TVECG Comments on TVA Executive Salaries and Bonus Objectives

The Tennessee Valley Energy Consumers Group represents the interests of energy consumers with the objectives of a reliable supply of electric power at the lowest possible electric rates. See www.tvecg.com . We are concerned that TVA executive compensation is excessive and that the structure of the bonus calculations leads to decisions that may not be in the best interests of consumers. TVECG will address these concerns in our comments for the TVA IRP process.

From the time of its founding until 2004 TVA salaries were capped at what members of Congress are paid, currently $174,000 per year. During this time TVA service was extremely reliable and our electric rates were among the lowest. TVA had many outstanding executives and their objectives were more about service to the region than about personal gain. This all changed in 2004 and today TVA executives make millions of dollars at consumer expense while service has deteriorated and electric rates have escalated.

The excessive compensation may not be the worst part of the TVA executive pay system. A large part of the TVA executive pay is tied to meeting certain performance goals as detailed in the TVA 10-k reports. There is a major flaw with this system, the performance goals exclude the costs of fuel and purchased power which are directly passed through to consumers on monthly power bills. As a result, management objectives are not fully aligned with consumer interest and management has incentive to take actions that may not be in the consumer best interest. The management incentive is to take actions that limit non-fuel expenses with little regard as to increased fuel and purchased power costs which pass directly to the consumer. Consumers must pay the total cost for power while management is compensated based on minimizing only the non-fuel portion. This can lead to decisions that benefit management to the determent of consumers. Some examples:

• Natural gas plants have lower non-fuel expenses than most other types of generation, but higher and more volatile fuel prices. Management has the incentive to select the natural gas options and let the consumer bear the fuel cost risks.
• Solar has no fuel cost, but substantial non-fuel costs, so TVA owned solar goes against management incentives. When TVA does choose solar, they tend to buy it from power producers in which case it is purchased power and can be passed to consumers. Given that TVA has large land holdings plus huge buying power at low interest rates, it would likely be lower total costs for TVA to construct solar farms in addition to purchasing solar power.

The bottom line for TVECG is that we want management objectives aligned with the lowest total power cost as shown on consumer bills. Beyond that, we question the necessity and wisdom of the very high TVA executive compensation. We will be addressing these points in the TVA IRP process.