This section describes TVA’s (1) legislation and governance, (2) operations and planning, (3) debt ceiling, and (4) retirement system. TVA is an independent federal corporation established by the 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 built dams and hydropower facilities on the Tennessee River and its tributaries. From its inception in 1933 through fiscal year 1959, TVA received annual appropriations to finance its cash and capital requirements. In 1959, however, Congress amended the TVA Act and provided TVA with the authority to finance its power program through revenue from electricity sales and borrowing and required it to repay a substantial portion of the annual appropriations it had received to pay for its power facilities. Under the TVA Act, TVA must design its rates to cover all costs but also keep rates as low as feasible. TVA must charge rates for power that will produce gross revenues sufficient to provide funds for its costs including operating, administrative and maintenance costs. TVA can borrow by issuing bonds and notes, an authority set by Congress that cannot exceed $30 billion outstanding at any given time. Legislation also limits competition between TVA and other utilities. When the TVA Act was amended in 1959, it prohibited TVA, with some exceptions, from entering into contracts to sell power outside the area where it or its distributors were the primary source of power supply on July 1, 1957. This is commonly referred to as the “fence,” because it limits TVA’s ability to expand substantially outside its service area. In addition, the Federal Power Act includes a provision that helps protect TVA’s ability to sell power within its service area. This provision, called the “anti- cherrypicking” provision, exempts TVA from being required to allow other utilities to use its transmission lines to deliver power to customers within its service area. The anti-cherrypicking provision reduces TVA’s exposure to loss of customers and competition from other utilities. A nine-member Board of Directors nominated by the President and confirmed by the U.S. Senate administers TVA. The board sets TVA’s goals and policies, appoints the CEO, develops long-range plans, seeks to ensure those plans are carried out, and approves TVA’s budget. The board also approves rate changes and has the sole authority to set wholesale electric power rates and approve the retail rates charged by TVA’s distributors. TVA’s board approves the agency’s strategic plan which outlines TVA’s broad goals, priorities, and performance measures. TVA’s most recent strategic plan covers fiscal years 2014 through 2018 and outlines its “strategic imperatives”—namely, to “maintain low rates, live within our means, manage our assets to meet reliability expectations and provide a balanced portfolio, and be responsible stewards of the region’s natural resources.” In August 2013, TVA’s board approved the goal to reduce TVA’s debt to about $22 billion by fiscal year 2023. TVA developed this goal during its fiscal year 2014 long-term financial planning process, but TVA updates its long range financial plan each year. The TVA board approves the budget each fiscal year, and the board is updated at least semi-annually on the long-range financial plan. TVA uses a 10-year long-range financial plan to determine the amount of funds that will be available for capital investment. Operating priorities are detailed in business unit plans, such as the power supply plan, the transmission assessment plan, and the coal and gas operations asset plan. In addition, TVA files publicly available quarterly and annual financial reports with the Securities and Exchange Commission. TVA also submits a budget proposal and management agenda (performance report) to Congress and a performance budget (performance plan) to OMB. To meet demand for electricity, utilities can construct new plants, upgrade existing plants, purchase power from others, and provide incentives to customers to reduce and shift their demand for electricity through energy efficiency or demand-response programs. Since its establishment, to meet the subsequent need for more electric power, TVA has expanded beyond hydropower to other types of power generation such as natural gas, coal, and nuclear plants. In fiscal year 2016, TVA provided nearly 159 billion kilowatt-hours to customers from its power generating facilities and purchased power, as shown in figure 1. To guide TVA decisions about the resources needed to meet future demand for electricity and determine the most cost-effective ways to prepare for the future power needs of its customers, TVA periodically develops an integrated resource plan (IRP). TVA’s 2015 IRP found no immediate needs for new baseload plants—plants that generally have been the most costly to build but have had the lowest hourly operating costs—beyond the completion of the Watts Bar Unit 2 nuclear plant in Tennessee and the expansion of capacity at the Browns Ferry nuclear plant in Alabama. In October 2016, TVA completed Watts Bar Unit 2— the first nuclear unit to enter commercial operation in 20 years. Beyond those projects, the 2015 IRP found that TVA could rely on additional natural gas generation, greater levels of cost-effective energy efficiency, and increased contributions from competitively priced renewable power. 