Tennessee Valley Authority: Full Consideration of Energy Efficiency and Better Capital Expenditures Planning Are Needed
Published: 2011-10-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Tennessee Valley Authority (TVA), the nation's largest public power provider, is a self-financing, federal electric utility with annual revenues of about $11 billion. TVA has financed large capital investments mostly by issuing debt and is subject to a $30 billion debt ceiling imposed by the TVA Act. TVA is governed by a 9-member Board. Within an affirmation requirement for the TVA Board, the TVA Act recognizes that TVA's broad missions and objectives include being a national leader in technological innovation, low-cost power, and environmental stewardship. GAO was asked to examine (1) how TVA plans to meet future demand for electricity and how TVA's resource planning and forecasts compare to those from other sources, (2) TVA's efforts to use energy efficiency to meet demand for electricity, and (3) TVA's financial condition and how it affects TVA's ability to meet its operational and financial goals. GAO analyzed data from TVA and third parties, reviewed agency documents, and interviewed federal and state officials and industry stakeholders.
section_title: What GAO Found
paragraphs: According to its 2010 power supply plan, by 2029 TVA plans to meet electricity demand primarily by expanding natural gas-fired generating capacity, adding three nuclear reactors, and expanding energy efficiency programs. TVA also plans to retire some coal-fired capacity. These plans are informed by TVA's resource planning forecasts, which GAO determined were largely in line with plans and forecasts for the southeastern United States from other sources. For example, TVA forecasts that peak demand will grow at an average annual rate of about 1 percent for about the next 20 years, which is within the range of long-term forecasts for the Southeast from other sources, including the Department of Energy and a GAO nonprobability sample of five investor-owned utilities. TVA also plans to increase its generating capacity and total electricity generation by about 1 percent per year on average, both of which are within the range of plans and forecasts from other sources. While TVA plans to expand its energy efficiency efforts to meet future demand for electricity, TVA may not be fully considering this alternative. For example, TVA's plans may not reflect the full energy efficiency potential of its service area, since it has not yet completed a study of that potential. As a result, TVA cannot be sure that its current resource plans reflect the full scope and possible extent of energy efficiency programs or that the plans are realistic. In March 2011, TVA commissioned a study on the energy efficiency potential of its service area, which is scheduled to be completed by October 2011. In addition, TVA's use of energy efficiency is constrained by several factors, including TVA's planning approach, which did not allow for potentially more cost-effective levels of energy efficiency in its planning model. In addition, TVA is not subject to certain key mandates and incentives that apply to some other utilities, such as the requirement in California for utilities to consider energy efficiency before other resources. TVA's financial condition may hamper its ability to fund capital improvements. As of September 30, 2010, TVA's statutory debt was $23.6 billion, and TVA plans to spend almost $10 billion by fiscal year 2013 for various capital investment projects. Given the significant delays and cost overruns that TVA has historically experienced, these projects could potentially face similar issues. In addition, under a settlement with the Environmental Protection Agency, TVA agreed to invest $3 billion to $5 billion in the next 10 years on new and upgraded pollution controls on existing power plants. TVA also anticipates increases in operating costs. All of these factors could reduce the available funds TVA could use for its planned capital investments. TVA's financial condition leaves it with difficult decisions to make in order to meet electricity demand while keeping its debt within the statutory limit. TVA does not have a formal capital expenditure management plan that identifies assets to be acquired, their costs, and funding sources. The lack of such a plan may impede TVA's long range financial planning.
section_title: What GAO Recommends
paragraphs: GAO recommends that TVA (1) use information from the energy efficiency study it commissioned to inform its future resource planning process and (2) develop a written capital expenditure plan that includes the full costs of the assets TVA plans to acquire and the sources of funding for acquiring those assets. TVA agreed with GAO's first recommendation and generally agreed with the second recommendation.

section_title: Letter
paragraphs: The Tennessee Valley Authority (TVA) is a unique, self-financing,  federally owned electric utility that provides electric power in a seven- state area in the southeastern United States. With more than nine million  customers, a generating capacity of more than 34,000 megawatts (MW),  and annual electricity revenues of about $11 billion, TVA is the largest  publicly owned utility in the United States. The electric utility industry is  among the most capital-intensive industries in the world and utilities often  must plan years in advance to build generating capacity to meet future  demand. For example, a nuclear power plant with a single 1,100 MW  reactor that could provide electricity to more than 600,000 homes can  cost billions of dollars and require long lead times to obtain regulatory  approval, perform engineering studies, and build the necessary  infrastructure, among other things. TVA has primarily financed large  capital investments, such as the construction of nuclear power plants, by  issuing debt in the form of bonds. TVA is subject to a statutorily-imposed  $30 billion debt ceiling imposed by the TVA Act of 1933, as amended,  and as of September 30, 2010, had about $23.6 billion in statutory debt  and about $2.2 billion in alternative financial arrangements. TVA’s only  other source of funds for capital investments is its revenue from  operations.
TVA currently faces a number of financial challenges associated with  environmental cleanup or protection. For example, in April 2011, TVA  settled with the Environmental Protection Agency (EPA), agreeing to  invest $3 billion to $5 billion in the next 10 years on new and upgraded  pollution controls on existing power plants, and according to the  settlement, plans to invest another $350 million to reduce pollution,  primarily through energy efficiency projects. TVA has also incurred more  than $1 billion in cleanup costs at the site of a large coal ash spill that  occurred in December 2008 at TVA’s Kingston, Tennessee, coal-fired  plant.
You asked us to review aspects of TVA’s resource planning activities and  financial condition, emphasizing TVA’s existing resource planning  process in the context of its debts and financial obligations as TVA seeks  to make long-term energy investments. Our objectives were to examine  (1) how TVA plans to meet future demand for electricity and how TVA’s  resource planning and forecasts compare to plans and forecasts from  other sources, (2) TVA’s efforts to use energy efficiency to meet demand  for electricity, and (3) TVA’s financial condition and how it affects TVA’s  ability to meets its operational and financial goals.
To address our first objective, we collected and reviewed pertinent TVA  forecasts supporting TVA’s most recent power supply plan, characterized  TVA’s electricity generation portfolio, and analyzed aspects of its  electricity operations and plans to meet projected electricity demand. We  evaluated TVA’s assumptions and variables for some of the underlying  determinants of its power supply plan, such as capital costs of electricity  generation alternatives, fuel costs, emissions-related costs, and costs of  energy efficiency programs. In addition, we interviewed TVA officials  familiar with the agency’s resource planning process. We compared  TVA’s forecasts with forecasts from other sources, including the  Department of Energy’s Energy Information Administration (EIA) and  nongovernmental sources, such as IHS Global Insight. We also  compared TVA’s forecasts and plans with those of five investor-owned  utilities operating in the southeastern United States, which we selected  using a nonprobability sample. We assessed the reliability of forecasts  received from TVA, regional and national electric utilities, and other  sources such as IHS Global Insight by interviewing knowledgeable  individuals and by evaluating the forecasts for consistency with one  another. We judged these forecasts to be reliable for the purposes of  comparing TVA’s forecasts with a variety of relevant benchmarks.
To address our second objective, we reviewed TVA’s most recent power  supply plan, historical data from EIA, and TVA’s strategic planning  documents, and interviewed TVA officials regarding TVA’s energy  efficiency and renewable energy resources, policies, and goals. In  addition, we compared TVA’s energy efficiency and renewable energy  programs and efforts to the sample of five southeastern investor-owned  utilities chosen for the first objective, as well as a sixth regional utility,  Georgia Power, because it also had sufficient data for comparisons. We  also compared TVA’s programs and efforts to a nonprobability sample of  five additional utilities that we identified as national leaders in energy  efficiency to provide illustrative information. We identified these utilities  based on EIA data on energy efficiency program expenditures and energy  saved through these programs and by consulting with industry experts  and reviewing industry reports. These five leading utilities were Austin  Energy, Connecticut Power and Light, Northern States Power Company  (Xcel Energy–Minnesota), Pacific Gas and Electric Company, and  Southern California Edison. In addition, we interviewed officials from  public service commissions, power associations, and energy sector  associations to gather information on energy efficiency and renewable  energy programs incentives, disincentives, and implementation  challenges.
To address our third objective, we examined TVA’s strategic planning and  budget documents, as well as independently audited TVA financial  information from the Securities and Exchange Commission. We also  interviewed TVA officials to discuss TVA’s debt levels. We compared  TVA’s financial condition and activities to those of the five southeastern  investor-owned utilities from the nonprobability sample, which are viewed  as having a comparable financial credit rating and are geographically  similar. For all three objectives, as applicable, we assessed the reliability  of historical data received from TVA by interviewing individuals familiar  with the processing and maintenance of the data; we judged these data  reliable for the purpose of comparing TVA’s forecasts of key variables to  historical changes in the same variables.
