Tennessee Valley Authority's Payments In Lieu Of Taxes .

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TACIRPublication PolicyReports approved by vote of the Tennessee Advisory Commission onIntergovernmental Relations are labeled as such on their covers with thefollowing banner at the top: Report of the Tennessee Advisory Commission onIntergovernmental Relations. All other reports by Commission staff are preparedto inform members of the Commission and the public and do not necessarilyreflect the views of the Commission. They are labeled Staff Report to Membersof the Tennessee Advisory Commission on Intergovernmental Relations on theircovers. TACIR Fast Facts are short publications prepared by Commission staff toinform members and the public.Tennessee Advisory Commission on Intergovernmental Relations226 Anne Dallas Dudley Boulevard · Suite 508 · Nashville, Tennessee 37243Phone: 615.741.3012 · Fax: 615.532.2443E-mail: tacir@tn.gov · Website: www.tn.gov/tacir

Report of the Tennessee Advisory Commission on Intergovernmental RelationsTennessee Valley Authority’sPayments in Lieu of TaxesAnnual Report to the Tennessee General AssemblyBob Moreo, M.Arch.Senior Research Associate Mark McAdoo, D.B.A.Research Manager Melissa Brown, M.Ed.Deputy Executive Director Teresa GibsonWeb Development & Publications ManagerJanuary 2021

Recommended citation:Tennessee Advisory Commission on Intergovernmental Relations. 2021. Tennessee ValleyAuthority’s Payments in Lieu of Taxes: Annual Report to the Tennessee General Assembly.Tennessee Advisory Commission on IntergovernmentalRelations. This document was produced as an Internetpublication.

State of TennesseeTennessee Advisory Commission on Intergovernmental Relations226 Anne Dallas Dudley Boulevard, Suite 508Nashville, Tennessee 37243Legislative MembersSenator Jon LundbergBristolSenator Katrina RobinsonMemphisSenator Ken YagerKingstonSenator Jeff YarbroNashvilleRepresentative Mike Carter, ChairmanOoltewahRepresentative John CrawfordKingsportRepresentative Harold M. Love Jr.NashvilleRepresentative Antonio ParkinsonMemphisStatutory MembersSenator Bo WatsonHixonRepresentative Susan LynnMt. JulietJustin WilsonComptroller of TreasuryCounty MembersMayor Rogers AndersonWilliamson CountyMayor Buddy BradshawLoudon CountyCounty Executive Jeff HuffmanTipton CountyMayor Larry WatersSevier CountyMunicipal MembersMayor Tom BickersLouisvilleMayor Kevin Brooks, Vice ChairmanClevelandMayor Jill HollandMcKenzieMayor A. Keith McDonaldBartlettOther Local Government MembersMary Gaither, Tipton County ClerkCounty Officials Association of TennesseeMayor Terry FrankAnderson CountyTennessee Development District AssociationExecutive Branch MembersPaula Davis, Deputy Comm. of Operations & Admn.Dept. of Economic and Community DevelopmentSammie Arnold, Asst. Comm. of Comm. & Rural Dev.Dept. of Economic and Community DevelopmentJanuary 7, 2021The Honorable Bo WatsonChair, Senate Finance, Ways and Means Committee425 5th Avenue NorthSuite 706 Cordell Hull BuildingNashville, TN 37243The Honorable Paul BaileyChair, Senate Commerce and Labor Committee425 5th Avenue NorthSuite 736 Cordell Hull BuildingNashville, TN 37243The Honorable Steve SoutherlandChair, Senate Energy, Agriculture and Natural Resources Committee425 5th Avenue NorthSuite 722 Cordell Hull Building.Nashville, TN 37243The Honorable Susan LynnChair, House Finance, Ways and Means Committee425 5th Avenue NorthSuite 622 Cordell Hull BuildingNashville, TN 37243The Honorable Clay DoggettVice-Chair, House Commerce Committee425 5th Avenue NorthSuite 580 Cordell Hull BuildingNashville, TN 37243Dear Chairmen:Transmitted herewith is the Commission’s annual report evaluatingthe effect of Section 4 of Public Chapter 475, Acts of 2009, (the ElectricGeneration and Transmission Cooperative Act) as amended in PublicChapter 1035, Acts of 2010, on the Tennessee Valley Authority’s paymentsin lieu of taxes with specific attention to changes in TVA’s generatingsystem. The Commission approved the report on January 7, 2021, and ishereby submitted for your considerationRespectfully yours,Private Citizen MembersCalvin CliftonKingsportJeff PeachSmyrnaTACIRCliff Lippard, Executive DirectorRepresentative Mike CarterChairmanCliff LippardExecutive Director

