The Tennessee Valley Authority generates electricity for nearly 10 million consumers in the seven-state Tennessee Valley. TVA sells its power to local power companies (like MTE) that, in turn, distribute and sell the power to homes and businesses in their service territories. TVA uses the fuel cost adjustment (FCA) to help recover fuel and purchased power costs. In this case, fuel refers to what generates electricity — nuclear, natural gas, coal, hydro, and renewable energy — rather than gasoline. Like gasoline, prices can vary from one month to the next. Various factors affect these costs, including weather and global supply and demand issues of these commodities.

The FCA is calculated monthly as generation fuel costs and the cost of power TVA purchases from other suppliers rise and fall. It is based on TVA’s forecasted fuel and purchased power costs for the month, adjusted for any over- or under-collections in previous months. TVA’s monthly FCA is listed on the MTE rate schedule and varies each month.

TVA, like Middle Tennessee Electric, operates in a not-for-profit fashion. The FCA ensures TVA recovers costs as they occur, helping TVA better match its revenues to expenses.  

When the costs for these fuels change, TVA’s costs to make electricity also change. The FCA is the mechanism TVA uses to pass along monthly increases and decreases in fuel costs to its customers, like MTE and its members. Market costs for the fuels used to generate electricity — natural gas, coal, nuclear and others — are influenced mainly by temperature and supply-and-demand conditions. 

Many utilities across the country use similar mechanisms to adjust their rates. Often, it is called the PCA, standing for “purchased cost adjustment,” to cover variabilities in fuel costs for power generation and the impact of peak demand on the electricity markets.