Tennessee Valley Authority: Information on Benchmarking and Electricity Rates
Published: 2002-05-30T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Tennessee Valley Authority (TVA) declared its intent to become competitive by reducing its cost of power and becoming more financially flexible by reducing debt from $27.4 billion to $13.2 billion by 2007. Since the 1980s, TVA has used benchmarking to assess staffing levels for its nuclear program and it began to use benchmarking studies for its non-nuclear business units in 1998. Recent studies indicate that TVA's nuclear and transmission power supply units are close to the industry's best in terms of staffing efficiency. TVA has taken several actions to improve performance and efficiency, including reorganizing its human resources and business services organizations and automating its hydropower production facilities to reduce future staffing. TVA continues to utilize benchmarking to assist in identifying opportunities for improvement. TVA's current electricity rates are low when compared to 12 likely competitors and to national averages. Although TVA's electricity rates are relatively low, it is legislatively protected from most competition, and it has the statutory authority to raise rates. If TVA were to choose to raise electricity rates selectively and use the additional cash generated to repay debt, it could accelerate debt repayment and reduce fixed interest costs. Doing so would enhance TVA's ability to respond to future competitive pressures. But TVA is already subject to some competitive pressures and a decision to raise electricity rates could result in potential long-term negative consequences on power sales. TVA also is concerned that a a rate increase could affect distrubutors' perception of TVA before the they may be given the choice of selecting their suppliers. Increasing electricity rates could result in the loss of some customers, lower power sales, and possibly reduce revenue. Increased rates also could have an impact on the regional economy. Increased rates should be considered differently for each rate category because the difference between TVA's rates and the rates of other utilities varies by rate category.

section_title: Letter
paragraphs: This report responds to your request of June 14, 2001, to review potential  ways for the Tennessee Valley Authority (TVA) to accelerate its debt  reduction.  As competition spread in the electric utility industry, TVA  officials became increasingly aware of the need to prepare for the day  when TVA might be required to compete with other utilities.  In 1997 TVA  declared its intent to reduce its cost of power and increase its financial  flexibility to respond to competitive pressure largely by reducing debt by  over half from $27.4 billion to about $13.2 billion by 2007.  However,  according to estimates that TVA provided to the Office of Management and  Budget (OMB) in support of the president’s 2003 budget, TVA now plans to  reduce outstanding debt to about $22.2 billion by 2007; this represents $9 billion less debt reduction than planned in 1997.
Your concern over TVA’s decision to reduce its debt reduction goal  prompted you to ask us to determine whether TVA is in a position to reduce  debt by more than currently planned.  Specifically, you asked that we  determine (1) what benchmarking studies regarding staffing levels have  been performed to compare TVA to other electricity providers, the results  of these studies, and what changes TVA has made as a result of them, and  (2) how TVA’s electricity rates compare to those of likely competitors and  whether the rates are low enough for TVA to consider raising them.
subsections: section_title: Background
paragraphs: TVA is a multipurpose, independent, federal corporation established by the  Tennessee Valley Authority Act of 1933 (TVA Act).  The act established TVA  to improve the quality of life in the Tennessee River Valley by improving  navigation, promoting regional agricultural and economic development,  and controlling the floodwaters of the Tennessee River.  To those ends, TVA  erected dams and hydropower facilities on the Tennessee River and its  tributaries.  To meet the subsequent need for more electric power, TVA  expanded beyond hydropower, adding coal-fired power plants and nuclear  generating units to its power system.  TVA primarily sells wholesale power  to 158 municipal and cooperative distributors and about 62 directly served  large industrial customers and federal agencies.  The distributors, in turn,  sell the power on a retail basis to more than 8.3 million people in an 80,000  square mile region.  In fiscal year 2000, about 43 percent of the operating  revenue TVA and its distributors generated from sales to the ultimate  consumers came from sales to residential customers, 29 percent from sales  to commercial customers, and 28 percent from sales to industrial  customers.
