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KNOXVILLE - The Tennessee Valley Authority will boost its base electric rates this fall for the first time in two years, but most consumers may not notice the difference.

Power rates will rise 1.5 percent in October when the new fiscal year begins, adding about $1.50 a month to the average residential electric bill under a $10.5 billion spending plan approved Thursday by TVA directors.

But most of that increase is being offset with lower monthly fuel cost adjustments by TVA, which are projected to lower the average electric bill next month by about 6 percent below year-ago levels. Heavy rains and cooler temperatures this summer have reduced TVA's average fuel costs, which are adjusted each month. The fuel cost changes by TVA should offset most, if not all, of the base rate increase this fall, although fuel costs will likely rise again in the winter months.

To help mitigate the base rate hike, TVA also agreed Thursday to offer price breaks to industrial customers that agree to keep buying TVA power through at least 2015 or agree to shift more of their load off peak demand periods.

"We don't ever like to raise rates and we're working really hard to keep our rates low," TVA President Bill Johnson said. "This rate increase is only about half of what the inflation rate has been in the past couple of years. But we've had a significant decline in sales and revenues that we haven't yet been able to offset with our cost management efforts."

Most consumers are paying less for power this year because of mild weather and with more efficient appliances, air conditioners and furnaces many will continue to lower their monthly light bill.

TVA also lost its biggest industrial customer in May when U.S. Enrichment Corp. shut down its uranium enrichment plant in Paducah, Ky. As a result, electricity usage in TVA's seven-state region is projected to drop by a record 4.6 percent in fiscal 2014 and power demand is not expected to return to its prerecession levels for at least another decade.

TVA Chairman Bill Sansom said TVA's peak power demand isn't expected to surpass its 2006 peak until at least 2024 because of the slowdown in the growth of electricity sales. Power sales are projected to fall about $700 million next year.

"This is is a significant change, and anybody in business knows when your sales go down you've got to really work with your costs," Sansom said.

TVA asked this summer for voluntary resignations and retirements from the staff in its fossil division, where TVA is shutting down 18 of its oldest and least efficient coal-fired units. Johnson said he is still working on a plan to trim TVA's 12,500-employee staff, primarily by not filling vacancies and trimming use of some contract workers.

TVA's budget plan calls for reducing operating and maintenance expenses next year by $300 million and cutting another $200 million in operating expenses the following year.

"We're being more efficient to find ways to live within our means," Johnson said. "But at the end of the day, we have to keep the lights on and make the investments we need to keep reliability and safety high."

TVA will increase its base capital spending next year by $146 million to nearly $1 billion as the utility works to finish a second reactor at its Watts Bar Nuclear Plant and install scrubbers to limit air pollution at its Gallatin Steam Plant. TVA's capital spending will remain high for the next three years and as new generation comes into the rate base in fiscal 2015 further rate increases are likely, Johnson said.

Industrial customers complained Thursday that TVA, which once boasted some of the lowest power rates in the country, has raised its rate above the average for industrial customers in the Southeast. Anne Schillaci, Southeast energy manager for Praxair Inc., said TVA rates are the second highest among five utilities that supply power for Praxair.

"Electricity is our No. 1 variable cost, but unfortunately TVA's industrial prices are among the highest we pay in the Southeast," she said.

Schillaci and other members of the Tennessee Valley Industrial Committee praised TVA for adopting new incentives for industries that stay in the valley and keep buying TVA power, rather than shift production elsewhere.

"To be competitive in our industry, we have to be the low-cost producer and that is hard when TVA industrial rates are above other utilities," said Dave Hrabosky, a manager for Severstal LLC, which employs 680 employees at plants in Calhoun, Tenn., and Columbus, Miss.

Johnson said TVA will offer incentives to industrial customers that commit to buying TVA power for the next two years. The TVA president said the utility will develop new contracts in the long-term to put it in a better competitive position with other utilities.

TVA residential rates remain below the U.S. average, but its industrial rates compare less favorably with its neighboring utilities, according to industry comparisons.

"Our power rates are generally competitive now, but they have trended up in recent years," Johnson said.

Despite planned spending cutbacks and slower power growth, TVA will continue to spend money next year to maintain its unfinished Bellefonte Nuclear Plant and pursue the design of small modular reactors in Oak Ridge for future power supplies.

"This is probably the most difficult demand forecast period in my 30 years of doing this," said Johnson, a former Progress Energy CEO who joined TVA in January. "There is so much uncertainty about the future, that we need to keep our options open. The one thing you never want to do is run out of electricity."

Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.