GAO

United States General Accounting Office

Report to Congressional Requesters

February 2001 TENNESSEE VALLEY 

AUTHORITY

Debt Reduction 

Efforts and Potential 

Stranded Costs

GAO-01-327

Page 1 GAO-01-327 Tennessee Valley Authority

Contents

Letter 3

Appendixes Appendix I: Objectives, Scope, and Methodology 54

Appendix II: Mechanisms for Mitigating Stranded Costs 60

Appendix III: Comments From the Tennessee Valley Authority 61

Appendix IV: GAO Contact and Staff Acknowledgments 65

Tables Table 1: Factors Affecting Cash Available for Debt Reduction 

From 1998 Through 2007 15

Figures Figure 1: Annual Debt Reduction Goals in TVA’s 1997 Plan

Compared to Actual Debt Reduction for Fiscal Years 1998 

Through 2000 and Proposed Goals for Fiscal Years 2001

Through 2007 11

Figure 2: Annual Outstanding Debt Goals in TVA’s 1997 Plan 

Compared to Actual Debt Outstanding for Fiscal Years

1998 Through 2000 and Proposed Annual Goals for 

Fiscal Years 2001 Through 2007 12

Figure 3: Annual Capital Expenditure Goals in TVA’s 1997 Plan 

Compared to Actual Capital Expenditures for Fiscal

Years 1998 Through 2000 and Proposed Annual Goals for

Fiscal Years 2001 Through 2007 14

Figure 4: Annual Estimated Balances for Deferred Assets in TVA’s 

1997 Plan Compared to the Actual Deferred Asset 

Balances for Fiscal Years 1998 Through 2000 and to 

Estimated Balances for Fiscal Years 2001 Through 2007 18

Figure 5: Ratio of Total Financing Costs to Revenue for TVA and

Likely Competitors for Fiscal Years 1994 and 1999 23

Figure 6: Ratio of Fixed Financing Costs to Revenue for TVA and

Likely Competitors for Fiscal Years 1994 and 1999 24

Figure 7: Ratio of Net Cash From Operations to Expenditures for 

PP&E and Common Stock Dividends for TVA and Likely 

Competitors for Fiscal Years 1994 and 1999 26

Figure 8: Ratio of Portion of Capital Assets Not Yet Begun to Be

Taken Into Rates Compared to Gross PP&E for TVA and 

Likely Competitors for Fiscal Years 1994 and 1999 29
Contents

Page 2 GAO-01-327 Tennessee Valley Authority

Figure 9: Ratio of Accumulated Depreciation/Amortization to

Gross PP&E for TVA and Likely Competitors as of Fiscal 

Years 1994 and 1999 31

Figure 10: TVA’s Potential Application of the FERC Methodology

for Calculating Stranded Costs 38

Figure 11: The Link Between TVA’s Debt Reduction Efforts and Its

Potential Stranded Costs 44

Abbreviations

CBO Congressional Budget Office

CWIP construction work in progress 

EEI Edison Electric Institute 

EIA Energy Information Administration 

EPAct Energy Policy Act of 1992 

FASB Financial Accounting Standards Board

FERC Federal Energy Regulatory Commission

IOU investor-owned utilities

kWh kilowatthour

PP&E property, plant, and equipment

SFAS Statement of Financial Accounting Standards

TVA Tennessee Valley Authority
Page 3 GAO-01-327 Tennessee Valley Authority

United States General Accounting Office

Washington, D.C. 20548

Letr

February 28, 2001

The Honorable Bob Smith

Chair, Committee on Environment

and Public Works

United States Senate

The Honorable Mitch McConnell

United States Senate

This report responds to your request that we review several issues 

pertaining to the Tennessee Valley Authority’s (TVA) financial condition. 

Increasing competition in electricity markets led TVA management to 

develop a 10-year business plan in 1997 to position TVA to be more 

competitive. Among the objectives in the plan was reducing TVA’s cost of 

power, primarily by cutting its $27.4 billion debt in half by 2007. 

Because TVA is expected to have to compete with other utilities in the 

future and, as we reported in 1999,1

 will not achieve the debt reduction goal 

as laid out in its 10-year business plan, you expressed concern about TVA’s 

likely financial condition and competitiveness in the years ahead. You 

asked that we examine TVA’s (1) progress in reducing debt and recovering 

the costs of deferred assets,2

 (2) financial condition, including debt and 

fixed cost ratios, compared to that of other utilities, (3) potential stranded 

costs,3

 options for recovering them, and how they are linked to TVA’s debt, 

and (4) bond rating and its impact on TVA’s interest costs. As agreed with 

your offices, the first three issues are the subjects of this report; we plan to 

issue a separate report on the fourth issue.

1

Tennessee Valley Authority: Assessment of the 10-Year Business Plan (GAO/AIMD-99-142, 

April 30, 1999).

2

In this report, we use the term “deferred assets” to jointly refer to (1) TVA’s deferred nuclear 

generating units (Bellefonte 1 and 2 and Watts Bar 2), and (2) unamortized regulatory assets 

and certain other deferred charges. The costs of deferred assets are costs that have been 

incurred but not yet recovered. In cases where we discuss TVA’s deferred nuclear generating 

units separately, we refer to them as deferred nuclear units.

3

Stranded costs can generally be defined as costs that become uneconomical to recover 

through rates due to regulatory changes. They arise in competitive markets as a result of 

uneconomic assets, the costs of which are not recoverable at market rates.
Page 4 GAO-01-327 Tennessee Valley Authority

Results in Brief TVA has reduced its debt by about $1.4 billion over the first 3 years of its 

1997 10-year business plan. By reducing debt, and refinancing some debt at 

lower interest rates, TVA has reduced its annual interest expense from 

about $2.0 billion in fiscal year 1997 to about $1.7 billion in fiscal year 2000. 

However, TVA continues to fall behind schedule in meeting its debt 

reduction goal, and consequently is revising this goal. Through the first

3 years of the plan, TVA’s debt reduction shortfall was about $1.4 billion and 

is expected to be even higher by 2007. In 1997, TVA projected a debt 

balance of about $13.2 billion by September 30, 2007. Currently, TVA 

officials estimate that its outstanding debt by September 30, 2007, will be 

between $18 billion and $24 billion, with a target of about $19.6 billion—or 

about $6.4 billion higher than TVA envisioned when it issued the 1997 plan. 

Assuming it reaches the $19.6 billion target and its average interest rate 

does not change, we estimate that TVA’s interest expense in the year 2008 

will be about $416 million more than if it had reduced debt to $13.2 billion. 

TVA is not projecting a debt reduction target beyond 2007. The revision to 

the debt reduction goal is due primarily to lower revenues than projected in 

1997, and to the use of cash originally targeted for debt reduction to instead 

pay for greater than anticipated annual operating expenses and capital 

expenditures for new generating capacity and environmental controls. 

TVA has also made progress in recovering the costs of its deferred assets. 

TVA’s recovery of the costs of its deferred assets, in total, is on schedule; it 

has recovered about $1.1 billion over the first 3 years, as planned. However, 

since issuing its 1997 plan, TVA has added other deferred assets totaling 

about $600 million, some of which will have to be recovered through rates 

in the future. In addition, TVA is revising downward its goal for deferred 

asset recovery over the remaining years covered by the plan. Its proposed 

revision to the 10-year plan changes the estimate for the balance of 

deferred assets outstanding by September 30, 2007, to about $3.9 billion, up 

from the $500 million envisioned in the 1997 plan. Projected increases in 

operating and other expenses will delay recovery of the costs of TVA’s 

deferred assets.

Since issuing its 10-year plan, TVA’s financial condition has improved, but 

still compares unfavorably to likely competitors. TVA continues to have 

relatively high debt and financing costs. For example, for fiscal year 1999, 

28 cents of every revenue dollar earned by TVA went to pay its fixed 

financing costs compared to about 9 cents on average for its likely 

competitors. Similarly, TVA’s unrecovered costs associated with its 

deferred capital assets are relatively high. As a result of its relatively high 
Page 5 GAO-01-327 Tennessee Valley Authority

financing costs associated with its high debt, and its deferred assets, TVA’s 

financial flexibility to respond to financial or competitive challenges is less 

than that of its likely competitors. Although facing these financial 

disadvantages, TVA currently enjoys certain competitive advantages 

because of its ties to the federal government as a wholly owned 

government corporation; these advantages may not exist in the future.

Because it has incurred costs that might not be recoverable in a 

competitive environment, TVA could have stranded costs if Congress 

enacts legislation that requires TVA to compete with other electricity 

providers. Stranded costs could result if TVA were unable to recover all its 

costs when selling power at or below market rates. TVA’s potential for 

stranded costs relates to its deferred assets—particularly the $6.3 billion in 

costs for three nuclear units that are not operational and thus generate no 

revenue—and high debt, which totaled about $26 billion as of 

September 30, 2000. If TVA enters a competitive environment with 

relatively high debt service costs, its ability to price its power competitively 

could be jeopardized, thus increasing its potential for stranded costs. TVA’s 

competitive challenge would be even greater if it were at the same time 

attempting to recover costs of deferred assets, including the deferred 

nuclear units, through rates.

TVA, in a letter from its Chief Financial Officer, disagreed with our findings 

in three areas. TVA’s comments related to differing opinions about the 

future market price of electricity, financial comparisons of TVA to other 

utilities that are its likely competitors, and the relationship between TVA’s 

deferred assets and stranded costs. We continue to believe that our findings 

are appropriate. Therefore, we made no substantive changes to our report 

in response to TVA’s comments, but did make certain changes for 

clarification purposes. TVA’s comment letter is reproduced in appendix III 

and our detailed evaluation of TVA’s comments is at the end of this letter. 

Background Under the TVA Act of 1933 (TVA Act), as amended, TVA is not subject to 

most of the regulatory and oversight requirements that commercial electric 

utilities must satisfy. The Act vests all authority to run and operate TVA in 

its three-member board of directors. Legislation also limits competition 

between TVA and other utilities. The TVA Act was amended in 1959 to 

establish what is commonly referred to as the TVA “fence,” which prohibits 

TVA, with some exceptions, from entering into contracts to sell power 

outside the service area that TVA and its distributors were serving on

July 1, 1957. 
Page 6 GAO-01-327 Tennessee Valley Authority

In addition, the Energy Policy Act of 1992 (EPAct) provides TVA with 

certain protections from competition, called the “anti-cherry picking” 

provisions. Under EPAct, TVA is exempt from having to allow other utilities 

to use its transmission lines to transmit (“wheel”) power to customers 

within TVA’s service area. This legislative framework generally insulates 

TVA from direct wholesale competition. As a result, TVA remains in a 

position similar to that of a regulated utility monopoly.4

EPAct’s requirement that utilities use their transmission lines to transmit 

wholesale electricity for other utilities has enabled wholesale customers to 

obtain electricity from a variety of competing suppliers, thus increasing 

wholesale competition in the electric utility industry across the United 

States. In addition, restructuring efforts in many states have created 

competition at the retail level. If, as expected, retail restructuring continues 

to occur on a state-by-state basis over the next several years, then 

industrial, commercial, and, ultimately, residential consumers will be able 

to purchase their power from one of several competitors rather than from 

one utility monopoly.

Since EPAct exempts TVA from having to transmit power from other 

utilities to customers within its territory, TVA has not been directly affected 

by the ongoing restructuring of the electric utility industry to the same 

extent as other utilities. However, if the Congress were to eliminate TVA’s 

exemption from the wheeling provision of EPAct, its customers would have 

the option of purchasing their power from other sources after their 

contracts with TVA expire. Under the Clinton administration’s proposal in 

April 1999 to promote retail competition in the electric power industry, 

which TVA supported, TVA’s exemption from the wheeling provision of 

EPAct would have been eliminated after January 1, 2003. If this or a similar 

proposal is enacted, TVA may be required to use its transmission lines to 

transmit the power of other utilities for consumption within its service 

territory. A balancing factor is that recent proposals would have also 

removed the statutory restrictions that prevent TVA from selling wholesale 

power outside its service territory. 

4

However, TVA is subject to some forms of indirect competition. For example, TVA has no 

protection against its industrial customers relocating outside its service area or businesses 

deciding not to move to its service area for reasons related to the cost of power. In addition, 

customers can decide to generate their own power. 
Page 7 GAO-01-327 Tennessee Valley Authority

Because of these ongoing restructuring efforts, TVA management, like 

many industry experts, expects that in the future TVA may lose its 

legislative protections from competition. TVA’s management recognized the 

need to act to better position TVA to compete in an era of increasing 

competition and, in July 1997, issued a 10-year business plan with that goal 

in mind. TVA established a 10-year horizon because a majority of its longterm contracts with distributors could begin expiring at that time, and TVA 

could be facing greater competitive pressures by 2007. The plan contained 

three strategic objectives: reduce TVA’s cost of power in order to be in a 

position to offer competitively priced power by 2007, increase financial 

flexibility by reducing fixed costs, and build customer allegiance. 