We conducted this performance audit from November 2009 through  October 2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. For more details on our  scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Established by the TVA Act of 1933 as part of President Franklin D.  Roosevelt’s New Deal, TVA’s mission is to supply affordable, reliable  power; support a thriving river system; and stimulate sustainable  economic development in the public interest. In addition to generating and  transmitting power, TVA also manages the nation’s fifth-largest river  system to minimize flood risk, maintain navigation, provide recreational  opportunities, and protect water quality.
TVA’s power service area covers about 80,000 square miles in the  southeastern United States, an area that includes almost all of  Tennessee and parts of Mississippi, Kentucky, Alabama, Georgia, North  Carolina, and Virginia (see fig. 1) and has a total population of more than  nine million people.
In fiscal year 2010, TVA sold more than 173 million megawatt-hours  (MWh) of electricity to customers. To meet this demand for electricity,  TVA generates electricity at 11 coal-fired plants, 11 natural gas-fired  plants, 3 nuclear plants, and a hydroelectric system that includes 29  hydroelectric dams and 1 pumped storage facility (see fig. 1). In fiscal  year 2010, TVA’s coal-fired plants produced about 42 percent of TVA’s  power, nuclear plants about 30 percent, the hydroelectric system about 8  percent, natural gas-fired plants about 3 percent, and nonhydropower  renewables of less than 1 percent. TVA also purchased about 16 percent  of its power needs from other suppliers. TVA owns and operates one of  the largest electric transmission systems in North America.
Under the TVA Act, as amended, TVA has not been subject to many of  the regulatory oversight requirements that commercial utilities must  satisfy. Additionally, TVA is exempt from paying federal and state  taxes, and can borrow funds for investment in its power system at very  competitive interest rates as a result of its triple-A credit rating. This rating  is based on TVA’s credit strengths: its ownership by the federal  government, the TVA Board’s regulatory responsibility and statutory rate  setting mechanisms, and TVA’s protected service territory.
Unlike many utilities, TVA charges rates for its electric power and its  power resource decisions that are not subject to review and approval by  state public utility commissions. However, in setting TVA’s rates, TVA’s  Board must comply with the primary objectives of the TVA Act, including  the objective that power shall be sold at rates as low as are feasible.
All authority to run and operate TVA is vested in TVA’s nine-member  Board of Directors, including the sole authority to set wholesale electric  power rates and approve the retail rates charged by TVA’s distributors.  Each board member is nominated by the President of the United States  and confirmed by the Senate. Under the TVA Act, in order to be eligible  for appointment as a member of TVA’s Board of Directors, an individual  must, among other things, affirm support for the objectives and missions  of the TVA, including being a national leader in technological innovation,  low-cost power, and environmental stewardship.
The TVA Act provides that the Board shall establish the broad goals,  objectives, and policies of the Corporation that are appropriate to carry  out the Act; develop long-range plans to guide the TVA in achieving its  goals, objectives, and policies; and ensure that those goals, objectives,  and policies are achieved. Within an affirmation requirement for the  Board, the TVA Act recognizes that TVA’s broad missions and objectives  include being a national leader in technological innovation, low-cost  power, and environmental stewardship. In particular, eligibility for  membership on the TVA Board requires, among other things, that  potential members “affirm support for the objectives and missions of  , including being a national leader in” these three areas. The Act  lays out the general duties of the board. These duties include that the  Board shall: (a) “establish the broad goals, objectives, and policies of   that are appropriate to carry out this Act”; (b) “develop long-range  plans to guide  in achieving  goals, objectives, and policies”; and  (c) “ensure that those goals, objectives, and policies are achieved”.
TVA’s latest strategic plan approved by the Board of Directors on May 31,  2007, which presents the agency’s policy-level direction for the next  decade, lists priorities for TVA’s future focus that recognize the industry’s  changing landscape and a public policy emphasis on maintaining power  reliability, providing competitive rates, renewable energy, low-emission  generation technologies, and energy efficiency. The strategic plan also  includes a number of strategic objectives and critical success factors,  including partnering with distributors and directly serving customers to  encourage conservation, promoting energy efficiency, and reducing peak  demand; continuing to reduce the impacts of TVA’s operations on the  environment; and applying science and technological innovation to  improve operational performance. In discussing these objectives, the plan  states that TVA will strive to be a leader in energy-efficiency  improvements and that renewables will play an increasingly important role  in TVA’s future generation. Moreover, in a July 21, 2009, resolution, the  TVA Board stated that it is committed to being a “national leader in  technological innovation, low cost power and environmental stewardship.”  In addition, in August 2010, the Board adopted a “renewed vision,” stating  that TVA will serve the people of the Tennessee Valley by being (1) the  nation’s leader in improving air quality, (2) the nation’s leader in increased  nuclear production, and (3) the Southeast’s leader in increased energy  efficiency. The renewed vision also states that TVA will be one of the  nation’s leading providers of low-cost and cleaner energy by 2020.
TVA’s strategic plan and renewed vision guide the development of other  plans that are a part of TVA’s overall power supply planning process. Of  these, TVA’s annual capacity expansion plan (or “power supply plan”) is  the primary plan TVA uses to provide support for its resource decisions.
TVA uses the power supply plan to examine options for expanding its  resources over the next 20 years in response to multiple scenarios. As  part of its power supply plan, TVA develops forecasts of demand for  electricity that help it make resource planning decisions, such as how  much and what kind of capacity to build, or how much power to buy from  other sources. Accurate forecasts can help utilities manage their costs  and reliability by anticipating the need to invest in and maintain  generating equipment that meets their customers’ needs. If forecasts are  not accurate, a utility could end up with more or less generating capacity  than it needs to serve its customers reliably, or it could end up with a mix  of generating capacity that is not cost effective. These outcomes can  affect electricity rates as well as the utility’s financial situation.
TVA employs a set of econometric and other models to forecast the  demand for electricity in its service area for the next 20 or more years.  However, forecasting beyond a few years into the future involves great  uncertainty. Utilities deal with forecast uncertainty by producing a range of  forecasts based on factors believed to influence demand growth, such as  population growth and economic growth in a utility’s service area, and by  maintaining excess generating resources, known as reserves. Models  help utilities choose the least-cost combinations of such generating  resources to meet expected demand. Models are also used to project the  amount of generation capacity that needs to be built to meet peak  demand.
To meet demand, utilities can upgrade existing plants, construct new  plants, purchase power from others, and provide incentive programs to  customers to reduce and shift their demand for electricity, called energy  efficiency programs. TVA delivers its energy efficiency programs to end- use customers through its 155 distributors, which are municipal utilities  and electric cooperatives in TVA’s service area. Energy efficiency  programs are intended to reduce the electricity used for a given task, and  can reduce a system’s overall requirements to provide electricity.
Utilities can also use renewable energy resources such as wind, solar,  biomass, and hydropower to meet electricity needs. A number of states  have emphasized renewable energy in recent years, especially through  the implementation of state renewable portfolio standards (RPS).  Designed to encourage the development of new renewable energy  resources, an RPS requires utilities to provide a certain proportion of their  electricity from renewable resources. As of June 2011, according to the  Department of Energy, 29 states and the District of Columbia have  mandatory RPSs, and 8 states have voluntary standards.
Under the TVA Act, as amended, for its capital needs in excess of funds  generated from operations, TVA is authorized to borrow by issuing bonds  and notes; however, it is not authorized to issue equity securities such as  stock. TVA’s authority to issue bonds and notes is set by Congress and  cannot exceed $30 billion outstanding at any given time, and its power  programs are required to be self-financing through revenues from the sale  of electricity.
We have previously reported on TVA’s management of its high levels of  debt, interest, and financing obligations. TVA has historically recognized  the need to reduce its debt and other financing obligations to increase its  financial flexibility and meet competitive challenges, but has not always  been successful in doing so. For example, in 1997, TVA issued a 10-year  business plan that called for TVA to reduce its debt by half over a 10-year  period to about $13.2 billion by increasing its electricity rates beginning in  1998, reducing certain expenses, and limiting capital expenditures;  however, TVA was unable to meet its 1997 debt reduction goal because it  used revenue to cover annual operating costs and had capital  expenditures that were higher than expected. TVA officials explained that  TVA had intended to meet demand by relying, in part, on purchased  power agreements and merchant-provided power. However, according to  these officials, some purchased power agreements failed due to default,  and merchant-provided power was not readily available. They added that,  as a result, TVA switched to an emphasis on constructing generating  assets which, in turn, limited TVA’s ability to meet its debt reduction  goals.
In fiscal year 2000, to obtain lower financing costs, TVA began entering  into alternative financial arrangements in the form of lease-leasebacks  and energy prepayments. In a June 2003 report, we stated that TVA’s  lease-leaseback arrangements involved the refinancing of 24 combustion  turbine power generators. TVA leased the power generators to private  investors for 50 years and simultaneously leased them back for 20 years.  Under these lease-leaseback arrangements, TVA received cash from  private investors, but retains legal title to the assets. The investors  receive lease payments from TVA and obtain certain tax benefits, some  of which are passed on to TVA in the form of more favorable financing  rates. TVA also implemented energy prepayments that allowed its  customers to prepay for power in exchange for discounted rates in  advance of the period in which it is provided. In the 2003 report, we  suggested that Congress may want to consider amending the TVA Act to  clarify whether these arrangements should count toward the debt cap,  since they have the same impact on TVA’s financial condition and  competitive position as traditional debt financing, but no such amendment  has been made to date.
