Tennessee Valley Electric System Advisory Committee
Minutes from the Second Meeting (January 20, 1998)


1.0 Opening Remarks and Perspectives

Chairman Derrick called the second meeting of the Tennessee Valley Electric System Advisory Committee (the Committee) to order at 3 p.m., January 20, in Room 204 of the Nashville Convention Center. He welcomed those members and observers who attended the first meeting and also those attending for the first time. He said that comments by the public would be heard at the end of meeting and that anyone wishing to speak should register at the registration table.

The Chairman briefly described the Committee's assignment as being to focus on those issues related to competition that are unique to the Tennessee Valley. He summarized the questions before the Committee as follows:

Chairman Derrick applauded the spirit of cooperation thus far demonstrated by the members of the Committee and closed his opening remarks with a reminder that the work is to be completed by the end of March so that findings can be received by Secretary Peña in time to be taken into consideration during policy discussions by the Administration.

2.0 Panel Presentations and Discussion

The Chairman opened the panel discussion by characterizing the members of the panel as persons with insights and expertise on the subject of electric service in the Tennessee Valley. He introduced each discussant and, in turn, asked each to make a brief opening statement and then stand for questions. He first introduced Senator Bud Gilbert, Tennessee State Legislature.

Senator Bud Gilbert summarized his views on the issues under consideration and made the following additional observations:


Mathew Cordaro, President & CEO of Nashville Electric Service gave high praise to TVA for historically providing the Valley with reliable service at low costs. His other comments included the following:


Earl Weeks, General Manager & CEO of the Four County Electric Cooperative, Mississippi said that TVA's customers (distributors) should be included in the planning for deregulation and that TVA has been reluctant to share its plan to improve service. He made the following additional points:

Jim Baker, President, Middle Tennessee Membership Corporation and President, National Rural Electric Cooperative Association said he was speaking for the 159 distributor customers of TVA. He said that TVA and the Tennessee Valley Public Power Association (TVPPA) are now in agreement on many of the issues. He stated TVPPA's following positions:

Following the panel discussions, Chairman Derrick asked each leaders of a drafting group to report on the status of the position papers under development by that group. The Chairman emphasized that the reports from the drafting groups represented initial positions for discussion and did not necessarily represent the views of the Committee as a whole. A summary of the status reports follows.

 

3.0 WORKING GROUP A; REGULATION AND JURISDICTION

Transmission and Wholesale Rate Jurisdiction for Public Power and Federal Entities:
The drafting group reported consensus that TVA should be subject to FERC jurisdiction for transmission. Further, they thought that legislation will be needed to establish FERC jurisdiction over all wholesale transmission in the region. Some members felt that the Federal Power Act should be modified to extend anti-trust jurisdiction to cover TVA and all other transmission entities in the region.

Anti-Trust and Labor Law:
The drafting group offered a proposal that anti-trust and labor laws should be applied uniformly to all participants in the region, including TVA. There was considerable discussion on precisely how that should be accomplished. The International Brotherhood of Electrical Workers's (IBEW) position is that TVA should be governed by the National Labor Relations Act, but TVA said that would be unfair because they already were under more severe federal regulations. IBEW pointed out that TVA employees presently cannot strike but, instead, must appeal to the Secretary of Labor for redress in lieu of that right.

Tax Status for Public and Federal Power Entities:
The drafting group considers this to be a national issue. They acknowledge that public and private entities generally are treated differently for tax purposes but they believe that the Congress, state and local regulators will have to consider how best to resolve the issue and that, in the final analysis, all taxes must be considered. All agreed that all entities should be taxed on a fair and even basis. TVA Watch expressed the belief that TVA should pay federal and state income taxes. TVA disagreed.

Retail Regulation of Public and Federal Power Entities:
Concern was expressed that the state of Tennessee lacks expertise to regulate at retail. Most agreed that TVA should not exercise such authority. TVPPA supported local jurisdiction for regulation at retail for public power entities. Rural Legal Services (RLS) also argued that local governments also lack experience. RLS suggested that some entity should be created at the regional level to regulate at retail. Other members of the drafting group felt that retail regulation should be left to the states, as it is in other states.

 

4.0 WORKING GROUP B: TVA MISSION

The drafting group stated its belief that the TVA mission should include integrated operations and that TVA should continue as a federal agency. Considerable discussion took place centered on the need to identify unique aspects of TVA's mission or to be prepared to accept the notion that, possibly, TVA has outlived its purpose. There was an acknowledgment that TVA has statutory obligations that are not addressed in the mission statement developed by the group. Such responsibilities as 'improving the social and economic well-being of the inhabitants in the region' and 'providing for navigation on the Tennessee River and its tributaries' are examples of ongoing responsibilities of TVA. The group agreed that, in addition to carrying out those responsibilities over the years, TVA also has managed to provide reliable power at low rates compared to other providers.