226 Anne Dallas Dudley Blvd., Suite 508Nashville, Tennessee 37243-0760Phone: (615) 741-3012Fax: (615) 532-2443www.tn.gov/tacirTO: Commission MembersFROM: Cliff LippardExecutive DirectorDATE: 7 January 2021SUBJECT: Tennessee Valley Authority Payments in Lieu of Taxes—Annual Report forApprovalThe attached Commission report is submitted for your approval. The report respondsto Public Chapter 475, Acts of 2009, which directed the Commission to monitor changesin the wholesale distribution of electric power by the Tennessee Valley Authority andits distributors for possible effects on the Authority’s payments in lieu of taxes to thestates in the Valley region, and to Public Chapter 1035, Acts of 2010, which made thereport an annual requirement. There are no recommended actions to be taken by theGeneral Assembly in this year’s report.

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General AssemblyContentsTennessee Valley Authority’s Payments in Lieu of Taxes.1After Three Years of Increases, TVA’s Payments in Lieu of Taxes Decrease. 3TVA’s Efforts to Meet Power Needs and Remain Within Its Debt Limit. 6Potential for Changes in TVA’s Customer Base.16The Shift Away from Coal: Environmental and Business Reasons.18References. 25Appendix A: TVA’s Allocation Formula. 31Appendix B: Tennessee’s Allocation Formula. 33Appendix C: Distribution of Counties’ Share of TVA Payments in Lieu of Taxes to Tennessee byTennessee Fiscal Year. 35Appendix D: Distribution of Cities’ Share of TVA Payments in Lieu of Taxes to Tennessee byTennessee Fiscal Year. 37Appendix E: Impact Payments Distributed to Counties in Areas Affected by TVA Construction byTennessee Fiscal Year. 45Appendix F: Impact Payments Distributed to Cities in Areas Affected by TVA Construction byTennessee Fiscal Year. 47Appendix G: TVA 2019 Integrated Resource Plan Recommendations by Resource Type . 55WWW.TN.GOV/TACIRi

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General AssemblyTennessee Valley Authority’s Payments in Lieuof TaxesThe Tennessee Advisory Commission on Intergovernmental Relations wasdirected by the Electric Generation and Transmission Cooperative Act of2009 (Section 4 of Public Chapter 475, Acts of 2009) to monitor changes in thewholesale distribution of electric power by the Tennessee Valley Authority(TVA) and its distributors for possible effects on the Authority’s paymentsin lieu of taxes (PILOTs) to the states in the Valley region. The Commission’sreport was to “include recommendations, if any, on adjustments to thestate tax system that would keep the state and local governments wholefrom such future changes.” The Act authorized the creation of nonprofitmembership cooperatives to generate and transmit electricity in Tennessee.At the time, one such co-op already owned a power-generating facilityin Mississippi, and the legislature was concerned that, having authorizedthem, they had opened the door to a potential decline in TVA’s paymentsto the states if the co-ops began selling electricity directly to distributors.After considering a number of options, including those developed by theCommission,1 the Tennessee General Assembly passed Public Chapter1035, Acts of 2010, requiring payments equivalent to TVA’s TennesseePILOT from any other entity providing wholesale electric current forresale within the state, such as the electric generation and transmissioncooperatives authorized in 2009. Public Chapter 1035 was designedto ensure that revenue from power sales in the TVA region would notdepend on who produced that power or who sold it, and the Act putto rest immediate concerns about the potential loss of TVA revenuecreated by the 2009 law. The Act also renewed the requirement that theCommission monitor changes in wholesale power supply arrangementsin TVA’s service area that could affect TVA’s payments to the state and itslocal governments and report to the General Assembly annually. This isthe Commission’s report for the 2021 legislative session.After three yearsof increases, TVA’spayments in lieu oftaxes to Tennessee areestimated to decreaseby 33 million for federalfiscal year 2020-21.Among the factors that could significantly affect TVA revenue, thepossibility that distributors might opt out of their TVA contracts andobtain power from other sources occasionally reappears. TVA’s largestmunicipal customer, Memphis Light, Gas and Water (MLGW) is currentlyevaluating such a move, as is another Tennessee power provider, VolunteerElectric Cooperative. If a Tennessee distributor were to leave the TVAsystem, the overall effect on state and local revenue from TVA’s PILOTand the equivalent payments required under the 2010 law would dependin part on the cost of wholesale power the distributor purchases from otherproviders. Regardless, local governments in the distributor’s service areawould see their share of this revenue decrease.1Tennessee Advisory Commission on Intergovernmental Relations 2010.WWW.TN.GOV/TACIR1