To help meet the first two strategic objectives noted above, one of the key 

goals of TVA’s 10-year plan was to reduce debt from its 1997 levels by about 

one-half, to about $13.2 billion. In addition, while not specifically discussed 

in the published plan, TVA planned to reduce the balance (i.e., recover the 

costs through rates) of its deferred assets from about $8.5 billion to 

$500 million, which TVA estimated to be the net realizable value of its 

deferred nuclear units. TVA planned to generate cash that could be used to 

reduce debt by increasing rates beginning in 1998, reducing expenses, and 

limiting capital expenditures; these actions would increase its financial 

flexibility and future competitiveness. TVA’s plan to reduce debt and 

recover the costs of deferred assets while it is still legislatively protected 

from competition was intended to help position TVA to achieve its ultimate 

goal of offering competitively priced power by 2007. In a competitive 

market, if TVA’s power were priced above market because of high debt 

service costs and the recovery through rates5

 of the costs of its deferred 

assets, it would be in danger of losing customers. Losing customers could 

result in stranded costs if TVA is unable to sell the capacity released by the 

departing customers to other customers for at least the same price. 

Stranded costs, as discussed later, are costs that are uneconomical to 

recover in a competitive environment due to regulatory changes.

5

As discussed later, if TVA were to be required to compete with other utilities and it had not 

recovered the costs of its deferred assets, TVA might immediately write off all or a portion 

of the costs to retained earnings. To the extent that TVA instead takes the costs into future 

rates, there would be upward pressure on rates that would diminish TVA’s competitive 

prospects.
Page 8 GAO-01-327 Tennessee Valley Authority

Objectives, Scope, and 

Methodology

For each of the three objectives addressed in this report, you asked us to 

answer specific questions. Regarding debt and deferred assets, you asked 

us to determine what progress TVA has made in achieving the goals of its 

10-year business plan for reducing debt and deferred assets, and to what 

extent TVA has used the additional revenues generated from its 1998 rate 

increase to reduce debt and deferred assets. Regarding TVA’s financial 

condition, you asked us to compare TVA’s financial condition, including 

debt and fixed cost ratios, to neighboring investor-owned utilities (IOUs). 

Finally, regarding stranded costs, you asked us to (1) explain the link 

between TVA’s debt and its potential stranded costs, (2) determine whether 

TVA has calculated potential stranded costs for any of its distributors, and 

if so, determine the methodology it used, and (3) determine the options for 

recovering any potential stranded costs at TVA.

We evaluated the progress TVA has made in achieving the debt reduction 

and recovery of deferred assets goals of its 10-year plan, and determined 

the extent to which TVA is using revenue from its 1998 rate increase to 

reduce debt and recover the cost of its deferred assets, by interviewing TVA 

and Congressional Budget Office (CBO) officials; reviewing and analyzing 

various TVA reports and documents, including annual reports, audited 

financial statements, the original 10-year business plan and proposed 

revisions to it; and reviewing supporting documentation (analytical 

spreadsheets, etc.) and assumptions underlying TVA’s 10-year plan. 

To determine TVA’s financial condition, we analyzed TVA’s debt and fixed 

costs, and then compared TVA to its likely competitors. To accomplish this, 

we obtained financial data for TVA and its likely competitors from their 

audited financial statements; computed and compared key financial ratios 

for TVA and its likely competitors; analyzed data on the future market price 

of power; interviewed TVA officials about their efforts to position 

themselves competitively, including their efforts to reduce debt, recover 

the cost of their deferred assets, and mitigate and/or recover stranded 

costs; and reviewed IOU annual reports to determine what steps the IOUs 

are taking to financially position themselves for competition. 
Page 9 GAO-01-327 Tennessee Valley Authority

To assess TVA’s potential stranded costs, we interviewed industry experts 

at the Federal Energy Regulatory Commission (FERC),6

 Edison Electric 

Institute (EEI),7 and CBO on the options other utilities have pursued to 

recover stranded costs; reviewed Energy Information Administration 

(EIA)8

 documents on stranded cost recovery at the state level; questioned 

TVA officials on TVA’s plans for calculating and recovering potential 

stranded costs; and analyzed TVA’s contracts to determine whether TVA has 

contractually relieved its customers of any obligation to pay for any 

stranded costs. Also, to determine the link between TVA’s debt and its 

potential stranded costs, we analyzed the interrelationship between debt 

reduction and stranded cost mitigation. Additional information on our 

scope and methodology is in appendix I. 

We conducted our review from April 2000 through January 2001 in 

accordance with generally accepted government auditing standards. To the 

extent practical, we used audited financial statement data in performing 

our analyses, or reconciled the data we used to audited financial 

statements; however, we were not able to do so in all cases and we did not 

verify the accuracy of all the data we obtained and used in our analyses. In 

addition, we based information on debt reduction, deferred asset recovery, 

and the future market price of power on TVA’s planned revisions to its key 

goals and assumptions at the time of our review. We requested written 

comments from TVA on a draft of this report. TVA provided both technical 

comments, which we have incorporated, as appropriate and written 

comments, which are reproduced in appendix III.

6

FERC is an independent agency within the Department of Energy with broad regulatory 

authority over the interstate transmission and sale of wholesale electricity, natural gas, and 

oil.

7

EEI is the industry group for investor-owned utilities.

8

EIA is a statistical and analytical agency in the Department of Energy.
Page 10 GAO-01-327 Tennessee Valley Authority

TVA’s Schedule for 

Reducing Debt and 

Recovering Deferred 

Assets Is Slipping

In April 1999,9 we reported that capital expenditures not accounted for in 

the 1997 plan would negatively impact TVA’s ability to achieve its plans to 

reduce debt and recover the cost of deferred assets by 2007. At that time, 

TVA’s fiscal year 2000 federal budget request acknowledged that TVA would 

not achieve its goal of reducing outstanding debt by about half until 2009,

2 years later than originally planned. TVA’s goal in its original plan was to 

reduce debt to about $13.2 billion. Since April 1999, TVA has fallen further 

behind in meeting its debt reduction goal. TVA now has a target of reducing 

debt to $19.6 billion by 2007; it no longer is projecting a target for debt 

reduction beyond 2007. 

For fiscal years 1998 through 2000, TVA reduced its debt by about

$1.4 billion. However, TVA’s debt reduction shortfall also totaled about

$1.4 billion, which resulted from greater than anticipated capital 

expenditures and annual operating and other expenses and lower revenues 

than projected in 1997. These same factors will hamper TVA’s debt 

reduction efforts over the last 7 years of the plan. 

In addition, although TVA reduced deferred assets to the extent planned for 

the first 3 years of the plan, it is revising the amount of deferred assets it 

plans to recover through 2007 downward. TVA now plans to reduce the 

balance of its deferred assets to about $3.9 billion by September 30, 2007, 

compared to its original goal of $500 million. 

Annual Debt Reduction Is 

Behind Schedule and 

Overall Goal Is Being 

Revised Downward

To achieve the overall debt reduction goal in the original 10-year plan, TVA 

established annual debt reduction goals. In the 1997 plan, the annual debt 

reduction goals ranged from $476 million in 1998 to $2 billion in 2007. TVA 

has made progress in reducing debt, and in fact, exceeded its target goal in 

the first year of the plan. However, TVA fell far short in the second and third 

years. Through the first 3 years of the 10-year plan, TVA reduced debt by 

about $1.4 billion, but its debt reduction shortfall also totaled about 

$1.4 billion. In addition, TVA is now planning to issue a revised plan that 

would significantly reduce the goals for 2001 through 2007. Figure 1 

compares the annual debt reduction goals contained in TVA’s July 1997 

10-year plan to TVA’s actual debt reduction for fiscal years 1998 through 

9

Tennessee Valley Authority: Assessment of the 10-Year Business Plan (GAO/AIMD-99-142, 

April 30, 1999).
Page 11 GAO-01-327 Tennessee Valley Authority

2000 and to TVA’s proposed revisions to its annual debt reduction goals for 

fiscal years 2001 through 2007. 

Figure 1: Annual Debt Reduction Goals in TVA’s 1997 Plan Compared to Actual Debt 

Reduction for Fiscal Years 1998 Through 2000 and Proposed Goals for Fiscal Years 

2001 Through 2007

Source: GAO analysis based on data from TVA.

In its presidential budget submission for fiscal year 2000, TVA 

acknowledged that it would not achieve its goal of reducing debt by about 

one-half by 2007. Instead, TVA said it would not meet the debt reduction 

goal until 2009, 2 years later than the goal in its original 10-year plan. TVA is 

in the process of revising its goal for reducing outstanding debt again. TVA 

officials now estimate that its outstanding debt by September 30, 2007, will 

be between $18 billion and $24 billion, with a target of about $19.6 billion, 

or about $6.4 billion higher than TVA envisioned when it issued the 1997 

Original Plan

Actual/Revised Plan

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

500

1000

1500

2000

2500 Dollars in millions
Page 12 GAO-01-327 Tennessee Valley Authority

plan. TVA is not projecting a target reduction goal beyond 2007. Figure 2 

compares the annual outstanding debt goals contained in TVA’s July 1997 

10-year plan to TVA’s actual debt outstanding for fiscal years 1998 through 

2000 and to TVA’s proposed revisions to annual goals for fiscal years 2001 

through 2007. 

Figure 2: Annual Outstanding Debt Goals in TVA’s 1997 Plan Compared to Actual 

Debt Outstanding for Fiscal Years 1998 Through 2000 and Proposed Annual Goals 

for Fiscal Years 2001 Through 2007

Source: GAO analysis based on data from TVA.

TVA officials attribute the $1.4 billion debt reduction shortfall over the first 

3 years to four factors. The first factor is greater than anticipated cash 

expenditures for new generating capacity. For fiscal years 1998 through 

2000, TVA spent $436 million more than planned to purchase new peaking 

generator units. The 1997 plan assumed that TVA would meet future 

increases in demand for power by purchasing power from other utilities, 

which would have used less cash through 2007 than purchasing the peaking 

Debt Outstanding - Original Plan

Debt Outstanding - Actual and Revised Plan

0

5

10

15

20

25

30 Dollars in billions 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Page 13 GAO-01-327 Tennessee Valley Authority

units. TVA officials believe that its capital expenditures for new generating 

capacity will have two positive effects. First, they believe the new 

generating capacity will ultimately reduce TVA’s cost of power, even though 

the increased capital expenditures will use cash that could have been used 

to reduce debt. Second, they believe the new generating capacity will 

enhance system reliability by providing a dependable source of power. 

The second factor to which TVA officials attribute the debt reduction 

shortfall over the first 3 years of the plan is greater than anticipated capital 

expenditures requiring cash for environmental controls to meet Clean Air 

Act requirements. For fiscal years 1998 through 2000, TVA spent 

$276 million more than planned on environmental controls. Meanwhile, 

over the 3-year period, TVA spent about $221 million less than planned on 

other types of capital items. 

The net effect of increased spending on new generating capacity and 

environmental controls and decreased spending on other types of capital 

items is that TVA’s capital expenditures have exceeded the planned amount. 

TVA had forecast about $1.7 billion in capital expenditures over that 3-year 

period; its actual capital expenditures were almost $500 million more 

(about $2.2 billion). Under current plans, TVA expects its major capital 

costs for new generating capacity and environmental controls to be 

completed by 2004. Figure 3 compares the annual capital expenditure goals 

contained in TVA’s July 1997 10-year plan to TVA’s actual capital 

expenditures for fiscal years 1998 through 2000 and to TVA’s proposed 

revisions to annual goals for fiscal years 2001 through 2007.
Page 14 GAO-01-327 Tennessee Valley Authority

Figure 3: Annual Capital Expenditure Goals in TVA’s 1997 Plan Compared to Actual 

Capital Expenditures for Fiscal Years 1998 Through 2000 and Proposed Annual 

Goals for Fiscal Years 2001 Through 2007

Source: GAO analysis based on data from TVA.

The third factor to which TVA officials attribute the debt reduction shortfall 

over the first 3 years of the plan is a net increase in annual expenses 

requiring cash that could have been used for debt reduction. For fiscal 

years 1998 through 2000, TVA’s operating and maintenance expenses, and 

sales, general, and administrative expenses were greater than anticipated. 

