Tennessee Valley Authority

Implementation of its 10-year business plan is moving the Tennessee Valley Authority (TVA) in the right direction by addressing key issues--its high fixed financing costs and large investment in nonproducing and other deferred assets that have not been recovered through rates. The plan, which was issued in July 1997, called for lowering fixed costs by reducing outstanding debt by about one-half--to about $14 billion--by 2007. The plan also provides for the recovery through rates of all but about $500 million of the $8.5 billion in deferred assets outstanding. The year 2007 is important for TVA because it expects to face greater competition by then and because many long-term contracts with customers could expire at about that time. However, TVA's plan does not address certain costs, including (1) the capital costs to increase generating capacity to meet the growth in demand for power as is now planned; instead, it expects to meet the rise in demand by buying power from other utilities; (2) the cost of complying with environmental regulations; and (3) the cost of nonpower programs that were formerly funded through appropriations. TVA estimates that the additional costs will total at least $1 billion. Also, some of the plan's goals and assumptions were not achievable, largely because of the additional costs described above. Because of the additional costs not addressed in the 10-year plan, it is unlikely that TVA can reduce its debt to the extent planned by 2007. Although TVA has acknowledged major changes to several of the plan's goals and assumptions and has factored these into its internal planning, the 10-year plan has not been formally updated to reflect these changes. Until the plan is formally updated, Congress and other users of the plan will lack the information needed to make policy, oversight, and investment decisions about TVA.

GAO noted that: (1) implementation of the 10-year plan is moving TVA in the right direction toward its strategic objectives by addressing the key issues it faces--its high fixed financing costs and large investment in nonproducing and other deferred assets that have not been recovered through utility rates; (2) the plan calls for lowering fixed costs by reducing outstanding debt by about one-half--to about $14 billion--by 2007; (3) the plan also provides for the recovery through rates of all but about $500 million of the $8.5 billion in deferred assets outstanding as of the plan issuance date; (4) the year 2007 is key for TVA because it expects to face greater competitive pressures by then and because many long-term contracts with customers could expire at about that time; (5) the plan emphasizes changes designed to enable TVA to offer competitive rates by the end of 2007; (6) while focusing on the right issues, TVA's plan does not fully address certain costs; (7) the plan does not include: (a) the capital costs of increasing generating capacity to meet the growth in demand for power as is now planned; instead, it provides for meeting the growth in demand for power by purchasing power from other utilities; (b) the costs of complying with new and proposed environmental regulations; and (c) the costs of nonpower programs that were formerly fully funded through appropriations; (8) TVA estimates that these additional costs will total about $1 billion over the remaining life of the plan and will likely be higher; (9) GAO also found that while many of the plan's goals and assumptions were achievable or reasonable, certain of them were not, largely due to the additional expected costs described above; (10) some of these additional costs could be offset by increases in expected market rates of power in 2007; (11) because of the additional costs not addressed in the 10-year plan, it is unlikely that TVA can reduce its debt to the extent planned by 2007; (12) estimates in TVA's fiscal year 2000 federal budget request indicate that its debt reduction goal will likely not be achieved until 2009; (13) however, since it is not possible to accurately predict what the market price of power will be in 2007, TVA could still achieve its objective of offering competitively priced power, even if it does not fully achieve the plan's other goals and objectives; and (14) while TVA has acknowledged major changes to several of the plan's goals and assumptions and has factored these into its internal planning, the 10-year plan has not been formally updated to reflect these changes.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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