Under the TVA Act, as amended, TVA continues to operate like a traditional  regulated monopoly and is not subject to most of the regulatory and  oversight requirements that commercial electric utilities must satisfy.  The  act vests all authority in TVA’s three-member board of directors to run and  operate TVA in a manner consistent with the purposes and objectives of the  act, including the objective of keeping TVA’s electricity rates “as low as are  feasible.”  The board decides when to raise electricity rates and sets its  rates at whatever level it deems necessary to recover TVA’s annual  budgeted expenses, plus a margin determined by the board to help ensure  it meets financial tests and other financial objectives required by the TVA  Act and the Basic TVA Power Bond Resolution.  Unlike other utilities, the  rates TVA charges for its electric power are not subject to review and  approval by state public utility commissions or the Federal Electric  Regulatory Commission (FERC).  In contrast, regulated investor-owned  utilities (IOUs) must justify rate changes to their public service  commissions based on cost requirements determined to be “just and  reasonable” plus a regulated return to shareholders.  However, an  increasing portion of  “wholesale” power sales have been made by  independent power producers and marketers at market-based prices which  are not subject to regulatory approval.
The Energy Policy Act of 1992 (EPAct) requires utilities to use their  transmission lines to transmit wholesale electricity for other utilities.  This  act has enabled wholesale customers to obtain electricity from a variety of  competing suppliers, thus increasing wholesale competition in the electric  utility industry across the United States.  In addition, restructuring efforts  in many states have created competition at the retail level.  If, as expected,  retail restructuring continues to occur on a state-by-state basis over the  next several years, then industrial, commercial, and, ultimately, residential  consumers will be able to purchase their power from one of several  competitors rather than from one utility monopoly.
Currently, legislation limits competition between TVA and other utilities.   The TVA Act was amended in 1959 to establish what is commonly referred  to as the TVA “fence,” which prohibits TVA, with some exceptions, from  entering into contracts to sell power outside the service area that TVA and  its distributors were serving on July 1, 1957.  In addition, EPAct provides  TVA with certain protections from competition, called the “anti-cherry  picking” provisions.  Under EPAct, TVA is exempt from having to allow  other utilities to use its transmission lines to transmit (“wheel”) power to  customers within its service area.  This legislative framework generally  insulates TVA from direct wholesale competition.  As a result, TVA remains  in a position similar to that of a regulated utility monopoly.
Because of ongoing restructuring efforts in the electric utility industry, TVA  management, like many industry experts, expects that in the future TVA  may lose its legislative protections from competition.  TVA’s management  recognized the need to act to better position TVA to compete in an era of  increasing competition and, in July 1997, issued a 10-year business plan  with that goal in mind.  TVA established a 10-year horizon because a  majority of the long-term contracts with its distributors could begin  expiring at that time, and TVA could be facing greater competitive  pressures by 2007.  The plan contained three strategic objectives:  (1) reduce TVA’s cost of power in order to be in a position to offer more  competitive prices by 2007, (2) increase financial flexibility by reducing  fixed costs, and (3) build customer allegiance.
To help meet the first two strategic objectives noted above, one of the key  goals of TVA’s 10-year plan was to reduce its interest expense by reducing  debt by over half from its 1997 level, to about $13.2 billion.  To increase its  financial flexibility and future competitiveness by generating cash that  could be used to reduce debt, TVA increased its electricity rates beginning  in 1998, and planned to reduce expenses and limit capital expenditures.   TVA’s plan to reduce debt while it is still legislatively protected from  competition was intended to help it achieve its ultimate goal of being in a  position to continue to offer competitively priced power after 2007.  In a  competitive market, TVA would be in danger of losing customers if its high  debt service costs caused its price of power to be above market.