 

5.0 WORKING GROUP C: COMPETITION

The Fence and Anticherry-Picking Provision:
The drafting group agreed that simply lifting the fence or repealing the cherry picking prohibition will not make competition occur at wholesale or at retail. Entry barriers erected by the fence and the cherry picking prohibition are projected into the future via contracts that were entered into when those barriers were in effect. Accordingly, the group recommended that the date on which legislation becomes effective to lift the fence and repeal the cherry picking prohibition be postponed until such time as wholesale power purchase contracts can be reopened at the request of the purchaser.

The Wholesale Contracts:

This drafting group concluded that the Congress should not interfere with contracts if it wishes to allow smooth transition to retail and wholesale competition in the utility industry. Such a course of action would render TVA unable to pay for past investments, much less pursue capital improvements in the power system to meet the region's future power needs. A termination limitation also would prevent wholesale power distributors and direct-served customers from freely negotiating the provisions of their contract with power suppliers. Some parties may prefer a longer notice provision in exchange for other benefits, such as reduced price, additional transmission, or guaranteed supply. Ultimately, any legislative limitation on TVA's contracts will preclude the possibility of a smooth transition to normal competition in the utility industry.


The Retail/ Wholesale Nature of TVA:
The drafting group proposed that TVA should remain basically a wholesale business and be allowed to sell wholesale outside the fence consistent with guidelines established by Federal legislation. They thought that TVA's existing retail customers should have the option to continue to receive service from TVA if they choose and that TVA should be able to sell at retail inside the fence under conditions mutually agreed to between TVA and its existing distributors. They thought that TVA should have the option to sell at retail outside the fence to replace lost load should the emergence of retail choice result in a loss of firm load such that TVA's ability to mitigate stranded investment is diminished (i.e., loss of loads which would result in less net revenue than TVA's current 10 year financial plan). TVA Watch suggested that TVA should not be able to sell at retail outside the fence.

Stranded Cost Issues in the TVA Service Territory:
The drafting group proposed that any stranded costs resulting from congressional action to mandate competition should be borne by those customers for whom TVA incurred those costs (i.e., customers that TVA had a reasonable expectation of serving when the investments were made). However, they also felt that TVA's discretion in recovering stranded costs should not be unbounded and that specific cost recovery proposals should be subject to regulatory review and approval. There was a suggestion that calculation of TVA stranded costs could follow the revenues-lost approach adopted by FERC in Order 888 and that stranded investments could be recovered via a non-bypassable surcharge on TVA's direct-served customers and an equivalent surcharge on other retail customers . The amount paid by each customer subject to the surcharge should be allocated in a nondiscriminatory manner and Congressional action could be required to impose such a surcharge on all customers.

 

6.0 GENERAL DISCUSSION:

A question was raised as to whether distributors would be allowed to have their own generation, claiming that the present contract does not permit such an arrangement. The answer indicated that this is only the case for FULL requirements contracts. PARTIAL requirements contracts, on the other hand, already would permit a distributor to go elsewhere for remaining requirements.

One member noted that customers are paying stranded costs now; they just are not identified as such, as they will be in the future. He said that the costs are there and, to the extent that prices are above market, customers are paying stranded costs. He made the point that it takes a market action to strand costs.

Following the discussion, the Chairman thanked the members for working so hard on their assigned tasks.



7.0 PUBLIC COMMENTS:

Mr. Lou Wallace; Chairman, TVA Retirees Association, said that the 21 chapters throughout the valley, representing roughly 18,000 members, were truly stakeholders. He stressed that state and federal planning should take into consideration the unique nature of TVA. It is not, and should not, be considered just a provider of power. The non-power portions of the TVA mission have worked well over the years. He said there should be no confusion about TVA being subsidized. It has not received power subsidies in 40 years and has repaid 3 times the original amount of the federal loan for power appropriations, although that was not originally intended as a debt obligation. Further, he said TVA's performance as a power provider has been outstanding. Most consumers continue to pay rates well below other areas and receive reliable service.

He emphasized that electricity is not simply another commodity, and that reliability is equally important. He expressed his concern lest the public lose sight of the importance of reliability and, in their bargain hunting, undercut the reliability of the system,

Mr. Frank J. Holm stated his belief that America should get on the international system of units. He said he agrees with a kilowatt-hour tax which would, among other things, promote conservation. He said he thought it important to promote good managers in utilities because, if they are very efficient, utility profits will be higher. Conversely, if they retain poor managers, profits will decrease.

Ms. Lee W. Patten, Save Our Sequatchie expressed her concern that Independent Power Producers (IPP) can be granted the power to condemn property by FERC and displace property owners without due process. (The Chairman corrected Ms. Patten making the point that the IPP in question was granted the right of eminent domain by FERC as a result of permit approval for a hydro project. In general, IPPs may not be granted such authority.)

Dr. Ethel Nelson, Save Our Sequatchie said that the right of eminent domain should be reserved only for public good.

Ms. Margaret Johnson, Save Our Sequatchie repeated the objections of the group and handed out material describing the allegations against Armstrong Energy Resources, Inc., activities in the Sequatchie Valley.

There being no further comments from the public, Chairman Derrick thanked the committee members and adjourned the meeting at 9:10 pm.