By James Gilliland Jr.
It didn’t take long for TVA to reveal its true position.
Years of lobbying with funding for various organizations and flattery about their love for Shelby County came to an abrupt halt two weeks ago. It was then that we learned that the Tennessee Valley Authority refuses to negotiate its contract with us, their biggest customer.
Once MLGW executives recommended staying with TVA, TVA retreated from its promise to be a full partner. It begs the question: when do real partners give you a take it-or-leave-it demand?
Let’s check the details. TVA’s contract is 20 years, but with a catch. It is “evergreen,” meaning that the initial 20-year term resets to zero annually until termination notice is given. Suppose after 15 years MLGW wants bids. This would mean MLGW could not leave for another 20 years, effectively turning that 20-year contract into a 35-year contract.
Incredulous Conditions
How could any company take bids on unknown technology and unknown energy prices 20 years into the future? It’s impossible, and that is the point. MLGW management calls the contract “flexible,” but it eliminates our options forever. Since our unparalleled geographic advantages give us other options for electricity, that’s unacceptable
Even worse, the contract has a “reimbursement requirement,” or “exit penalty” at about $30 million per year before inflation. How does this penalty work? Because of the contract’s evergreen clause, every year MLGW stays in the agreement, the penalty grows. This means that, at the initial signing, MLGW would in effect owe TVA $600 million — i.e., 20 years times $30 million — if MLGW wanted to end the contract. And that doesn’t include inflation, which would bring the total penalty to more than $1 billion if MLGW wanted to cancel after 35 years, a price no City or County could afford and especially not one like us with high poverty rates.
TVA’s CEO also says its contract does not require local utilities to cover TVA debt, but that is simply not true. Nashville Electric even affirms the “cost recovery” definition in writing, which includes service — i.e., repayment — of not only current TVA debt, but any future debt TVA incurs for any reason, and anywhere within its service area.
Since Shelby County ratepayers already guarantee MLGW debt, this increases our financial risk. Yet MLGW management calls the contract “great value.”
This is important because we — TVA’s largest customer — paid the most for TVA’s disastrous, $9-billion Alabama nuclear plant write down. Our share was roughly $900 million. This blunder kick-started TVA’s rate increases to where we are today, as shown in a comparative snapshot from a few years ago.
Misstep #2
TVA’s next misstep — Kingston 2011 coal ash industrial disaster — could also be extremely expensive, since the 6th Circuit Court of Appeals recently ruled against the governmental immunity claims that TVA and its contractor, Jacobs Engineering, have made.
Via what appears to be a secret agreement, TVA seems to have promised to cover Jacob’s legal bills for any illnesses and deaths related to coal ash — of which, tragically, there have been many. Jacobs invoked this allegedly secret agreement, yet TVA won’t say if TVA — which is really us, the ratepayers — will be paying those legal bills from its $51 billion in resources.
Bottom line? TVA behaves like a private company rather than a government entity that we taxpayers own — and we ratepayers fund.
Two years ago many people, including me, predicted that MLGW would support the status quo. Nonetheless, we were stunned that MLGW’s CEO tried to stop the RFP before being overruled by Mayor Strickland. If MLGW were a normal company, it would run away from a permanent contract that shifts risk to their counterparties such as MLGW. But MLGW executives are pushing to sign this agreement in spite of our currently having a 5-year term with no exit penalty.
MLGW Bias
As one of the leaders of $450 Million for Memphis, I can say that we are proud to have had hundreds of business and community stakeholders support us, including former Mayors Mark Luttrell, Dick Hackett, and Bill Morris, current Mayor Lee Harris and, by his actions, Mayor Strickland (who did not explicitly endorse our group).
Our group’s name, $450M for Memphis, came directly from MLGW’s own 2019 study that showed a scenario with $429 million in annual savings (prior to inflation). Yet MLGW quickly sandbagged this scenario in its 2020 IRP study to show only $100 million of savings. The IRP/RFP’s faulty assumptions — such as a non-existent $100 million TVA rate cut — were made to make the economics of TVA’s proposal look good.