Over the first 4 years of the 10-year plan (through September 30, 2001), TVA  reduced its debt by about $2 billion.  By reducing debt, and refinancing  some debt at lower interest rates, TVA has reduced its annual interest  expense.  TVA’s interest expense has dropped from about $2.0 billion in  fiscal year 1997 to about $1.6 billion in fiscal year 2001.  Its net interest  expense through the first 6 months of fiscal year 2002 was $717 million.   However, TVA has fallen behind in meeting the debt reduction goal in the  original 10-year plan, and consequently has revised this goal downward.    According to estimates that TVA provided to OMB in support of the  president’s 2003 budget, TVA expects to reduce its debt by about  $5.2 billion by 2007 rather than the planned $14.2 billion, which represents  $9 billion less debt reduction than planned in 1997.  TVA’s most recent  projections show a debt level of about $18 billion by 2012.  The revision to  the debt reduction estimate is due primarily to lower revenues than  projected in 1997, and the use of a portion of the cash originally targeted  for debt reduction to pay for greater than estimated annual cash operating  expenses and capital expenditures for new generating capacity and  environmental controls.  TVA officials told us that the above debt  reduction estimates would be affected by the recent decision to recover  and restart Browns Ferry unit 1.
section_title: Objectives, Scope, and Methodology
paragraphs: To identify the benchmarking studies regarding staffing levels that have  been performed to compare TVA to other electricity providers, the results  of these studies, and the changes TVA has made as a result of them, we  interviewed officials from TVA, Standard & Poor’s, investor-owned utility  members of TVA Exchange, and the American Public Power Association.   In these discussions of efficiency in the electricity industry, we identified  several staffing-related benchmarking studies prepared for TVA by Tim D.Martin & Associates (Navigant), which we obtained and analyzed.  We  analyzed staffing-related studies dated September 1998 through March 2000  that pertained to TVA’s major business units, including Fossil Power Group,  Nuclear, Transmission Power Supply, and River System Operations &  Environment.  In addition, to assess the quality and reliability of data  available for this purpose, we interviewed a Navigant official to discuss  their staffing benchmarking methodology for TVA and other electric  utilities, the number of utilities included in their database, and their overall  experience in benchmarking staffing levels in the electric utility industry.   Further, we inquired of industry experts regarding their familiarity with and  use of Navigant in performing staffing analyses.  However, given the fact  that Navigant’s staffing database is proprietary, we could not verify the  accuracy of the data used in the studies.
To determine how TVA’s electricity production costs and rates compare to  those of other electricity providers, we first identified its likely competitors  through discussions with officials from TVA, TVA’s Office of Inspector  General (IG), investor-owned utility members of TVA Exchange, and the  American Public Power Association.  We then analyzed TVA’s costs and  electricity rates and compared them to those of a group of investor-owned  utilities that could comprise TVA’s likely competitors in a competitive  environment.  We obtained electricity production cost and rate data for  fiscal year 2000 for TVA and the group of likely competitors from RDI  POWERdat, which is a database of electric power companies and their  plants compiled and maintained by Resource Data International, Inc.   Further, we reviewed various reports related to TVA finances, and our own  as well as prior TVA IG reports.
To determine whether TVA’s electricity rates are low enough to support a  rate increase, we analyzed the results of the production costs and rate  comparisons and interviewed TVA officials regarding this issue.  Additional  information on our scope and methodology is in appendix I.
We conducted our review from July 2001 through May 2002 in accordance  with generally accepted government auditing standards.  We requested  comments from the chairman of TVA or his designated representative on a  draft of this report.  TVA’s chairman provided written comments, which are  reproduced in appendix II.  We also received oral comments of a technical  nature from the senior advisor to TVA’s chief financial officer (CFO), which  we incorporated as appropriate.
section_title: TVA Has Used Benchmarking to Make Changes and Identify Other Potential Areas for Improvement
paragraphs: TVA has been benchmarking since the 1980s and since the early 1990s has  primarily used Navigant to perform staffing benchmarking studies.  These  studies initially assessed the staffing levels of TVA’s nuclear program and,  in 1998, TVA began to assess its non-nuclear business units as well.  Recent  benchmarking studies performed by Navigant have indicated that TVA’s  nuclear and transmission units are close to the industry’s best in terms of  staffing efficiency, but that opportunities for improvement exist in all four  of the business units most recently benchmarked—Fossil Power Group,  Transmission Power Supply, Nuclear, and River System Operations &  Environment.  TVA has used these studies to initiate automation and  reorganization at the business unit level, and also to make  organizationwide changes.  TVA continues to utilize benchmarking to assist  in identifying potential areas for improvement.