In 2004, with total financing obligations of almost $26 billion, TVA’s board  adopted a strategic plan for reducing debt that called for increasing  revenue, controlling costs, and reducing the growth of capital  expenditures. In 2006, TVA prepared a budget proposal that set a debt  reduction goal of $7.1 billion, which included reducing its statutory debt by  $6.7 billion and alternative financing obligations by $400 million. However,  based on the direction of TVA’s board and as reflected in its 2007  strategic plan, TVA shifted its focus from debt reduction to a broader  focus on financial management based on a set of financial guiding  principles. TVA stated that this strategy was developed in response to  the priorities of its Board of Directors; significant changes in the electric  utility marketplace since the 2004 strategic plan; and the Energy Policy  Act of 2005, which places more emphasis on reliability, renewable  energy, low-emission generation technologies, and energy efficiency and  conservation. Since the adoption of these principles, TVA’s statutory debt  has surpassed the 2004 level, while total financial obligations have almost  returned to 2004 levels. On September 30, 2010, TVA reported having  $25.8 billion in financial obligations, including $23.6 billion in statutory  debt and about $2.2 billion in alternative financing arrangements. While  TVA’s level of total financial obligations has fallen since fiscal year 2000  when it was almost $26.3 billion, the overall level of total financial  obligations has remained fairly constant for the past 10 years, as shown  in figure 2.
section_title: TVA’s Plans Focus on Building Natural Gas and Nuclear Capacity, and Its Forecasts Are Largely in Line with Others
paragraphs: TVA plans to meet future electricity demand primarily by expanding  natural gas-fired and nuclear-powered generating capacity, reducing the  amount of coal-fired generating capacity, and expanding energy efficiency  programs. These plans were informed by TVA’s planning forecasts, which  we determined were largely in line with forecasts from other sources for  the Southeast.
subsections: section_title: Plans for Meeting Electricity Demand Focus on Building Natural Gas and Nuclear Plants
paragraphs: Our analysis of TVA’s 2010 power supply plan indicates that TVA plans to  change the mix of resources it will use to meet demand from 2010  through 2029, primarily by expanding natural gas-fired and nuclear- powered generating capacity (see fig. 3). TVA also plans expansions of  energy efficiency programs.
TVA’s power supply plan describes three types of resources that TVA can  use to meet its electricity demand from 2010 through 2029: its own  generating capacity, power purchases, and energy efficiency. TVA’s own  generating capacity comprises power plants that use various sources of  energy, including nuclear power, coal, hydropower, natural gas, and  renewable energy sources. TVA’s power purchases may include   contracted or spot purchases. Finally, by helping to reduce demand for  electricity, energy efficiency programs can reduce TVA’s need for either  new generating capacity or power purchases.
In its 2010 power supply plan, TVA’s total generating capacity would  increase by a net of 6,627 MW from summer 2010 through summer 2029,  reflecting reductions of 3,768 MW and 10,395 MW of new additions.  These changes would affect the composition of TVA’s total generating  capacity: the planned reductions include 3,608 MW of coal-fired capacity  to be retired, while the planned new additions include 6,737 MW of  natural gas-fired capacity and three nuclear reactors with a total capacity  of 3,658 MW. These new additions include committed new additions,  approved by TVA’s Board of Directors, as well as uncommitted new  additions, which the board has not yet approved. The committed projects  would add 2,556 MW of capacity by summer 2013, including 540 MW of  natural gas-fired capacity at the Lagoon Creek plant already completed in  September 2010. The other committed projects include 878 MW of  natural-gas fired capacity at the John Sevier power plant and 1,138 MW  of nuclear capacity at the Watts Bar Unit Two power plant. Uncommitted  new additions account for 7,839 MW of new additions, split between  5,319 MW of natural-gas fired capacity and 2,520 MW of nuclear  capacity. Figure 4 depicts TVA’s planned retirements of coal-fired  capacity, and all new additions of natural gas-fired and nuclear capacity  from 2010 through 2029.
According to TVA officials and documents, TVA plans to complete  construction of three nuclear reactors, or units, at two nuclear plants by  summer 2021. The initial construction on these units began about four  decades ago but was never completed. TVA resumed construction on  the Unit Two reactor of the Watts Bar nuclear plant, in eastern  Tennessee, in 2007, and it is scheduled for completion by summer  2013. At the Bellefonte nuclear plant site, in northeastern Alabama, TVA  is considering completing Unit One by 2018 and Unit Two by 2021.  According to our analysis of TVA’s plans, in the summer of 2029, TVA’s  total nuclear capacity would account for about 23 percent of TVA’s total  resources but would produce about 43 percent of TVA’s electric powe from all sources, because TVA’s nuclear power plants are baseload  plants that would operate almost continuously. In contrast, our analysis  shows that TVA’s natural gas plants would account for about 29 percent  of TVA’s total resources in summer 2029 but produce about 6 percen t of  TVA’s power in fiscal year 2029, since these plants are expected to  operate primarily during periods of peak demand. these changes will be to increase the share of electricity produced by nuclear power and natural gas and decrease the share of e produced by coal and other sources, as shown in figure 5.
The figure of 6 percent represents power generated from TVA’s own natural gas-fired  plants as a share of power obtained from all sources, including electricity purchases.  When purchases of electricity from natural gas-fired plants are added to power generated  from TVA’s own natural gas-fired plants, the share of generation from natural gas rises to  8.8 percent.
section_title: TVA’s Resource Planning and Forecasts Are Largely in Line with Plans and Forecasts for the Southeast from Other Sources
paragraphs: The average annual rates of growth in TVA’s long-term plans and  forecasts are largely within the range of the average annual rates of  growth in long-term plans and forecasts for the Southeast from other  sources. Figure 6 shows how TVA’s long-term plans and forecasts in its  reference case—which represents base assumptions for capacity  expansion and related financing—compare to those of other sources. The  figure shows measures of demand, supply, and factors influencing  demand, derived from TVA’s forecasts and plans, compared with similar  measures from forecasts and plans of investor-owned utilities in the  Southeast and forecasts for the region from the EIA and IHS Global  Insight.
TVA expects its peak demand will grow at an annual rate of about 1.2  percent, on average, from 2010 through 2030. This is within the range of  the average annual growth rates in forecasts of peak demand from the  five southeastern utilities in our nonprobability sample. The annual growth  in TVA’s projected electricity sales of about 0.9 percent is slightly below  the bottom of the range of annual growth rates in projections from the five  southeastern utilities, EIA, and IHS Global Insight. An important factor  affecting TVA’s projected sales is that TVA expects that one of its largest  single customers, the United States Enrichment Corporation, will reduce  its demand for electricity from TVA, from about 8 percent of TVA’s sales  in fiscal year 2010 to less than 1 percent of TVA’s sales in fiscal year  2015.
The average annual rates of growth in TVA’s forecasts of factors that can  influence demand, such as population, employment, and real per capita  income, are also within the range of estimates from the other  southeastern utilities in our sample, EIA, and IHS Global Insight. TVA  forecasts that the population in its service area will grow by about 0.9  percent, employment will grow by about 1 percent, and real per capita  income will grow by about 2.2 percent annually from 2010 through 2030.
To help meet its forecasted demand for electricity, TVA plans to increase  its total generating capacity and produce more electricity. The average  annual rates of growth in TVA’s plans for capacity and electricity  generation are within the range of average annual rates of growth in other  plans and forecasts for the Southeast from other utilities, EIA, and IHS  Global Insight. TVA plans to increase its total generating capacity at an  annual rate of about 1 percent and its total electricity generation at an  annual rate of about 0.9 percent, on average.
Growth in TVA’s long-term plans and forecasts also tends to fall within the  range of growth rates in forecasts of different cases modeled by EIA in its  2010 Annual Energy Outlook, as figure 7 shows.
section_title: Although Expanding Its Energy Efficiency Programs, TVA May Not Be Fully Considering This Resource
paragraphs: TVA plans to expand its energy efficiency efforts to meet future demand  for electricity. However, as TVA has not used studies of the energy  efficiency potential of its service area as the primary basis for its energy  efficiency goal, it cannot be sure that its current plans reflect the full  scope and possible extent of energy efficiency programs nor that its  current plans are realistic. In addition, TVA’s use of energy efficiency is  constrained by several factors, including how TVA treats energy efficiency  in its resource planning approach, and the fact that TVA is not subject to  certain key mandates or incentives that apply to some other utilities.
subsections: section_title: TVA’s Plans May Not Reflect the Full Energy Efficiency Potential of Its Service Area
paragraphs: In August 2010, TVA announced in its renewed vision that it plans to  become the leader in energy efficiency in the Southeast. To accomplish  its vision, TVA established a goal of 3.5 percent cumulative energy  savings in 2015 resulting from energy efficiency programs begun since  2010. TVA selected this goal based on a study it commissioned to  determine the level of savings necessary to become the Southeast’s  energy efficiency leader among electric utilities. TVA’s Board of Directors  approved $135 million in spending on energy efficiency programs in fiscal  year 2011, but TVA officials told us that it will need to add $414 million  more to future budgets to achieve its 3.5 percent energy efficiency goal in  2015. Although several experts said that TVA’s projected level of savings  is aggressive for utilities lacking significant energy efficiency experience,  TVA officials said they considered the level of expected savings to be  reasonable based on their views of the technical feasibility of planned  efforts and the ability to work through TVA’s distributors. Nonetheless,  TVA did not use studies of energy efficiency potential in its service area  as the primary basis for the goal. In March 2011, TVA signed a contract  commissioning a third party to study the energy efficiency potential of  TVA’s service area, which is scheduled to be completed by October 2011.  Until this study is completed, TVA cannot be sure that its goal reflects the  full potential for cost-effective energy efficiency savings in its service  area, nor can it be sure that its goal is realistic.
