Office of the Inspector General

Semiannual Report

April 1, 2002 – September 30, 2002

2 0 0 2
Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee 37902-1401

G. Donald Hickman

Inspector General (Acting)

October 31, 2002

TO THE TVA BOARD OF DIRECTORS AND THE UNITED STATES CONGRESS

I am pleased to submit this semiannual report on the accomplishments of the OIG for the six-month period 

ending September 30, 2002.

I am honored to continue serving as the Acting Inspector General. During this reporting period, our efforts

ranged from increasing our role in financial-related matters and security reviews to conducting contract audits

and integrity investigations. Our products, as summarized throughout this report, have been well received and

have contributed in many ways toward helping TVA achieve its goals.

As part of our ongoing efforts to focus on our core missions in these times of uncertainty, we have adopted an

OIG seal, as reflected on the front cover. That seal incorporates three themes––the United States, TVA, and the

OIG. We can best serve both the United States and TVA by concentrating on the role given us by Congress, as

reflected in that seal––to promote economy, efficiency, and effectiveness.

To better carry out this role, we measure and reward productivity, timeliness, and results. Our efforts in these

areas during this past year resulted in significant internal OIG improvements, and I intend to continue 

emphasizing these three areas as we move forward to face the challenges of the new year.

I am extremely pleased by the support I have received as Acting Inspector General from Congress, OIG 

employees, the TVA Board, and our other stakeholders. I look forward to further serving these constituencies. 

Sincerely,

G. Donald Hickman
SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Executive Summary 1

TVA Profile 2

Office of the Inspector General 3

Special Features 6

Audits 8

Nonaudit Services 13

Investigations 14

Legislation and Regulations 19

Appendices 20

Appendix 1 Index of Reporting Requirements Under the Inspector General Act 21

Appendix 2 Audit Reports Issued 22

Appendix 3 Audit Reports Issued With Questioned Costs and Recommendations for Better Use of Funds 25

Appendix 4 Investigative Referrals and Prosecutive Results 27

Appendix 5 Audit Reports With Corrective Actions Pending 28

Highlights 29
TVA / OFFICE OF THE INSPECTOR GENERAL 1

During this reporting period, we continued our efforts to support TVA through

quality audits, investigations, and other

projects. 

We believe our efforts helped TVA management avoid unnecessary costs,

recover funds, and correct identified

weaknesses. Also, in many instances,

our efforts helped confirm that many programs were working effectively. In total,

we identified over $56.9 million in recoveries, fines/penalties, potential savings,

questioned costs, or funds which could

be put to better use. A large portion of

these funds resulted from our preaward

audits, where we identified potential savings for management to use in negotiating contracts. 

We completed 40 audits and 16 nonaudit service engagements during this

reporting period. These reviews included

(1) preaward and postaward contract

audits, (2) other financial-related audits,

(3) information technology reviews, and

(4) performance reviews of TVA operations. Corrective actions in response to

our audits included monetary recoveries,

process improvements, and security

enhancements. Nonaudit engagements

were conducted primarily in support of

procurement activities and in response to

requests from TVA management. 

We closed 89 investigations, including

multi-agency task force projects, which

led to over $1.05 million in recoveries,

projected savings, and fines/penalties;

administrative or disciplinary action

against 7 individuals; and other corrective action (counseling and management

techniques) in 24 cases. Matters we

investigated included contract compliance, health care fraud, environmental

crimes, and employee misconduct.

These investigations led to the indictment

of nine and the conviction of four individuals or entities.
2 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

TVA is a federal corporation established

in 1933 to provide flood control, navigation, and electric power in the Tennessee

Valley region. Today, TVA is the nation’s

largest public power company and a

regional development agency that supplies low-cost reliable power, supports a

thriving river system, and stimulates sustainable economic development in a

service area that covers 80,000 square

miles in the Southeastern United States,

including almost all of Tennessee and

parts of Mississippi, Kentucky, Alabama,

Georgia, North Carolina, and Virginia.

TVA generates power at 11 coal-burning

plants, 3 nuclear plants, 29 hydroelectric

dams, 1 pumped storage plant, and

5 gas/fuel oil combustion turbine sites.

TVA also produces energy from three

renewable sources––sun, wind, and

methane gas from waste. TVA provides

electric power to 158 local power distributors, 54 large industries, and 8 federal

agencies through a network of

17,000 miles of transmission lines. TVA

also sells power to 12 surrounding utilities on the interchange market.

TVA manages the nation’s fifth largest

river system. TVA dams are part of a

totally integrated resource management

system where each dam operates in

relationship to the others for multiple purposes and public benefits. These

include navigation, flood control, power

supply, land use, water quality, and

recreation.

TVA contributes to the Valley economy,

chiefly by keeping power rates competitive, which helps attract and retain industries that provide quality jobs in the

region. TVA also helps communities promote sustainable economic development

by providing assistance in job creation

and retention and productivity improvements via capital investment, support of

business incubators, specialized technical services and advice, and recruitment

for new and existing industries.

The TVA power system pays its own way

by selling electricity and issuing bonds.

The system does not use tax dollars. In

addition, TVA no longer receives congressional appropriations to help fund its

activities in navigation, flood control,

environmental research, and land management. These programs are now

funded by power revenues.

TVA is governed by a three-member

Board of Directors appointed by the

President and confirmed by the Senate.

Glenn L. McCullough, Jr., is Chairman,

and Skila Harris and Bill Baxter are

Directors.
Office Authority

TVA’s OIG was created by the TVA Board

of Directors in October 1985. It became

statutory under the Inspector General

Act Amendments of 1988. Those

amendments established OIGs at TVA

and 32 other agencies with Inspectors

General appointed by the agency heads.

The authority to appoint the TVA

Inspector General was transferred to the

President in November 2000 by Public

Law 106–422.