Given MLGW executives’ apparent bias, lack of competence and dearth of economic vision, we are grateful that Mayor Strickland has mandated his energy consultant to execute a review of the RFP, which should soon be underway.
We hope TVA’s “reliability” claims are also reviewed by the Mayor’s consultant, since Department of Energy (DOE) energy flow data reveals that about 10% of TVA’s daily power demand flows from the Midwestern Independent System Operator (MISO).
Although TVA denied these are power purchases, they later said, “TVA’s transmission system boasts 69 interconnections with other utilities, which TVA can use to purchase less expensive or additional energy from surrounding markets. This saves our customers money.”
We thank TVA for the clarity on this point.
TVA’s Dependence on MISO
The data is irrefutable: TVA depends on MISO for power. Not surprisingly, TVA went radio silent on this issue — and MLGW simply ignored this hard data.
The DOE data also undercuts TVA’s claim of 99.999% reliability, particularly since TVA, unlike other utilities, won’t admit that the 99.999% figure does not include severe weather outages — outages from which no utility is immune.
It is worth noting, however, that TVA includes the 99.999% figure in its executive compensation formulas.
And speaking of reliability, the chickens came home to roost for Texas last year after it deliberately bypassed federal energy regulation, as a give-away to the Texas-based energy industry. Comparing Texas to MLGW is a scare tactic used by folks who ignore the rules of U.S. energy regulation.
Shelby County’s suburbs, after heavy TVA lobbying recently said they did their own research and want to remain with TVA. The suburbs should have an MLGW voice, and they certainly have the right to create their own utility system; their leaders, however, should do their constituents a service and wait for Mayor Strickland’s consultant’s report, which is the only independent voice in the process.
Wanted: A Fair RFP
There is not enough room here to discuss TVA-MLGW’s current rate increases that have squeezed us all or how MLGW’s naturally low water and gas rates have hidden high power costs. Nor is there room to discuss how TVA’s coal ash threatens the Memphis Sand Aquifer, about which MLGW has been pitifully silent. This is particularly concerning since “W” — water — is a core part of MLGW’s job. Our aquifer is arguably Shelby County’s greatest natural asset.
If Mayor Strickland’s consultant finds significant problems with how the RFP was structured and how the resulting bids were assessed, MLGW executives involved should be recalled and removed. Put simply, MLGW has failed its fiduciary duties to its ratepayers. The ratepayers of Shelby County deserve a fair RFP. City Council should vote against the TVA contract until all questions are answered, even if it takes a few years.
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Jim Gilliland Jr. has worked 22 years in the project finance and public finance sectors in the municipal bond market and has focused on electric utilities and independent power producers. He is currently in municipal bond investment management at Diversified Trust Co. He is a member of $450 Million for Memphis, which advocates an open bid process for the city’s power supply.
Prior to joining Diversified Trust, he served as a Senior Vice President at Morgan Keegan, where he worked in the municipal investment banking group. Prior to his tenure at Morgan Keegan, Jim served for two years as Director of U.S. Public Finance Underwriting at CIFG NA bond insurance in New York City, and prior to that Jim served for nearly six years in New York City as Director in both the Public Finance and Project Finance Departments at Fitch Ratings, working on all varieties of U.S. municipal bond transactions. He holds a Bachelor of Arts degree from the University of North Carolina at Chapel Hill and a Master of Public Administration-Finance from Columbia University in New York City. He also received a Certificate in Financial Planning from Christian Brothers University. He is a member of the Assisi Foundation’s Community Advisory Council, and a member of the Financial Planning Association of Greater Memphis and a former member of the Methodist Le Bonheur Healthcare’s Quality Committee. Jim is also a Board Member of The Orpheum Theater Group, a fellow of The Leadership Academy of Memphis, and former Trustee of the Memphis College of Art.
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