Compared with leading national utilities we identified, TVA and other  southeastern utilities have so far made smaller investments in energy  efficiency. Industry experts consider the level of investment a leading  factor in judging a utility’s performance in energy efficiency. During the  period from 2005 through 2009, TVA averaged about $17 million per year  in spending on energy efficiency programs, or about 0.18 percent of its  revenues, as shown in figure 8. The southeastern utilities we reviewed in  our regional sample spent an average of 0.21 percent of revenues on  energy efficiency programs during the same period. In contrast, as  illustrated in figure 8, the five leading national utilities we identified spent  an average of 2.5 percent of revenues on energy efficiency programs,  about 14 times as much as TVA.
Studies by industry experts have indicated that the South Census region  has the greatest potential for energy efficiency savings of any in the  country. Furthermore, a TVA official told us that the lack of investment  in energy efficiency programs in TVA’s past means that there is a larg e  reservoir of attainable energy efficiency savings to be had in the future.  For example, TVA has done relatively little to target lighting efficiency, an  area in which some utilities have achieved as much as one-third of their  total efficiency savings.
As a result of its smaller investments, TVA has realized less energy  savings from energy efficiency programs than the savings achieved by  leading utilities we examined. Energy that is saved through energy  efficiency programs reduces the amount of electricity that a utility must  generate itself or purchase from others. There are various ways to  measure and compare energy savings from energy efficiency programs,  but, according to industry experts, the most accepted way is to measure  savings in a given year based on efforts implemented during that year,  referred to as annual incremental savings. While TVA officials told us  that TVA has not established a goal for incremental energy savings, an  energy efficiency expert we contacted said that TVA’s goal of 3.5 percent  cumulative energy savings in 2015 could translate into 1 percent  incremental savings in that year. As shown in figure 9, from 2005 through  2009, the incremental energy savings of TVA’s energy efficiency  programs averaged 0.06 percent of retail energy sales. As illustrated in  figure 9, the sample of southeastern utilities we reviewed averaged about  0.02 percent, whereas leading national utilities we reviewed averaged 1.4  percent over this period, about 23 times as much as TVA.
Several factors constrain TVA’s energy efficiency efforts. Especially  significant is that, as of 2010, TVA’s planning process constrained the  consideration of energy efficiency.
Several elements of the process TVA used to establish its 2010 power  supply plan may have favored construction of new generating capacity  over energy efficiency. First, according to TVA officials, TVA did not use  its planning model to help identify the most cost-effective levels of energy  efficiency. Rather, the officials told us that they chose the energy  efficiency level based on what they judged was achievable at an  “attractive” cost, and then TVA developed the remainder of its plan  around these predetermined levels by letting its planning model identify  the most cost-effective levels of nuclear, natural gas, power purchases,  and other resources. Because of the predetermined levels, the model  was not allowed to select from different levels of energy efficiency. As a  result, TVA does not know whether the model would have identified other  potentially more cost-effective levels of energy efficiency resources. This  may be particularly problematic because TVA data indicate that it  generally costs less to save a unit of electric power through energy  efficiency programs than it does to generate a unit of electricity from a  newly-built nuclear or natural gas-fired plant.
A second element that may favor new generating capacity is that TVA’s  assumptions regarding contributions from energy efficiency programs  may have been too conservative in the long run. TVA’s 2010 power  supply plan shows leveling off of energy efficiency program contributions,  especially after 2020 (see fig. 10). According to TVA officials, this leveling  off is due to the assumption that energy efficiency technology will remain  at existing levels and that there are finite opportunities for energy savings  among TVA’s customer base. However, TVA’s assumption that energy  efficiency technology will remain at existing levels is contrary to the  historic trend of improvements in energy efficiency in the United States,  as well as to future projections. For example, a study of Organization for  Economic Co-operation and Development member countries indicates  that overall improvement in energy efficiency in the United States  averaged 1.5 percent annually between 1990 and 2006 and that it was  driven by technological change. Experts expect technological advances to  continue providing opportunities for energy efficiency gains into the future.  For instance, advancements in the energy efficiency of windows and air  conditioners allow home-owners to reduce their electricity usage. TVA  officials said that they will review their assumptions affecting the potential  impact of energy efficiency programs in future planning, as well as the  results of the study TVA commissioned on the energy efficiency potential  for TVA’s service area, which is expected to be completed in October  2011.
A third element is TVA’s method of accounting for the cost of energy  efficiency programs, which may introduce bias against energy efficiency.  TVA assigned the costs of energy efficiency programs to the years in  which the investments are made, instead of spreading these costs over  the years during which energy savings are realized. This practice  assumes that the majority of energy efficiency program costs must be  recovered from ratepayers during the early years of a program’s useful  lifetime. While this treatment of energy efficiency programs is not unique  to TVA, it may make energy efficiency appear less desirable than it would  if costs were spread out over the projects’ useful lives, according to  electric utility planning experts and a Lawrence Berkeley National  Laboratory study.
TVA is not subject to certain significant mandates and incentives that  other utilities have to encourage energy efficiency. For example, TVA  lacks mandates to treat energy efficiency as a top-priority resource, and it  has chosen not to prioritize energy efficiency over other cost-effective  resources. In addition, some utilities are subject to an Energy Efficiency  Resource Standard, which requires a minimum level of energy efficiency  savings, and some states have established energy efficiency savings  goals for utilities and provided financial incentives to these utilities based  on the percentage of savings achieved. Additional examples of mandates  and incentives and other policies that encourage energy efficiency are  shown in appendix III.
According to TVA officials, other factors challenge TVA’s ability to achieve  its energy efficiency plans. Specifically:    Numerous diverse distributors. TVA’s distributors purchase power  from TVA and sell it to retail customers. According to TVA officials,  because distributors’ abilities to implement energy efficiency programs  can vary widely and each one has a unique customer base, in many  cases energy efficiency programs must be tailored accordingly. To  address this challenge, TVA officials said that TVA must provide a  range of program options across all end-use customer classes and  allow for delivery by the distributor directly or by TVA staff and its  contract program administrators.    Relatively low electricity rates. TVA has concerns that energy  efficiency programs could make it more difficult to keep rates as low  as feasible, as the TVA Act requires. TVA officials stated that energy  efficiency efforts will likely raise rates by less than 1 percent, but some  industry experts said that rate increase can be offset because a  consumer’s overall electricity bill may be lower as total energy use  decreases.    Rate structure. Before April 2011, TVA’s distributor customers were  charged the same electricity rate regardless of the time of day or  season, so customers did not receive strong price signals that  encouraged them to save energy.53, 54 According to TVA officials,  beginning in April 2011, TVA started charging rates that vary by  season and depending on the time of the day for peak and off-peak  periods. TVA officials said that this could reduce distributor revenue  but also reduce growth in peak electricity demand, allowing TVA to  avoid or delay the construction of costly new generation and peak  power purchases from the market.    Economic downturn. Significant technological improvements are  needed to support an energy efficiency infrastructure and achieve  TVA’s stated energy efficiency goals, according to TVA officials. For  example, such improvements are most easily installed during  construction of new buildings, but poor economic conditions have  slowed new home construction, reducing opportunities for market  penetration by energy-efficient technologies.    Measurement and verification of savings. TVA, like many utilities,  faces challenges measuring and verifying savings achieved through  energy efficiency. According to TVA officials, to address this challenge  TVA has contracted with a third party to provide a framework for  measurement and verification.
TVA’s end-use wholesale rate combines fixed and variable costs into one energy  charge, effectively removing demand charges and any incentive to reduce demand during  peak periods. Thus, if there is an increase in electricity demand, there is no change in the  price per kilowatt-hour at any time during the day.