Because staffing needs of different business units vary and utilities have a  differing mix of business units, simply using benchmarking to compare  total number of employees would not provide meaningful comparisons.   This is further complicated by the fact that TVA primarily sells wholesale  power and other electricity providers primarily sell retail power.  However,  benchmarking studies can provide meaningful comparisons at the business  unit level.
TVA’s goal is for its business units to be among the best performing in the  industry.  To accomplish this, TVA’s staffing levels would have to be  comparable to those of the industry’s best.  TVA’s business units include:  Nuclear, River System Operations & Environment, Fossil Power Group,  Transmission Power Supply, Bulk Power Marketing, Customer Service, and  Corporate.  According to TVA officials, the results of benchmarking studies  are used as a management tool to determine the best areas to target to  improve performance and operate more efficiently.  TVA’s business units  use benchmarking studies that focus on staffing to identify trends by  functional areas (e.g., operations, technical engineering) in the electric  utility industry to assist in workforce planning.
While the results are not strictly used as “performance indicators” or  “targets,” they are considered in determining appropriate staffing levels.   Since 1981, TVA has reduced staffing from a high of about 47,000  employees to about 13,000 employees in 2001.  These reductions are  primarily attributable to the discontinuation of the nuclear construction  program in the early 1980s and a major cost-cutting program beginning in  the late 1980s.  TVA had planned to build 17 nuclear facilities with its own  design and construction staff.  When TVA began to curtail its nuclear  construction program, there was no longer a need for a large number of  these staff.  TVA officials also told us that other electricity providers have  downsized over the years, but not as significantly as TVA since the others  had not planned to build as many nuclear facilities with their own design  and construction staff.  According to TVA officials, although significant  staff reductions resulted from the curtailment of nuclear construction  activities and major cost-cutting initiatives from the 1980s through 1997, in  recent years staff reductions have been a result of process improvements,  work elimination, and efficiency gains.
Navigant, the firm primarily used by TVA in recent years, generally uses  three benchmarks:  average, best, and lowest.  “Average” is the average  staffing per job function of all plants and utilities in Navigant’s database.   “Best” is the median staffing per function of the best performing  plants/utilities.  “Lowest” is the least number of staff in each function  (that is, a nonexistent “ideal” company comprised of a composite of the  industry’s best performing plants/utilities).  For this reason, utilities  assessed as being in the lowest category are considered  “ideal” plants and  we will refer to this category as “ideal” throughout the remainder of the  report.  To account for differences in the type of plant such as size, fuel  type, and age, Navigant normalizes the benchmarks by plant (i.e., the  benchmarks are adjusted to account for the differences to ensure a valid  comparison).  Then, Navigant performs a regression analysis and produces  a report summarizing the results.  The purpose of the reports is to direct  management’s attention to job functions and/or organizations within  business units where staffing levels differ from the benchmarks.
TVA has commissioned studies in several business units, including Fossil  Power Group, Transmission Power Supply, Nuclear, and River System  Operations & Environment.   The most recent Navigant reports (dated  September 1998 through March 2000) for each of the four business units we  reviewed showed differences between TVA’s staffing levels and the  benchmark utilities by function and by organization within the business  unit.  The reports also identified possible explanations for the differences  as well as observations on functions for which management attention was  warranted.  For example, a March 2000 nuclear benchmarking study  indicated that TVA’s nuclear unit overall was close to the industry’s best in  terms of staffing efficiency; however, several functions fell in the average  category and some warranted management attention.
For TVA’s non-nuclear units, benchmarking studies performed by Navigant  within the last 4 years indicated that these units generally had fewer staff  than average staffing levels at benchmark utilities, but more staff than the  best performing utilities. For example, a March 1999 staffing analysis of the  Transmission Power Supply business unit found that it had about 9 percent  fewer staff than the average benchmark and about 3 percent more staff  than the best performer benchmark, placing it among the best in the  industry.  However, a March 2000 staffing analysis of the River System  Operations & Environment business unit indicated that for hydropower  functions, TVA generally had more staff than the average benchmark, while  staffing for “federal-based” functions, which include land and watershed  management and environmental protection activities, was close to the  average benchmark.