This increase in annual expenses was partially offset by a reduction in fuel 

and purchased power expense10 and interest expense. The net effect was 

that annual expenses totaled about $122 million more than planned.

10TVA’s revised plan anticipates higher prices for natural gas and for electricity purchased 

from other utilities. However, this is partially offset by TVA’s plans to buy less electricity 

from others. 

Original Capital Expenditures Forecast

Actual and Revised Capital Expenditures Forecast

0

200

400

600

800

1000

1200

1400

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Dollars in millions
Page 15 GAO-01-327 Tennessee Valley Authority

The fourth factor to which TVA officials attribute the debt reduction 

shortfall over the first 3 years of the plan is less revenue than originally 

anticipated. According to TVA officials, the revenue shortfall was caused 

primarily by mild winters that lessened demand for electricity. The revenue 

shortfall for fiscal years 1998 through 2000 totaled about $725 million. 

Our analysis confirms that the above four factors were the primary ones 

that hampered TVA’s debt reduction efforts for fiscal years 1998 through 

2000. These factors are also projected to limit TVA’s ability to reduce debt in 

fiscal years 2001 through 2007. Over this 7-year period, the primary factors 

limiting TVA’s debt reduction efforts are that annual revenue is expected to 

be lower, and capital expenditures and cash expenses are expected to be 

higher. This reduces the amount of cash that would have been available to 

repay debt. TVA now anticipates that its revenue will be about $2.2 billion 

lower, and its capital expenditures and cash expenses—at about 

$1.6 billion and $2.5 billion, respectively—will be higher than planned in 

1997. Table 1 shows our analysis of the factors affecting cash available to 

reduce debt from 1998 through 2007.

Table 1: Factors Affecting Cash Available for Debt Reduction From 1998 Through 

2007

Note: Figures in parentheses denote factors that reduced the amount of cash available for debt 

reduction. 

Source: GAO analysis based on data from TVA.

In developing its 10-year plan, TVA planned to use the additional revenue 

from its 1998 rate increase to reduce its debt. TVA officials attribute about 

an additional $1.24 billion in revenue over the first 3 years of the plan to the 

rate increase. During this period, TVA has reduced its outstanding debt by 

more than a comparable amount—about $1.4 billion. 

(Dollars in Billions)

Source Amount

Decrease in revenue $(2.2)

Increase in capital expenditures (1.6)

Decrease in fuel and purchased power expense 1.2

Increase in other operating and maintenance expense (3.1)

Increase in interest expense (1.3)

Decrease in other uses of cash 0.6

Total reduction in cash available to reduce debt $(6.4)
Page 16 GAO-01-327 Tennessee Valley Authority

Plan to Recover Deferred 

Assets Is Being Revised 

Downward 

A key element of TVA’s plan was not only to reduce the cost of its power by 

reducing its debt and the corresponding interest expense, but also to 

recover a substantial portion of the costs of its deferred assets. By 

increasing operating revenues and reducing interest and other expenses to 

generate cash flow that could be used to reduce debt, TVA would have the 

opportunity11 to use revenues in excess of expenses to recover a portion of 

the costs of its deferred assets. However, as noted previously, the proposed 

revision to the plan contains additional operating and other expenses over 

the remainder of the 10-year period, which, absent any future rate 

increases, will decrease the amount of revenue available to recover 

deferred assets. TVA has also added about $600 million in deferred assets, 

some of which will have to be recovered in the future.12 Although TVA 

recovered the costs of deferred assets to the extent planned over the first 3 

years of the plan, it is reducing its overall deferred asset recovery goals 

through 2007.

TVA has a significant amount of unrecovered capital costs associated with 

three uncompleted and nonproducing deferred nuclear units—about 

$6.3 billion as of September 30, 2000.13 At that time, TVA’s investment in its 

deferred nuclear units represented about 26 percent of the cost of TVA’s 

total undepreciated generating property, plant, and equipment. The 

deferred units do not generate power, and TVA has chosen not to begin to 

recover their costs through rates. In contrast, the unrecovered costs of 

TVA’s operating nuclear plants, which produced about 31 percent of TVA’s 

power in 2000, represented about 45 percent of the cost of TVA’s total 

undepreciated generating assets as of September 30, 2000. 

At the time TVA issued the original 10-year business plan, the unrecovered 

balance of TVA’s deferred assets, including both its nuclear units and other 

deferred assets, was about $8.5 billion. TVA recovered the cost of deferred 

11The original 10-year plan called for TVA to raise rates and reduce expenses in order to 

generate the cash needed to reduce debt. The TVA Act requires TVA to generate sufficient 

revenues to recover all costs and allows but does not require TVA to make a profit. 

Therefore, TVA could use revenues in excess of expenses to begin recovering the costs of its 

deferred nuclear units and accelerate the recovery of its other deferred charges.

12A portion of the increase in deferred assets is attributable to an increase in nuclear 

decommissioning costs. TVA believes it will recover all of these costs through earnings on 

its related trust fund portfolio; to the extent it does so, it will not have to recover these costs 

through rates.

13There are two uncompleted nuclear generating units at Bellefonte and one at Watts Bar.
Page 17 GAO-01-327 Tennessee Valley Authority

assets to the extent planned for over the first 3 years of the plan. Through 

September 30, 2000, $1.1 billion in other deferred assets had been 

recovered through rates, but recovery of the cost of the deferred nuclear 

units had not begun. However, since the original plan was issued, TVA has 

also added about $600 million in other deferred assets, some of which will 

have to be recovered in the future; its current total is about $8 billion. TVA’s 

overall plan for recovering the costs of its deferred assets through 2007 is 

being reduced significantly. TVA now plans to reduce the balance of its 

deferred assets, including both its nuclear units and other deferred assets, 

to about $3.9 billion; this represents much less deferred asset recovery than 

TVA’s original estimate of $500 million. Figure 4 compares the annual 

estimated remaining balances of deferred assets (both the deferred nuclear 

units and other deferred assets) contained in TVA’s July 1997 10-year plan 

to TVA’s actual deferred asset balances as of the end of fiscal years 1998 

through 2000 and to TVA’s estimated balances for fiscal years 2001 through 

2007. 
Page 18 GAO-01-327 Tennessee Valley Authority

Figure 4: Annual Estimated Balances for Deferred Assets in TVA’s 1997 Plan 

Compared to the Actual Deferred Asset Balances for Fiscal Years 1998 Through 2000 

and to Estimated Balances for Fiscal Years 2001 Through 2007

Source: GAO analysis based on data from TVA.

Not reducing debt and recovering deferred assets to the extent planned by 

2007 while still legislatively protected from competition could diminish 

TVA’s future competitive prospects. Specifically, not meeting these goals 

could cause the price of its future power to be above market, if TVA’s debt 

service costs remain relatively high at the time it is required to compete and 

if TVA is at the same time attempting to recover the costs of its deferred 

assets through rates. Assuming that TVA’s outstanding debt balance is

$19.6 billion as of September 30, 2007, and its weighted average interest 

rate14 remains about 6.5 percent, we estimate that TVA’s interest expense in 

14The weighted average interest rate on TVA’s debt outstanding as of September 30, 2000, 

was about 6.5 percent.

Balance of Deferred Assets - Original Plan

Balance of Deferred Assets - Actual and Revised Plan

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

1

2

3

4

5

6

7

8

9 Dollars in billions
Page 19 GAO-01-327 Tennessee Valley Authority

the year 2008 will be about $1.27 billion, about $416 million higher than if 

debt were reduced to $13.2 billion. As we stated in our April 1999 report, 

the more progress TVA makes in addressing these issues while it has 

legislative protections, the greater its prospects for being competitive if it 

loses those protections in the future. 

Although reducing debt and the amount of deferred asset costs that have 

not yet been recovered are important to TVA as it prepares for competition, 

TVA’s future competitiveness will be based to a large degree on market 

conditions and how TVA will be restructured if and when TVA loses its 

legislative protections. Of particular importance is the uncertainty of the 

future market price of power. In our 1999 assessment of TVA’s 10-year plan, 

we found that TVA’s projection of the future market price of wholesale 

power in 2007 was somewhat lower than the projections of leading industry 

experts. This lower projection prompted TVA to be aggressive in its 

planning to reduce costs to position itself to offer competitively priced 

power by 2007. 

TVA and other industry experts are continuing to revise their projections of 

the future market price of power in 2007. TVA’s projection is a load-shaped 

forecast—i.e., its projection is based specifically on how TVA’s load varies 

during different hours of the day and different days of the week. TVA 

officials told us that higher projections are warranted now than when it 

prepared its plan in 1997 primarily due to projected increases in the price of 

natural gas, but also due to a combination of other factors, including the 

extreme volatility of spot prices (in the summer months), increasing power 

demands beyond what they expected 3 years ago, shortages (or at least, 

shrinking surpluses) of both generating and transmission capacity, and a 

better understanding of the increased costs of complying with 

environmental regulations that are likely to take effect between now and 

2007. TVA has stated that the impact of these factors can be seen in higher 

current trading prices, higher forward prices being offered by suppliers, 

higher long-term contract prices, and higher energy prices. TVA officials 

are now forecasting a market price of power in 2007 in the range of 4.0 to 

5.0 cents per kilowatthour (kWh), which would be sufficient to cover its 

projected costs of about 3.8 to 3.9 cents per kWh in 2007. An analysis by 

Salomon Smith Barney,15 which extends through 2004, supports TVA’s 

15Salomon Smith Barney is a financial services firm that, among other things, conducts 

research on energy issues.
Page 20 GAO-01-327 Tennessee Valley Authority

position that market indicators suggest that the future market price of 

power will be higher during this part of the plan period.

Not all industry experts agree with TVA’s belief that the price of natural gas 

will necessarily drive electricity prices higher. For example, the Energy 

Information Administration (EIA) projects a downward price trend (in 

current dollars) between now and 2007 in the region in which TVA 

operates, in part due to declining coal prices16 that EIA projects would 

more than offset increasing gas prices. EIA also projects that nuclear fuel 

prices will remain stable. However, when projecting future prices by 

geographic region, EIA and other industry experts generally forecast the 

future market price of power on an average yearly price that includes all 

peaks and valleys. Such average yearly price forecasts are not directly 

comparable to TVA’s load-shaped forecast. Differing forecasts by various 

industry experts underscore the uncertainty of predicting the future market 

price of power. 

The higher actual market prices are, the better positioned TVA will be to 

generate revenue that could be used to pay down debt and recover costs, 

including the costs of deferred assets. However, by increasing its 

projections for the future market price of power, TVA assumes it can 

accommodate a higher debt level than originally planned. Because of the 

uncertainly surrounding whether TVA’s projections of higher market prices 

in 2007 are accurate, TVA’s higher debt projections increase the risk that it 

will not be able to generate the revenue needed to recover all costs or offer 

competitively priced power at that time. In a competitive environment, 

these assumptions could increase the federal government’s risk of loss due 

to its financial involvement with TVA.17

16EIA projects declining coal prices due to improved productivity in coal mining and 

growing production from lower-cost mines in the west.

17In September 1997 we reported on the risk of loss to the federal government as a result of 

its indirect and direct financial involvement in TVA (Federal Electricity Activities: The 

Federal Government’s Net Cost and Potential for Future Losses, GAO/AIMD-97-110 and 

110A, September 19, 1997). The federal government’s financial involvement and risk of loss 

is primarily indirect. For indirect involvement, the federal government is at risk of loss for 

unreimbursed costs because of any actions it might take to prevent default on the debt 

service requirements on TVA’s outstanding public debt. Although the federal government 

explicitly does not guarantee TVA’s publicly issued debt, the major credit rating agencies 

rate this debt as if it has an implicit federal guarantee. 
Page 21 GAO-01-327 Tennessee Valley Authority

TVA’s Financial 

Condition Has 

Improved but Key 

Financial Indicators 

Still Compare 

Unfavorably to Likely 

Competitors

A key objective of TVA’s 1997 plan was to alter its cost structure from a 

rigid, high fixed-to-variable cost relationship to a cost structure with more 

financial flexibility that is better able to adjust to a more volatile 

marketplace. However, while TVA has made positive steps, its financial 

flexibility remains below that of likely competitors, largely because its debt 

remains relatively high. Another key objective of TVA’s 1997 plan was to 

reduce its cost of power. One of the components of the cost of power is the 

recovery of the costs of its capital assets. Similar to improvements in 

flexibility, while TVA has made some progress in recovering the costs of its 

capital assets, financial indicators show that TVA has recovered fewer of 

these costs than its likely competitors.