TVA’s distributors are not-for-profit and must receive enough revenue from electricity  sales to cover fixed costs necessary to provide reliable electrical distribution. TVA’s  distributors have raised concerns that energy efficiency programs could reduce their  revenues. TVA, its distributors, and the Tennessee Valley Public Power Association—an  advocacy group serving more than 100 municipal electric systems and 50 electric  cooperatives in TVA’s service area—recently agreed on a time-of-use rate structure  intended to mitigate concerns about the impacts of increased rates, as well as give  distributors greater opportunities to manage their system during peak periods, for example  by promoting energy efficiency. participation, this could allow TVA to adopt energy efficiency measures  and increase rates more quickly and aggressively, if it were to decide this  is desirable.
section_title: TVA’s Financial Condition May Hamper Its Ability to Fund Capital Improvements
paragraphs: TVA’s financial condition may hamper its ability to fund planned capital  improvements over the next several years. TVA plans to spend about  $9.9 billion by fiscal year 2013 for various capital projects, including  completing the construction of one nuclear power plant, upgrading  existing fossil fuel plants, and finishing various environmental and  transmission projects. Unexpected cost overruns, however, may  negatively affect TVA’s ability to make these planned capital investments.  In addition, these investments may be constrained by limited financial  flexibility due to existing debt levels, the fact that TVA can only finance  with debt, and projected increases in operating costs.
subsections: section_title: TVA’s Planned Capital Investments May Be Affected by Cost Overruns
paragraphs: TVA plans several large capital investments—notably in capacity  expansion, environmental measures, and transmission—but unexpected  cost overruns may impact its ability to make these investments.
By the end of fiscal year 2013, TVA plans to spend almost $9.9 billion for  various capital projects, including completing the construction of the  nuclear power plant Watts Bar Unit Two, expanding the capacity of  existing nuclear and fossil fuel plants, and conducting various  environmental and transmission projects. TVA officials estimated in  March 2011 that bringing Watts Bar to full operational status would cost  almost $1.8 billion from fiscal years 2010 through 2012. In addition, TVA  anticipates that it will need $878 million by the end of fiscal year 2013— and almost $2 billion by fiscal year 2021—to expand the operating  capacity of several of its natural gas-fired plants. TVA has also budgeted  $471 million for the conversion of six wet ash storage ponds to dry ash  storage, including the installation of gypsum dewatering facilities. A  summary of TVA’s planned capital investments is shown in table 1. This  table represents TVA’s current schedule of planned capital investments,  which TVA could reschedule or postpone if necessary.
TVA faces a number of significant environmental capital costs in addition  to those shown in table 1. In April 2011, TVA settled with EPA and agreed  to invest $3 billion to $5 billion during the next 10 years on new and  upgraded pollution controls to resolve alleged Clean Air Act violations at  11 of its coal-fired plants in Alabama, Kentucky, and Tennessee. As part  of the settlement, TVA plans to invest $350 million on projects to reduce  pollution, save energy, and protect public health and the environment.  While TVA plans to spend $471 million in ash remediation capital costs  through 2013, total remediation costs are estimated to range from $1.5  billion to $2 billion over the next 10 years.
According to senior TVA officials, including TVA’s Senior Vice President  and Treasurer, TVA recognizes the need to manage the funding for its  planned capital investments, or expenditures; however, TVA does not  have a formal capital expenditure management plan. Such a plan would  identify the assets that the agency intends to acquire, the full costs of  those assets, and the sources of funding for acquiring those assets.  Office of Management and Budget guidance identifies several potential  problems that could occur when an agency has no formal capital  expenditure management plan, including poor planning, acquisition of  assets not fully justified, higher acquisition costs, cancellation of major  investments, the loss of sunk costs (i.e., prior costs that cannot be  recovered), and inadequate funding to maintain and operate the assets.  Therefore, the lack of an effective plan may impede TVA’s long-range  financial planning.
TVA and other utilities have historically experienced significant delays or  cost overruns with nuclear plant construction projects, and could  potentially face similar issues in the future. During the 1990s, TVA’s  nuclear plant construction projects experienced significant construction  delays and cost overruns. For example, as we reported in August 1995,  between 1990 and 1994, the construction costs of TVA’s Watts Bar Unit  One and Browns Ferry Unit Three increased by a total of about $2.74  billion, about 45 percent of their combined cost, and the scheduled  completion dates slipped by more than 3 years. Other electric utilities  have experienced similar issues. For example, in 2007, Progress Energy  announced the construction of two proposed nuclear power units in Levy  County, Florida, which were initially estimated to cost $17.2 billion;  however, in April 2010, Progress Energy revised the cost estimate to  more than $22 billion, an increase of almost 28 percent. In September  2011, TVA officials clarified that in August 2011 TVA’s Board decided that  the agency would complete Bellefonte Unit One at an estimated cost of  $4.9 billion in the time frame ranging from 2018 through 2020.  Furthermore, TVA is still studying the feasibility of Bellefonte Unit Two  completion and is unsure about the associated cost.60, 61 Given historical  trends in nuclear construction, TVA faces risks that its estimated  construction costs could increase. Leading credit-rating agencies in the  United States, such as Moody’s and Standard and Poor’s, cite  construction delays, cost overruns, shortages in engineering and  construction workers, and environmental and security uncertainties as  obstacles facing the industry in implementing and financing such projects.
Previously, according to TVA officials and information from TVA’s 2010 power supply  plan, TVA had planned to finish construction on two additional units—Bellefonte Unit One  in 2018 and Unit Two in 2021—at a total cost of $8.3 billion.
Although TVA’s power supply plan includes estimates of the potential costs of various  capacity expansion projects, it does not examine other planned capital expenditures, such  as transmission or environmental projects. TVA officials stated that when TVA runs its  models, the model considers needed transmission assets that are associated with specific  generation assets and any needed environmental improvements. the completion of construction by 2013 or detailed estimates of the  remaining costs. Based on TVA’s historical experiences with the  construction of nuclear power plants, and because Watts Bar Unit Two  was never fully operational, we are concerned that TVA’s estimates of the  total costs of bringing the unit into production by 2013 may be low.
section_title: TVA’s Planned Capital Investments May be Constrained by Existing Debt and Limited Financial Flexibility
subsections: section_title: Existing Debt Levels Could Affect TVA’s Planned Capital Investments
paragraphs: TVA may face challenges making its planned large capital investments  because of existing debt levels. Debt is the only way, other than the sale  of electricity, for TVA to fund capital investments, since it is not authorized  to issue stock and is required by statute to keep its rates as low as  feasible. According to the Edison Electric Institute, the electric utility  industry is the second most capital-intensive sector in the United States— surpassed only by the railroad industry—due to its extensive investments  in the construction and maintenance of power plants and transmission  lines. TVA’s investment decisions are critical to its future success and  involve large commitments of capital. These critical decisions include how  much to invest in maintaining and upgrading existing plants versus  developing new generating capacity, and how these investments will be  funded.
One way of examining a utility’s financial position is to compare its long- term debt and equity to its peak summer capacity. We compared this  measure for five southeastern utilities with TVA’s long-term debt and peak  summer capacity, and found that TVA is similar to three of the five, as  shown in figure 11, with a ratio of about $0.76 million dollars in debt and  equity per MW of capacity. However, direct comparisons are difficult  because of the differences in financing structures for these utilities. TVA  must finance its assets through the use of debt and operating revenues  alone, while these other five utilities may also finance with equity. TVA is  also the only utility with a statutory debt ceiling.
Although TVA has identified planned capital projects and determined the  potential costs of those projects, it has not identified how specific,  individual projects will be funded, which is a critical component of the  financial decision-making process.
Senior TVA officials have stated that they expect to fund TVA’s planned  capital expenditures from fiscal years 2010 to 2020 with new debt, in  compliance with its financial guiding principles.
TVA’s Financial Guiding Principles  Retire debt over the useful life of assets.    Accelerated retirement results in accelerated debt pay down.    Asset life extensions result in extension of debt pay down.
Issue new debt for new assets.    Only programs or specific projects greater than $100 million will be considered.    Capacity expansion, clean air, ash remediation, or asset useful life extensions.    Major modifications (e.g., replacement of steam generators, Browns Ferry  Nuclear Plant modifications to increase the generating capacity) may be  considered.
Use regulatory treatment for asset-related, specific and unusual events. Under  generally accepted accounting principles, a rate-regulated entity is allowed to defer  certain expenses and revenues as assets and liabilities that normally would be  charged to the statement of operations as expense or revenue.    Only items greater than $100 million will be considered.    Examples include the Bellefonte Nuclear Plant (recovery over 10 years) and  cleanup efforts for the Kingston power plant ash spill (recovery over useful life of  15 years).    Non-asset-related regulatory treatment maintained for previous board-approved  items.
Rate adjustments as necessary to fund operating expenses.    Fuel and purchase power, operations and maintenance, maintenance capital,  interest, and taxes.    Debt retirement in line with asset useful life.
Evaluate rate actions to avoid significant rate volatility.    Consider significant out-year increases in operating expenses.
Implement rate actions to maintain financial flexibility.    Consider financial constraints when establishing multiyear rate outlook.