The Inspector General is responsible for

conducting audits and investigations

relating to TVA programs and operations,

while keeping the TVA Board and

Congress fully and currently informed

about problems and deficiencies relating

to the administration of TVA’s programs

and operations. TVA’s Inspector General

is independent and subject only to the

general supervision of the TVA Board of

Directors. The Inspector General’s

authority includes conducting any audits

or investigations the Inspector General

deems necessary or desirable, issuing

subpoenas, administering oaths, and

granting confidentiality to individuals who

provide information to the OIG.

Organization

The OIG consists of two major operational units––Audits and Investigations.

OIG Audits consists of four departments.

One is devoted to contract-related

audits, both preaward and postaward

reviews. The other three focus, respectively, on (1) performance, (2) financial,

and (3) ADP-related issues. 

OIG Investigations consists of three

departments. One focuses on identifying

and investigating potential misconduct

and integrity issues. The others focus,

respectively, on (1) contract fraud and

misfeasance and (2) improper use of TVA

computers and health care fraud.

TVA / OFFICE OF THE INSPECTOR GENERAL 3
Strategic Plan

We continued our efforts to meet our five

strategic objectives: (1) cultivating and

retaining a highly skilled, innovative, and

motivated workforce; (2) enhancing communications with stakeholders and delivering services that meet their needs;

(3) leveraging OIG resources to optimize

productivity and results; (4) focusing on

areas of high risk to TVA; and (5) envisioning change affecting TVA and identifying effective solutions. We have

concentrated during this period on the

areas of improving stakeholder relations,

developing our staff, and focusing our

resources on areas that contribute to

TVA’s success.

Activities that contributed to accomplishments in these strategic areas included

(1) regularly apprising the TVA Board of

Directors of significant audit and investigative results, (2) frequent meetings with

TVA managers to discuss OIG plans and

results and to solicit feedback, (3) developing a more formal training program for

our special agents, (4) continuing developmental training of our Level I auditors

as well as offering our more senior auditors opportunities to maintain existing

skills and develop new ones, (5) implementing improvements in our investigative process that enabled us to

significantly reduce cycle time, (6) allowing management to handle minor

employee misconduct issues with some

OIG oversight, and (7) emphasizing

scoping, planning, and initial analysis

during both audit and investigative 

projects.

In fiscal year 2002, we measured our

performance against goals set for three

separate weighted measures rather than

on the number of projects completed,

the only measure used in prior years.

These measures––productivity, timeliness, and results––were selected to

encourage better planning, to minimize

time spent on unproductive projects, and

to improve timeliness and resource utilization. While our most substantial

accomplishment was a significant reduction in the average cycle time of audits

and investigations, we also met goals for

productivity and results.

Staffing and Budget

The OIG’s offices are in the TVA headquarters in Knoxville, Tennessee. The

OIG also has a satellite office in

Chattanooga, Tennessee.

The OIG’s fiscal year 2002 budget was

$8 million with a budgeted headcount of

90 employees.

4 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002
TVA / OFFICE OF THE INSPECTOR GENERAL 5

Inspector General

Legal Counsel

Deputy Assistant

Inspector General

(Audit and Support)

Assistant Inspector

General (Audits)

Human Resource

Manager

Assistant Inspector

General (Investigations)

Contract Audits

Financial Audits

Operational Audits

Information Technology

Audits 

Information Technology

Investigations 

Internal Investigations 

Financial Investigations 

Contacts

Inspector General (Acting)

G. Donald Hickman . . . . . . . . . .(865) 632-4120

Legal Counsel

Richard P. Levi . . . . . . . . . . . . . .(865) 632-6197

Assistant Inspector General (Audits)

Ben R. Wagner . . . . . . . . . . . . . .(865) 632-6309

Human Resource Manager

Kay T. Myers . . . . . . . . . . . . . . . .(865) 632-7718

Assistant Inspector General (Investigations)

G. Donald Hickman . . . . . . . . . .(865) 632-7720

Deputy Assistant Inspector General (Audit

and Support)

Lewis M. Ogles . . . . . . . . . . . . . .(865) 632-6180

OIG Media Relations

Anne B. Ferrell . . . . . . . . . . . . . .(865) 632-3505

Contract Audits Manager

David P. Wheeler . . . . . . . . . . . .(865) 632-3437

Financial Audits Manager

Jill M. Matthews . . . . . . . . . . . . .(865) 632-2272

Information Technology Audits Manager

Deborah M. Thornton . . . . . . . . .(865) 632-6184

Operational Audits Manager

Paul E. Ivie . . . . . . . . . . . . . . . . .(865) 632-2272

Financial Investigations Manager

Ron W. Taylor . . . . . . . . . . . . . . .(865) 632-3979

Information Technology Investigations

Manager

Curtis Phillips . . . . . . . . . . . . . . .(865) 632-2584

Internal Investigations Manager

C. Dale Hamilton . . . . . . . . . . . .(865) 632-3956

Hotline to report fraud, waste, and abuse: 1-800-323-3835

OIG website: http://oig.tva.gov
6 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

OIG Provides Financial

Reporting Oversight

Over the past year, issues surrounding

corporate responsibility, financial reporting practices, and auditor independence

have been thrust into the spotlight. TVA,

like other companies, is facing increased

scrutiny of its financial reporting practices

from the public, investors, and Congress.

As TVA's OIG, we are committed to continuing and enhancing our role in ensuring that TVA's financial reporting

practices promote the highest level of

financial integrity and accountability to

TVA stakeholders. 

Inspectors General have been given the

responsibility for assuring work performed by non-federal auditors complies

with Government Auditing Standards. To

meet this responsibility, we perform a

concurrent review of the external auditor's annual audit of TVA's financial

statements. As a part of this review, we

participate in key meetings with the

external auditor and TVA management,

review the external auditor's workpapers,

review the independence of the auditor,

and perform supplemental tests, as

needed, to assess the overall quality of

the audit. In fiscal year 2003, in addition

to the concurrent review, we will provide

technical contract management and

funding for the external audit contract to

assure the independence of the external

auditor both in fact and appearance.