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General AssemblyConcerns about the problems created by TVA’s debt ceiling, which has notbeen raised since 1979,2 and the threat of privatization also reappear fromtime to time. Both were among the reasons given by power distributorsin the region for seeking authorization to form the generation andtransmission cooperatives authorized by the 2009 Act. TVA’s debt ceilingremains 30 billion, which because of inflation now has the approximatebuying power that 10 billion would have had in 1979,3 but the threat ofprivatization has diminished at least for the time being.4 Figure 1 showsthe level of TVA’s debt since 2012.Figure 1. Tennessee Valley Authority Statutory Debt at Federal Fiscal Year End(in billions ) 9Source: Tennessee Valley Authority 2016a, 2019a, 2020a, and 2020b.To manage within its 30 billion debt limit, TVA has adopted a numberof innovative but by its own account costly financing techniques, someof which can alter the amount of PILOT revenue paid directly to states.The lease-and-lease-back technique used so far to finance the expansion ofpower production in Tennessee does not affect the amount of the PILOTpaid directly to Tennessee, but the sale-and-lease-back technique used atone of its plants in Mississippi reduced the amount paid directly to thatstate, and the potential for the same exists throughout the region. Thedifference is in who owns the property and whether it is subject to stateand local taxes.Changes in TVA’s supply system continue to affect the balance of PILOTsacross the region. TVA has retired numerous coal-fired units at its powerplants since 2012, while completing a second nuclear reactor at its WattsBar facility in Rhea County and building or acquiring several new naturalgas-fired facilities. In the states where these new or retired facilities are16 United States Code 831 n-4(a).US Department of Labor, Bureau of Labor Statistics “PPI Commodity Data for Fuels and RelatedProducts and Power: Electric Power.”4Sher 2018 and Collins 2018.232WWW.TN.GOV/TACIR

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General Assemblylocated, the changes have affected the value of TVA power property,one of two factors determining each state’s share of the PILOT. TVA’sinvestments in Tennessee combined with retirements in Alabama andKentucky have generally more than offset coal-fired facility retirementsin Tennessee in recent years, shifting the balance of the PILOT towardTennessee. However, TVA’s plan to retire its Bull Run facility in AndersonCounty by December 2023 will reduce that plant’s value and could reduceTennessee’s share of the PILOT in future years unless it too is offset byincreases in the value of TVA power property elsewhere in the state or bynet reductions in other states.5TVA’s decision to make many of these changes predates but is consistentwith the management strategy laid out in its 2019 Integrated Resource Plan(IRP).6 The 2019 IRP calls for closing a number of old coal-fired generatingplants, continuing to use existing nuclear-powered facilities, building oracquiring plants powered by natural gas, expanding solar power capacity,as well as other renewables, and encouraging more energy efficiency.The plan’s strategies for increasing energy efficiency, if successful, couldreduce TVA revenues and ultimately the PILOT for all recipients, as couldother factors, such as the economy and the weather.Changes in TVA’s wholesale power contracts with its distributors alsoaffect TVA’s power revenue and, therefore, the PILOT. Rebates fordistributors included in a new long-term contract option made available in2019 have reduced revenue TVA otherwise would have received, thoughthe full effect of this rebate will depend on the number of distributors thatopt into these contracts.7Tennessee receivesalmost 68% of thepayments TVAdistributes to states inthe region, a percentagethat has increased eachfiscal year but one since2008‑09.None of these policy changes by TVA, nor the possibility that one or moreof Tennessee’s electric power distributors might leave the TVA system,appear to warrant legislative action at this time but should continue to bemonitored.After Three Years of Increases, TVA’s Payments in Lieu ofTaxes DecreaseTVA’s actual payments in lieu of taxes for federal fiscal year 2019-20amounted to 552 million, of which 373 million was paid to Tennesseegovernments, including 3.4 million in direct payments to counties.8 ThisEmail from Michelle Huffman, taxes program manager, Tennessee Valley Authority, December21, 2020.6Tennessee Valley Authority 2019c.7As of September 30, 2020, 142 of TVA’s 153 local power companies had opted to sign thesecontracts. See Tennessee Valley Authority 2020b.8Letter from Michelle Huffman, taxes program manager, Tennessee Valley Authority, to AmandaMcGraw, chief financial officer, Tennessee Department of Revenue, October 28, 2020.5WWW.TN.GOV/TACIR3

