Tennessee Valley Authority:

Assessment of the 10-Year Business Plan

AIMD-99-142: Published: Apr 30, 1999. Publicly Released: Apr 30, 1999.

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Pursuant to a congressional request, GAO provided information on the Tennessee Valley Authority's (TVA) 10-year business plan, focusing on whether the 10-year plan: (1) addresses key issues facing TVA; (2) takes into consideration all applicable costs and revenue sources; (3) contains goals and assumptions that are achievable or reasonable and in line with industry estimates and expectations; and (4) has been updated to reflect significant changes in key goals and assumptions or actual experience.

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 for Executive Action

  1. Status: Closed - Implemented

    Comments: TVA provides information of its progress towards achieving the objectives of its 10-year plan in its annual reports and elsewhere. Most importantly, TVA has provided a more realistic assessment of its ability to reduce debt than was contained in the 10-year plan. This important information has been provided to stakeholders in a variety of ways, including budget documents submitted to Congress, briefings of investors, and TVA's annual reports. TVA also reduced the carrying value of its deferred assets by about $3.4 billion in fiscal year 2002, better reflecting the value of those assets. For these reasons GAO believes TVA has been responsive to its recommendation, even though TVA has not published a new 10-year plan.

    Recommendation: The Chairman of the Board of Directors of TVA should move quickly to improve the reporting of information to the plan's users. Specifically, the Chairman should revise and reissue the plan to reflect evolving conditions and operating plans and their impact on TVA's ability to meet the strategic objectives outlined in the plan by 2007. TVA should also include a discussion of its plans to recover the costs of its deferred assets. As further significant changes occur, the plan should be updated to communicate these changes to plan users.

    Agency Affected: Tennessee Valley Authority

  2. Status: Closed - Implemented

    Comments: As GAO suggested, TVA does provide information in its annual reports regarding its progress towards achieving the major objectives of its 10-year plan. GAO confirmed that it did so in its most recent annual report. TVA provides relevant information that gets to the intent of GAO's recommendation through other avenues as well, including budget submissions, investor briefings, and website articles and reports. Specifically, TVA periodically provides updated information pertaining to revenues, debt reduction efforts, capital expenditures, cost savings initiatives, and expectations regarding the future market price of power. Because TVA has been providing this information, GAO believes TVA has been responsive to its recommendation.

    Recommendation: The Chairman of the Board of Directors of TVA should move quickly to improve the reporting of information to the plan's users. Specifically, the Chairman should periodically communicate its progress toward achieving the 10-year plan's strategic objectives to those who rely on the information contained in the plan. One option would be for TVA to expand its discussion of the 10-year plan in its annual reports, including reporting: (1) how actual results compare to all of the plan's key goals and assumptions, including those for revenues, debt reduction, capital expenditures, cost savings, and the market price of power; (2) progress toward achieving performance measures related to the plan, when developed; and (3) an overall assessment of whether TVA is on course to provide competitive power in 2007.

    Agency Affected: Tennessee Valley Authority

 

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