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, how much power to buy from other sources, or how much to invest in energy efficiency. To forecast the demand for electricity in its service area for the next 20 or more years, TVA employs a set of models but forecasting beyond a few years into the future involves great uncertainty. Utilities deal with uncertainty partly by producing a range of forecasts based on demographic and economic factors, and by maintaining excess generating capacity, known as reserves. Models help utilities choose the least-cost combination of generating resources to meet demand. If demand forecasts are unreasonably high or low, 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 experienced less than anticipated electricity demand growth over the past 20 years and now forecasts little, if any, growth in demand for electricity in the upcoming years. Congress increased TVA’s debt ceiling four times from 1966 to 1979, from $750 million to $30 billion. In the years following these increases, TVA’s financial condition worsened, largely as the result of construction delays, cost overruns, and operational shutdowns in its nuclear program. In the late 1960s and 1970s, TVA started construction on 17 nuclear units but completed only 7 because of lower-than-anticipated demand for electricity, resulting in billions of dollars of debt. In February 2001, we reported that TVA had about $6.3 billion in unrecovered capital costs associated with uncompleted and nonproducing nuclear units. In fiscal year 2016, TVA had about $1.1 billion in unrecovered costs associated with uncompleted nuclear units. While the debt ceiling has not been changed since 1979, TVA’s business and operations have grown along with the power needs of the Tennessee Valley. TVA has continued to add generating capacity to the system, as its customer base has increased, and environmental spending requirements have increased. TVA generally uses debt financing for capital investments in new generation capacity and environmental controls and uses revenues for operation and maintenance of the power system. TVA can borrow funds at competitive interest rates as a result of its triple-A credit rating which is based, in part, on its ownership by the federal government. Appendix I includes historical data on TVA’s debt and other selected financial data. TVA’s board established TVARS in 1939. TVARS is a separate legal entity from TVA and is administered by a seven-member Board of Directors. The TVARS board manages the retirement system, including decision-making on investment portfolios, the interest rate or rates used in actuarial and other calculations, and benefits. The Rules and Regulations of the TVA Retirement System (TVARS Rules) establish how the retirement system is administered and what benefits are payable to participants. The TVARS Rules establish the minimum amount TVA must contribute to the system each year. The TVARS board can amend the TVARS Rules, but TVA has veto power and amendments proposed by the TVARS board become effective only if TVA does not exercise its veto within 30 days. As a governmental plan, TVA’s plan is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans in the private sector. As of September 30, 2016, the defined benefit pension plan (which we refer to as the pension plan in this report) had about 34,000 participants, of whom about 24,000 were retirees; it is a “mature” plan, in that there are more than twice as many retirees and beneficiaries as employees participating in the plan. To meet its goal to reduce its debt from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023, TVA plans to increase revenue through rate increases, limit the growth of operating expenses, and reduce capital expenditures. TVA’s plans assume the completion of capital projects will occur on time and within budget. TVA’s plans also include costs for investigating the development of new nuclear technology but do not include capital costs for construction. According to TVA officials, TVA aims to increase its overall financial flexibility over the long term to ensure sufficient room under the debt ceiling so it can access capital for future investments to meet its mission. TVA plans to gradually decrease debt through 2023 (see fig. 2). To meet its goal to reduce its debt to about $22 billion by fiscal year 2023, TVA’s plans include the following. Rate increases. TVA’s plans include annual rate increases not to exceed 1.5 percent of the retail rate as needed to maintain its debt reduction trajectory. According to TVA officials and documents, TVA’s plans included rate increases of 1.5 percent for about $200 million in annual revenue. TVA can use increased revenue to refinance existing debt or to fund certain expenditures rather than taking on new debt, but TVA’s board must approve rate increases. TVA increased rates each fiscal year from 2014 through 2017. According to TVA officials, annual rate increases through 2023 could result in the reduction of debt to about $19.8 billion by fiscal year 2023, which would exceed the agency’s debt reduction goal. Limits in the growth of operating expenses. TVA plans to continue evaluating its operations and to limit the growth of its operating expenses. Having fewer operating expenses frees up revenue from rates that TVA can use to repay outstanding debt or fund certain expenditures without taking on new debt. In fiscal year 2016, TVA’s O&M expenses totaled about $2.8 billion—a reduction of about 18 percent from $3.4 billion in fiscal year 2013. As part of its cost-reduction initiatives, TVA eliminated 2,200 positions through attrition and elimination of vacant positions. TVA plans to pursue additional workforce reductions to offset increases in retirement benefit and labor costs. According to TVA