Evanoff: Scrap over rates marks beginning of long haul for MLGW

Memphis’ scrap over rising gas and electric rates marks the beginning of a long haul to keep costs stable in the city-owned utility.

Memphis Light, Gas and Water Division’s new chief executive officer is coming from an Atlanta-based utility noted for its profit mindset.

Incoming utility boss Jarl T. Young could usher in higher rates for electric customers, fewer and more streamlined jobs, a new strategy for reducing the frequent service outages, smoother customer relations, better deals with power wholesaler Tennessee Valley Authority and, some consumer advocates say, a possible exit from the TVA system.

In recent years, MLGW quietly absorbed rising expenses rather than pass the full costs to Memphis customers. MLGW’s cash reserves fell, leading to the first electric rate increase in 10 years last week by the Memphis City Council.

More:Smaller MLGW rate increases approved by Memphis City Council

More:Departing MLGW head Jerry Collins says 'small, normal' rate hikes needed

Opinion:Collins: Memphis, MLGW must grow and prosper together

Council Chairman Berlin Boyd and some other council members have made no secret of their exasperation with MLGW in recent weeks.

MLGW chief executive Jerry Collins Jr. recently retired, leaving the $215,000 job after serving on city and MLGW payrolls since 1979. No one has accused him of bad work, though city officials clearly wanted a fresh face after he left.

Rather than reach inside 2,600-employee MLGW for the next utility boss, Memphis Mayor Jim Strickland hired an MBA with a Harvard business degree. 

Young, who calls himself J.T., will start work in Memphis on March 19 for $320,000 per year, The Commercial Appeal’s Ryan Poe reported earlier.

Privately, some council members say Young’s attraction has less to do with his education and more with his experience. He’s coming out of a company regarded as a star in the world of electric power.

Southern star

Utilities make money by controlling costs and avoiding mistakes like soaring construction budgets on new power plants. By that benchmark, his employer has stood out.

Young currently works as the customer service general manager at Gulf Power Co. of Pensacola, Florida, a part of Atlanta-based Southern Co. Southern's various electric utilities employ 32,500 people combined in 19 states.

Southern handed its owners, the stockholders, a return on equity last year of almost $11 on every $100 invested in the utility’s stock, almost double the return at 29,000-employee Duke Energy Corp. of Charlotte, North Carolina, and close to Seattle retail tech giant Amazon’s $12.91 return on equity.

One difference: Southern extracts a great deal more profit out of a dollar. For every employee on the payroll, Amazon earned $5,359, while Southern pocketed $77,870 per employee.

Spending freely to expand, Amazon held onto only $3 billion in profit on revenue of $177 billion last year, while Southern earned nearly as much on far lower sales volume — $2.5 billion in profit on $19.9 billion in revenue.

Cash short

Exactly what Young might do that Collins didn’t isn’t clear.

Listening to the council debate Tuesday left the impression Collins’ longtime marching orders were to steer clear of both rate increases and the City Council. 

True, MLGW customers' electric rates stayed flat even as Nashville's climbed a reported 14 percent, Chattanooga's 13 percent and Knoxville's 8 percent over the years. But one result was the frustration expressed by council members. Old power lines fail often. At one point Councilwoman Patrice Robinson assured MLGW employees packing the meeting room: “You are not the enemy.”

While the utility may be cash short, MLGW officials insist everyone works hard. Crews routinely fix rather than replace old machines, one MLGW manager told the council. Workers pitched in another way. A reduction in benefits last year raised copays for health services, Rick Thompson, business manager of International Brotherhood of Electrical Workers Local 1288, which represents about 1,800 MLGW employees, said in an interview.

“There seems to be some impression of management not doing all it could do,” Councilman Martavius Jones said. “My pushback is how much mismanagement can you have if you have not needed a rate increase for 10 years.’’

Winter woes

Even so, relations grew strained.

“The prior president didn’t have a good relationship with the council,’’ IBEW’s Thompson said.

That became apparent this winter.

“Jerry Collins did a great job for MLGW,” said Boyd, who pointed out the present council's more assertive than in the past. “We’re not a rubber-stamp board. This council, they read, they ask questions, and when they ask questions they expect to get an answer back.”

This winter, two different answers came on one question, a response Boyd said irritated  him.

In September, credit rating agency Standard & Poor’s downgraded a $90 million electric bond issue to AA from AA+. Bonds are like a loan. Downgrade means S&P advised lenders it was slightly less confident MLGW could fully repay them over time. Because of the downgrade, interest rates on future MLGW bonds could tick up, raising expenses.