In 199518 we reported that one option available for TVA to improve its 

financial condition was to raise rates while it is still legislatively protected 

from competition and use the proceeds to reduce its debt. In 1998, TVA 

implemented its first rate increase in 10 years. For the previous 10 years, 

TVA had chosen to keep rates as low as possible rather than generate 

additional revenue that could have been used to reduce debt. Revenue from 

TVA’s 1998 rate increase has reduced debt (and corresponding interest 

expense)19 and recovered some of the costs of deferred assets over the first 

3 years of its 10-year plan. From September 30, 1997, through 

September 30, 2000, TVA reduced its debt from about $27.4 billion to about 

$26.0 billion. This debt reduction, along with the refinancing of debt at 

lower interest rates, enabled TVA to reduce its annual interest expense 

from about $2.0 billion in fiscal year 1997 to about $1.7 billion in fiscal year 

2000. In addition, TVA has recovered about $1.1 billion of its deferred 

assets through rates. While not reducing debt and recovering the costs of 

deferred assets to the extent anticipated in its original plan, these actions 

are important because they are a step toward giving TVA more financial 

flexibility to adjust its rates in a competitive environment. 

18Tennessee Valley Authority: Financial Problems Raise Questions About Long-term Viability

(GAO/AIMD/RCED-95-134, August 17, 1995).

19TVA has reduced its interest expense not only by repaying debt but also by refinancing 

debt at lower interest rates. In fiscal year 1999, TVA obtained authority from the Congress to 

prepay, without penalty, the $3.2 billion that TVA then owed the Federal Financing Bank; it 

then refinanced that debt at lower interest rates. In our 1999 report, we estimated that the 

interest savings from this refinancing would provide an average annual savings of about 

$116 million. TVA has also refinanced other debt.
Page 22 GAO-01-327 Tennessee Valley Authority

TVA’s Financial Flexibility 

Remains Relatively Low

To assess the progress TVA has made in achieving its key objective of 

altering its cost structure from a rigid, high fixed-to-variable cost 

relationship to a cost structure with more financial flexibility, and to put 

TVA’s financial condition in perspective, we compared TVA to likely 

competitors20 in terms of (1) total financing costs, (2) fixed financing costs, 

and (3) net cash generated from operations as a percentage of expenditures 

for property, plant, and equipment and common stock dividends. These 

ratios are indicators of TVA’s flexibility to withstand competitive or 

financial challenges. To assess TVA’s financing costs21 compared to these 

competitors, we computed the total financing costs to revenue ratio, which 

is the percentage of an entity’s operating revenue that is needed to cover all 

of its financing costs. A lower percentage indicates greater flexibility to 

respond to financial or competitive challenges. Financing costs for TVA, 

which consist of the interest expense on its outstanding debt and payments 

made to the federal government as returns on past appropriations,22 are 

fixed costs in the short term that must be paid even in times of financial or 

competitive difficulty. In contrast, for the IOUs, financing costs include 

preferred and common stock dividends in addition to interest expense, 

because part of the IOUs’ capital is derived from preferred and common 

stock and dividends represent the cost of this equity capital. Figure 5 

shows that TVA’s total financing costs, although improved since 1994, 

remain high when compared to those of likely competitors.

20According to industry experts, TVA’s competition is most likely to come from nearby 

entities because of the high cost of transmitting power. Our analysis used seven utilities that 

border on TVA’s service territory that are used by analysts to compare TVA to other electric 

utilities, and one large independent power producer; we refer to these entities generically as 

IOUs. TVA could face competition from other sources, including utilities that do not border 

on TVA’s service area, power marketers, and other independent power producers. 

21Differences in financing structures between TVA and likely private sector competitors 

make direct comparisons somewhat difficult. Specifically, financing costs include (1) 

interest expense on short-term and long-term debt (both TVA and IOUs), (2) returns on 

appropriation investment (TVA only), and (3) preferred and common stock dividends (IOUs 

only). In addition, IOUs are organized as tax-paying businesses and are usually financed by 

the sale of securities in the free market and by issuing debt, while TVA’s capital is derived 

primarily from debt. The requirement that TVA obtain financing by issuing debt could be 

considered a competitive disadvantage because of the corresponding fixed financing costs 

which reduce TVA’s financial flexibility. We performed analyses which take into effect these 

differences in financial structure.

22The 1959 amendments to the TVA Act require TVA to make annual principal payments to 

Treasury from net power proceeds plus a market rate of return on the balance of this debt. 

The latter is the payment on appropriations.
Page 23 GAO-01-327 Tennessee Valley Authority

Figure 5: Ratio of Total Financing Costs to Revenue for TVA and Likely Competitors for Fiscal Years 1994 and 1999

Source: GAO analysis based on entity annual reports.

Next, we computed the fixed financing costs to revenue ratio, which 

indicates the percentage of operating revenues needed to cover the fixed 

portion of the financing costs. For this ratio, we excluded the common 

stock dividends paid by IOUs because these are not contractual obligations 

that must be paid. They can be reduced—or even suspended in extreme 

cases—to allow an entity to respond to financial or competitive challenges. 

As with the total financing costs to revenue ratio, the lower the percentage 

of the fixed financing costs to revenue, the greater the financial flexibility 

of the entity. Figure 6 shows that, while TVA has made progress since 1994, 

its fixed financing costs remain high compared to those of likely 

competitors. For example, for fiscal year 1999, 28 cents of every revenue 

1994

1999

0

5

10

15

20

25

30

35

40

American

Electric

Power

Carolina

Power and 

Light

Dominion

Resources,

Inc.

Duke 

Power

Entergy LG&E 

Energy

Corporation

Southern

Company

AES TVA

Percentage
Page 24 GAO-01-327 Tennessee Valley Authority

dollar earned by TVA went to pay for fixed financing costs23 compared to 

about 9 cents on average for its likely competitors.

Figure 6: Ratio of Fixed Financing Costs to Revenue for TVA and Likely Competitors for Fiscal Years 1994 and 1999

Source: GAO analysis based on entity annual reports.

Another key indicator of financial flexibility is the ratio of net cash from 

operations (i.e., cash in excess of operating and interest expenses) to 

expenditures for property, plant, and equipment (PP&E) and common 

23TVA has further reduced this to about 26 cents of every revenue dollar for fiscal year 2000.

1999

1994

American

Electric

Power

Carolina

Power and 

Light

Dominion

Resources,

Inc.

Duke 

Power

Entergy LG&E 

Energy

Corporation

Southern

Company

AES TVA

0

5

10

15

20

25

30

35

40 Percentage
Page 25 GAO-01-327 Tennessee Valley Authority

stock dividends. This net cash in effect represents the amount available for 

management’s discretionary use. A percentage of 100 would indicate 

sufficient net cash provided by operations to pay for 100 percent of annual 

PP&E expenditures and common stock dividends. By necessity, utilities 

that are unable to pay for capital expenditures from net cash are forced to 

pay for them through retained earnings or by borrowing funds or issuing 

stock. Issuing debt to cover capital expenditures increases a utility’s cost of 

power by requiring annual interest payments, and issuing stock could also 

increase the cost of power through the payment of dividends. Since TVA 

does not pay dividends, its ratio only includes expenditures for PP&E. 

A higher percentage indicates greater flexibility. Because of increased 

revenue from TVA’s recent rate increase, a significant reduction in annual 

capital expenditures for its nuclear power program, and cost control 

measures that reduced certain expenses, TVA’s ratio has improved 

significantly and now compares favorably to those of likely competitors. 

Figure 7 illustrates the improvement TVA has made to date compared to 

likely competitors.
Page 26 GAO-01-327 Tennessee Valley Authority

Figure 7: Ratio of Net Cash From Operations to Expenditures for PP&E and Common Stock Dividends for TVA and Likely 

Competitorsa

 for Fiscal Years 1994 and 1999

a

We did not include the 1994 ratio for AES in figure 7 because this ratio was significantly higher than 

the other utilities (about 1,700 percent) and the scale that would have been needed to include it would 

have visually distorted the differences among the other utilities; AES’s ratio has decreased 

considerably since 1994 due to capital expenditures for generating equipment.

Source: GAO analysis based on entity annual reports.

TVA’s Capital Cost Recovery 

Remains Relatively Low

Electricity providers, including TVA, generally recover their capital costs 

once the capital assets have been placed in service by spreading these costs 

over future periods for recovery through rates. This way, customers “pay” 

for the capital assets over time as the assets provide benefits. When a 

decision is made not to complete a capital asset, it becomes “abandoned.” 

Accounting standards require that abandoned assets be classified as 

1994

1999

0

20

40

60

80

100

120

140

160

180

200

American

Electric

Power

Carolina

Power and 

Light

Dominion

Resources,

Inc.

Duke 

Power

Entergy LG&E 

Energy

Corporation

Southern

Company

AES TVA

Percentage
Page 27 GAO-01-327 Tennessee Valley Authority

regulatory assets and amortized into operating expense; therefore, they 

would be included in rates over time.24 Thus, even though abandoned 

assets are nonproductive, the costs may still be recovered. 

TVA’s three uncompleted deferred nuclear power units have not been 

classified as abandoned, even though no construction work has been done 

in the last 12 to 15 years. In 1995 and 1997, we reported that TVA should 

classify them as regulatory assets and begin to recover the costs 

immediately. However, TVA continues to assert that there is a possibility 

the units will be completed in the future and has not classified them as 

regulatory assets and begun to recover their costs. 

As of September 30, 2000, the deferred cost of the three uncompleted 

nuclear generating units was about $6.3 billion. If TVA is required to 

compete with other electricity providers, depending on the market price of 

power and TVA’s cost of providing power, recovery of these deferred assets 

could be difficult. Effective for 1999, TVA began emphasizing the 

accelerated recovery of certain of its other deferred assets in its planning 

and adopted accounting policies that would enable it to recover more of 

these costs earlier.25 However, as the following analysis indicates, TVA’s 

continued deferral of the $6.3 billion related to the three nuclear units 

would hinder its ability to compete in a restructured environment, if TVA 

tries to recover the costs through rates. This would increase the risk of loss 

to the federal government from its financial involvement in TVA. 

The extent to which the costs of deferred capital assets have not been 

recovered by TVA compared to its likely competitors can be shown by two 

analyses. The first analysis compares the amount of capital assets that have 

not yet begun to be taken into rates to gross PP&E.26 For TVA, this consists 

of construction work in progress (CWIP)27 and the costs of the deferred 

24Financial Accounting Standards Board (FASB) Statement of Financial Accounting 

Standards (SFAS) No. 90, Regulated Enterprises—Accounting for Abandonments and 

Disallowances of Plant Costs.

25As of September 30, 2000, TVA had recovered about $1.1 billion of the costs of its 

unamortized regulatory assets and other deferred charges. None of the $1.1 billion related to 

TVA’s deferred nuclear units.

26For this analysis, we only include those deferred assets that TVA and its competitors 

include in PP&E; thus, we excluded other deferred assets.

27CWIP represents the cost of PP&E projects under construction that have not been placed 

into service.
Page 28 GAO-01-327 Tennessee Valley Authority

nuclear units; for the other entities this consists of CWIP only. A lower ratio 

indicates fewer capital costs to be recovered through future rates, and 

therefore more flexibility to adjust rates to meet future competition. TVA’s 

ratio improved—dropping by more than half—when it brought two nuclear 

plants on line in 1996 and began to recover their costs. However, as figure 8 

shows, the portion of TVA’s capital assets that has not yet begun to be taken 

into rates remains significantly higher than that of likely competitors. This 

is due largely to the deferral of TVA’s three uncompleted nuclear units. For 

example, about 19 percent of the total cost of TVA’s PP&E as of 

September 30, 1999, was not in rates, while the highest percentage for TVA’s 

likely competitors was only 10 percent.
Page 29 GAO-01-327 Tennessee Valley Authority

Figure 8: Ratio of Portion of Capital Assets Not Yet Begun to Be Taken Into Rates Compared to Gross PP&E for TVA and Likely 

Competitors for Fiscal Years 1994 and 1999

Source: GAO analysis based on entity annual reports.

1994

1999

0

5

10

15

20

25

30

35

40

45

50 Percentage

American

Electric

Power

Carolina

Power and 

Light

Dominion

Resources,

Inc.

Duke 

Power

Entergy LG&E 

Energy

Corporation

Southern

Company

AES TVA
Page 30 GAO-01-327 Tennessee Valley Authority

A second way to analyze the extent to which capital costs have been 

recovered through rates is to compare accumulated 

depreciation/amortization28 to gross PP&E. A higher ratio indicates that a 

greater percentage of the cost of PP&E has been recovered through rates. 