Figure 1 summarizes the overall results of the four most recent staffing  benchmarking studies we reviewed.  For TVA’s River System Operations &  Environment business unit, we categorized the functions into two groups  to differentiate between the “federal-based” functions and hydropower  functions (comparable to utility benchmarks) within the business unit.  The  “x” indicates, in general, how each business unit’s overall staffing level  compared relative to the benchmarks used by Navigant.
TVA officials provided us information pertaining to how they addressed  each of the observations in the benchmarking studies, indicating that they  took several actions to improve performance and operate more efficiently.   For example, in Navigant’s March 2000 staffing analysis of TVA’s River  System Operations & Environment hydropower operations, staffing levels  were above the “average” benchmarks.  To address this observation, TVA  has an ongoing project to automate the hydropower production facilities as  a process improvement to enable River System Operations & Environment  to reduce future staffing levels.  This change is expected to eliminate work  by turning over the operation of the generating units to a central  dispatching location and will reduce the requirement for the around-the- clock onsite operating staff at the plant sites.
In addition, TVA officials cited two other major initiatives underway  designed to improve efficiency in the hydro operations area.  These are:  (1) the “multi-skilling” program which will reduce staffing by eliminating  the need for job handoffs among multiple craft personnel, and (2) the  “hydro modernization” program which increases the generation capacity of  existing hydro units and thereby improves system efficiency on a kWh  output-per-employee basis.
In addition, even though TVA’s Nuclear business unit overall is close to the  best performer benchmark, in Navigant’s March 2000 staffing analysis,  seven functions were identified where management attention was  warranted because the staffing levels were either considerably above the  best performer benchmark or below the ideal benchmark.  According to  TVA officials, they continue to focus on areas where the March 2000  staffing analysis identified potential efficiency gains.  For example, the  staffing analysis confirmed the need to reorganize and centralize the  Human Resources organization.  In June 2001, all human resources  functions were transferred to the Operations Support organization under  the chief operating officer.  The human resources functions were reduced  by 28 positions (i.e., 86 positions to 58 positions).
Although the benchmarking studies are performed at the business unit  level, TVA has evaluated observations from benchmarking studies and  initiated organizationwide changes.  For example, as a result of an  observation made in the March 1999 Navigant staffing analysis of the  Transmission Power Supply business unit, and in conjunction with the  results of the 2001 Human Capital Benchmarking Report prepared by the  Saratoga Institute,  TVA is monitoring the number of employees  supervised by a single supervisor to determine if adjustments are needed to  meet a target ratio of 1 supervisor to every 6.44 employees. The 1999  benchmarking study found that the Transmission Power Supply business  unit had a higher percentage of managers supervising fewer than 6 people  than the benchmark utilities.  At the time of the Saratoga Institute study,  TVA’s corporate wide ratio was 1 supervisor to 5.61 staff.  TVA will decide  how to proceed upon review of the results of the performance indicator.
TVA continues to benchmark staffing levels to assist in identifying potential  areas for improvement and expects any future reductions to be the result of  (1) gains in efficiency, (2) elimination of certain types of work, and/or  (3) process improvements, such as the previously mentioned automation of  hydropower production facilities. According to TVA officials, TVA hopes to  achieve cost savings by getting its various business units to be among the  best performing in the industry.
section_title: TVA’s Electricity Rates are Relatively Low Compared to Likely Competitors
paragraphs: TVA has the statutory authority to raise its electricity rates, is legislatively  protected from most competition, and has current rates that are low when  compared to likely competitors.  If TVA were to choose to raise electricity  rates selectively and use the additional cash generated to pay down debt, it could reduce its financing costs (interest expense), thereby strengthening  its ability to respond to future challenges (as discussed in previous GAO  reports).  Although TVA’s variable costs (e.g., production costs) are low  when compared to likely competitors, previous GAO reports have noted  that its fixed costs such as financing costs and the unrecovered costs  associated with nonperforming nuclear units are high. These costs could  pose competitive challenges because they would limit TVA’s financial  flexibility to adjust its electricity rates to respond to competitive  pressures.  TVA is, however, currently subject to some level of  competition.  Therefore, in determining whether to raise rates, TVA would  need to consider current market rates and the potential negative  consequences, such as the impact on power sales and the regional  economy.