S&P cited the city utility’s weak financial performance. However, MLGW officials at one meeting with council members portrayed the utility in good shape and at another meeting described the dire need for an immediate rate hike. Spending its cash reserves to cover rising expenses apparently masked deficits run up trying to keep the electrical system going.

Speaking against the 2 percent rate increase approved Tuesday, Boyd said forestall it until Young evaluates MLGW.

“I don’t need two different answers from two different people at the top,” Boyd said Tuesday, chiding the utility for the mixed signals on finances and going on to belabor MLGW for proceeding with a $240 million smart meter program while old power lines failed in what he described as modest windstorms.

Summing up his view of what the council should do, Boyd said: “This organization needs to allow the new president to come on and evaluate the overall financial stability” of MLGW.

He didn’t flesh out the evaluation, though it sounds like Young was told to figure out what MLGW needs, how much it will cost, how to pay for it and then do it in the next few years.

If that’s the case, it’s obvious rate increases await MLGW customers. 

'Perfect storm'

MLGW doesn’t have a lot of wiggle room.

Of every dollar in revenue MLGW collects from customers, about half goes back to Knoxville-based TVA.

MLGW doesn’t make electricity. The city utility buys TVA power and resells the electricity to 421,000 customers hooked to MLGW’s own power lines.

MLGW can seem out of touch in Memphis — like the homeowners' recent protest of  plans to disrupt their leafy neighborhood with a new MLGW office building. Although MLGW spends $1 billion every year with TVA, the Knoxville company can seem tone deaf, too.

“It’s become more egregious as time goes by,” said Memphis lawyer Herman Morris, former general counsel at MLGW.

For years, TVA electricity has flowed into Memphis under a long-term wholesale power contract. Martavius Jones said the contract will soon expire. When it does, TVA wants to introduce fixed rates, like a monthly fee owed by consumers regardless of power used.

“No matter how responsible you are in cutting back consumption in your home, your bill is going to go up if they do this,” Morris said.

MLGW has little negotiating leverage on fixed rates, or the other matter on the TVA agenda — rate cuts for large industrial users.

Industrial customers throughout TVA’s system were handed lower rates, while residential customers were handed rate increases. Most utilities served by TVA passed the higher rates directly to household users. Morris called this families subsidizing factories.

When the current wholesale contract expires, MLGW and the council will have to deal with fixed rates, the industrial subsidy and whatever upgrades J.T. Young recommends.

Said Jones: “It’s like the perfect storm coming.”

Goodbye?

TVA, created by Congress in 1933, is a federal agency set up to help aid the South with abundant and inexpensive energy.

TVA makes electricity at two nuclear plants, six coal-fed plants and 27 other generating stations, and sells most of the power to 154 utilities operating throughout Tennessee and parts of Alabama, Georgia, Kentucky, Mississippi, North Carolina and Virginia.

William Johnson is the boss. TVA’s chief executive earned $995,000 in salary last year, up about 40 percent in four years, plus $5.4 million in performance bonuses and other compensation. His $6.4 million income exceeds the pay of everyone else on U.S. government payrolls, but as Johnson himself probably could tell you, his paycheck appears meager next to the $15.8 million paid Southern Co. CEO Tom Fanning. 

There’s one major difference between them. Fanning answers to shareholders and public regulators in 19 states. TVA has no regulator. The agency answers to itself, said critic Stephen Smith, executive director of Southern Alliance for Clean Energy, a consumer advocate in Asheville, North Carolina.

TVA's independence, he said, works against the interests of average families. It wasn't visible in Memphis, where a low-term contract shielded customers. Other cities, though, have had regular rises in power bills. In the blog Clean Energy, Southern Alliance  analyst John Wilson wrote since 2010 "TVA has approved an average 50% increase in mandatory fees. ... But if you’re a residential customer on TVA’s system, this information may not appear on your bill, and you may not even be notified when your utility is considering an increase in the fee."

What can a hometown utility do? Smith said Memphis might investigate cutting ties to TVA, perhaps buy power from the Mid-Continent Independent Systems Operators, or MISO, a group of big companies including Duke Energy that generate electricity from Louisiana to Manitoba.

Jones said just looking for a TVA alternative has merit, although Berlin Boyd doubted  MLGW would ever cut ties.

“Historically we have paid some of the lower rates in the country for power. Where else can we go to get rates this low?” Boyd said. “For a long time TVA was told to talk to MLGW and not to us (on the council). That’s changed. TVA is reaching out to us now. It’s a developing relationship. They recognize Memphis is their largest customer.”

Can that lead to negotiating leverage by an engaged City Council? We'll have to wait and see.

Ted Evanoff, business columnist for The Commercial Appeal, can be reached at evanoff@commercial appeal.com and (901) 529-2292.