A utility that has already recovered a greater portion of its capital costs 

could be in a better financial condition going into an increasingly 

competitive environment because it would not have to include those costs 

in future rates. TVA has also made progress in this area since 1994, as have, 

in general, its likely competitors. However, figure 9 shows that as of 

September 30, 1999, TVA had recovered a substantially smaller portion of 

its capital costs than most of its likely competitors, again, largely due to the 

deferred nuclear units.

28Depreciation is the process of recovering the cost of PP&E by allocating the expenses 

associated with it to each period benefited by the asset. Amortization is the allocation of 

expenses associated with intangible and other assets, such as abandoned plant costs, to 

each period benefited. 
Page 31 GAO-01-327 Tennessee Valley Authority

Figure 9: Ratio of Accumulated Depreciation/Amortization to Gross PP&E for TVA and Likely Competitors as of Fiscal Years 

1994 and 1999

Source: GAO analysis based on entity annual reports.

When considering its financing costs and unrecovered deferred assets, 

TVA’s financial condition compares unfavorably to its likely competitors. 

Although TVA’s ratio of net cash from operations to expenditures for PP&E 

and common stock dividends is better than its likely competitors, this 

advantage is negated by TVA’s relatively higher financing costs, including 

fixed financing costs, and relatively higher deferred asset costs. These 

1994

1999

0

5

10

15

20

25

30

35

40

45

American

Electric

Power

Carolina

Power and 

Light

Dominion

Resources,

Inc.

Duke 

Power

Entergy LG&E 

Energy

Corporation

Southern

Company

AES TVA

Percentage
Page 32 GAO-01-327 Tennessee Valley Authority

factors reduce TVA’s financial flexibility to respond to future financial or 

competitive pressures, a key objective of TVA’s 10-year plan. 

Bond analysts with experience rating TVA’s bonds confirmed our 

assessment by stating that if forced to compete today, TVA’s financial 

condition would pose a serious challenge. The analysts further stated that 

their Aaa rating of TVA bonds is based on TVA’s ties to the federal 

government and the belief that any restructuring legislation would give TVA 

sufficient time to prepare for competition. According to the analysts, their 

bond rating of TVA was not based on the same financial criteria applied to 

the other entities rated.

When assessing the progress TVA has made in achieving the key objectives 

of its 1997 plan, TVA’s financial condition remains unfavorable compared to 

its likely competitors in the current environment. However, TVA also has 

certain competitive advantages. Specifically, it 

• remains its own regulator; 

• is not subject to antitrust laws and regulations;

• enjoys a high bond rating, and associated lower interest costs, based on 

its ties to the federal government; 

• is a government entity that is not required to generate the level of net 

income that would be needed by a private corporation to provide an 

expected rate of return;

• is not required to pay federal and state income taxes and various local 

taxes, but is required to make payments in lieu of taxes to state and 

local governments equal to 5 percent of gross revenue from sales of 

power in areas where its power operations are conducted; in addition, 

TVA’s distributors are also required to pay various state and local taxes; 

and

• has relatively more low-cost hydroelectric power than neighboring 

utilities.

Although TVA enjoys these competitive advantages, its high debt and 

unrecovered costs would present challenges in a competitive environment. 

However, it is not possible to predict TVA’s future competitive position. In 

addition to uncertainties over the future market price of power, TVA’s 

future competitive position will be affected by a number of issues, 

including
Page 33 GAO-01-327 Tennessee Valley Authority

• the specific requirements of any legislation that might remove TVA’s 

legislative protections, including whether it would be able to retain 

some or all of the competitive advantages described previously;

• actions being taken by TVA to prepare for competition in relation to 

those being taken by TVA’s competitors;

• the amount of time before TVA might lose its protections from 

competition and is required to compete with other utilities—the longer 

TVA is legislatively protected from competition, the longer it will have to 

reduce its debt and related financing costs and recover deferred costs 

through rates; 

• the extent to which TVA would write off all or a portion of the cost of its 

deferred nuclear units to retained earnings should it go from a regulated 

to a restructured, competitive environment. To the extent retained 

earnings is sufficient to cover the cost of the write-offs, any costs 

written off directly to retained earnings would not have to be recovered 

through future rates;29 and

• total cost of delivering power in relation to likely competitors, 

generation capacity and mix, transmission capability, and geographic 

location.

29TVA follows FASB standards on regulated enterprises, including SFAS No. 71, Accounting 

for the Effects of Certain Types of Regulation. Unless otherwise prescribed by restructuring 

legislation, TVA would be required to apply other FASB accounting standards in a 

nonregulated environment, including FASB 101, Regulated Enterprises—Accounting for the 

Discontinuation of Application of FASB Statement No. 71; and FASB 121, Accounting for the 

Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. Under these 

standards, TVA would be required to mark certain of its capital assets up/down to market 

value. If the book value of those capital assets exceeds market value, TVA would be required 

to recognize the difference as a period loss and write it off to retained earnings. However, 

restructuring legislation could allow the recovery of certain capital assets that otherwise 

would be required to be written off in accordance with accounting standards.
Page 34 GAO-01-327 Tennessee Valley Authority

TVA’s Potential for 

Stranded Costs and 

Options for Recovery 

Stranded costs can generally be defined as costs that become 

uneconomical to recover through rates when a utility moves from a 

regulated to a competitive environment. Stranded costs arise in 

competitive markets as a result of uneconomic assets, the costs of which 

are not recoverable at market rates.30 There are two commonly used 

methods for calculating stranded costs, and various mechanisms have been 

used to recover them in the states that have restructured their electricity 

markets. TVA’s potential for stranded costs arises mainly from its 

uneconomic assets—primarily its three nonproducing nuclear units with 

unrecovered costs totaling about $6.3 billion—and the fixed costs 

associated with its high debt. The mechanism(s) that would be available to 

TVA to recover stranded costs would determine which customer group 

would pay for them.

Calculating and Recovering 

Stranded Costs 

Stranded costs occur when a utility moves from a regulated to a 

competitive environment and is unable to recover certain costs because the 

market price of power will not allow it to generate revenue at a level 

sufficient to recover these costs. Such costs result from past decisions that 

were considered prudent when they were made, and the costs would have 

been recoverable in a cost-based, regulated environment.31 However, in a 

competitive environment, recovery of these costs would force a utility’s 

price above market, and it consequently could not recover them by 

charging market-based rates. As discussed below and in appendix II, states 

that have restructured their electricity markets have addressed the issue of 

mitigating and recovering potential stranded costs in various ways. 

Stranded costs can be the result of, among other things:

30TVA’s deferred nuclear units would be uneconomic in either a regulated or a competitive 

market, but the recovery of the costs associated with them would be different. In a regulated 

market in which there is little price competition, TVA, acting as its own regulator, would 

have a better chance of recovering these costs through future rates; in a competitive market, 

assuming competition had decreased prices, there would be less chance of recovery 

through rates.

31In the regulated environment, utilities are required to meet demand for electricity within 

their service territories and to make investments in generating assets to do so. The utilities’ 

investment decisions are approved in advance by regulators and the costs are approved to 

go into the utilities’ rate bases. When the regulatory structure is changed, the utilities may 

no longer be guaranteed the right to recover these costs. If the costs are not recoverable at 

market rates after regulatory restructuring, they may be considered stranded costs. 
Page 35 GAO-01-327 Tennessee Valley Authority

• investment in generation assets that may not be able to produce 

competitively priced power in a restructured environment, even though 

the investments were considered prudent at the time they were made;

• power purchase contracts made in anticipation of future needs that 

would become uneconomical should market prices for power in a 

competitive market become lower;

• regulatory assets, such as deferred income taxes that regulators would 

have eventually allowed utilities to collect but may not be recoverable in 

a competitive market;

• future decommissioning costs for nuclear facilities; and

• social programs where public utility commissions mandated spending 

for programs such as demand side management32−such costs would 

typically be capitalized and amortized in a regulated environment, but, 

since the costs are not part of generating power, the market price for 

electricity under competition may not allow recovery of them.

Methods of Calculating 

Stranded Costs

Two methods are commonly used to calculate the amount of allowable 

stranded costs—the FERC “revenues lost” methodology and the “asset-byasset approach.” FERC has jurisdiction over stranded cost recovery related 

to wholesale power sales and power transmission and uses the revenues 

lost method in determining allowable stranded costs for these activities. If 

legislation is enacted providing for TVA to compete in a restructured 

environment, TVA would likely fall under FERC jurisdiction for stranded 

cost recovery for its wholesale customers. TVA’s wholesale sales to its 

158 distributors were about $6 billion in fiscal year 2000, or about 88 

percent of TVA’s total operating revenues. 

Under the FERC methodology, whether a utility’s plants are nonproducing 

or productive is immaterial to the stranded cost calculation, as long as the 

costs associated with the plants are included in rates at the time a customer 

departs TVA’s system. According to FERC officials, stranded cost recovery 

assumes the costs are already in the rate base; if not, FERC officials told us 

they would likely not consider them in a stranded cost recovery claim. The 

three deferred nuclear units, with costs of about $6.3 billion as of 

September 30, 2000, that TVA has not yet begun recovering, are a primary 

reason for TVA’s potential exposure to stranded costs. However, TVA’s 

projections through 2007, using its current power rates, show that by the 

32Demand side management programs offer incentives to consumers to modify patterns of 

electricity usage.
Page 36 GAO-01-327 Tennessee Valley Authority

end of 2007 the costs will have been reduced to about $3.8 billion.33

Depending on the timing of any restructuring legislation affecting TVA and 

assuming that FERC would have jurisdiction over TVA, it is unclear 

whether FERC would consider these costs to be in TVA’s rate base and, 

thus, allow TVA to include some or all of these costs in a stranded cost 

recovery claim.

In the past when TVA calculated its stranded costs, it used the FERC 

“revenues lost” methodology. When the 4-County Electric Power 

Association (near Columbus, Mississippi) and the city of Bristol, Virginia, 

threatened to find other sources of power, TVA used the FERC 

methodology to calculate stranded costs, and TVA officials told us that they 

would continue to use the FERC methodology to calculate stranded costs 

in the future. TVA’s calculations of stranded costs for the 4-County Electric 

Power Association ranged from $57 million to $133 million.34 The 4-County 

Electric Power Association ultimately decided not to leave the TVA system 

and therefore no stranded costs were assessed. In contrast, Bristol did 

leave the TVA system. TVA again calculated stranded costs using the FERC 

methodology and initially attempted to assess Bristol for $54 million for 

stranded costs. However, TVA and the city of Bristol ultimately negotiated a 

settlement that included an agreement under which Bristol would not be 

assessed for stranded costs, but would purchase transmission and certain 

ancillary services from TVA.

According to a FERC official, under the revenues lost method, when a 

customer leaves a utility’s system, stranded costs are calculated by

• first taking the revenue stream that the utility could have expected to 

recover if the customer had not left, then

33The underlying spreadsheets provided by TVA show that it will begin recovering these 

costs in 2005. However, in February 2001, TVA officials told us that based on revenue 

projections for fiscal year 2001, it is possible that TVA could begin recovering these costs as 

early as fiscal year 2002.

34To determine stranded costs in the case of the 4-County Electric Power Association, TVA 

performed a study in which it evaluated four scenarios using different capacity alternatives. 

According to TVA officials, under all four scenarios, TVA would have been forced to sell the 

freed up capacity at a lower price than it would have received under the existing contract 

with the 4-County Electric Power Association due to a limited wholesale market for the 

released capacity.
Page 37 GAO-01-327 Tennessee Valley Authority

• subtracting the competitive market value of the electricity capacity 

released by the departing customer (that the utility will sell to other 

customers), then

• multiplying the result by the length of time the utility could have 

reasonably expected to continue to serve the departing customer. 

Figure 10 illustrates TVA’s potential application of the FERC methodology. 
Page 38 GAO-01-327 Tennessee Valley Authority

Figure 10: TVA’s Potential Application of the FERC Methodology for Calculating 

Stranded Costs

Note: As discussed previously, TVA could still have uneconomic assets even if it has no stranded costs. 

Restructuring changes the character of uneconomic assets from costs that might be recoverable in a 

regulatory environment to stranded costs that may not be recoverable in a competitive environment.

Source: GAO analysis based on information from TVA and FERC.





