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Tennessee Valley Authority: Plans to Reduce Debt While Meeting Demand for Power

GAO-06-810 Published: Aug 31, 2006. Publicly Released: Sep 29, 2006.
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Highlights

Competition in the electricity industry is expected to intensify, and restructuring legislation may dramatically change the way electric utilities do business in the future. To be competitive, the Tennessee Valley Authority (TVA) needs to reduce fixed costs and increase its flexibility in order to meet market prices for power. TVA plans to reduce its financing obligations, which include statutory debt and other financing arrangements, by $7.1 billion by the end of fiscal year 2015. GAO was asked to (1) describe how TVA plans to meet its goal for reducing financing obligations, (2) assess the reasonableness of TVA's approach in developing its plan, (3) identify key factors that could impact TVA's ability to successfully carry out its plan, and (4) identify how TVA's plans for meeting the growing demand for power in the Tennessee Valley may impact its ability to reduce financing obligations. To fulfill these objectives, GAO interviewed TVA officials and others, and reviewed budget submissions, financial projections, and other documentation supporting the plan.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Tennessee Valley Authority To explore additional data sources for estimates of key input variables in the Enterprise Risk Model and better illustrate the range of outcomes in the Enterprise Risk Model used for planning purposes, the Chairman of the Board of Directors of the Tennessee Valley Authority should consider incorporating the variability surrounding certain assumptions that are now held fixed, such as the starting date for Browns Ferry Nuclear Unit 1 or possible new environmental legislation. In cases where professional judgment is used to quantify the uncertainty, the effects of incorporating that judgment should be documented.
Closed – Implemented
Our report recommended that TVA strengthen the range of outcomes used in its modeling by incorporating variability for assumptions that were previously held fixed in scenarios. TVA agreed with our recommendation. TVA said they would begin using variable start dates for new generating assets or future environmental costs to improve the range of outcomes used in TVA?s planning. Further, TVA said they would continue to develop and explore scenarios on a regular basis to examine fundamental shifts in the landscape, including legislation for carbon or renewables; policy or litigation-derived shifts in environmental factors, market reliance, or customer/contract structure; major changes in the economy; plant shutdowns; and different approaches to capacity expansion.
Tennessee Valley Authority To explore additional data sources for estimates of key input variables in the Enterprise Risk Model and better illustrate the range of outcomes in the Enterprise Risk Model used for planning purposes, the Chairman of the Board of Directors of the Tennessee Valley Authority should augment its sources for projections of key model inputs with sources such as commodity prices and the volatility of those prices. Market prices for commodities with active futures and options markets can be used to determine the expectations of market participants concerning prices and their volatility.
Closed – Implemented
Our August 2006 report assessed the Enterprise Risk Model used by TVA to estimate key financial information used in preparing its annual internal budgets. We recommended that TVA augment its sources for projections of key model inputs with sources such as commodities futures and options prices to increase the data sources for estimates of key input variables in the accounting model. In response to our recommendation, TVA has begun to evaluate potential new data sources to support its modeling and assessments and has expanded the number of commodities represented as uncertain inputs in its modeling.

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Topics

CompetitionCost controlElectric energyElectric power generationElectric utilitiesEnergy costsEnergy demandFinancial analysisProgram evaluationPublic utilitiesRisk assessmentStrategic planning