According to TVA officials, existing debt and other obligations—including  TVA’s alternative financing arrangements—will be gradually paid off and  new debt issued. These officials told us they use $28 billion as a planning  threshold for debt, so as to maintain a $2 billion debt “cushion” to help  ensure that TVA does not exceed its $30 billion debt ceiling. According  to the TVA Inspector General, approaching or reaching this debt ceiling  could adversely affect TVA’s business by limiting its ability to borrow  money and increasing the cost of servicing its debt.
According to TVA officials, TVA plans to comply with its guiding principles  by maintaining an average debt life less than the average life of the  underlying assets, although TVA’s total debt may increase in order to  invest in new assets. For example, during fiscal years 2011 through 2013,  TVA plans to issue new debt to finish the construction of two nuclear  power plants, as well as to upgrade three existing natural gas-fired plants  to extend their operational asset life. TVA officials stated that TVA’s  statutory debt levels will remain within the $30 billion limit on bonds and  notes as long as that remains the legal limit.
If the $28 billion planning threshold were to be exceeded, TVA’s senior  officials said they would immediately begin to examine various options for  modifying the debt structure and adjusting TVA’s capital investments. For  example, TVA plans to reduce its current existing debt and other  obligations and issue new debt as needed. TVA is also working to  balance the amount of its debt that matures in any given year, spreading  maturities over time in order to reduce exposure to interest rate volatility.  In addition, since interest rates are at historic lows, TVA, as of September  30, 2010, had 100 percent of its outstanding long-term debt in fixed-rate  securities. TVA has modified its debt structure and has sought opportune  times to refinance debt, in some cases doing so before the due dates at  advantageous rates. As a result, TVA maintains a relatively low cost of  capital. For example, TVA’s financing expense as a percentage of  revenue decreased from approximately 25.7 percent in fiscal year 2000 to  11.3 percent in fiscal year 2009.
Adjusted for inflation, TVA’s operating expenses have increased from  about $8.7 billion in fiscal year 2005 to about $10 billion in fiscal year  2010—an increase of about 15 percent. For example, fuel and  purchased power costs increased $328 million during this time. TVA  officials said they expected operating expenses will continue to rise,  which would affect the amount of net income that TVA could use for  investing in planned new facilities. In 2011, TVA officials estimated that  nonfuel operating and maintenance costs would increase over the next 10  years—from about $3.3 billion in fiscal year 2011, adjusted for inflation, to  about $3.9 billion in fiscal year 2021, adjusted for inflation—an increase of  more than 19 percent. These officials said that they expect that fuel  costs and interest payments will also rise, although they said that the  amount of the increase is difficult to estimate or predict. If TVA starts  operating new facilities as planned, this would also increase maintenance  costs.
TVA’s gross revenues come primarily from the sale of electricity and are  used to fund TVA’s annual operating expenses, including fuel and  purchased power, operating and maintenance costs, interest, and other  costs. The revenue that remains after deducting operating expenses  from gross revenue is net income (see table 2). TVA can use its net  income to fund a variety of financial needs, such as paying down its debt  or covering unexpected costs. It could also use net income, along with  new debt, to help fund future capital investments. Although TVA’s net  income increased from $96 million, adjusted for inflation, in fiscal year  2005 to $982 million, adjusted for inflation, in fiscal year 2010, TVA did  not significantly reduce its debt during this period. TVA has reported that  it is difficult to reduce annual costs by reducing nonfuel operating and  maintenance costs or postponing scheduled capital expenditures.
Adjusted for inflation, gross revenues have increased from about $8.8  billion in fiscal year 2005 to about $11 billion in 2010—an increase of  almost 25 percent—due to the increase in demand for electricity. Our  analysis of forecasts in TVA’s 2010 power supply plan showed that TVA  expects the demand will continue to increase over the next decade due to  a number of factors, including increases in the population and levels of  employment throughout the region. However, future revenues will also be  affected by weather, the economy, and other factors. For example, the  economic downturn in fiscal year 2009 resulted in a decrease in the  demand for power, and TVA experienced a 6.7 percent decrease in  electricity sold in fiscal year 2009 compared to the prior year.
A coal ash spill at TVA’s Kingston power plant in 2008 also created  significant additional operating expenses. The collapse of a retaining wall  released more than 1.2 billion gallons of water and coal ash, covering  approximately 300 acres of adjoining property. TVA is conducting cleanup  and recovery efforts in conjunction with federal and state agencies and  estimates the work will be completed by the fourth quarter of fiscal year  2014. TVA estimates the total cost of the cleanup will be between $1.1  billion and $1.2 billion. However, actual amounts could exceed expected  costs if, among other things, TVA has to remove more ash than currently  anticipated, there are delays in the ash removal process, or the methods  of final remediation change. Consistent with its financial guiding  principles, TVA has deferred the cost of the Kingston power plant cleanup  as a regulatory asset, and plans to amortize such costs into operating  expenses over a 15-year period, which it began to do in 2010.
TVA may also face additional operating expenses in the form of fines,  penalties, and regulatory actions stemming from the Kingston ash spill.  On June 14, 2010, the Tennessee Department of Environment and  Conservation fined TVA approximately $12 million for the spill, citing  violations of the Tennessee Solid Waste Disposal Act and the Tennessee  Water Quality Control Act. TVA has not included certain additional costs  in its estimates of the cleanup and recovery efforts, since it has  determined that the costs are not probable or reasonably estimable.  Specifically, it has not included other penalties, regulatory directives,  natural resources damages, outcomes of lawsuits, future claims, long- term environmental impact costs, final long-term disposition of the ash  processing area, costs associated with new laws and regulations, or costs  of remediating any mixed waste discovered during ash removal process.  Such costs could increase TVA’s operating expenses and affect its ability  to fund its planned capital investments.
Economic conditions could increase the need for TVA to make substantial  contributions to its pension fund due to lower than anticipated returns on  investments within the fund. As of September 30, 2010, TVA’s pension  fund liability was more than $10.3 billion; however, at that time, the fund’s  assets were valued at less than $6.8 billion, which amounts to an  estimated $3.6 billion shortfall. The plan currently has nearly 23,000  retirees receiving benefits, totaling about $600 million per year. TVA is  looking at various options for modifying the management of the pension  fund, which could include revising existing pension plans or developing  new ones. According to TVA officials, a contribution of $270 million to the  pension fund has been budgeted in fiscal year 2011, and TVA’s Board  approved plans to contribute up to $300 million to the pension plan in  fiscal year 2012.
Finally, in addition to the specific planned financial investments discussed  previously in this report, TVA must find the resources to achieve the  agency’s broad objectives, including the TVA Board’s commitment to be a  “national leader in technological innovation, low cost power and  environmental stewardship.” Achieving these broad objectives could  require additional investments.
section_title: Conclusions
paragraphs: TVA has set energy and environmental goals in its 2007 strategic plan  and its August 2010 renewed vision and has taken steps to increase its  use of energy efficiency programs. Utilities typically try to meet future  demand for electricity by identifying the most cost-effective ways of doing  so. However, while TVA’s strategic plan states that TVA will strive to be a  leader in energy efficiency improvements, it is not clear whether TVA is  making the most cost-effective resource decisions possible to meet future  electricity demand, especially with regard to energy efficiency. That is  because TVA’s planning process may be ignoring opportunities to pursue  a more cost-effective path that could make greater use of energy  efficiency. More specifically, TVA’s resource planning framework and  decisions have not yet incorporated an analysis of the full potential for  energy efficiency that exists in its service area, although TVA has  commissioned a study on this. In addition, TVA did not use its planning  model to identify the most cost-effective levels of energy efficiency, and,  as a result, it does not know whether the model would have identified  other potentially more cost-effective levels of this resource. Energy  efficiency has been shown to be a generally cost-effective option  compared to new generating capacity, and energy efficiency efforts at  other electric utilities show that it is possible to use energy efficiency at  much higher levels. By not fully exploring and identifying energy efficiency  resources, TVA cannot be certain that its plans to meet future demand,  largely by building new generating capacity, are the most cost effective.
TVA is planning to spend billions of dollars on several large capital  investments over the next 3 years and faces increasing operating  expenditures in order to meet demand for electricity in its service area. TVA  faces difficult decisions as it plans for these investments and other  significant expenses related to environmental cleanup or protection. As of  September 30, 2010, TVA’s statutory debt was $23.6 billion, and it plans to  spend about $10 billion through fiscal year 2013 for capital expenditures  related to new and upgraded nuclear, fossil fuel, and hydropower plants.  Moreover, pursuant to a settlement with EPA, TVA agreed to invest an  additional $3 billion to $5 billion in the next 10 years on pollution control  devices on existing power plants. Collectively, these expenditures could  cause TVA to exceed its statutory debt limit. TVA’s options for addressing  its financial challenges include (1) raising rates to increase gross revenue,  (2) reducing operating expenditures, (3) delaying some capital investments,  and (4) modifying its debt structure. TVA’s debt structure can be modified  by refinancing its debt, developing additional alternative financing  arrangements, or requesting an increase in its debt ceiling. Each of these  options involves trade-offs that complicate the agency’s financial decision  making. For example, TVA could raise its rates, and with the additional  revenue generated, reduce its borrowing or pay down some of its existing  debt. However, the TVA Act also mandates that TVA keep rates as low as  feasible, and raising rates could affect the Tennessee Valley economy.