Our role in ensuring the integrity of TVA's

financial reporting process is not limited

to the annual audit. In addition, we:

n Perform reviews of TVA's systems of

internal control, financial reporting

practices, and key computer systems

supporting TVA's financial reporting

process and provide recommendations for improvement.

n Keep the Board of Directors and

Congress apprised of our significant

findings through our semiannual

reports and other communications.

n Perform investigations pertaining to

alleged financial and/or accounting

irregularities and violations of ethical

standards by TVA managers and

employees.

n Provide employees with a hotline for

anonymous reporting of financial

and/or accounting irregularities.

The past year has seen new auditor

independence standards and legislation

enacted that are designed to enhance

corporate accountability. TVA, although

not subject to recent legislation, is taking

steps to enhance its financial reporting

practices. We fully support TVA's efforts

and will continue to conduct audits and

investigations and make recommendations, as warranted, to improve these

practices.
TVA / OFFICE OF THE INSPECTOR GENERAL 7

President’s Council on 

Integrity and Efficiency

(PCIE) Award

Each year, the PCIE and the Executive

Council on Integrity and Efficiency present awards for outstanding achievements

within the Inspector General community

in promoting economy and efficiency in

preventing and fighting fraud, waste, and

abuse in federal operations. Effective

October 1, 2001, the TVA OIG became a

member of the PCIE. 

An OIG audit team was awarded a 2002

Award of Excellence by the PCIE for their

work in the area of TVA Long-Term Bulk

Power Trading. The team (pictured to

the right) produced two highly complex

reviews of TVA's weekly, monthly, seasonal, annual, and multi-year trading in

the wholesale electricity market. 

The reviews were especially timely, as

several power marketers have either filed

for or are on the brink of bankruptcy and

other utilities have faced scrutiny due to

questionable energy trading and

accounting practices. The reviews also

were significant because TVA’s gross

long-term bulk power sales and purchases exceeded $300 million in fiscal year

2001.

By taking coursework, performing extensive research, and consulting an industry

expert, the OIG auditors became knowledgeable about important issues such as

forward prices and volatility, option valuation, price risk book, hedging, delta

hedging, mark-to-market, and value at

risk. During the review, they interviewed

numerous bulk power trading and risk

management personnel to gain an

understanding of TVA’s long-term trading

philosophy and process, identified and

compared industry best practice controls

to TVA’s long-term trading process, and

tested controls.

The team determined TVA’s long-term

bulk power trading process was operating in an effective control environment

because (1) TVA's trading philosophy

inherently reduces its trading risk, (2) it

had implemented 33 of the 35 industry

best practice controls that the team

identified, and (3) the controls the team

tested worked effectively. However, the

team identified opportunities for improvement in the areas of documenting the

overall trading policy, implementing a

code of conduct applicable to individuals

executing trades, and segregating the

receipt of trade confirmations from the

trade execution function. Management

agreed and took appropriate corrective

action.

The team (left to right): Louise Beck, Rick Taylor, Paul Ivie, Melissa

Neusel, Sharon Bates, and Patsy Foster (Cheryl Liles not pictured).
8 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Summary of

Representative Audits

Audits are initiated from (1) the OIG

annual workplan, (2) additional issues

identified by the OIG subsequent to the

annual workplan, (3) issues identified by

cooperative efforts with TVA management, and (4) concerns raised by TVA

management or other stakeholders.

During this reporting period, we completed 40 audits which identified over

$3.8 million in questioned costs and over

$52 million in funds which could be put

to better use (includes $30.9 million for

proposals that were not awarded). We

also identified numerous opportunities for

TVA to improve program operations. Our

audits included (1) preaward and

postaward contract audits, (2) other

financial-related audits, (3) information

technology reviews, and (4) operational

audits. 

PREAWARD CONTRACT AUDITS 

To support TVA management in negotiating procurement actions, we conducted

13 preaward audits. During this reporting period, TVA management successfully negotiated $7.7 million in savings as

a result of audits issued during this and

previous reporting periods and is continuing to negotiate other potential contracts audited during this period.

Highlights of the more significant

preaward audits follow. 

n Three competing companies submitted proposals to provide engineering

support services for the recovery of

Browns Ferry Unit 1. In assessing

whether the proposed labor costs

were fairly stated, we identified various opportunities for TVA management to negotiate savings involving a

five-year, $240 million project. TVA

management subsequently negotiated nearly $7 million in reduced labor

burdens and favorable contract terms

with the company it decided to

select. 

n We reviewed the indirect cost rates

TVA is paying two contractors for

engineering and design services and

determined TVA could save nearly

$4 million over the next two years by

lowering the rates to (1) reflect historical costs for one company and

(2) eliminate excessive performance

bonuses and account for the effect of

the planned expenditure level on the

other company's rates. Negotiations

with these contractors are ongoing.

n We reviewed a contractor's proposed

billing rates and fees for a $50 million,

five-year contract to provide boiler

parts and services. We determined

the proposed rates and fees were

fairly stated except for the inclusion of

over $200,000 in unallowable costs.

TVA management negotiated reductions in the contractor's gross margins to eliminate the unallowable

costs. 
TVA / OFFICE OF THE INSPECTOR GENERAL 9

n We reviewed the costs and pricing

methodology proposed by a contractor for providing services and equipment for TVA's hydro modernization

program under a potential $350 million contract. We suggested TVA

(1) eliminate interest costs from the

proposed sales, general, and administrative rate; and (2) negotiate consistently applied profit rates.

Negotiations for this contract award

are ongoing. 