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General Assemblywas an increase of 4 million over payments to all states in the previousfiscal year.Payments for the current fiscal year, federal fiscal year 2020-21, areestimated to decrease 52 million to a total of 500 million.9 TVA’s fiscalyear 2019-20 revenue from sales of electricity to its local power company(LPC) and direct industrial customers, which determines the PILOTamount for 2020-21, decreased by 1 billion from the year before, drivenby mild weather, partnership credits to LPCs, and reduced demand forelectricity resulting from business closures and temporary shutdowns inresponse to the COVID-19 pandemic starting in March 2020.10TVA’s fiscal year 2019-20revenue from sales ofelectricity decreased by 1 billion, due in partto reduced demand forelectricity resulting frombusiness closures andtemporary shutdowns inresponse to the COVID-19pandemic starting inMarch 2020.Payments to Tennessee are estimated to decrease by 33 million to atotal of 340 million, of which 3.4 million will again be paid directly tocounties, in federal fiscal year 2020-21.11 However, for the third straightyear Tennessee’s percentage of the Authority’s overall payments increasedslightly, primarily because TVA retired the last remaining coal-fired unitat its Paradise facility in Kentucky in February 2020. This decreased thevalue of TVA power property in that state relative to the other states in theregion.12Total payments are based on 5% of prior-year gross proceeds13 from powersales, and funds are divided among the eight states in which TVA ownspower property14 based both on revenues from power sold by TVA andon the value of TVA power property located in each state. Although TVAbuys power from other sources, those purchases do not affect the amounteach state receives from its PILOTs. See appendix A for an explanation ofTVA’s allocation formula.Tennessee receives almost 68% of the total distributed through TVA’sformula, a percentage that with the exception of fiscal year 2017-18 has beenincreasing since 2008-09. Past increases in this percentage helped offsetwhat would have otherwise been larger decreases in TVA’s payments toTennessee in federal fiscal years 2015-16 and 2016-17. See table 1.Federal fiscal year 2020-21 PILOT estimate provided by TVA; email from Rayna Ware, assistantdirector, financial control, Tennessee Department of Revenue, November 13, 2020. See table 1.10Tennessee Valley Authority 2020d.11Letter from Michelle Huffman, taxes program manager, Tennessee Valley Authority, to AmandaMcGraw, chief financial officer, Tennessee Department of Revenue, October 28, 2020.12Email from Michelle Huffman, taxes program manager, Tennessee Valley Authority, December17, 2020.13TVA interprets “gross proceeds” as the proceeds from the sale of power to municipalities,cooperatives, and industries. The TVA Act specifically excludes TVA’s sales to federal agenciesfrom the PILOT calculation.14TVA interprets “power property” to include facilities that generate electricity, property used totransmit electricity, coal assets, and a portion of the overall value of TVA’s reservoir properties.94WWW.TN.GOV/TACIR

Tennessee Valley Authority’s Payments in Lieu of TaxesAnnual Report to the Tennessee General AssemblyTable 1. Tennessee Valley Authority Revenue SharingDistribution to Tennessee by Federal Fiscal Year (in millions)TVA's Overall PILOTTennessee's PercentxTennessee's AmountDirect Payment to CountiesTennessee's Share-2020-21*2019-202018-192017-182016-172015-16 499.6 551.7 547.7 523.7 517.1 534.867.97%67.58%67.06%66.33%66.54%65.78% 339.6 372.8 367.3 347.4 344.1 351.83.43.43.43.43.43.4 336.2 369.4 363.9 344.0 340.7 348.5* Estimate based on unaudited gross receipts. TVA distributes payments monthly from October through August based on thisestimate then makes a final payment for the fiscal year in September based on audited revenue figures. It is not unusual for thefinal payment to be adjusted upward from the original estimated amount.Note: Share distributed to Tennessee may not equal amount allocated to state minus direct payments to counties because ofrounding.Source: Tennessee Valley Authority.Tennessee’s local governments continue to receive more than 40% of theamount TVA allocates to Tennessee for distribution through the state’s ownformula. Under Tennessee Code Annotated, Section 67-9-101 et seq., thisformula

Mayor Buddy Bradshaw Loudon County County Executive Jeff Huffman Tipton County Mayor Larry Waters Sevier County Municipal Members Mayor Tom Bickers Louisville Cleveland Mayor Jill Holland McKenzie Mayor A. Keith McDonald Bartlett Other Local Government Members Mary Gaither, Tipton County Clerk County Officials Association of Tennessee Mayor .

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