Joe Put It In Perspective
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DAVE’S WORLD
By David Howell
I have written a lot of words over the past few weeks about the City of Water Valley, the Utility Commission and something called PILOT. And I may have used too many, which would not be the first time.
Joe Newman stopped by the Herald office last week because he thought there is still some confusion on the topic. After talking with Joe, I think he was right.
First, what is PILOT?
PILOT stands for Payment In Lieu of Taxes.
Water Valley’s electric system is publicly owned, so it doesn’t pay property taxes to the city like a privately owned utility would. Instead, the electric system may make a payment to the city’s general fund in lieu of taxes.
In simple terms, it is a way for the city-owned electric system to contribute toward the cost of city government.
For decades, that payment has been important to Water Valley. Very important.
But here is the part that gets interesting.
PILOT comes last.
The electric department operates the electric system first. It buys power from TVA, pays employees, buys materials and supplies and pays its other operating expenses.
Then it pays its debt.
Then it maintains reasonable reserves and working capital — money for replacing equipment, improving the system and dealing with the unexpected.
Then comes PILOT.
One. Operating expenses.
Two. Debt.
Three. Reserves and working capital.
Four. PILOT.
It is written into Water Valley’s power contract with the Tennessee Valley Authority, and the same basic principle is spelled out in Mississippi law.
TVA quoted the city’s contract in the letter it sent Water Valley last month when city leaders requested clarity. After operating expenses, debt and reasonable reserves are taken care of, the contract says PILOT may come from revenues then remaining.
TVA made another point clear: Even if excess revenue exists, the payment is discretionary. The city may take a PILOT payment. It is not required to do so.
The PILOT payment is legal.
It is permissible.
It is negotiable.
And it comes last.
That, Joe told me, is nothing new.
For those who don’t know Joe, there probably aren’t many people around Water Valley with more firsthand knowledge of our electric system.
Joe spent 25 years with the Water Valley Electric Department. He started dragging brush and cutting trees to keep rights-of-way clear, then worked his way through the department before eventually becoming its manager.
And Joe wasn’t just keeping the lights on.
During his tenure, the Electric Department built a dedicated power line to BorgWarner, then Water Valley’s largest employer and the electric system’s largest customer. At the time, the plant was using well over half of the electricity distributed in Water Valley. The dedicated line provided BorgWarner with more reliable power while improving flexibility elsewhere in the city’s system.
Joe’s department also made major improvements to the north substation, obtaining surplus transformers and circuit breakers from Ole Miss that Joe estimated were worth about $1 million. The city department did much of the work itself.
Then there was the big one.
The main 161-kilovolt substation at Gore Circle belonged to TVA. Water Valley was the only one of TVA’s 158 distributors at the time that didn’t own its main substation and it was a matter of time.
In 2008, Water Valley bought the substation from TVA for $1.
One dollar sounds like a pretty good deal, and it was. Water Valley would be able to purchase electricity a little cheaper if TVA didn’t own and maintain the substation.
But ownership also meant responsibility.
Joe knew transformers, breakers and substations don’t last forever. Eventually, Water Valley would have to spend serious money repairing, replacing and expanding that equipment.
So he started a substation fund.
The idea was simple: Put money away while you can because the day will come when you need it. It had grown to a substantial amount before it became necessary to regularly dip into it for normal operating expenses in recent years.
Joe had other ideas for improvements to the city grid, but the PILOT payment was one of the financial pressures that made projects like that more difficult.
And this is where I want to be careful. Joe wasn’t arguing that PILOT was some terrible thing the city should never have received.
The PILOT payment has been critical to the City of Water Valley.
That money went into the general fund that pays for police and fire protection, streets and all the other things city government is expected to provide.
Take hundreds of thousands of dollars out of a city budget and the budget process is guaranteed to get interesting.
But Joe saw the other side of that equation for years. Every dollar transferred from the electric system was a dollar that couldn’t also be used for electrical infrastructure, reserves or another project.
Joe isn’t so sure the city’s longtime focus on revenue from the electric department didn’t overshadow efforts to develop other sources of revenue. His point is simple: Economic development isn’t easy and growing the tax base takes time, but we needed to spend more time making the pie bigger instead of simply dividing the one we had.
There is one more reason I think Joe’s simple explanation matters.
TVA isn’t treating this situation as some new interpretation of its contracts.
Last year, TVA sued the City of Holly Springs in federal court, alleging, among other things, that the city made PILOT payments while higher-priority financial obligations of its electric utility had not been met.
Water Valley is not Holly Springs.
Let me repeat that because I don’t want anybody getting sideways with what I am saying.
Water Valley is not Holly Springs.
The relevance is simply that TVA has demonstrated elsewhere that the order spelled out in its power contracts means something.
Mississippi law says much the same thing. It directs utility revenues first toward operating expenses, debt, system obligations, improvements and appropriate working or surplus funds. Then comes an especially important little phrase:
“The balance of the revenues of said systems, if any,” may be used for other lawful municipal purposes.
If any.
So perhaps the letter TVA sent Water Valley last month wasn’t nearly as complicated as I made it sound.
TVA didn’t invent a new rule.
It didn’t declare PILOT illegal.
And it didn’t say Water Valley could never make another PILOT payment from electric sales revenue.
It clarified what the contract already said.
Take care of the electric system.
Pay its obligations.
Prepare for what is coming.
Then talk about PILOT.
Thanks for stopping by, Joe.