CONTRACT COMPLIANCE

During this reporting period, we completed 12 contract compliance audits that

identified about $969,000 in ineligible

and unsupported costs. Management

generally agreed with our findings and

has taken or plans to take appropriate

corrective action. Highlights of some of

the more significant audits follow.

n We determined that a contractor

(1) provisionally billed about $187,000

over actual costs for payroll taxes,

fringe benefits, and paid time off; and

(2) overbilled about $12,000 in labor

costs due to miscellaneous billing

errors. We also found TVA incorrectly

paid a $2,310 credit invoice, resulting

in an overpayment of $4,620. The

contractor subsequently issued credits to TVA for these amounts. 

n We determined a contractor that provided computer-related services and

materials overbilled TVA a projected

amount exceeding $300,000 by

(1) billing rates exceeding the contract price list, (2) using excessive

markup rates for items not on the

contract price list, and (3) double

billing for one service. TVA management is seeking recovery of the questioned costs.

n We found that a contractor (1) overbilled TVA about $15,000 in administrative fees and (2) neglected to file

tax exemption requests for commercial fuel purchases in several TVA

region states. The contractor subsequently reimbursed TVA for the overbillings and agreed to apply for future

tax exemptions with each state.

n We determined that a contractor's

markup rate for a subcontract agreement was overstated due to a misapplication of the profit rate. The

subcontractor subsequently reimbursed TVA $53,000 and corrected

the profit application.

n We found that a contractor that provided software, maintenance, and

implementation services overbilled

TVA about $70,000 by (1) using labor

rates not included in the contract,

(2) miscalculating billable days,

(3) incurring ineligible and unsupported travel expenses, and (4) submitting duplicate billings for training

costs. TVA management plans to

recover the overbillings. 
10 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

n We identified over $65,000 in overbillings and unsupported costs involving a contractor that provided

computer-related training, software,

and services. TVA management

recovered the questioned costs. 

n We determined that a research contractor overbilled TVA over $30,000

and co-mingled TVA project costs

with non-TVA project costs, thereby

negating our ability to audit costs

associated with a TVA project. The

contractor agreed to give TVA a 

credit for the overbilling and is taking

steps to correct the recordkeeping

issue.

INFORMATION TECHNOLOGY (IT)

During this reporting period, we completed audits in the IT environment pertaining

to software operating systems, an 

internet-based system, a remote

automation process, and various IT procedures. We also reviewed compliance

of TVA’s IT security program with the

Government Infor-mation Security

Reform Act. We found improvements

were needed to address weaknesses

pertaining to: 

n Software change control processes

designed to ensure that only authorized software changes are made. 

n Physical and logical security access

controls designed to prevent unauthorized access to computer equipment, software, and data.

n Protection of computer equipment

used to remotely operate hydroelectric plants from environmental hazards such as water leaks. 

n Contingency planning requirements

that ensure continuity of operations in

the event of a disaster or system 

failure.

n IT purchasing procedures.

n TVA’s IT security program and 

practices.

TVA management agreed with our findings and is taking appropriate corrective

action. 

HIGHLAND RIDGE TOWER

At the request of TVA management, we

reviewed the reasonableness of TVA's

estimate that it would save $4.8 million

over a five-year period by subleasing the

Highland Ridge Tower to Bridgestone/

Firestone Americas Holding, Inc., and

leasing other office space in Nashville to

accommodate TVA employees. We concluded TVA’s estimate of savings was

reasonable provided (1) TVA's current

plan for leasing 55,962 rentable square

feet is sufficient to meet its future office

needs in Nashville and (2) TVA does not

incur additional costs due to no longer

having an exercise facility and space

capable of accommodating large conferences and meetings.
TVA / OFFICE OF THE INSPECTOR GENERAL 11

CONTROL OVER TVA FIREARMS

We assessed whether TVA had adequate

controls over its firearms. Although we

did not identify any discrepancies in

TVA’s inventory listings, we concluded

TVA could improve its processes for controlling and maintaining accountability

over firearms by (1) better documenting

the results of periodic inventories and

(2) recording all acquisition and disposition information. We also found that TVA

had not developed a comprehensive policy addressing the disposal of surplus

firearms. TVA management is taking

appropriate corrective action.

WILLINGNESS TO REPORT NUCLEAR

QUALITY AND SAFETY ISSUES

We assessed the willingness of TVA

Information Services (IS) employees who

directly support TVA's nuclear activities

to raise quality and safety issues. We

compared these results to prior surveys

of TVA nuclear employees. Our survey

results showed these IS employees were

as willing as TVA nuclear employees to

raise nuclear safety and quality issues.

However, they were less willing to raise

unpopular views on non-nuclear safety

and quality issues. TVA management

agreed to improve communications and

address employee perceptions.

SPECIAL FINANCING 

ARRANGEMENTS

TVA used special financing arrangements

in the form of lease/leaseback agreements to finance 16 combustion turbine

generating units in fiscal years 2000 and

2001. We reviewed these arrangements

and determined TVA (1) developed and

consistently applied reasonable criteria in

the lease/leaseback agreements,

(2) recorded both leasing transactions in

accordance with generally accepted

accounting principles (GAAP), and

(3) reported the fiscal year 2000 leasing

transaction in its financial statements as

required by GAAP, except for not disclosing leaseback terms and the obligation for future minimum lease payments

for each of the five succeeding years.

TVA management agreed to include the

additional information in the notes to its

fiscal year 2002 financial statements.

SAFETY PROGRAM

The Occupational Safety and Health Act

of 1970 requires the head of each federal

agency to establish and maintain an

effective and comprehensive occupational safety and health program consistent

with standards promulgated under the

Act. We reviewed TVA's Safety Program

and found the program generally complied with the requirements of the Act.

We also determined TVA line organizations complied with the safety program

requirements, except for certain aspects

of (1) safety training, (2) workplace

inspections, (3) injury/illness investigation

reports, and (4) certified safety committees. TVA management agreed with our

findings and is taking appropriate corrective action. 
12 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

CAPITAL PROJECT JUSTIFICATION

PROCESS

TVA spent over $950 million on capital

projects in fiscal year 2001 and expected

to spend over $1.2 billion in fiscal year

2002. We assessed whether TVA's

revised project justification process incorporated leading practices in capital decision-making as described in the General

Accounting Office's (GAO) Executive

Guide: Leading Practices in Capital

Decision-Making. We determined the

revised process, either as designed or in

practice, included the leading practices

as described by GAO. Nonetheless, we

determined that opportunities exist for

improving the process in the areas of

cost estimating, project monitoring, and

post completion evaluations. TVA management generally agreed and is taking

appropriate corrective action.