documents, reductions in expenses associated with coal plant closures will offset some of the increase in labor-related costs but other reductions will be required. TVA officials said that additional reductions could involve contract labor in its nuclear group. In July 2016, TVA offered a voluntary reduction-in-force program to all 3,500 employees in its nuclear group, providing an opportunity to retire or depart; as of January 2017, TVA officials had not provided information on the number of employees participating in this program. In fiscal year 2016, TVA’s workforce included 10,691 employees and 12,729 contractors. According to TVA documentation, as a major component of its O&M costs, TVA continuously evaluates its staffing levels, both employees and contractors. TVA plans are being finalized, over the next several years, to decrease the overall workforce through various mechanisms as TVA aligns its workforce with changes to its generating assets; these mechanisms may include reductions-in-force, attrition, and elimination of vacant positions. However, early retirements and severance associated with workforce reductions could also pose additional expenses. Reductions in capital expenditures. TVA plans to reduce its capital expenditures through fiscal year 2023. Over the past decade, TVA’s capital expenditures increased by over 180 percent—from about $1.2 billion in fiscal year 2006 to about $3.4 billion in fiscal year 2015. TVA aims to decrease capital expenditures to about $1.8 billion by fiscal year 2023 (see fig. 3). Based on its electricity demand forecast, TVA does not anticipate the need for additional baseload capacity until the 2030s beyond completion of Watts Bar Unit 2—which cost about $4.7 billion—and capacity expansion at three nuclear units. TVA’s capital expenditure plan from fiscal years 2016 through 2023 includes a total of about $17.4 billion; about $8.3 billion for base capital projects to maintain the current operational state, about $5.2 billion for capacity expansion projects, and about $3.9 billion for environmental and other projects. Under TVA’s financial guiding principles, TVA may issue debt for new assets, including capacity expansion and installation of environmental controls, but, according to TVA officials, TVA plans to primarily fund capital expenditures with revenue, as opposed to issuing new debt, to reach its debt goal. TVA increased construction expenditures from fiscal years 2006 through 2016 from about $1.4 billion ($1.6 billion in 2016 dollars) to about $2.7 billion while reducing the amount of new debt issued (see fig. 4). According to TVA officials, TVA’s plans assume that the completion of capital projects will occur on time and within budget. TVA’s plans included the assumption that it would complete construction of a new nuclear unit—Watts Bar Unit 2—in 2016. Watts Bar Unit 2 began commercial operation in October 2016. By completing construction of this unit in 2016, a key assumption underlying TVA’s debt reduction plans was met. However, TVA’s plans include other key capital projects such as the construction of two natural gas plants, modification of a coal plant to install clean air controls, and two smaller nuclear projects. Information about these two nuclear projects follow. Browns Ferry extended power uprate (EPU). TVA’s capital plans include a project that aims to increase generation capacity at the Browns Ferry nuclear plant’s three existing units. TVA began the project in 2001 and anticipated completion within 2 to 4 years but the project remains incomplete. As of September 30, 2016, TVA reported that it anticipates completion of the project by 2024 at a total estimated cost of about $475 million—an increase of 25 percent from an estimated $380 million in fiscal year 2014. According to TVA documentation, the agency spent about $191 million on the project through fiscal year 2016. The project involves engineering analyses and modification and replacement of certain existing plant components to enable the units to produce additional power. To allow operation at the higher power level, the license for each unit requires modification that would occur in parallel with the NRC license amendment review process. TVA originally submitted the licensing amendment requests to NRC in June 2004. However, TVA withdrew these requests in September 2014 and submitted a new request in September 2015. According to NRC, it is planning to complete its review by fall 2017. Watts Bar Unit 2 steam generator replacement. TVA’s capital plans include about $438 million to replace steam generators at the newly operational unit. The existing generators prematurely developed leaks and other problems occurred at nuclear plants, including Watts Bar Unit 1 which required replacement of the generators 9 years into operation. According to TVA officials, TVA has completed steam generator replacements at other nuclear units without significant cost overruns or schedule delays. Given historical trends in nuclear construction, TVA’s estimated capital costs may be optimistic and could increase. Any cost overruns or delays on its nuclear or other capital projects could require adjustments to its future financial plans. TVA’s history of cost overruns and schedule delays includes the construction of Watts Bar Unit 2 which began commercial operation in October 2016 after decades of construction (see table 1). TVA did not complete another nuclear project. TVA auctioned off the 1,400 acre site of the Bellefonte nuclear plant in Alabama, including two unfinished nuclear units, in November 