July 21, 2008
To: All TVA employees
Re: Update on Fuel Costs
Not a day seems to go by without headlines telling us the latest news about the economy, including rising gas prices and how those prices affect so many other goods and services.
Unfortunately for TVA, as well as for Tennessee Valley consumers, TVA is not immune to those same cost pressures in our business. I know you hear questions and comments about electricity prices from your friends and families, and you may feel on the spot trying to explain all that TVA does. Employees are TVAs best and most credible representatives, and I want to share this update on fuel costs with you so you know more about the issues TVA is facing.
Two years ago, TVA began including a Fuel Cost Adjustment (FCA) in monthly power bills. Most other utilities have similar mechanisms in place to recover fuel and purchased-power costs as they occur. TVA spent more than $3.4 billion on fuel and purchased power last year. And by June of this year, we had already exceeded the amount we anticipated spending for all of 2008.
Let me just give you one example: Currently, the price of coal in all markets is moving in the same direction as the prices weve been seeing at the gasoline pumps. The price of European coal is up 92 percent in the last year; prices for coal deliveries to Japan are up 124 percent, and U.S. prices are up more than 100 percent. These increases are driven primarily by global coal-production and supply-chain challenges, and we in the Tennessee Valley are directly affected by whats happening around the globe.
Our FCA is adjusted quarterly and is separate from our base rates for electricity. Last April, TVA increased wholesale base electric rates by 7 percent to help fund new power-generation and energy-efficiency initiatives. The TVA Board directed us to make those investments as part of our Strategic Plan, and they will help us ensure that we continue to provide affordable, reliable power for many years to come. In addition to the base rate increase, our FCA increased 5 percent for that quarter, bringing the total impact to 12 percent. In July, we saw another 2 percent increase in the FCA.
For TVA, the problem of rising fuel prices is worsened by the ongoing drought in the region. Drought conditions mean we have less hydro power, and TVA must replace that cheapest form of generation with one of the most expensive − power purchased from other suppliers, typically generated from oil or natural gas.
A new FCA amount, which will take effect beginning October 1, will be calculated and announced to customers next month. Over the next few weeks, TVA is talking with customers about the drivers affecting the FCA, and what TVA is doing to help control costs. We will continue to share this news with you through regular updates so that when the new FCA is announced, you can help us carry TVAs message.
Thank you for the work you do every day in support of TVAs mission.
Tom Kilgore
President and Chief Executive Officer