MEDICAL PLAN ELIGIBILITY

TVA provides medical coverage to its

active employees through contracts with

four medical plan providers. We

assessed the adequacy of TVA’s eligibility

controls and identified nearly $30,000 in

ineligible benefits paid on behalf of 16 of

991 participants we sampled from the

active employee medical plan. We concluded TVA’s eligibility-related processing

controls should be strengthened, especially those associated with non-spouse

dependents ages 19 through 24. TVA

management agreed to (1) pursue recovery of the identified ineligible payments

and (2) strengthen controls related to the

students.
TVA / OFFICE OF THE INSPECTOR GENERAL 13

Summary of Nonaudit

Services

We provide nonaudit services upon

request to assist TVA management in

improving the efficiency and effectiveness

of its operations. In addition, when

requested, we provide information, data,

and analyses to members of Congress to

help keep them informed about aspects

of TVA’s operations. Depending upon

the objective, these reviews are performed in accordance with either the

(1) American Institute of Certified Public

Accountant’s standards for Consulting

Services or (2) PCIE’s Quality Standards

for Inspections.

During this reporting period, we completed 16 nonaudit service engagements

requested by TVA management, primarily

in support of procurement activities.

Highlights of representative nonaudit

services follow.

COAL PROCUREMENT PROCESS

TVA purchases over 46 million tons of

coal annually at a cost of about $1.3 billion. We reviewed TVA's coal procurement process and identified opportunities for process improvements in the

areas of organizational goals, communication, documentation, segregation of

duties, information systems, contract

management, oversight of weighing and

sampling, and working relationships. We

also provided information comparing

TVA's fuel procurement process to the

processes used by other utilities. TVA

management generally agreed with our

suggestions and is taking corrective

action.

STAFF AUGMENTATION

We reviewed the use of staff augmentation contractors in TVA's Chief Operating

Officer and Administration organizations,

with an emphasis on two or more years

of continuous service. Based on available information, we concluded the number of staff augmentation contractor

employees with 2 or more years’ service

was about 46 percent higher than had

previously been reported to upper management. This was due primarily to TVA

organizations (1) misclassifying staff augmentation as managed task support and

(2) inaccurately reflecting service dates.

TVA management subsequently centralized the administration of staff augmentation contracts and is considering the

development of a reporting and tracking 

database.

REVIEW OF REQUESTS FOR 

PROPOSALS

We provided informal advice on six

requests for proposals involving security

services, administration of flexible spending accounts, communication services,

voluntary benefits, design and installation

of scrubbers, and a potential leverage

contract for electrical parts.
14 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Summary of

Representative

Investigations

During the last six months, we closed 89

investigations, including allegations and

concerns received from ratepayers, TVA

managers and employees, governmental

and congressional staffs, and OIG auditors. Our investigations, including task

force projects, resulted in (1) $1,056,127

in recoveries, projected savings, and

fines/penalties, (2) nine individuals or

entities indicted, and (3) four individuals

convicted. Representative investigations

are highlighted below.

COAL OVERBILLING

We determined an Indiana coal vendor

billed TVA for delivered coal on estimated

weights, not certified weights as specified by its contract with TVA. We estimated the invoiced weight overstated the

value of the vendor's delivered coal by

more than $1 million.

As a result of our findings, the company

agreed to (1) pay TVA over $650,000 for

the overstated weight and (2) conduct a

daily random weight check on each truck

delivering coal until certified in- and outbound truck scales can be built by the

vendor.

SENTENCING––FALSE 

DOCUMENTATION TO HIDE THEFT

AND RESALE OF TVA TOOLS

This investigation was initiated based on

allegations the subject received stolen

TVA tools and subsequently sold a portion of them back to TVA. Our inquiry

substantiated the allegations.

During a previous reporting period, the

subject, a Knoxville, Tennessee, businessman, pled guilty in federal court to

two counts of making and causing to be

made false documents that he presented

to the OIG in an effort to show the stolen

tools, valued at nearly $70,000, were

legitimately acquired from a third party.

During this reporting period, the subject

was sentenced to pay a $5,000 fine and

to serve 2 years' probation, including

6 months' home detention and

100 hours' community service.

HIRING ISSUES

Nepotism

We investigated an allegation of nepotism in hiring a group of trainees at a TVA

nuclear plant. Our inquiry confirmed relatives of TVA employees on the selection

panel were hired. While the employees

on the panel recused themselves from

consideration of their relatives, we concluded they should not have served in

the selection process in any capacity.

TVA management agreed to take steps

to assure TVA employees do not participate on selection panels when they have
TVA / OFFICE OF THE INSPECTOR GENERAL 15

relatives applying for the position(s) and

stated it will provide training, including

developing checklists for managers and

Human Resource consultants, on nepotism and other hiring issues.

Veterans Preference Act (VPA)

Our investigation did not substantiate an

allegation that TVA violated the VPA by

never interviewing an Army veteran in

spite of his repeated applications for

electrician positions. However, we did

find a weakness in TVA’s practice of listing job vacancies on its external web

site.

Management agreed to (1) revise the

web site to eliminate any confusion over

whether advertised positions were available or anticipated, and to ensure VPA

information is available; and (2) give the

complainant appropriate consideration

for all vacancies for which he is qualified.

EMPLOYEE MISCONDUCT

Unauthorized E-Mail Access

Our inquiry revealed a TVA employee

used a computer keyboard logging

device to monitor two employees' e-mail

activities. (A keyboard logging device is

a small "recording" mechanism that

attaches to a keyboard cable and captures all characters entered on the keyboard for subsequent retrieval.)

The individual used the device to capture

the coworkers' user names and passwords. This, in turn, enabled him to

access their e-mail accounts and correspondence without their knowledge or

consent.

Based on our investigation, TVA terminated the individual's employment.

False Statements/Misuse of TVA

Resources

We concluded a TVA electrician provided

a false statement on a background security form, submitted false timesheets and

per diem claims, used a TVA truck for

unauthorized purposes, and used a TVAissued fuel credit card to purchase personal items and fuel for non-TVA

vehicles. The electrician resigned as a

result of our investigation.