2016 for $111 million—a fraction of the approximately $5 billion TVA had spent on the plant. TVA began building the plant in 1974, but several stops and starts in construction occurred primarily as a result of lower-than-anticipated growth in electricity demand. According to TVA officials, TVA decided again to complete unit 1 in 2011 but stopped work in 2013 because of reduced electricity demand, Watts Bar Unit 2 concerns, and anticipated increases in construction costs. In 2013, TVA estimated that the cost to complete the unit had grown from its prior approved cost of $4.9 billion to at least $7.5 billion or more. TVA stated that it wanted to complete Watts Bar Unit 2 and await the results of its IRP process. Based on the 2015 IRP, TVA decided not to complete construction of Bellefonte. According to TVA documentation, TVA spent about $10 million to $12 million annually maintaining the Bellefonte site. TVA’s plans do not anticipate any such events occurring with its current projects that would interfere with timely completion within budget. TVA’s plans include costs for investigating the development of new nuclear technology but do not include capital costs for construction of the technology. Specifically, TVA is assessing the potential of its Clinch River site in Tennessee for the construction of small modular reactors (SMR). According to TVA documentation, these efforts include research and development activities that support its technology innovation mission. In 2016, TVA submitted an early site permit application to NRC to assess the suitability of the site for construction and operation of SMRs at its 1,200-acre Clinch River site. An early site permit is valid for up to 20 years and would address site safety, environmental protection, and emergency preparedness associated with any of the light-water reactor SMR designs under development in the United States. According to TVA documentation, TVA has not selected a technology and has not entered into any contracts for design work. If TVA decides to construct SMRs, its costs are uncertain but could total about $3 billion after cost sharing through public-private partnerships but expenditures prior to a construction decision would be a very small portion of this cost, according to TVA documentation. The total estimated costs for TVA to develop, submit, and support the NRC application and review include about $72 million, according to an interagency agreement with DOE, and TVA is responsible for half of these costs. According to TVA documentation, the agency spent about $23 million on SMR activities through fiscal year 2015 and estimates spending about $5 million in fiscal year 2016. According to TVA, it spends about $10 million to $15 million on research and development activities each year as part of its technology innovation organization (not including spending on SMRs). TVA officials said that the agency will not decide whether or not to construct SMRs for at least 5 years. However, TVA is investigating SMRs even though its 2015 IRP found that TVA does not need additional baseload power plants beyond the projects currently under way and that SMRs are cost-prohibitive. TVA’s debt reduction plans and performance information are not reported in a manner consistent with GPRAMA requirements. GPRAMA requires agencies, including TVA, to report major management challenges that they face, and for each major management challenge that agencies develop and report performance information—including performance goals, measures, milestones, and planned actions to resolve the challenge. TVA identifies managing debt and its unfunded pension liabilities as major management challenges but TVA has not reported required performance information in its annual performance plan or report on these challenges. For managing debt, TVA’s CEO stated a goal for debt reduction by 2023 during a congressional hearing in April 2015 and the goal is reported in internal documents and Board presentation slides available on TVA’s website. In addition, according to TVA’s 2016 performance report, its strategic objectives include “effectively manage debt to ensure long-term financial health.” TVA’s 2016 performance report includes a goal related to total financing obligations for fiscal years 2016 and 2017, but the goal shows these obligations increasing, and the report does not include information on planned actions to resolve the challenge. Although TVA established a goal to reduce its debt, it has not documented in its annual performance plan or report strategies for how it will meet its goal, as required by GPRAMA, thereby reducing transparency and raising questions about how the agency will meet its goal. For TVA’s unfunded pension liabilities, TVA officials have stated a goal to eliminate the pension funding shortfall (about $6 billion at the end of fiscal year 2016) by 2036, but TVA has not identified such a goal or milestones in its performance plan or report. As of September 30, 2016, TVA’s pension plan was about 54 percent funded with a funding shortfall of about $6 billion (plan assets totaled $7.1 billion and liabilities $13.1 billion). While TVA’s debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years (see fig. 5). Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. According to a joint American Academy of Actuaries and Society of Actuaries task force, a pension plan needs to be evaluated as part of a plan sponsor’s overall enterprise; an analysis that looks at the pension plan as a self-standing entity is incomplete and too narrow. However, TVA officials told us that because TVA uses revenue from the rates it charges customers to fund the pension, and not debt in the form of bonds, unfunded pension liabilities would not affect TVA’s debt reduction plan. In addition, TVA defers pension costs as “regulatory assets”— incurred costs deferred for recovery through rates in the future—in accordance with accounting standards and with TVA board approval. However, because TVA will need to recover these costs through rates in the future, this affects its financial health and operations. If TVA uses revenue from rate increases to close the pension shortfall, this could decrease its ability to fund other activities such as capital projects with revenue from rates. This could, in turn, require TVA to rely on debt to fund certain capital projects and interfere with efforts to meet overall debt reduction goals. Alternatively, further rate increases could interfere with TVA’s objective of keeping rates as low as feasible. Without the Board of Directors ensuring that TVA better document and communicate information about its goals to reduce debt and unfunded pension liabilities in its performance plan and report, including strategies for achieving its goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. Several factors could affect TVA’s ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. In addition, TVA aims to eliminate its $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but no mechanism is in place to ensure TVA fully funds the liabilities if, for example, plan assets do not achieve expected returns. Several factors could affect TVA’s ability to meet its debt reduction goals, including regulatory pressures that could require additional capital investment, changes in demand for electricity, technological innovations, or unforeseen events that could affect revenues or require additional investments. TVA’s fossil fuel and nuclear power plants are, or potentially will be, affected by existing and proposed environmental and other regulations, and the implementation of these regulations may require TVA to make additional capital investments. For example, TVA estimates it will spend about $2 billion on environmental expenditures and compliance with regulations from 2017 through 2023 but, according to a TVA document, this estimate could change as additional information becomes available and regulations change. TVA spent about $977 million to eliminate the wet storage of coal combustion residual, commonly called coal ash, to assist in meeting EPA and Tennessee Department of Environment and Conservation environmental requirements. As part of these efforts, TVA prepared a June 2016 environmental impact statement on the approach it planned to take for closing coal ash impoundments at its coal plants, which involved converting all its wet storage to dry storage. According to a TVA document, the agency anticipates spending about an additional $1.2 billion in related coal ash costs through 2022. While the status of the Clean Power Plan that EPA issued in 2015 is unclear, TVA continues to assess the plan and its status. According to TVA documentation, TVA is well positioned to meet carbon emission guidelines for existing fossil fuel plants under the plan. Specifically, in April 2011, TVA agreed to retire 18 of its 59 fossil fuel units by the end of 2017 for several reasons, including the cost of adding emission control equipment and other environmental improvements to the units. As of September 2016, TVA had retired 14 of the 18 units and reported that it would continue to evaluate the appropriate asset mix, given the costs of continuing to operate its coal plants, including adhering to environmental regulations. With regard to TVA’s nuclear power plants, TVA also faces potential costs related to proposed regulations. For example, in May 2014, NRC notified certain nuclear power plant licensees of the results of seismic hazard screening evaluations performed following the Fukushima nuclear accident. Based on the screening results, TVA must conduct additional seismic risk evaluations of all three of its nuclear plants—Browns Ferry, Sequoyah, and Watts Bar—by 2019. According to TVA, NRC is developing a rule anticipated in mid-2017 for nuclear plants to mitigate the effects of events, such as seismic events, that exceed plant design standards that could require TVA to modify one or more of its nuclear plants. According to TVA documents, plant modification costs will be unknown until the rule is finalized, but they could be substantial. Reductions in demand for electricity could affect TVA’s revenues; alternatively, increases in demand could generate additional revenue but require investment in additional capacity or purchased power. The expanded use of distributed generation and increased energy efficiency and conservation could reduce demand for electricity in TVA’s service area and affect its revenues. As the amount of distributed generation grows and renewable generation and energy efficiency technologies improve and become more cost-effective, TVA projects sales of electricity will see little, if any, growth in upcoming years. According to several representatives from industry and stakeholder groups, distributed generation could increase competition from end-use customers— consumers who typically buy power from the local power companies that obtain power from TVA—if they adopt on-site power generation. According to EIA’s Annual Energy Outlook 2016, annual electricity demand for the average household will decline by 11 percent from 2015 to 2040. EIA reported that