Factors affecting electricity rates and other impacts—TVA vs. private utilities
| Factors | Tennessee Valley Authority (TVA) | Investor-owned utilities (IOUs) (e.g., Duke Energy, Southern Company, Xcel Energy) | Independent power producers (IPPs) (e.g., Calpine, Dynergy, NRG) |
|---|---|---|---|
| Ownership/ governance | – Federal government owned | – Owned by private investors – Ownership typically widely distributed as publicly traded shares – May also be owned by private investors – Shareholder-elected board of directors |
– Owned by private-sector investors—ownership typically widely distributed as publicly traded shares, but may also be owned by private investors – Shareholder-elected board of directors |
| Market structure | – Provides generation and transmission services to LPCs – Protected from competition, but cannot sell outside the “fence” |
– Provides regulated generation, transmission, and distribution services to retail and wholesale customers within a defined service territory – Distribution function owned by IOU, whereas transmission and generation sometimes owned by third parties |
– Provides generation services to wholesale customers under electricity rates driven by market supply and demand – IPPs typically sell power, capacity, and ancillary services |
| Rate-setting mechanism | – Independent, statutory rate-setting authority – Rates approved by TVA board – TVA acts as regulator for LPCs |
– Regulatory structures vary across U.S. – Rates typically set by state regulatory agencies based on cost of service and well-established rate-setting process – May operate nonregulated (though usually power-related) businesses through affiliates |
– Limited regulatory oversight by FERC – Regional operators (independent system operators (ISOs), and regional transmission organizations (RTOs)) play key role regulating markets – No/limited state regulatory influence on pricing |
| Taxation | – Does not pay federal taxes – Exempt from state/local taxes – Pays PILOT, which approximate state/local taxes |
– Pays federal taxes; pays applicable state and local taxes – Tax rate: 35% |
– Pays federal taxes, pays applicable state and local taxes – Tax rate: 35% |
| Capital access/ credit | – Self-financed through internally generated cash flows and taxable debt issuances | – Financed through internally generated cash flows, taxable debt, and shareholder equity | – Financed through internally generated cash flows, taxable debt, and shareholder equity |
| Credit rating | – S&P: AA+; Moody’s: Aaa | – Most have investor-grade credit rating (A to BBB range for S&P). | – Credit ratings have historically been noninvestment grade |
| Cost of debt | – Interest rate: 3.2% – After-tax cost of debt: 3.2% – Cost of equity: NA |
– Weighted average “pre-tax” cost of capital: 6.7%–7.6% – Weighted average cost of capital: 4.4%–4.9% |
– Weighted average “pre-tax” cost of capital: 7.6%–9.1% – Weighted average cost of capital: 5.1%–6.1% |
Source: Adopted from TVA (2014c, 45)