The Challenge
The Tennessee Valley Authority (TVA), a U.S. government-owned corporation, powers 9 million people across seven southeastern states. Historically, TVA has relied on a diverse fuel mix of coal, gas, and nuclear, alongside purchased power, consuming approximately $4.5 billion annually in fuel.
However, shifts in commodity pricing and TVA's fuel supply mix led to a decline in coal usage. This created a significant problem: legacy coal transportation contracts, which did not anticipate this shift, left TVA in a disadvantaged cost position, unable to accurately estimate future liquidated damages due to over-hedged transportation risks.
Furthermore, coal-on-gas price competition propelled TVA's gas-fired fleet from a peaking role to an increasing base-load responsibility. While coal remains a dominant fossil fuel, this dynamic challenged existing contracting practices within TVA's commercial group. It underscored the critical need for comprehensive position management for all fuels and demanded the development of new contracting and risk management skills, processes, and systems within TVA.
The evolving fuel mix and the demand for innovative contracting strategies necessitated precise capture and valuation of all commodity contracts, along with their integration into TVA's newly established system of record, CXL Triplepoint.
The Solution
Opportune professionals stepped in to address TVA's complex challenges, delivering targeted solutions across several key areas:
- Commodity Risk Management: We assessed and recommended improvements for TVA's coal and non-commodity trade risk books. Ownership of coal transportation risk measurement was assigned to the Chief Risk Officer, and TVA adopted a robust risk-based approach to managing transportation risk.
- Transaction Protocol Development: We advised on and implemented fundamental protocols for classifying and processing all commodity transactions at TVA. These protocols ensure consistent oversight and processing, aligning with the unique risk, complexity, and valuation issues associated with each transaction.
- Mid-Office Support: Our team provided consistent consultation and support to TVA's mid-office on daily operational matters and emerging issues.
- Fuel Supply Plan Optimization: We conducted a best practices review of TVA's CGS Fuel Supply Plan, identifying areas for improvement and efficiency enhancements.
- System Integration & Transformation: Leveraging our extensive risk management expertise (front/mid/back office processes, risk control, risk analytics, IT systems, and infrastructure), we helped TVA develop the appropriate risk systems and processes. Our deep knowledge of the natural gas business was crucial in assisting TVA with the necessary business process and strategic changes to transition from a coal-dominated approach to one focused on natural gas.