When comparing TVA’s electricity rates to those of 12 likely competitors,  we found that its fiscal year 2000 (1) residential rates were lower than all 12  of the other utilities, (2) industrial rates were lower than 10 of the 12  others, and (3) commercial rates were lower than 4 of the 12 others.  When  comparing TVA’s electricity rates to the averages of each category, we  found that TVA’s fiscal year 2000 rates were lower than the comparable  averages for the 12 utilities in our comparison group as well as the national averages.  Table 2 compares TVA’s fiscal year 2000 average electricity  rates for each customer class to the national average and the utilities in the  comparison group.
Since TVA remains in a position similar to that of a traditional regulated  utility monopoly, its electricity rates continue to be cost based.  Its  variable production costs are low when compared to likely competitors.   TVA’s fiscal year 2000 production costs, which consist of the costs of  operations and maintenance, fuel, and purchased power, were lower than  11 of the 12 utilities in the comparison group.  TVA’s production costs are  low primarily because a greater portion of its power is produced by low- cost hydropower and nuclear plants.
While production costs are a key factor in setting a utility’s rates, they do  not represent the total cost of power because they do not include fixed  costs such as depreciation and amortization and interest expense.  While  TVA’s total cost of power is relatively attractive, its cost structure is heavily  weighted toward these fixed costs.  As a result, TVA would be at risk should  its revenues decline since each unit sold would have to recover a greater  portion of the fixed costs.  Our previous reports have noted that TVA’s  high financing costs could impede its ability to compete in the future  because they reduce its flexibility to lower rates.  TVA’s financing costs  stem largely from the debt burden associated with its nuclear power  program.
Although TVA has made progress in reducing its debt and the  corresponding financing cost, its financing costs are high when compared  to its likely competitors.  As we reported in February 2001, 28 cents of  every revenue dollar earned by TVA in fiscal year 1999 went to pay for fixed  financing costs (i.e., interest costs related to TVA’s debt), a considerably  higher portion than the 9 cents for TVA’s competitors.  Since TVA’s fiscal  year 2001 interest expense represented about 24 percent of total operating  revenue, debt reduction would be a key element of any efforts to prepare  for competition.  TVA would be better positioned to operate in the future  competitive environment if it continued to reduce these fixed costs,  thereby increasing its financial flexibility to lower rates, if necessary, in  response to competitive pressures.
Prior GAO reports have also pointed out that TVA has not made a final  decision on whether to complete its deferred nuclear generating units.  The  recovery of the costs of these assets is not required until they are  completed and placed in service or cancelled.  As of September 30, 2001,  the balance of TVA’s deferred nuclear generating units amounted to  $4.1 billion, which pertained to two unfinished nuclear units (Bellefonte  units 1 and 2).    TVA could be vulnerable to future competition if it has to  begin recovering the costs of its deferred nuclear units at a time when  competitive pressures prevent it from setting rates at levels sufficient to  recover them.  Therefore, beginning to recover these costs now would  improve TVA’s ability to offer competitively priced power in the future.
TVA’s electricity rates are relatively low, it is presently legislatively  protected from most competition, and it has the statutory authority to raise  rates; however, there are several factors that enter into a decision to raise  electricity rates.  Any positive benefits that accrue to TVA from raising  rates and accelerating debt repayment would need to be weighed against  potential negative consequences.  TVA officials told us that they believe an  increase in electricity rates could result in the loss of customers, lower  power sales, and possibly less overall revenue.  Another potential negative  consequence is the impact a rate increase could have on the regional  economy as a whole.  A rate increase could also affect the distributors’  perception of TVA just before they may be given the choice of selecting  their suppliers.
TVA officials also cited two other reasons they would be reluctant to raise  electricity rates. Because of commitments given to customers and ongoing  contract negotiations, TVA officials said it would be particularly difficult  to raise rates before 2007, unless it is required to cover additional costs,  such as for additional environmental controls.  In addition, the officials  cited both the TVA board’s responsibility and pressure from customers to  abide by TVA’s statutory responsibility to provide power at rates “as low as  are feasible.”  Nonetheless, the TVA officials acknowledged that TVA’s  board has the authority and obligation to adjust TVA’s rates as necessary to  cover costs and provide adequate margin for the protection of investors.