factors contributing to a decline in household demand include efficient lighting technologies and increased distributed generation, particularly rooftop solar. According to TVA documents, the agency cannot predict the financial impact from future growth of distributed generation but TVA has taken steps to anticipate the changes in the electricity market that distributed generation could bring. For example, in 2016, TVA announced a new business unit focused on distributed energy resources and the energy delivery marketplace, and according to a TVA official, it also formed information exchanges to provide forums to discuss implementation issues related to distributed generation and energy efficiency. Other technological developments in the electric utility industry could change TVA’s operating costs or requirements. For example, several representatives we interviewed from industry and stakeholder groups said that energy storage technology could become more cost-effective and change the way utilities operate. While the added capacity provided by energy storage could delay or alleviate the need for TVA to build additional power plants, TVA officials said that there are still several unknowns about the technology though they do not believe integration of battery storage into the system would be problematic. Finally, unforeseen events could also affect TVA’s ability to meet debt reduction goals. For example, the 2008 Kingston coal ash spill cost about $1.2 billion to remediate—costs TVA is still recovering. TVA plans to make annual contributions of $300 million to the pension plan, or more if required by the TVARS Rules, for up to 20 years. According to TVA’s analysis, there is a 50 percent chance that annual contributions of $300 million could eliminate the $6 billion funding shortfall at the end of 20 years and a 50 percent chance that a funding shortfall would remain. TVA’s analysis assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. According to TVA officials, the pension plan asset performance is critical to TVA’s ability to close the pension funding shortfall. TVA officials have stated a goal to fully fund the pension plan within 20 years. However, if market conditions over the next 20 years are not favorable enough to fully fund the pension liabilities, which TVA’s analysis assigns a 50 percent chance, TVA would need to contribute more than $300 million per year to make up the difference if it aims to eliminate the funding shortfall. Other factors that could affect TVA’s pension liabilities include greater than expected increases in retiree lifespans and declining bond yields. In a 2010 report, the TVA OIG found that a combination of factors— including market conditions and TVA actions—resulted in a significant shortfall between pension plan assets and projected liabilities. These factors included: (1) TVA not making contributions to TVARS for 6 years, (2) the addition of significant retirement benefits to the plan when the funded status was better, (3) the establishment of TVARS Rules that had the effect of enticing employees to retire, and (4) the economic downturn in 2008 and 2009. The TVARS pension plan’s funded status decreased from about 92 percent in 2007 to about 55 percent in 2016 (see fig. 6). In December 2015, TVA proposed changes to the TVARS Rules to reduce the obligations of the pension plan and commit to making consistent contributions. The TVARS board approved amendments that reduced TVA’s pension liabilities by about $960 million, reduced future benefit accruals, and added a minimum contribution requirement of $300 million to the existing requirement for a period of 20 years. However, the amended TVARS Rules do not adjust TVA’s annual contribution requirement to ensure TVA will fully fund its pension liabilities. The TVARS Rules require that for a period of 20 years, or until the plan is deemed fully funded, TVA’s annual contribution equal the greater of (1) a formula-based contribution or (2) $300 million. To the extent that a $300 million contribution proves inadequate because of plan experience, the formula-based contribution would determine the amount TVA must contribute each year. The formula uses a 30-year “open amortization method,” meaning that the amortization period is reset to 30 years each fiscal year, so the end of the amortization period (i.e., paying off the unfunded liability) may never be achieved. A Blue Ribbon Panel commissioned by the Society of Actuaries believes that plans’ risk management practices and their ability to respond to changing economic and market conditions would be enhanced through the use of amortization periods shorter than the 30-year period commonly used today. The panel recommended amortization periods of no more than 15 to 20 years for gains and losses. According to the panel’s 2014 report, the panel believes that fully funding pension benefits of public employees over their average future service reasonably aligns the cost of today’s public services with the taxpayers who benefit from those services. In addition, according to the American Academy of Actuaries, funding rules should include targets based on accumulating the present value of benefits for employees by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a defined and reasonable time period. In the private sector, ERISA generally requires a 7-year amortization of shortfalls for private sector single- employer pension plans. Unlike an open amortization period, a closed, or fixed, amortization period is generally maintained until the original unfunded liability amount