 	








	
	

























		




	


	





















	

	






	

	
	









	





	
	










	




	




	
























		




	




	
Page 39 GAO-01-327 Tennessee Valley Authority

The second commonly used method to calculate stranded costs is the 

“asset-by-asset” or “bottoms up” approach. This method has been used by 

the states when they restructure their retail markets. In this method, the 

market value35 of a utility’s generating assets is determined and compared 

to the amount at which those assets are currently recorded on the utility’s 

books (book value). The difference would be reflected on the income 

statement as a gain or loss and recorded in the retained earnings of the 

organization. If the total book value of a utility’s generating assets exceeds 

their total market value, the utility would have stranded costs equal to the 

difference between book and market values.

Because TVA is a unique36 self-regulator that crosses state borders and is 

not currently subject to FERC regulation, it is unclear what entity would 

have jurisdiction over any stranded cost recovery at the retail level.37 Sales 

to TVA’s direct service industrial customers and other nondistributors, 

which we consider retail sales because they are sales to final users, were 

about $0.7 billion in fiscal year 2000, or about 10.4 percent of TVA’s total 

operating revenues. 

Options for Recovering 

Stranded Costs

In the states that have restructured their electricity markets, there have 

been five commonly used mechanisms to recover stranded costs.38

Depending on the approval of state regulators, utilities have the following 

options; the choice of option affects which customer group pays.

• Exit fees − fees charged to departing customers, either via a lump sum 

or over a set number of years.

35Market value is the amount a willing buyer would pay and a willing seller would accept in 

an arms-length transaction.

36TVA is the only federal government corporation supplying electricity and is specifically 

excluded from the wheeling provisions of EPAct; other federal entities involved in the 

electricity industry are not government corporations but include entities under the 

departments of Defense, Agriculture, Energy, Interior, and State.

37In its published discussion to the April 1999 Clinton administration’s plan for restructuring 

the electricity industry, officials state that “since no State would have jurisdiction over TVA, 

there must be a federal arbiter [FERC] to provide for the Authority’s [TVA’s] recovery of its 

stranded costs;” however, this was only a proposal.

38In addition, the states that have restructured have generally used three mechanisms for 

mitigating the amount of stranded costs. These mechanisms were employed either before or 

during the restructuring. See appendix II for a discussion of the mitigation mechanisms.
Page 40 GAO-01-327 Tennessee Valley Authority

• Competitive transition charge (or competitive transition 

assessment) − either (1) a one time charge applied to all customers at 

the time the state initiates restructuring, or (2) charges based on 

kilowatthour (kWh) usage, usually charged to remaining customers over 

a set number of years.

• Wires charge (also called transmission surcharge) − a predetermined 

surcharge that is not based on kWh usage, which is added to remaining 

customers’ power bills during a set period of time; sometimes 

considered a subset of competitive transition charges.

• Rate freeze or cap − regulators set a cap on the total amount a utility 

can charge; however, under the cap, the regulator would allow the utility 

to recover stranded costs by charging higher prices for the two 

components of the market that are still regulated (distribution and 

transmission). The cap is usually frozen for the estimated length of time 

needed to recover the stranded costs. Remaining customers bear the 

burden.39

• Write off to retained earnings − In the case where a utility moves 

from a regulated to a competitive environment and has assets whose 

book value is in excess of market value, it would mark its assets to 

market value, and recognize any excess of book value over market value 

as a loss on the income statement, which would flow through to retained 

earnings. Retained earnings represent cumulative net profit from past 

operations that can be used to benefit either stockholders or current 

and future customers, by keeping profits in the company for future use. 

In addition, the change to a competitive environment, with overvalued 

assets, could result in stranded costs. However, the legislation that 

caused the change to a competitive environment could give utilities the 

option of recovering the amount of overvalued assets over time, rather 

than charging all the cost to retained earnings immediately. Writing off 

the costs of the overvalued assets to retained earnings immediately 

would mitigate potential stranded costs and eliminate the need to 

recover the cost of these assets from future ratepayers, making a utility’s 

power rates potentially more competitive.

39It should be noted that not all entities consider competitive transition charges, wires 

charges, or rate caps to be true stranded cost recovery mechanisms. For example, the 

Edison Electric Institute (EEI), the industry group for investor-owned utilities, considers 

only that portion of costs associated with the change to competition that is paid by 

departing customers to be stranded costs; other mechanisms that involve recovery from 

remaining customers or other groups is considered cost shifting. Therefore, EEI believes 

only exit fees are an appropriate stranded cost recovery mechanism. The option(s) available 

to TVA to recover potential stranded costs would depend upon the final makeup of any 

restructuring legislation passed by Congress.
Page 41 GAO-01-327 Tennessee Valley Authority

TVA Has the Potential for 

Stranded Costs Because of 

Its Nonproducing Nuclear 

Plants and High Debt

TVA continues to operate similar to a regulated monopoly because of its 

legislative protections from competition. Since regulatory changes 

requiring TVA to compete with other electricity providers have not been 

made, TVA does not currently have stranded costs. 

However, as discussed previously, TVA has uneconomic assets—primarily 

its three nonproducing nuclear units with unrecovered costs totaling about 

$6.3 billion that do not generate revenue. In 1998, TVA estimated the net 

realizable value of these assets to be about $500 million. 

TVA has not made a final decision on whether to abandon these three units 

or complete them and place them into service. If it abandons them, under 

current accounting standards,40 TVA would be required to mark them to 

market value, begin amortizing the revalued plants on a yearly basis over a 

set number of years, and recognize any excess of book value over market 

value that it deems unrecoverable as a loss on the income statement of the 

year in which the decision is made. However, according to the proposed 

revision to its 10-year plan, to the extent there is sufficient revenue, TVA 

plans to begin recovering the full costs of these assets by 2005.41 This action 

would require approval of TVA’s Board. If its retained earnings are not 

sufficient to cover any losses arising from revaluation of these units, TVA 

could find itself with stranded costs if legislation were enacted that would 

require TVA to compete with other electricity providers before it completes 

these units and brings them into operation. TVA’s ability to recover costs 

that could ultimately become stranded is compounded by TVA’s high debt 

and corresponding financing costs.

If legislation is enacted subjecting TVA to FERC authority, subject to FERC 

approval, TVA officials envision using exit fees, wires charges, or 

competitive transition charges to recover any allowable stranded costs. 

FERC’s guidance specifies that the recovery mechanism would be exit fees 

from departing customers. However, TVA could have difficulty recovering 

any stranded costs because of existing contracts entered into with 97 of its 

158 distributors. These contracts would prevent TVA from collecting 

stranded costs after 2007 from these distributors if they agreed to purchase 

all their power requirements from TVA through 2007. Proposed 

40FASB 90 would apply because TVA remains in a regulated environment.

41As mentioned earlier, TVA officials told us they could begin recovering the costs of these 

deferred nuclear units as early as fiscal year 2002.
Page 42 GAO-01-327 Tennessee Valley Authority

restructuring legislation would have required these contracts to be 

renegotiated; however, it is possible that this clause will remain in effect. 

Thus, if TVA enters a competitive environment with stranded costs, it may 

be unable to collect them from certain departing customers after 2007, and 

the burden for recovering these costs may fall on remaining customers or 

retained earnings from prior customers.42

According to TVA officials, if TVA were unable to collect any stranded costs 

from departing customers under its contracts, remaining customers would 

bear the burden of stranded cost recovery. To the extent stranded cost 

recovery is spread among remaining customers, it would become more 

difficult for TVA to price its power competitively. 

The Link Between TVA’s 

Potential Stranded Costs 

and Its Debt Reduction 

Efforts

A key element of TVA’s 10-year business plan is to reduce its cost of power. 

TVA planned to accomplish this by reducing expenses, limiting capital 

expenditures, and instituting a rate increase in 1998 to increase the cash 

flow available to pay down debt. Reducing debt, in turn, reduces the 

corresponding annual interest expense. By reducing interest expense, TVA 

frees up cash that can be used to further reduce debt. In addition, these 

actions increase the portion of revenue that would be available to recover 

the costs of its deferred assets. To the extent that TVA reduces costs, it will 

be able to offer more competitively priced power and its distributors will 

be less likely to leave TVA’s system for alternate suppliers. At the wholesale 

level, under current FERC rules, if its distributors do not leave, TVA does 

not have the option of recovering stranded costs. If its distributors decide 

to leave, TVA would have potential stranded costs if TVA is either unable to 

sell the power released by the departing distributor or is forced to sell the 

power that would have been purchased by the departing distributor for 

42Depending on the magnitude of TVA’s potential stranded costs, its retained earnings may 

not be sufficient to cover them. For example, TVA’s main uneconomic assets—its three 

nonproducing nuclear plants—have a book value of about $6.3 billion, some or all of which 

could contribute to potential stranded costs—while its retained earnings as of 

September 30, 2000 are about $3.7 billion.
Page 43 GAO-01-327 Tennessee Valley Authority

lower rates.43 Figure 11 illustrates the link between debt reduction and 

stranded costs. 

43This discussion applies to TVA’s wholesale distributors because, as noted in our report, 

they account for about 88 percent of TVA’s sales, and it is unclear who would have 

jurisdiction over any stranded costs at the nondistributor level. The main difference 

between stranded cost recovery at the wholesale and retail levels is that the options 

available for retail stranded cost recovery do not necessarily presuppose that a customer 

leaves. However, the link between TVA’s potential stranded costs and debt reduction 

remains the same.
Page 44 GAO-01-327 Tennessee Valley Authority

Figure 11: The Link Between TVA’s Debt Reduction Efforts and Its Potential 

Stranded Costs

Source: GAO analysis.

TVA institutes rate 

increase and reduces 

expenses to increase 

cash flow and 

revenue

TVA uses cash 

to pay down 

debt 

Paying down 

debt reduces 

interest expense

Reducing interest 

expense increases 

cash flow

Reducing expenses and 

recovering the cost of 

deferred assets 

enhances TVA's ability to 

offer competitively priced 

power

If TVA offers 

competitively priced 

power, distributors are 

less likely to leave

If distributors do not 

leave, TVA has no 

wholesale stranded 

costs

TVA uses additional 

revenue to recover 

deferred assets 
Page 45 GAO-01-327 Tennessee Valley Authority

This circular relationship is key to understanding how TVA’s 10-year plan 

links to potential stranded costs. In its original 10-year plan, a key element 

of TVA’s plan was to reduce its cost of power by cutting its debt in half by 

September 30, 2007. By reducing debt, TVA would also reduce future 

interest expense, which would free up additional cash that could be used to 

further reduce debt. However, not explained in the published plan was how 

the revenue generated from its 1998 rate increase would give TVA the 

opportunity to recover the cost of its deferred assets. By increasing 

revenue and reducing expenses, TVA would free up revenue that could be 

used to recover the cost of its deferred assets and cash that could be used 

to pay down debt. 

As discussed previously, TVA estimates the additional revenue from the 

rate increase over the first 3 years of the plan to be about $1.24 billion. TVA 

had the option to use that revenue for any authorized purpose, such as 

adding any excess revenue to retained earnings, accelerating depreciation, 

or amortizing its deferred assets, including writing down its deferred 

nuclear units. TVA planned to first amortize some of its other deferred 

assets before writing down its deferred nuclear units. To accomplish this, 

TVA’s Board of Directors approved a resolution to begin accelerating 

amortization of these other deferred assets. This means that in any given 

year in which TVA has revenue sufficient to meet all of its legal 

requirements to recover all costs and comply with all laws and regulations 

regarding revenue levels, any excess revenue can be used to accelerate the 

write-down of a portion of the costs of its deferred assets; this would result 

in TVA recovering these costs over time.44

In relation to its deferred nuclear units, TVA’s original plan was to recover 

all but $500 million of these $6.3 billion costs by September 30, 2007, at 

which time TVA officials believed it could be subject to a competitive 

environment through legislative changes and expiring customer contracts. 

Its proposed revision to the 10-year plan now calls for a balance of about 

$3.8 billion by 2007, or about $3.3 billion more than originally planned. To 

the extent TVA recovers the costs of the deferred nuclear units before such 

time as the Congress may remove its legislative protections, it would no 

longer have to recover these costs through future rates, potentially making 

44As previously noted, TVA is allowed to but is not required to make a profit. The supporting 

schedules to TVA’s 10-year plan indicate that TVA plans to manage its earnings so that in 

general, its net income will be about $100 million per year, and any net income in excess of 

$100 million can be used to accelerate amortization or write off its deferred nuclear units.
Page 46 GAO-01-327 Tennessee Valley Authority

its power more competitive, and giving it more flexibility to operate in a 

competitive environment. And, as noted above, if TVA is able to offer 

competitively priced power by 2007, its distributors would be less likely to 

leave and TVA would be less likely to have stranded costs.

Conclusions If TVA were to lose its legislative protections today, its high level of debt 

and corresponding high financing costs would be a competitive challenge. 

