.

"Memphis was in a process of learning what their options were, and evaluating those options, and we wanted to make sure we were supporting them in that process," Lyash said.

TVA doesn't relish the idea of losing its largest customer, but shouldn't need to raise rates to get by if Memphis does leave, he said. Rather, Lyash said TVA would likely reduce future capital investment and reconsider retiring some of its coal plants if Memphis does give notice. But he said TVA wanted to make sure MLGW was clear on the benefits of purchasing power from TVA.

"We think it is in the best interest of the residents to stay with TVA," he said. "We believe that clearly the best value for Memphis is TVA, especially when you consider the risk they would have to take to get what in the best circumstances are modest savings."