BusinessTN

Last September, a cooperative of TVA distributors secured short-term loans to buy 70% of an 810-megawatt, combined-cycle combustion turbine plant in Southaven, Miss. That they found $325 million in the midst of a frozen credit market was "miraculous," says Jack Simmons, president of the Tennessee Valley Public Power Association (TVPPA), which represents TVA's 158 municipal distributors. Longtime observers of the Tennessee Valley Authority may find equally miraculous the purchase itself. Municipal ownership of generating capacity, standard practice for other public utilities, is a first for TVA, which for 75 years had retained sole custody of the assets its ratepayers fund. It was a historic moment that's gone largely unnoticed.

TVA's new willingness to share has been germinating since 2004, when the utility's previously monolithic governance was restructured--a move made, in part, to bolster its relationship with distributors. Still, several municipalities just inside the TVA fence threatened to jump it; some eventually did. What emerged from negotiations with those unhappy municipalities, Simmons says, was an awareness of their desire for "more voice and choice and input into the asset-planning decisions" paid for by their citizens.

In response, TVA and TVPPA launched a pilot program allowing distributors to own, collectively, up to 5% of the generating capacity in the Valley. (The program involves the coordinated, shared purchase of newly acquired facilities; as federal property, existing TVA assets can be sold only if deemed "surplus.") In July 2007, TVPPA formed the nonprofit generation and transmission cooperative Seven States Power Corp., which took its first opportunity to partner with TVA in the purchase of the Southaven facility and plans to buy another 20% share, the maximum allowable, early this year. Until contracts and permanent financing are finalized next spring, TVA and Seven States have a temporary lease/buyback arrangement covering the cost of the nonprofit's short-term loans and interest.

Simmons hopes through the project to achieve a more economical, cost-based model of distribution. But the real benefit to distributors and ratepayers, he says, is "a long-term equity shift" away from the federal government--and a successful pilot program may eventually help raise TVA's limit on publicly owned capacity.

TVA, struggling to meet growing demand under a $30 billion debt ceiling, can gain from the arrangement, as well. While TVA spokesman Jim Allen says the utility hopes to benefit ratepayers, not "to circumvent [our] debt limitations," distributor-financed assets mean TVA can generate new power while incurring less long-term debt.

In the process, TVA hopes also to generate good will among a public that no longer holds the nostalgic view of TVA as the power that lifted the rural South into modernity. Current ratepayers see, instead, a largely self-regulated anachronism that--last year alone--raised its rates 25%, released toxic sludge into the Ocoee River, and offered few substantive answers to a disastrous, 300-acre coal ash spill in Roane County.

Its new partnership with the public marks a real change of course for TVA--but it's also a nuanced and protracted process. Ultimately, its historic significance may be lost in a year marked by equally historic, and far more immediate, problems.