is fully repaid. Thus, a closed amortization period would be a better practice if the goal is to fully fund pension liabilities. Table 2 compares the amortization of $6 billion in unfunded liabilities using open and closed amortization methods, assuming assets return 7 percent, as TVA expects. The closed amortization method would extinguish the unfunded liability in 30 years, whereas more than $4 billion in unfunded liability would remain under the open amortization method (see table 2). As we mentioned earlier, TVA assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. If the return on investment was lower than expected, the unfunded liabilities would be greater, and TVA would need to contribute more than $300 million per year to make up the difference. The open amortization period utilized by the TVARS formula-based contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and does not ensure full funding of the pension liabilities. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. TVA officials told us that the agency does not plan to contribute more than the TVARS Rules require and that it plans to continue to treat its unfunded pension liabilities as regulatory assets, deferring pension costs for recovery through rates in the future. However, the TVARS Rules do not provide for fully funding pension benefits over the service of TVA employees covered by the plan, which would align the cost of services provided by covered employees with the rates paid by customers who benefit from the services of covered employees. The deferral of contributions necessary to close the funding shortfall reduces future financial flexibility and may result in the need for rate increases during a period of declining demand for electricity. If TVA needs to use revenue originally targeted for debt reduction to pay for greater than estimated pension expenses, this could interfere with TVA’s debt reduction goal and additional rate increases may be required which could interfere with TVA’s ability to keep rates low. Alternatively, less flexibility could lead to pressure to reduce the pay or benefits of future TVA employees. Since fiscal year 2013, TVA reduced its O&M costs by about 18 percent while completing construction of the first nuclear unit to enter commercial operation in 20 years. However, since the late 1970s, TVA’s financial condition worsened largely as a result of delays, cost overruns, and operational shutdowns in its nuclear program, and the agency continues to invest in nuclear projects while deferring full recognition and funding of pension liabilities. TVA generally aims to reduce its debt to increase its financial flexibility over the long term to ensure sufficient room under its debt ceiling so it can access capital for future investments to meet its mission. However, retirement benefit and labor costs and cost overruns or delays on nuclear capital projects could put pressure on TVA’s plan, along with other factors including future demand for electricity or unforeseen events. GPRAMA requires agencies to report major management challenges that they face and report performance information—including performance goals, measures, milestones, and planned actions needed to resolve them. However, TVA is not fully meeting this requirement, thereby reducing transparency and raising questions about how it will meet its goals of managing debt and reducing its unfunded pension liabilities. TVA’s unfunded pension liabilities affect TVA’s financial health and operations especially if TVA will need to fund them through rate increases in the future. Without better documentation and communication of TVA’s goals to reduce debt and unfunded pension liabilities in its performance plan and report, including the strategies for achieving these goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. TVA aims to eliminate $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but factors such as market conditions could affect TVA’s progress and no mechanism is in place to ensure the pension plan is fully funded. The TVARS Rules do not adjust TVA’s required contributions to ensure pension liabilities will be fully funded and TVA plans to contribute no more than the rules require and to defer the remaining pension liability. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. We recommend that the Board of Directors ensure that TVA take the following two actions: better document and communicate its goals to reduce its debt and unfunded pension liabilities in its performance plans and reports, including detailed strategies for achieving these goals. propose, and work with the TVARS board to adopt, funding rules designed to ensure the plan’s full funding. We provided a draft of this product to TVA for comment. In its comments, reproduced in appendix II, TVA agreed with our first recommendation and stated that it will incorporate additional details in the next iteration of its performance plan and report to enhance transparency. TVA neither agreed nor disagreed with our second recommendation. However, TVA said that it is committed to working with the TVARS Board to ensure a fully funded system. It did not specifically state whether it would consider proposing, and working with the TVARS Board to adopt, funding rules designed to ensure the pension plan’s full funding. As TVA states in its comments, it worked with the TVARS Board to implement plan amendments that were effective October 1, 2016. TVA states that those amendments have placed the retirement system on a path toward achieving full funding in 20 years. We continue