This competitive challenge would be even greater if it were at the same 

time attempting to recover costs of deferred assets through rates. Despite 

having reduced its debt and deferred assets over the past 3 years, TVA still 

compares unfavorably to its likely competitors in these regards. In 

addition, TVA is revising its goals for reducing debt and deferred assets 

downward significantly. Whether or not the deferred assets will contribute 

to stranded costs that are recoverable from customers depends on the 

specific requirements of any legislation that might remove TVA’s legislative 

protections and TVA’s ability to retain its current competitive advantages in 

a restructured environment. In addition, the longer that TVA has to prepare 

for competition, the longer it will have to reduce debt and recover the costs 

of its deferred assets and position itself more competitively. Ultimately, 

TVA’s ability to be competitive will depend on the future market price of 

power, which cannot be predicted with any certainty.

Agency Comments and 

Our Evaluation

TVA, in a letter from its Chief Financial Officer, disagreed with our findings 

in three areas—the future market price of electricity, TVA’s financial 

condition compared to other utilities, and the relationship between TVA’s 

deferred assets and potential stranded costs. TVA’s comments are 

reproduced in appendix III and discussed below. In addition, TVA officials 

provided technical comments on the draft report, which we have 

incorporated as appropriate.

TVA also took the opportunity to comment, in a section called “Looking 

Back,” on progress it has made since issuing its 10-year plan in 1997, 

including reducing debt and recovering the costs of certain deferred assets, 

and its goals and strategies for the future. We discuss these comments at 

the end of this section.

Market Prices for Electricity TVA agreed that the future market price of electricity is a key factor in 

assessing the likelihood of success in a competitive environment and that 
Page 47 GAO-01-327 Tennessee Valley Authority

the price cannot be predicted with any certainty, but disagreed on the 

general direction of prices. TVA and its consultants are projecting higher 

future market prices. As evidence of projected increases in market prices, 

TVA cites higher trading prices, higher “forward” prices offered by 

suppliers, higher long-term contract price offerings, and higher prices for 

fuel sources such as natural gas. Our report discusses TVA’s views in this 

regard; however, we underscore the uncertainty of projections of the future 

price of power by citing a knowledgeable source that projects lower prices.

In the draft we provided to TVA for comment, we included point estimates 

from various sources for the future market price of power. Considering 

TVA’s comments, we agree that point estimates imply more certainty about 

future prices than we intended or is warranted. As a result, we revised our 

report by removing those estimates. However, to underscore the 

uncertainty of future market prices, we have included the Energy 

Information Administration’s (EIA) projection of a downward trend in the 

future market price of power45 in the region in which TVA operates. EIA’s 

analysis was based in part on a projected decline in coal prices46 that, 

according to EIA, would more than offset projected increases in gas prices. 

EIA is also projecting that nuclear fuel prices will remain steady. We believe 

these are relevant points to consider since, in the year 2000, TVA’s power 

generation fuel mix was about 63 percent coal, 31 percent nuclear, 

6 percent hydropower (which has no fuel cost), and less than 1 percent 

natural gas.47 Our main point is that the future market price of power 

“cannot be predicted with any certainty.” 

TVA cites prices for electricity and natural gas for December 2000 as an 

example of market direction and volatility to support their projection of 

future higher prices. We agree that the market has shown volatility at 

certain times. In fact, this volatility strengthens our view that future prices 

are uncertain. In addition, according to data from the National Oceanic and 

Atmospheric Administration, in the entire region in which TVA markets 

power, December 2000 was one of the 10 coolest periods on record over 

45Prices from EIA are in current dollars.

46EIA projects prices for coal to decline due to improved productivity in coal mining and 

growing production from lower-cost mines in the west.

47Since 1999, TVA has added 680 megawatts (mw) of new gas-fired peaking capacity and 

plans to add up to another 1360 mw of gas-fired peaking capacity over the next 2 years. 

However, based on the usage patterns of peaking units, the percent of total generation from 

natural gas units should not significantly increase.
Page 48 GAO-01-327 Tennessee Valley Authority

the last 106 years. We would not predict the future on the basis of such an 

anomaly. 

Comparing TVA’s Financial 

Condition With Private 

Utilities

TVA commented that it appreciated our recognition of its progress in 

improving its financial condition, but objected to our findings that TVA’s 

financial condition compares unfavorably to likely competitors. In 

particular, TVA questioned our choice of financial ratios in comparing it to 

other utilities. TVA noted that most of our ratios ignore total cost and 

merely reflect the differences between the capital structure of TVA and that 

of IOUs. We disagree with TVA in this regard. Our choice of ratios was 

appropriate because they result in meaningful information regarding the 

relative financial conditions of the entities. 

To assess the financial condition of the entities, we selected two types of 

ratios. The first type indicates an entity’s financial flexibility to successfully 

respond to competitive and financial challenges. In this regard, we 

compared TVA to other utilities in terms of (1) total financing costs, 

(2) fixed financing costs, and (3) the ability of an entity to pay for capital 

expenditures and common stock dividends from net cash generated from 

operations. Each of these ratios is an indicator of an entity’s ability to 

withstand stressful financial conditions. Interest costs are particularly 

important to consider because they are fixed costs that must be paid even 

in times of competitive or financial pressures. 

Contrary to TVA’s comment letter, we recognize the differences between 

TVA’s financial structure and those of IOUs and accounted for those 

differences in performing our analyses. As our report notes, TVA’s financing 

(except for internally generated cash, as with all entities we assessed) is 

obtained by issuing debt, while IOUs also have the option of equity 

financing. The requirement that TVA obtain financing only by issuing debt 

could be considered a competitive disadvantage because of the 

corresponding fixed financing costs which affect TVA’s financial flexibility. 

The ratio of total financing cost to revenue compares TVA interest costs, as 

a percent of revenue, to the IOUs’ costs of (1) interest, (2) preferred stock 

dividends, and (3) common stock dividends as a percent of revenue. The 

ratio of fixed financing costs to revenue compares TVA interest costs, as a 

percent of revenue, to the fixed portion of the IOUs’ financing costs (i.e., 

their interest costs and preferred stock dividends) as a percent of revenue. 

These analyses appropriately adjust for the different financing structures of 

the entities in assessing financing costs, and assessing the extent to which 
Page 49 GAO-01-327 Tennessee Valley Authority

entities have fixed costs that limit their financial flexibility is a valid means 

by which to consider their respective financial conditions. 

The second type of financial ratio we used indicates the extent to which 

capital costs, including the costs of deferred assets, have been recovered. 

In this regard, we compared TVA to other utilities in terms of the 

(1) portion of capital assets that has not begun to be included in rates and 

(2) the portion of gross property, plant, and equipment that has already 

been recovered. These indicators are important because a high level of 

unrecovered capital costs could compound an entity’s challenges as it 

enters a competitive market. In the case of TVA, if it enters a competitive 

environment with the relatively high debt service costs it now carries, its 

ability to price its power competitively could be jeopardized, thus 

increasing its potential for stranded costs. Our report notes that TVA’s 

competitive challenges would be even greater if it were at the same time 

attempting to recover the costs of deferred assets through rates. 

We disagree with TVA’s statement that a single statistic—the residential 

price of electricity in TVA’s region—best reflects TVA’s competitiveness. 

While we agree that selling price is a function of cost, we note that TVA has 

a large amount of unrecovered costs. Since TVA remains in a regulated 

environment, with the ability to set its own rates and to recover or defer 

recovering the costs of some of its capital assets, this single statistic does 

not provide a complete picture of TVA’s costs nor its ability to operate in a 

competitive environment. In addition, TVA’s current cost of delivering 

power does not provide a complete picture of the competitive environment 

TVA would likely be subject to if its legislative protections and the benefits 

of being a wholly owned government corporation were removed.

We also disagree with TVA’s statement that our ratios are distorted because 

they do not recognize the uniqueness of TVA’s business compared to others. 

According to TVA, a distortion results when TVA, which has predominantly 

wholesale sales, is compared to other entities that have predominantly 

retail sales. However, these other entities also sell at wholesale and would 

be competing with TVA at that level. Regardless, an entity’s fixed costs and 

portion of capital assets that have not been recovered are relevant and 

important considerations as one considers an entity’s prospects in a 

competitive market, be it wholesale or retail. We also note that, in its 

comment letter, TVA compared its total production costs to those of the

50 largest power producers in the United States, which for the most part 

are providers of retail power, but objected to our comparing TVA to some 

of the same utilities.
Page 50 GAO-01-327 Tennessee Valley Authority

Deferred Assets and 

Stranded Costs

TVA states “the report is misleading when it implies that the historical 

accounting value of any particular set of assets determines the potential for 

stranded costs,” and that it is the net market value of all assets combined 

that is germane to the determination of stranded costs, and only if their 

amortization drives total cost above market. While we do not disagree with 

TVA’s interpretation of stranded costs, we do disagree that historical 

accounting value plays no part in determining stranded costs. Historical 

accounting value, less accumulated depreciation and/or amortization, 

shows the amount of remaining capital costs to be recovered in the future. 

If TVA is attempting to recover more of these costs than other utilities in a 

competitive market and, as a result, its rates are above market, it could 

have stranded costs. 

TVA also implies that we consider its deferred assets to be a proxy for 

stranded costs. On the contrary, our report clearly states that TVA could 

have stranded costs if it were unable to recover all its costs when selling 

power at or below market rates. In addition, we state that TVA’s potential 

for stranded costs relates to its high debt and deferred assets, which as of 

September 30, 2000, totaled about $26 billion and $8 billion, respectively. 

Recovery of these costs could drive the price of TVA’s power above market, 

leading to stranded costs. This is consistent with TVA’s definition of 

stranded costs.

Our report reaches no conclusion on whether TVA will have stranded costs; 

it merely points out that if TVA is unable to price its power competitively 

because it is attempting to recover costs it incurred in the past, it could 

have potential stranded costs, depending on market conditions at the time. 

As noted above, due to the uncertainty of the future market price of power, 

we also do not conclude on whether TVA will be competitive in the future.

Looking Back TVA notes that it has made progress in reducing debt, and corresponding 

interest expense, and recovering the costs of deferred assets since it 

released its 1997 plan. For example, by the end of fiscal year 2001, TVA 

expects to have reduced its debt by about $2.2 billion and its annual 

interest expense by about $300 million, and expects to have recovered 

about $2 billion in costs associated with its deferred assets. While we agree 

that TVA is moving in the right direction, TVA’s current proposed revisions 

to its 10-year plan project significantly less progress than envisioned in 

1997 and these changes are not without consequence.
Page 51 GAO-01-327 Tennessee Valley Authority

As our report states, TVA’s current revisions to the plan estimate that debt 

outstanding at the end of fiscal year 2007 will be about $19.6 billion versus 

the $13.2 level anticipated when TVA issued its 1997 plan. TVA notes that 

since issuing the plan in 1997, it changed its strategy by investing cash in 

new generating capacity that otherwise would have been used for debt 

reduction. However, in our report we correctly point out that, while TVA 

has made this change, the cash it has invested in new capacity is far less 

than its debt reduction shortfall. TVA’s current projections show its debt 

reduction through 2007 being about $6.4 billion less than planned in 1997, 

and its investment in new generating capacity about $1.3 billion more. 

As a consequence of this debt reduction shortfall, we estimate that TVA’s 

interest expense in 2008 will be about $416 million greater than if it had 

reduced debt to $13.2 billion. In the 1997 plan, one of TVA’s key stated 

objectives was to “alter its cost structure from its currently rigid, high 

fixed-to-variable cost relationship to a structure that is more flexible and 

better able to adjust to a volatile marketplace.”48 TVA’s 1997 plan further 

stated that interest expense is the cost component that, more than any 

other, challenges TVA’s ability to provide power at projected market rates in 

the future. This situation continues to be true today. However, as we state 

in our report, ultimately, TVA’s ability to be competitive will depend on the 

future market price of power, which cannot be predicted with any 

certainty. To the extent TVA is able to improve the financial ratios set out in 

our report, the better positioned it will be to deal with this future 

uncertainty.

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this letter until 7 days from its 

date. At that time, we will send copies of this report to appropriate House 

and Senate Committees; interested Members of Congress; Craven Crowell, 

Chairman, TVA’s Board of Directors; The Honorable Spencer Abraham, 

Secretary of Energy; The Honorable Mitchell E. Daniels, Jr., Director, Office 

of Management and Budget; and other interested parties. The letter will 

also be available on GAO’s home page at http://www.gao.gov. We will also 

make copies available to others upon request.