Despite the many financial decisions it faces, TVA does not have a formal  capital expenditure management plan that lays out how it will fund the  significant capital investments it expects to make during the next 3 years.  Such a plan is important to help identify the assets in which TVA plans to  invest, the full costs of the assets, and the sources of funding for  acquiring those assets to ensure that adequate funding exists to maintain  and operate the assets. Without such a plan, TVA faces increased risk  that its planned capital investments are not sufficiently justified or that the  acquisition costs of these capital investments will rise, potentially leading  to the cancellation or delays of major investments and the loss of sunk  costs. Further, in the absence of a capital expenditure management plan,  TVA may also face challenges in achieving the full range of the Board’s  stated objectives, including its commitment to be a “national leader in  technological innovation, low cost power and environmental stewardship.”
section_title: Recommendations for Executive Action
paragraphs: Consistent with TVA’s goals, objectives and policies, including TVA being  a national leader in technological innovation, low-cost power, and  environmental stewardship, and to better ensure that TVA has the  financial resources to accomplish the Board’s broader objectives, we  recommend that TVA’s Board:    use information on the energy efficiency potential of TVA’s service  area from its commissioned study to better ensure that TVA’s future  resource planning process reflects the most cost-effective mix of  resources to meet the demand for electricity, and    develop a written capital expenditure plan that includes the full costs  of the assets in which TVA plans to invest and the sources of funding  for acquiring those assets.
section_title: Agency Comments and Our Evaluation
paragraphs: TVA provided oral technical comments to our draft, and we incorporated  them as appropriate. In its written comments, TVA agreed with our first  recommendation, and while TVA did not expressly agree with our second  recommendation, it noted the importance of utility companies having a  written capital expenditure plan. TVA further stated that it is working to  refine and improve its long-term planning processes and intends to more  formally integrate them. We encourage TVA’s efforts in this regard.  However, TVA’s current planning processes do not address how its  planned capital investments will be funded. For example, TVA’s vision  establishes broad agency priorities and goals and provides a structure for  TVA’s budget cycle and capital expenditures, but the vision does not  address how these items will be funded. As we stated in the draft report,  several potential problems can occur when an agency does not describe  how capital expenditures will be funded, including poor planning,  acquisition of assets that have not been fully justified, higher acquisition  costs, cancellation of major investments, and inadequate funding to  maintain and operate the assets. TVA also remained silent on a critical  component of our second recommendation, which is to describe the  manner in which TVA will fund future investments, notably its planned  $9.9 billion in capital investments by the end of fiscal year 2013. As we  stated in our draft report, TVA’s planned capital investments and financial  flexibility may be constrained by increased operating costs, existing debt  levels, and unexpected cost overruns.
In its comments, TVA also noted its need for financial flexibility in the  funding of long-term assets. We acknowledge this need but believe that a  more detailed blueprint for the funding of planned capital expenditures,  including information on how TVA expects to manage its expenditures,  would better assist TVA in prudently making its capital investments and in  achieving greater financial flexibility and responsibility in the long-term.  Accordingly, we reiterate the importance of a formal capital expenditure  plan that not only identifies the assets that TVA intends to acquire or  develop, but includes the full costs of the assets in which TVA plans to  invest and the sources of funding for acquiring those assets.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. At that time, we will send copies to TVA’s  board of directors, appropriate congressional committees, and other  interested parties. In addition, this report will also be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-3841 or ruscof@gao.gov, or Susan Ragland at (202)  512-9095 or raglands@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: Our report objectives were to examine (1) how the Tennessee Valley  Authority (TVA) plans to meet future demand for electricity and how  TVA’s resource planning and forecasts compare to plans and forecasts  from other sources, (2) TVA’s efforts to use energy efficiency to meet  demand for electricity, and (3) TVA’s financial condition and how it affects  TVA’s ability to meet its operational and financial goals.
To address our first objective, we collected and reviewed TVA’s most  recent long-term plans, including its long-term financial plan and capacity  expansion plan (or “power supply plan”). As part of this analysis, we  identified key variables related to TVA’s demand forecasts and its plans  to supply electricity. We also gathered information about alternative  supply resources that can affect the amount of power TVA would need to  generate from its own capacity, including TVA’s plans to purchase power  and invest in energy efficiency and demand response programs.  Additionally, we interviewed TVA officials familiar with the agency’s  resource planning process.
We collected annual data from TVA on key demand forecasts and supply  plans used to develop its long-term plans. With respect to demand for  electricity, we looked at TVA’s forecasts of its peak load and electricity sales.  We also examined several factors influencing the demand for electricity,  including forecasts of population, per capita income, and employment for  TVA’s service region. With respect to supply for electricity, we reviewed  TVA’s plans to expand its generating capacity and generate electricity.
We compared TVA’s forecasts and plans for these key variables to  relevant forecasts and plans from other sources, such as the Department  of Energy’s Energy Information Administration (EIA), IHS Global Insight,  and a group of investor-owned electric utilities. The purpose of these  comparisons was to determine whether TVA’s forecasts were markedly  different in any key areas.
In our comparisons, we focused on annual forecasts and plans for  geographical regions similar to TVA’s service region. We examined EIA’s  forecasts related to electricity demand and supply for the East South  Central census region and for the Southeastern Electric Reliability  Council (SERC) Region. From IHS Global Insight we focused on  forecasts for the East South Central census region. We also examined  forecasts and plans for five electric utilities from either the SERC Region  or the southeastern United States, as the following describes.
We selected a nonprobability sample of five utilities based on their  similarity to TVA across a variety of dimensions that are relevant to  forecasting, planning, and investment. We selected these regional utilities  through the following steps:  1.  We compiled a list of 13 large, investor-owned utilities in the SERC  Region or in the southeastern United States that did not have a legal  prohibition against nuclear generation. These utilities were: Alabama  Power, Duke Carolinas, Entergy Arkansas, Entergy Louisiana,  Entergy Mississippi, Entergy New Orleans, Florida Power & Light,  Georgia Power, Progress Carolinas, Progress Florida, South Carolina  Electric & Gas, Union Electric, and Virginia Dominion Power.  2.  We scored each utility based on its similarity to TVA on each of the  capacity (a number was calculated to represent how close each  utility’s generating capacity was to that of TVA),    average age of coal plants (a number was calculated to represent  how similar the average age of each utility’s coal plants was to  that of TVA),    proportion of energy derived from coal (a number was calculated  to represent how close each utility was to TVA in its proportion of  energy derived from coal),    proportion of energy derived from natural gas (a number was  calculated to represent how close each utility was to TVA in its  proportion of energy derived from natural gas),    proportion of energy derived from nuclear power (a number was  calculated to represent how close each utility was to TVA in its  proportion of energy derived from nuclear power),    proportion of energy sold to industrial customers (a number was  calculated to represent how close each utility was to TVA in its  proportion of energy sold to industrial customers), and  financial similarity (for each utility, we calculated the ratio of its  debt and equity to its revenues and then calculated a number to  represent the closeness of this ratio to an analogous ratio for  TVA).  3.  We combined these scores to yield an overall measure of each  utility’s similarity to TVA. For each utility, this overall measure of  similarity was calculated as a weighted average of its scores on the  several dimensions described in step 2. We chose the weights based  on our judgment of the relative importance of each dimension to a  utility’s forecasting, planning, and investment.  4.  The utilities were ranked according to their overall similarity to TVA.  5.  In order to check that the ranks were not heavily dependent on the  weights we chose in step 3, steps 3 and 4 were repeated using four  different distributions of weight over the seven dimensions. These four  different weighting schemes were designed to cover a reasonable  range of ways in which the dimensions (capacity, average age of coal  plants, etc.) might be important to forecasting, planning, and  investment. All four weightings yielded the same top-six-ranked  utilities with the exception that one of the weightings differed from the  others in which utilities were ranked 5 and 6.
The five utilities with highest similarity to TVA were selected, except that  one utility, Alabama Power, was skipped to ensure that the final sample  not include two utilities from the same parent company (Georgia Power,  also owned by the Southern Company, had already been selected due to  its higher similarity to TVA). The final selection of utilities was Duke  Carolinas, Progress Carolinas, Virginia Dominion Power, Union Electric,  and Entergy Arkansas. The TVA Inspector General has also considered  these five utilities as comparable to TVA in terms of capacity and location  for benchmarking purposes.
To gather information for the comparisons with TVA, we distributed a  questionnaire to each of the five utilities asking for historical and forecast  information on peak load; electricity sales; generation and generation  capacity, including renewable sources; demand and supply “drivers”  (such as population, regional income, fuel prices, and capacity  construction costs); energy efficiency and demand response programs;  and related regulatory issues. We asked for such data on an annual  basis. This questionnaire was pretested to ensure that questions were  clear and answerable, by means of an extended interview with officials at  one of our selected utilities. The remaining four utilities received the  questionnaire only after it had been pretested and revised. We then  conducted follow-up interviews with the appropriate resource planning  officials at these utilities, as necessary, to clarify the information and to  ensure consistency of the data and information collected.