to believe that the action we recommended is needed and, as discussed in the report, that the open amortization period used in the TVARS Rules to determine TVA’s minimum contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and, therefore, does not ensure full funding of the pension liabilities. In addition, we received technical comments, which we have incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, TVA’s board of directors, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@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 members who made major contributions to this report are listed in appendix III. The Tennessee Valley Authority (TVA) reports on debt using a measure of total financing obligations that includes bonds and notes, which TVA considers “statutory debt,” and other financing obligations which include lease-leaseback obligations, energy prepayment obligations, debt related to variable interest entities, and membership interests issued in connection with a lease financing transaction. As table 3 shows, in fiscal year 2016, TVA’s $26 billion in debt included about $24 billion in bonds and notes and $2 billion in other financing obligations. Table 4 shows selected data from TVA’s financial statements including revenues, expenses, and other data. Table 5 shows TVA’s pension liabilities, assets and funded status. Table 6 shows TVA’s regulatory assets—incurred costs deferred for recovery through rates in the future—by major category. Frank Rusco, (202) 512-3841 or ruscof@gao.gov. In addition to the contact named above, Michael Hix (Assistant Director), Janice Ceperich, Philip Farah, Kirk Menard, and Joseph Silvestri made key contributions to this report. Also contributing to this report were Antoinette Capaccio, Cindy Gilbert, Steve Lowrey, Alison O’Neill, Karissa Robie, Dan C. Royer, Barbara Timmerman, and Jacqueline Wade.

Summary: TVA, the nation's largest public power provider, is a federal electric utility with revenues of about $10.6 billion in fiscal year 2016. TVA's mission is to provide affordable electricity, manage river systems, and promote economic development. TVA provides electricity to more than 9 million customers in the southeastern United States. TVA must finance its assets with debt and operating revenues. TVA primarily finances large capital investments by issuing bonds but is subject to a statutorily imposed $30 billion debt limit. In fiscal year 2014, TVA established a debt reduction goal. GAO was asked to review TVA's plans for debt reduction. This report examines (1) TVA's debt reduction goal, plans for meeting its goal, and key assumptions; (2) the extent to which TVA reports required performance information; and (3) factors that have been reported that could affect TVA's ability to meet its goal. GAO analyzed TVA financial data and documents and interviewed TVA and federal officials and representatives of stakeholder and industry groups. To meet its goal to reduce debt by about $4 billion—from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023—the Tennessee Valley Authority (TVA) plans to increase rates, limit the growth of operating expenses, and reduce capital expenditures. For example, TVA increased rates each fiscal year from 2014 through 2017 and was able to reduce operating and maintenance costs by about 18 percent from fiscal year 2013 to 2016. TVA's plans depend on assumptions that future capital projects will be completed on time and within budget, but TVA's estimated capital costs may be optimistic and could increase. TVA's debt reduction plans and performance information are not reported in a manner consistent with the GPRA Modernization Act of 2010. Specifically, TVA identifies managing its debt and its unfunded pension liabilities as major management challenges but has not reported required performance information in its performance plans or reports on these challenges, thereby reducing transparency and raising questions about how it will meet its goal. As of September 30, 2016, TVA‘s pension plan was about 54 percent funded (plan assets totaled about $7.1 billion and liabilities $13.1 billion). While TVA's debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years, as shown below. Tennessee Valley Authority's Debt and Unfunded Pension Liabilities, Fiscal Years 2006 through 2016 Several factors could affect TVA's ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. Also, TVA aims to eliminate its unfunded pension liabilities within 20 years, according to TVA officials. However, factors such as market conditions could affect TVA's progress, and no mechanism is in place to ensure it fully funds the pension liabilities if, for example, plan assets do not achieve expected returns. The TVA retirement system rules that determine TVA's required annual pension contributions do not adjust TVA's contributions to ensure full funding and TVA does not plan to contribute more than the rules require. Without a mechanism that ensures TVA's contributions will adequately adjust for actual plan experience, unfunded liabilities could remain and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. GAO recommends that TVA (1) better communicate its plans and goals for debt reduction and reducing unfunded pension liabilities in its annual performance plan and report and (2) take steps to have its retirement system adopt funding rules designed to ensure the pension plan's full funding. TVA agreed with the first recommendation and neither agreed nor disagreed with the second. GAO believes that action is needed as discussed in the report.