False Statements to TVA Management

and the OIG 

Our investigation showed a TVA electrician submitted falsified medical excuses

and made false statements to TVA management and the OIG regarding medical

care he purportedly received.

After discussions with the employee's

union representatives, TVA placed the

employee on unpaid leave until he

becomes eligible for retirement in one

year.

ENVIRONMENTAL CRIMES JOINT

TASK FORCE (ECJTF)

We continued our participation in the

ECJTF, which is comprised of members

from state and federal agencies.

Highlights of the task force's work

reported during this period include the

following.
16 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Guilty Plea and Sentencing––Illegal

Dumping

A Tennessee physician pled guilty to one

count of violating the Clean Water Act

and was sentenced during this reporting

period.

The physician had purchased property

bearing an above-ground storage tank

previously used by a paper mill. The

tank contained over 500,000 gallons of

"black liquor"––a by-product of paper

manufacturing––which the individual illegally caused to be discharged into the

Emory River in Eastern Tennessee.

Subsequent to his guilty plea, the individual was sentenced to 2 years' probation

comprised, in part, of 1 year home

detention, 300 hours’ community service, and special conditions including

remediating the damaged site and placing advertisements in local newspapers

apologizing to the public for the environmental violations.

In addition, he was ordered to pay a

$10,000 fine and restitution totaling

almost $35,000 to the Tennessee

Department of Environment and

Conservation (TDEC) and $15,000 to

TVA. He is also to make a $25,000 voluntary contribution to the Southern

Environmental Enforcement Network

(SEEN) training fund. (The SEEN is an

association of regulatory and law

enforcement agencies in the Southern

United States.)

Sentencing––Waste-Disposal

Company and Its President

During a previous reporting period, a

Chattanooga company and its president

each pled guilty to one count of violating

the Clean Water Act by knowingly falsifying documentation to the city of

Chattanooga relating to the company's

permit to dispose of nonhazardous

waste.

On over 40 occasions, the company's

discharge monitoring reports to the city

showed the company disposed of copper and zinc within the limitations of the

company's permit when both the company and its owner knew the levels in the

wastewater discharges exceeded limitations. According to the Environmental

Protection Agency, the levels of copper

in the discharged wastewater were as

much as 17 times the federal limit, and

the levels of zinc as much as 14 times

the limit.

During this reporting period, the company was sentenced to five years' probation, and its president was ordered to

pay a $10,000 fine and to serve one year

of probation, including nine months'

home detention. The company and its

president were jointly sentenced to pay

$250,000 restitution––$100,000 to both

the city of Chattanooga and TDEC and

$50,000 to the SEEN training fund.
TVA / OFFICE OF THE INSPECTOR GENERAL 17

HEALTH CARE FRAUD TASK FORCE

We continued to support health care

fraud task forces and working groups

sponsored by the United States

Attorneys’ offices in Tennessee.

The cases highlighted below reflect our

involvement in the Eastern District of

Tennessee Health Care Fraud Task

Force. Participants on the task force

include investigative arms of federal,

state, and local agencies, and Blue

Cross/Blue Shield's Special

Investigations Unit.

Six Indicted on Drug Charges

A federal indictment against a Sevier

County, Tennessee, physician charged

him with 516 counts of unlawfully dispensing and distributing Schedule II controlled substances and various products

containing a Schedule III controlled 

substance.

The indictment additionally alleged four

co-defendants (1) illegally obtained and

diverted controlled-substance prescriptions issued by the physician, who

sometimes charged a fee for the bogus

prescriptions; (2) abused the controlled

substances themselves; and (3) sold or

otherwise distributed the illegally

obtained controlled substances to 

others.

An area pharmacist was named in a separate indictment for allegedly distributing

and facilitating the illegal distribution of

controlled substances, illegal possession

of firearms, and obstruction of a criminal

investigation of health care offenses.

Orthopedic Physician Indicted

A physician, owner of a Tullahoma,

Tennessee, orthopedic clinic, was indicted by a federal grand jury on 95 counts

of defrauding health care benefits plans,

including the TVA-funded workers' compensation benefits program.

The indictment alleged the physician

(1) billed benefits plans for a procedure

called a "nerve block" when, in fact, a

more simple and less expensive procedure was performed; and (2) used billing

codes resulting in higher payments for

the physician than the value of the services actually provided.

According to the indictment, the total

financial losses incurred as a result of the

physician's false representations exceed

$2.2 million.
18 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Administrative and Disciplinary Actions

October 1, 1997 ~ September 30, 2002*

Total = 291

Oral/Written 

Warnings

18% Suspensions/

Demotions/

Transfers

9%

Resignations/

Terminations

9%

Counseling/

Management 

Techniques

46%

Reemployment

Flagged

18%

*Prosecutive referrals are shown in Appendix 4.

Closed Cases by Area

April 1 ~ September 30, 2002

Total = 89 

River System 

Operations &

Environment

11%

TVA Nuclear

7% Human 

Resources

17%

Fossil Power

30%

Other

19%

Information

Services

16%

Sources of Hotline Calls Warranting Further OIG Action 

April 1 ~ September 30, 2002

Total = 32

General Public

50%

Former TVA/

Contractor

Employees

16%

TVA Employees

34%
TVA / OFFICE OF THE INSPECTOR GENERAL 19

We continued to follow issues of interest

to the OIG and TVA, including proposals

regarding law enforcement authority and

utility deregulation.