To compare the information we collected from other sources to TVA’s  long-term forecasts and plans, we computed the annual growth rate for  each data series describing a forecast or set of plans. We used two  methods to compute the growth rates, and they yielded similar results.  The first method estimates the annual growth rate from a least squares  regression of the natural logarithm of the data series on a constant and a  time trend. The second method calculates the compound annual growth  rate. The results for each method are summarized in appendix II.
In some cases, we adjusted the data before computing the growth rates  to improve the comparisons. For example, we received fiscal year data on  forecasts of electricity sales and plans for electricity generation from TVA,  and we received calendar year data on similar forecasts from other  sources. To avoid comparing fiscal year data from TVA to calendar year  data from other sources, we interpolated calendar year values for TVA  based on the span of its fiscal year, from October 1 of one calendar year  to September 30 of the next calendar year. To compare real income  growth on a per capita basis, we used data on real income and population  to compute real income per person.
We compared TVA’s past performance to future projections, other  utilities, the opinions of industry experts, and data provided by  knowledgeable third-party sources to determine the extent, if at all, to  which TVA’s forecasts and selection of values for key assumptions  deviated from what may be expected.
To address our second objective, we reviewed TVA’s most recent power  supply plan as well as historical data from EIA. We also reviewed TVA’s  interim and final strategic planning documents, which provide information  on TVA’s energy efficiency and renewable energy resources, planning  methods, policies, and goals. We interviewed TVA officials and reviewed  documents associated with TVA’s load forecasts and resource plans to (1)  evaluate TVA’s assumptions and goals associated with its use of energy  efficiency, renewable energy, and power purchases, and (2) determine the  extent to which these resources are included in TVA’s power supply plan.
We also compared TVA’s energy efficiency and renewable energy  programs and efforts to those of 11 other utilities. These included the five  regional utilities that were chosen in the first objective, as well as a sixth  regional utility, Georgia Power, because it also had sufficient data for  comparisons. In addition, we selected five national utilities because they  were identified by industry sources and TVA as leaders in energy  efficiency or renewable energy, and because they were in the top 2  percent of utilities nationwide in total energy saved from energy efficiency  and total spending on energy efficiency programs. Including these  national utilities allowed us to examine differences between TVA’s  programs and some of the highest-performing energy efficiency and  renewable energy programs in the country. We also informed our  selections through discussions with officials from nongovernmental  energy efficiency and renewable energy associations, including the  American Council for an Energy-Efficient Economy, the Southeast Energy  Efficiency Alliance, and the Southern Alliance for Clean Energy. Through  this process we selected Austin Energy, Connecticut Power and Light,  Southern California Edison, Pacific Gas & Electric Company, and  Northern States Power Company (Xcel Energy–Minnesota).
We provided a standard questionnaire to the 11 utilities addressing  operations, energy efficiency and renewable energy programs, and  incentives and disincentives relating to such programs. Ten out of the   11 utilities responded to our questionnaire. We conducted follow-up  interviews with utility officials, as necessary, to clarify the responses and  to ensure consistency of the data and information collected in order to  facilitate comparisons with TVA. We also collected data from TVA and  EIA in order to assess and compare energy efficiency and renewable  energy initiatives with those of TVA.
To examine TVA’s primary incentives or impediments to more energy  efficient or renewable energy practices, we interviewed officials from TVA  and the Tennessee Valley Public Power Association, which represents  TVA’s distributors. In order to determine factors that encourage or  discourage energy efficiency and renewable energy practices, we  reviewed industry studies and interviewed or corresponded with officials  from four public service commissions (California, Connecticut, Maryland,  and Vermont), three energy sector associations (American Council for an  Energy-Efficient Economy, the Southeast Energy Efficiency Alliance, and  the Southern Alliance for Clean Energy), the Northwest Power and  Conservation Council, and the National Renewable Energy Laboratory.  We also reviewed state laws and regulations that affect energy efficiency  and renewable energy programs. We then characterized the incentive  structures, regulatory policies, and governance systems associated with  leading energy efficiency and renewable energy programs, and compared  these to TVA’s current policies and plans.
To address our third objective, we examined TVA’s most recent strategic  planning documents, including its 2007 strategic plan; debt management  policies; and anticipated capital expenditures. We interviewed TVA officials  to discuss the impact of its debt levels on its ability to implement its  missions and goals, including its current debt financing strategy, planned  capital investments, and nuclear decommissioning costs. We obtained and  reviewed readily available audited financial information from the Securities  and Exchange Commission for TVA to determine gross revenues, long- term debt, alternative financing arrangements, operating and maintenance  expenditures, interest expenditures, and environmental costs. We met with  auditors from TVA’s Office of Inspector General and obtained and reviewed  copies of its audit reports on TVA’s financial performance, operations, and  environmental stewardship. We also interviewed representatives of the  Nuclear Regulatory Commission to discuss the status of TVA’s nuclear  decommissioning trust fund. We obtained and reviewed readily available  audited financial information from the Federal Energy Regulatory  Commission for five southeastern utilities to determine long term debt and  equity. We also obtained and examined EIA electricity capacity data for  TVA and the five southeastern utilities. We reviewed reports prepared by  the American Public Power Association, Congressional Budget Office, and  Congressional Research Service, and prior GAO reports related to TVA’s  financial condition to identify significant issues and deficiencies at TVA and  any reportable conditions. We contacted TVA officials at field locations in  Chattanooga and Knoxville, Tennessee, as necessary.
We conducted this performance audit from November 2009 through  October 2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: TVA Plans and Forecasts and Comparisons
paragraphs: TVA and other utilities develop forecasts of demand for electricity to  inform their resource plans, such as how much and what kind of capacity  to build, or how much power to buy from other sources. Other  organizations, such as EIA and IHS Global Insight, also generate  forecasts related to electricity demand and supply. Table 3 presents  estimates of the average annual growth rate for key variables related to  electricity plans and forecasts from TVA and other sources: peak  demand, electricity sales, employment, population, real income per  capita, total capacity, and electricity generation. For each key variable,  average annual growth rates were calculated using two alternative  methods. The first method involved estimating the average annual growth  rate from a least squares regression of the natural logarithm of the data  series on a constant and a time trend. The second method involved  calculating the compound annual growth rate. Also shown in the tables is  information related to the plans and forecasts, including the vintage, or  the year, in which the plan or forecast was developed, and the region and  time span covered by the forecast. For the Southeast utilities in our  nonprobability sample, this information is described in table 4.
section_title: Appendix III: Examples of Mandates, Incentives, and Other Policies that Encourage Energy Efficiency and Renewable Energy
paragraphs: Many electric utilities around the country are encouraged to invest in  energy efficiency and renewable energy projects through a variety of  mandates, incentives, and policies. One important type of mandate is the  renewable portfolio standard, which requires utilities to provide a certain  proportion of their electricity from renewable resources. Twenty-nine  states and the District of Columbia had established a renewable portfolio  standard as of June 2011, according to the Department of Energy. Some  states have also established Energy Efficiency Resource Standards,  which require utilities to attain a certain level of energy savings.  Incentives from state and federal governments can also encourage  investments in energy efficiency and renewable energy by lowering the  cost of these programs. Examples of policies that encourage energy  efficiency and renewable energy are shown in figure 12.
section_title: Appendix IV: Comments from the Tennessee Valley Authority
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
paragraphs: Frank Rusco, (202) 512-3841 or ruscof@gao.gov, or Susan Ragland,  (202) 512-9095 or raglands@gao.gov.
section_title: Staff Acknowledgments
paragraphs: Other key contributors to this report were Ernie Hazera, Philip Farah, and  Chanetta Reed, Assistant Directors; Aaron Shiffrin; Steve Lowery; David  Messman; Peter Beck; Ardith Spence; and Russell Burnett. Important  contributions were also made by Barbara Timmerman, Ben Shouse, and  Kiki Theodoropoulos.
section_title: Related GAO Products
paragraphs: Tennessee Valley Authority: Plans to Reduce Debt While Meeting  Demand for Power. GAO-06-810. Washington, D.C.: August 31, 2006.
Tennessee Valley Authority: Information on Lease-Leaseback and Other  Financing Arrangements. GAO-03-784. Washington, D.C.: June 30, 2003.
Tennessee Valley Authority: Information on Benchmarking and Electricity  Rates. GAO-02-636. Washington, D.C.: May 30, 2002.
Tennessee Valley Authority: Debt Reduction Efforts and Potential  Stranded Costs. GAO-01-327. Washington, D.C.: February 28, 2001.
Tennessee Valley Authority: Financial Problems Raise Questions About  Long-term Viability. GAO/AIMD/RCED-95-134. Washington, D.C.: August  17, 1995.
Tennessee Valley Authority Electric Power Rates. 088863. Washington,  D.C.: March 16, 1981.