48 TVA Ten Year Business Outlook, July 22, 1997.
Page 52 GAO-01-327 Tennessee Valley Authority

Please call me at (202) 512-9508 if you or your staffs have any questions. 

Major contributors to this report are listed in appendix IV.

Linda M. Calbom

Director

Financial Management and Assurance 
Page 53 GAO-01-327 Tennessee Valley Authority
Page 54 GAO-01-327 Tennessee Valley Authority

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

We were asked to answer specific questions regarding TVA’s (1) debt and 

deferred assets, (2) financial condition, (3) potential stranded costs, and 

(4) bond rating and its impact on TVA’s interest costs. As agreed with your 

offices, this report addresses the first three questions. We plan to issue a 

separate report to address the fourth question. Specifically, for each of 

these three areas, you asked us to determine:

1. Debt and deferred assets

• The progress TVA has made in achieving the goals of its 10-year business 

plan for reducing debt and deferred assets.

• The extent to which TVA has used the additional revenues generated 

from its 1998 rate increase to reduce debt and deferred and regulatory 

assets.

2. Financial condition

• How TVA’s financial condition, including debt and fixed cost ratios, 

compares to neighboring investor-owned utilities (IOUs).

3. Stranded costs

• The link between TVA’s debt and its potential stranded costs.

• Whether TVA has calculated potential stranded costs for any of its 

distributors, and if so, what methodology they used.

• TVA’s options for recovering any potential stranded costs.

Debt Reduction and 

Recovery of Deferred 

Assets

To identify the progress TVA has made in achieving the goals of its 10-year 

business plan for reducing debt and deferred assets, we

• reviewed GAO’s prior report on TVA’s 10-year Business Plan;1

• interviewed TVA and Congressional Budget Office (CBO) officials;

• reviewed and analyzed various TVA reports and documents, including 

annual reports, audited financial statements, TVA’s 10-year business 

plan, and proposed updates to the plan; and

1

Tennessee Valley Authority: Assessment of the 10-Year Business Plan (GAO/AIMD-99-142, 

April 30, 1999).
Appendix I

Objectives, Scope, and Methodology

Page 55 GAO-01-327 Tennessee Valley Authority

• analyzed supporting documentation (analytical spreadsheets, etc.) and 

assumptions underlying TVA’s 10-year plan and proposed updates to the 

plan. 

To identify the extent to which TVA has used the additional revenues 

generated from its 1998 rate increase to reduce debt and deferred and 

regulatory assets, we

• obtained an estimate from TVA of the amount of additional revenue 

generated from its 1998 rate increase;

• analyzed sales and revenue data in the supporting schedules to the 

proposed revision to the 10-year plan to determine whether TVA’s 

estimate was reasonable; and

• compared the estimate of the amount of additional revenue generated 

from the 1998 rate increase to the reduction in debt and deferred assets 

over the first 3 years of the plan.

Financial Condition To determine how TVA’s financial condition, including debt and fixed ratios, 

compares to its likely competitors, we 

• reviewed prior GAO reports on TVA that analyzed its financial 

condition;2

• determined likely competitors by analyzing prior GAO reports and other 

reports by industry experts; 

• obtained and analyzed financial data from the audited financial 

statements of TVA, seven IOUs, and one independent power producer;3

• computed and compared key financial ratios for TVA and the other eight 

entities;

• reviewed the annual reports of the eight entities to determine what steps 

they have taken to financially prepare themselves for competition; 

• interviewed TVA officials about their efforts to position themselves 

competitively, including their efforts to reduce debt, recover the costs of 

their capital assets, and recover stranded costs, and

2

Tennessee Valley Authority: Financial Problems Raise Questions About Long-term Viability

(GAO/AIMD/RCED-95-134, August 17, 1995) and Federal Electricity Activities: The Federal 

Government’s Net Cost and Potential for Future Losses (GAO/AIMD-97-110 and 110A, 

September 19, 1997).

3

The latest available data for TVA and the other entities was for fiscal years 2000 and 1999, 

respectively; for consistency, we used 1999 data for all our comparisons. 
Appendix I

Objectives, Scope, and Methodology

Page 56 GAO-01-327 Tennessee Valley Authority

• analyzed data on the future market price of power. 

The ratios we used in our comparison were computed as follows:

• The ratio of financing costs to revenue was calculated by dividing 

financing costs by operating revenue for the fiscal year. The financing 

costs include interest expense on short-term and long-term debt, 

payments on appropriations (TVA only), and preferred and common 

stock dividends (IOUs only). Note that preferred and common stock 

dividends were included in the IOUs’ financing costs to reflect the 

difference in the capital structure of these entities and TVA.

• The ratio of fixed financing costs to revenue was calculated by dividing 

financing costs less common stock dividends by operating revenue for 

the fiscal year. Common stock dividends were excluded from the IOUs’ 

financing costs because, since they are not contractual obligations that 

must be paid, they are not fixed costs.

• The ratio of net cash from operations to expenditures for PP&E and 

common stock dividends was calculated by dividing net cash from 

operations by expenditures for PP&E and common stock dividends for 

the fiscal year. Net cash from operations represents the cash received 

from customers minus the cash paid for operating expenses. Thus, net 

cash from operations represents the cash available for expenditures for 

PP&E, common stock dividends (IOUs only), and other investing and 

financing transactions. Again, we included common stock dividends in 

the IOUs ratios to reflect the difference in cash flow requirements for 

these entities and TVA. Preferred stock dividends were not included 

because they come out of operating revenues and thus are already 

reflected in the net cash figure. Because these data were not available 

for all entities, we excluded the effect of capital assets acquired through 

acquisition.

• The ratio of accumulated depreciation and amortization to gross PP&E 

was calculated by dividing accumulated depreciation and amortization 

by gross PP&E at fiscal year-end.

• The ratio of deferred assets to gross PP&E was calculated by dividing 

deferred assets by gross PP&E at fiscal year-end. Deferred assets 

include construction in progress and for TVA only, its deferred nuclear 

units. Deferred nuclear units are included for TVA because TVA treats 

them as construction in progress (i.e., not depreciated).

For comparison purposes, we selected the major IOUs that border on TVA’s 

service area because industry experts told us that due to the high cost of 

transmitting electricity, TVA’s competition would most likely come from 
Appendix I

Objectives, Scope, and Methodology

Page 57 GAO-01-327 Tennessee Valley Authority

IOUs located close to its service area. However, to represent the changing 

structure of the electricity industry, we included one large independent 

power producer. We did not include any publicly owned utilities in our 

analysis because the publicly owned utilities that provide electricity in the 

states served by our IOU comparison group generally only distribute but do 

not generate electricity. The IOUs used in our comparisons include

(1) American Electric Power, (2) Carolina Power & Light, (3) Dominion 

Resources, (4) Duke Power, (5) Entergy, (6) LG&E Energy Corporation, 

and (7) Southern Company. The independent power producer was AES 

Corporation.

To obtain information on various issues facing utilities in a restructuring 

industry, we reviewed documents from the Energy Information 

Administration (EIA) and the annual reports of TVA and the IOUs. We also 

spoke with the organization that represents TVA’s distributors to 

understand their concerns about TVA’s future competitiveness. In addition, 

we contacted financial analysts to identify the criteria they use to evaluate 

the financial condition of electric utilities. 

Stranded Costs To identify the link between TVA’s debt and its potential stranded costs, we 

• interviewed industry experts at the Federal Energy Regulatory 

Commission, Edison Electric Institute (EEI), and CBO on the options 

other utilities have pursued to recover stranded costs; 

• reviewed EIA documents pertaining to how stranded costs have been 

dealt with in the states that have restructured; 

• questioned TVA officials on TVA’s plans for mitigating, calculating, and 

recovering potential stranded costs; and 

• analyzed TVA’s contracts to determine whether TVA has contractually 

relieved its customers of any obligation to pay for stranded costs. 

To determine whether TVA has calculated stranded costs that could 

potentially be assessed against it distributors, and if so, the methodology 

used, we

• questioned TVA officials on whether they had calculated potential 

stranded costs for any of its distributors and

• obtained information on the methodology TVA used to calculate 

potential stranded costs for the two distributors who informed TVA of 

their intent to leave its system.
Appendix I

Objectives, Scope, and Methodology

Page 58 GAO-01-327 Tennessee Valley Authority

To identify the options for recovering any potential stranded costs at TVA, 

we 

• obtained and analyzed information from EIA, EEI, and CBO regarding 

the mechanisms for stranded cost recovery that have been used in states 

that have restructured their electricity industries and

• interviewed FERC officials and reviewed FERC documents pertaining 

to stranded cost recovery.

We conducted our review from April 2000 through January 2001 in 

accordance with generally accepted government auditing standards. To the 

extent practical, we used audited financial statement data in performing 

our analyses, or reconciled the data we used to audited financial 

statements; however, we were not able to do so in all cases and we did not 

verify the accuracy of all the data we obtained and used in our analyses. 

Information on TVA’s debt reduction, deferred asset recovery and 

projection of the future market price of power was based on TVA’s 

anticipated changes to the 10-year plan at the time of our review.

Organizations 

Contacted

During the course of our work, we contacted the following organizations.

Federal Agencies • Congressional Budget Office,

• Department of Energy’s Energy Information Administration,

• Federal Energy Regulatory Commission,

• Office of Management and Budget, and

• Tennessee Valley Authority.

Bond Rating Agencies • Moody’s Investors Service, New York, New York, and

• Standard & Poor’s, New York, New York.

Customer Representative or 

Trade Group

• Tennessee Valley Public Power Association, Chattanooga, Tennessee.
Appendix I

Objectives, Scope, and Methodology

Page 59 GAO-01-327 Tennessee Valley Authority

Others • Federal Accounting Standards Advisory Board, Washington, D.C.,

• Edison Electric Institute, Washington, D.C., and

• Standard & Poor’s DRI, Lexington, Massachusetts.
Page 60 GA-01-327 Tennessee Valley Authority

Appendix II

Mechanisms for Mitigating Stranded Costs ApendxiI

In the states that have restructured their electricity industries, there have 

been three commonly used mechanisms to mitigate stranded costs. These 

mitigation measures can be employed either before or during restructuring. 

Depending on the approval of state regulators, utilities have the following 

options:

• Securitization − Under securitization, state restructuring legislation 

authorizes a utility to receive the right to a stream of income from 

ratepayers, such as a competitive transition charge. The utility turns 

over that right to a state bank for cash, thus effectively refinancing 

present debt and trading a regulated income stream for a lump sum of 

money. The state bank issues debt (i.e., sells bonds) secured by future 

customer payments or the competitive transition charge on customers' 

bills. The benefits from securitization stem from lower financing costs −

the state bonds generally are free from state tax and have a higher rating 

than the utility, thus reducing interest expense. Therefore, the customer 

surcharge required to pay off the bonds is less than the charge that 

would be necessary to produce the same amount of money had the 

utility issued the bonds itself.

• Mitigation before restructuring − With this option, regulators allow a 

utility to take steps to reduce potential stranded costs before full 

restructuring is implemented, including allowing accelerated 

depreciation. To the extent a utility is permitted to mitigate potential 

stranded costs, customers benefit. 

• Mandatory asset divestiture − Requiring a utility to divest itself of 

generating assets produces revenue that can be used to recover 

potential stranded costs, potentially benefiting all customers. When a 

utility sells its assets, it can use the cash to reduce debt. At the same 

time, it no longer has to recover the cost of those assets, making its 

power potentially more competitive. However, it also must now 

purchase power and is thereby subject to market risk. In addition, 

proceeds from the sale are assumed to cover the book value of the asset; 

if not, potential stranded costs remain. Also, asset divestiture affects 

stockholders; to the extent a utility receives cash in excess of book 

value, stockholders benefit.
Page 61 GAO-01-327 Tennessee Valley Authority

Appendix III

Comments From the Tennessee Valley 

Authority ApendxiI
Appendix III

Comments From the Tennessee Valley 

Authority

Page 62 GAO-01-327 Tennessee Valley Authority
Appendix III

Comments From the Tennessee Valley 

Authority

Page 63 GAO-01-327 Tennessee Valley Authority
Appendix III

Comments From the Tennessee Valley 

Authority

Page 64 GAO-01-327 Tennessee Valley Authority
Page 65 GAO-01-327 Tennessee Valley Authority

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Rob Martin, (202) 512-4063

Acknowledgments In addition to the individual named above, Richard Cambosos, Jeff 

Jacobson, Joseph D. Kile, Mary Merrill, Donald R. Neff, 

Patricia B. Petersen, and Maria Zacharias made key contributions to this 

report.

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