During this reporting period, our reviews

included H.R. 5005, the Homeland

Security Act, which would provide statutory law enforcement authority to presidentially appointed OIGs; the SarbanesOxley Act of 2002; and regulations

issued under the Health Insurance

Portability and Accountability Act of

1996. We worked with the PCIE in submitting comments on legislative matters

of interest to the Inspector General 

community.
20 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

APPENDICES
TVA / OFFICE OF THE INSPECTOR GENERAL 21

Index of Reporting Requirements Under the Inspector General Act

REPORTING REQUIREMENT PAGE

Section 4(a)(2) Review of Legislation and Regulations 19

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 6-18

Section 5(a)(2) Recommendations With Respect to Significant Problems, Abuses, and Deficiencies 6-18

Section 5(a)(3) Recommendations Described in Previous Semiannual Reports on Which

Corrective Action Has Not Been Completed Appendix 5

Section 5(a)(4) Matters Referred to Prosecutive Authorities and the Prosecutions and Convictions

That Have Resulted Appendix 4

Section 5(a)(5) Summary of Instances Where Information Was Refused None

and 6(b)(2)

Section 5(a)(6) Listing of Audit Reports Appendix 2

Section 5(a)(7) Summary of Particularly Significant Reports 8-18

Section 5(a)(8) Status of Management Decisions for Audit Reports Containing Questioned Costs Appendix 3

Section 5(a)(9) Status of Management Decisions for Audit Reports Containing Recommendations

That Funds Be Put to Better Use Appendix 3

Section 5(a)(10) Summary of Unresolved Audit Reports Issued Prior to the Beginning of the

Reporting Period None

Section 5(a)(11) Significant Revised Management Decisions None

Section 5(a)(12) Significant Management Decisions With Which the Inspector General Disagreed None
22 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Audit Reports Issued

AUDIT REPORT

NUMBER QUESTIONED UNSUPPORTED FUNDS PUT TO

AND DATE TITLE COSTS COSTS BETTER USE

2001-048C

04/30/2002 Indus International, Inc. $66,978 $31,934

2001-051C

04/30/2002 Piping and Equipment Company

2001-087C

04/30/2002 Canberra Industries 331,557

2002-041V

05/02/2002 The Babcock & Wilcox Company - 

Preaward Audit $235,000

2002-009E

05/15/2002 Voith Siemens Hydro - 

Preaward Audit 5,040,000

2002-044C

05/17/2002 EMC Corporation

2002-052V

05/23/2002 Neill & Gunter - Rate Review -

Preaward Audit 119,000 301,200

2002-032C

06/25/2002 PS Energy Group, Inc. 120,401

2002-048C-01

06/25/2002 Pinkerton Government Services, Inc. - 

Contract No. 98NNX-224696 203,800

2002-049C

06/25/2002 BOC Gases- Preaward Audit 180,000

2002-060V

07/03/2002 Stone & Webster, Inc. - 

Preaward Audit 13,000,000

2002-055V

07/08/2002 Pinkerton Government Services, Inc. -

Preaward Audit 

2002-053V

07/11/2002 Wackenhut Services, Inc. - 

Preaward Audit 

2002-056V

07/16/2002 Sargent & Lundy Engineers - 

Preaward Audit 17,900,000

2002-042V

07/18/2002 Immix Technology - Contract 

P-01BYS-267832-000 70,750 3,849

2002-004C-01

07/24/2002 Electric Power Research Institute 32,145

CONTRACT
TVA / OFFICE OF THE INSPECTOR GENERAL 23

Audit Reports Issued

AUDIT REPORT

NUMBER QUESTIONED UNSUPPORTED FUNDS PUT TO

AND DATE TITLE COSTS COSTS BETTER USE

2002-054C

08/06/2002 TRC Garrow Associates, Inc.

2002-064V

08/27/2002 Mesa Associates, Inc. - 

Preaward Audit $2,367,000

2002-088C

09/06/2002 Tombras Group - 

Preaward Audit

2002-089C

09/06/2002 The Johnson Group - Preaward Audit

1998-071C

09/10/2002 Enterprise Sales, Inc.

2002-069V

09/16/2002 Sargent & Lundy - 

Preaward Audit 6,200,000

2002-066C

09/24/2002 Review of General Electric Field Labor 

Cost Adjustment for Lagoon Creek II 

and Kemper County - 

Contract P98P6D-195379 $26,305 $26,305

2002-061V

09/26/2002 Bechtel Power Company - 

Preaward Audit 6,814,000

2002-072C

09/27/2002 Thomas & Betts Company

2002-016C

07/24/2002 Review of TVA's Special Financing 

Arrangements

2002-067V

07/26/2002 Review of Facilities' Nashville Office 

Space Cost Assessment

2002-034C

07/31/2002 Review of Miscellaneous Cash 

Receipts

CONTRACT (continued)

FINANCIAL
24 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Audit Reports Issued

AUDIT REPORT

NUMBER QUESTIONED UNSUPPORTED FUNDS PUT TO

AND DATE TITLE COSTS COSTS BETTER USE

2002-017T

06/25/2002 Hydro Automation - Dams

2002-013T

07/24/2002 Customer Portal Control Assessment

2002-025T

08/07/2002 Security of Windows 2000/ 

Windows XP

2002-086C

09/12/2002 Government Information Security

Reform Act

2002-051T

09/27/2002 IT Store

2002-021V

04/08/2002 Survey of Information Services 

Personnel Who Directly Support 

TVA Nuclear

2001-065P

04/18/2002 Control and Accountability Over 

Weapons at TVA

2002-008E

07/18/2002 Review of Internal Controls in LongTerm Bulk Power Trading

2002-063E

07/19/2002 Review of Data for Long-Term Bulk 

Power Trading Decisions

2002-020C

07/23/2002 Review of TVA's Safety Program

2000-030P

08/13/2002 Review of TVA's Active Employee 

Medical Plan Eligibility $2,844,928

2001-091P

09/05/2002 Review of Capital Project Results

TOTAL 40 $3,815,864 $62,088 $52,037,200*

* This figure includes funds identified in preaward audits of proposals for contracts that may not be awarded.

