TVA Payments Down Again. Changing Conditions and Policies Could Affect the Balance of Payments Across the Region.

Nashville, TN–Estimated payments from the Tennessee Valley Authority (TVA) for Tennessee and other states in the region served by the authority are $25 million less for the federal fiscal year 2013-14 than the $547 million in actual payments for the previous fiscal year.  This will be the second consecutive year in which TVA revenues and payments declined.  The estimated decline in payments results from the continued slow pace of economic recovery, the loss of a major direct industrial customer, greater energy efficiency, and mild weather.  Even with the severe winter weather this year, TVA is expecting another decline in electricity sales.  They reported in early February that electricity sales in the final three months of 2013 were down $245 million from last year.

The TVA payments, which are known as payments in lieu of taxes, or PILOTs, are divided among the states based both on revenues from power sold and on the value of power-generating property owned by TVA in each state.  Tennessee, by far the single largest recipient of these payments, received $337.7 million in fiscal year 2012-13 and more than 60% of total payments made since 2011.  Since the state distributes close to half of that money to cities and counties, declines in the PILOT negatively affect not only state funds, but also county and city funds.  The estimated decline for the current year amounts to $2.7 million in the distribution to Tennessee’s county governments, slightly more than $1 million in the distribution to cities, and approximately $3 million to the state and its agencies.

The Tennessee Advisory Commission on Intergovernmental Relations, the agency charged with monitoring changes in the wholesale distribution of electric power by TVA and its distributors for possible effects on the PILOT, reporting annually to the Tennessee General Assembly and recommending changes as appropriate, noted in this year’s report that a number of the innovative financing methods used by TVA could further affect the PILOT.  The methods, developed in order to stay within the $30 billion debt ceiling imposed on it by Congress in 1979, include the use of sale-and-lease back and lease-and-lease back arrangements.  A sale-and-lease back arrangement between TVA and an electric generation and transmission cooperative could affect the distribution of payments made by TVA to states in the region and could negatively affect state, county, and city funds, as was the case in Mississippi following the sale of TVA’s Southaven and Caledonia plants.

Under the arrangements at Southaven and Caledonia, TVA operated the plants and all sales of electricity produced were through TVA.  Revenues were counted as TVA revenues and subject to the total PILOT.  Although the fact that TVA didn’t own the plants didn’t affect the PILOT allocation across states, it did affect the PILOT distribution to the state of Mississippi.  With a sale-and-lease back arrangement, the amount of the TVA PILOT that goes through any particular state’s own allocation formula would decrease to the extent that TVA must reimburse the new plant owners for taxes paid to the state or local governments.  For the State of Mississippi this was a reduction of $6.0 million in 2013, the amount TVA paid for local taxes.

So far, generating expansions in Tennessee have been through lease-and-lease back agreements.  An example is the natural gas combined cycle plant in Rogersville, Tennessee, which was completed in 2012 and leased to a private company.  The company paid TVA $1 billion for the lease and leased the plant back to TVA for 30 years.  The plant is managed by TVA.  This lease arrangement changes neither the ownership of the property nor TVA revenues and so has no effect on the PILOT within Tennessee.

The Commission also reported that the management strategy laid out in TVA’s Integrated Resource Plan could affect the balance of PILOTs across the region.  Changes in the supply system called for by the plan, brought about in part as a response to economic factors and environmental mandates, include closing a number of old coal-fired generation plants, acquiring new natural gas plants, and expanding nuclear-powered facilities.  These changes could affect the PILOT if they involve a shift in value of power-producing property from one state to another.

Changes so far, including the change from coal to natural gas at the Rogersville plant, which was made as part of an agreement with the Environmental Protection Agency, have occurred mostly at existing sites and so have not affected the value of TVA property or the PILOTs.  The expansion of the Watts Bar nuclear operation now under construction in Rhea County could actually increase Tennessee’s share of the PILOTs if it increases the value of that property.  The closure of coal plants in Alabama and Kentucky announced this year and the opening of a new natural gas plant at an existing Kentucky site could also affect the payments across states.

The full report is available on the Commission’s web site at www.tn.gov/tacir/pubs_by_date.html.  For more information, contact Melissa Brown at 615-741-3012 or email.

The Tennessee Advisory Commission on Intergovernmental Relations (TACIR) serves as a forum for the discussion and resolution of intergovernmental problems and provides high quality research support to state and local government officials to improve the overall quality of government in Tennessee and to improve the effectiveness of the intergovernmental system to better serve the citizens of Tennessee.