As suggested by the data in table 2, any decision to raise electricity rates  would need to be considered differently for each rate category because the  difference between TVA’s rates and those of its likely competitors varies by  rate category.  TVA’s residential and industrial rates are generally well  below the competition, while its commercial rates are lower than only 4 of  the 12 likely competitors.  Therefore, while raising some rates would be  feasible, TVA would need to carefully consider which rates to raise and by  how much.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, TVA’s chairman commended  us for producing a fair and insightful report.  In addition, the chairman  offered his perspectives on TVA’s responsibilities for setting rates, and on  the results of TVA’s recent efforts to bring its staffing levels in line with the  industry’s best.  TVA also provided us with oral technical comments, which  we have incorporated as appropriate.  TVA’s written comments are  reproduced in appendix II.
We are sending copies of this report to appropriate House and Senate  committees; interested members of the Congress; TVA’s board of directors;  the Secretary of Energy; and the Director of the Office of Management and  Budget.  We will also make copies available to others upon request.  In  addition, the report will be available at no charge on GAO's web site at  http://www.gao.gov.
If you or your staff have any questions, please call me at (202) 512-9508.   Major contributors to this report are listed in appendix III.
section_title: Objectives, Scope, and Methodology
subsections: section_title: Staffing Benchmarking Studies
paragraphs: To assess the overall quality of the staffing benchmarking studies, we  interviewed a Navigant Consulting, Inc. (Navigant) official to obtain an  understanding of their staffing benchmarking analysis for TVA and other  electric utilities, the number of utilities in their database, and their  overall experience in benchmarking staffing levels in the electric utility  industry;   inquired of industry experts regarding their familiarity with Navigant;   interviewed TVA officials involved in workforce planning in the Chief  Operating Office regarding Navigant’s observations.
To determine the changes TVA has made as a result of benchmarking  studies, we interviewed TVA officials and examined supporting documents;  however, we did not independently verify the results of TVA’s actions.
section_title: Comparison of Electricity Rates
paragraphs: To determine how TVA’s electricity rates compared to those of electricity  providers that could comprise TVA’s likely competitors in a competitive  environment, we identified TVA’s likely competitors through discussions  with officials from TVA, TVA’s IG, investor-owned utility members of TVA  Exchange, and the American Public Power Association.  Based on these  discussions, we selected investor-owned utilities or holding companies that  had 50 million MWhs or more in net generation in fiscal year 2000 in the  eastern interconnect.
We selected utilities with net generation over 50 million MWhs to eliminate  smaller utilities that do not represent a significant portion of the annual  sales in the TVA area, and are less relevant to TVA.  We limited our group to  utilities in the eastern interconnect because the high cost of transmitting  electricity will limit TVA’s competition to utilities in states located close to  TVA’s service territory.  We did not include independent power producers  and other power marketers in the comparison group because they are not  required by federal regulations to make certain data publicly available, and  therefore, the data needed to compare production cost and rates were not  available.
We then analyzed TVA’s electricity production costs and rates and  compared them to those of TVA’s likely competitors.  We obtained  electricity production cost and rate data for fiscal year 2000 for TVA and  the group of likely competitors from RDI POWERdat.  Further, we  reviewed various TVA financial-related reports, including GAO and TVA IG  reports.
To determine whether TVA’s electricity rates are low enough for TVA to  consider raising them, we analyzed the results of the cost and rate  comparisons; analyzed data on the future market price of power; and  interviewed TVA officials regarding this issue.
section_title: Organizations Contacted
paragraphs: During the course of our work, we contacted the following organizations.
subsections: section_title: Federal Agencies
section_title: Bond Rating Agency
section_title: Customer Representative or Trade Groups
paragraphs: Navigant Consulting, Inc.
section_title: Comments from the Tennessee Valley Authority
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Carolyn A. Frye, Mary B. Merrill,  Donald R. Neff, and Lisa J. Crye made key contributions to this report.
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