INFORMATION TECHNOLOGY

OPERATIONAL
TVA / OFFICE OF THE INSPECTOR GENERAL 25

Audit Reports Issued With Questioned Costs

QUESTIONED COSTS

NUMBER TOTAL UNSUPPORTED

A. For which no management decision has been

made by the commencement of the reporting period 0 $0 $0

B. Which were issued during the reporting period 9 $3,815,864 $62,088

Subtotals of A and B 9 $3,815,864 $62,088

C. For which a management decision was made during

the reporting period 9* $3,815,864 $62,088

(i) Dollar value of disallowed costs 8 $911,436 $62,088

(ii) Dollar value of costs not disallowed 2 $2,904,428 $0

D. For which no management decision has been made by

the end of the reporting period 0 $0 $0

E. For which no management decision was made within

six months of issuance 0 $0 $0

* The total number of reports differs from the sum of C.(i) and C.(ii) when the same reports contain both costs disallowed and not disallowed by management.
26 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Audit Reports Issued With Recommendations for Better Use of Funds

NUMBER DOLLAR VALUE

A. For which no management decision has been

made by the commencement of the reporting period 4 $25,027,000

B. Which were issued during the reporting period 9 $52,037,200

Subtotals of A and B 13 $77,064,200

C. For which a management decision was made during

the reporting period 11 $68,497,200

(i) Dollar value of disallowed costs 8 $44,944,200

(ii) Dollar value of costs not disallowed 3 $23,553,000

D. For which no management decision has been made by

the end of the reporting period 2 $8,567,000

E. For which no management decision was made within

six months of issuance 0 $0
TVA / OFFICE OF THE INSPECTOR GENERAL 27

Investigative Referrals and Prosecutive Results

Referrals

Subjects Referred to United States Attorneys 19

Subjects Referred to Other Agencies for Investigative or Administrative Action 2

Results

Subjects Indicted 9

Subjects Convicted 4

Referrals Declined 17

(No OWCP actions to report this period.)
28 SEMIANNUAL REPORT / APRIL 1 ∼ SEPTEMBER 30, 2002

Audit Reports With Corrective Actions Pending

AUDIT REPORT

NUMBER

AND DATE DESCRIPTION

2000-012P

January 9, 2002 This report included recommendations to clarify several provisions in TVA's Affirmative

Procurement Plan and to ensure documentation is maintained to support waivers from the

revised plan. TVA is currently revising its Affirmative Procurement Plan and implementing other

planned actions.

2000-026C-01

April 2, 2001 This report contained a recommendation to implement electronic data processing to collect

hours and rates billed for staff augmentation services and evaluate systems to determine how to

best meet these data processing needs. Representatives from several TVA organizations are

reviewing automated tools, and a business case, including cost benefit analysis, will be presented to TVA management for a decision.

2001-032F

November 7, 2001 This report included recommendations to institute an updated land management business practice and revise, update, and/or integrate processes and systems to facilitate better communication among TVA organizations. TVA management has initiated, but not completed, action

addressing these recommendations.

2001-052T

November 26, 2001 This report contained a recommendation to develop an agency-wide business practice on electronic business. TVA is implementing the recommendation.

2001-060P

October 22, 2001 This report contained recommendations to review storeroom access at TVA fossil plants and

revoke unneeded access and to consider adding storeroom staff at two fossil plants.

Management completed final action in October 2002.

2001-064T

December 21, 2001 This report included recommendations to upgrade firewall hardware and software, upgrade

server and operating system security, and develop and implement policies and procedures to

address access authorization, intrusion detection, program change control, and contingency

planning and disaster recovery. Actions to strengthen the firewall are complete. Actions to

address the remaining recommendations will be completed by December 21, 2002.

2001-074T

January 7, 2002 This report contained recommendations regarding TVA’s access control system for non-nuclear

facilities. TVA is now accepting proposals to replace or modify this system.

2002-024V

February 13, 2002 This report contained a suggestion about the contractor's markup for indirect costs and profit

and suggestions to improve TVA's audit rights under the potential contract. TVA is addressing

the suggestions in continuing negotiations; however, those negotiations have not been completed.
TVA / OFFICE OF THE INSPECTOR GENERAL 29

SEPT 30, MAR 31, SEPT 30, MAR 31, SEPT 30,

2002 2002 2001 2001 2000

ANNUAL BUDGET (In Millions of Dollars) 8.0 * 8.0* 8.6 8.6 7.2

CURRENT STAFFING 87 86 86 74 77

AUDITS IN PROGRESS

Carried Forward 33 38 45 43 48

Started 44 43 44 52 38

Canceled (4) (8) (4) (7) (8)

Completed (40) (40) (47) (43) (35)

In Progress at End of Reporting Period 33 33 38 45 43

AUDIT RESULTS (Thousands)

Questioned Costs $3,816 $1,780 $3,519 $2,613 $1,800

Disallowed by TVA 911 267 1,236 3,010 379

Recovered by TVA 387 225 1,634 821 390

Funds to Be Put to Better Use $52,037 $31,874 $10,401 $70,422 $12,862

Agreed to by TVA 44,944 6,069 10,155 37,450 12,499

Realized by TVA 16,014 6,090 8,277 30,918 17,340

NONAUDIT SERVICES (Thousands)

Completed 16 12 0 13 8

Cost Savings Identified/Realized 0 0 0 0 $233

INVESTIGATION CASELOAD

Opened 78 93 94 86 132

Closed 89 114 120 83 99

In Progress at End of Reporting Period 115 126 147 173 170

INVESTIGATIVE RESULTS (Thousands)

Recoveries $961 $233 $6,527 $214 $179

Savings 8 1,175 542 532 521

Fines/Penalties 86 0.1 105 250 11

ADMINISTRATIVE AND

DISCIPLINARY ACTIONS

Recommended (# of Cases) 18 22 13 14 13

Actions Taken (# of Subjects) 7 6 8 30 11

Counseling/Management

Techniques Employed (# of Cases) 24 15 3 9 6

PROSECUTIVE ACTIVITIES (# of Subjects)

Referred 19 5 13 7 32

Indicted 9 5 5 19 5

Convicted 4 3 7 14 5

* An additional $1.6 million in benefits is being covered in fiscal year 2002 as a corporate rather than an organizational 

expense as was done in the past.

AUDITS & SPECIAL PROJECTS

INVESTIGATIONS
The OIG Vision:

. . . illuminating today’s challenges 

and tomorrow’s solutions . . .

OFFICE OF THE INSPECTOR GENERAL OF THE TENNESSEE VALLEY AUTHORITY

400 WEST SUMMIT HILL DRIVE

KNOXVILLE, TENNESSEE 37902-1401