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entitled 'Tennessee Valley Authority: Plans to Reduce Debt While 
Meeting Demand for Power' which was released on September 29, 2006. 

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Report to the Chairman, Subcommittee on Water Resources and 
Environment, Committee on Transportation and Infrastructure, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

August 2006: 

Tennessee Valley Authority: 

Plans to Reduce Debt While Meeting Demand for Power: 

Tennessee Valley Authority: 

GAO-06-810: 

GAO Highlights: 

Highlights of GAO-06-810, a report to the Chairman, Subcommittee on 
Water Resources and Environment, Committee on Transportation and 
Infrastructure, House of Representatives 

Why GAO Did This Study: 

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. 

What GAO Found: 

TVA plans to reduce its financing obligations by about $7.1 billion 
from fiscal years 2004 through 2015 by increasing revenue, controlling 
the growth of its operating expenses, and limiting capital 
expenditures. TVA’s financing obligations include statutory debt, which 
it plans to reduce by $6.7 billion, and alternative financing 
obligations such as energy prepayments, which it plans to reduce by 
$0.4 billion. 

Overall, GAO’s review found TVA’s approach to developing its plan to 
reduce financing obligations reasonable. TVA performed detailed 
competitive analyses and modeled different market scenarios to estimate 
its future competitive environment, then used its internal budget 
process to project annual cash flows and refine its goal with a cash-
based accounting model. Many of the variables used in the models were 
based on recognized data sources. Augmenting these sources with prices 
from options markets could provide more accurate estimates in volatile 
markets. TVA also made fixed assumptions about actions it would take, 
such as building new power generation, and events, such as the advent 
of new environmental regulations. While these assumptions are 
reasonable, they carry uncertainty that is not reflected in the model. 
Modeling them as variables might better reflect that uncertainty and 
provide broader information for planning purposes. 

GAO identified several key factors that could impact TVA’s ability to 
successfully carry out its plan. Factors such as the timing of 
electricity industry restructuring, potential increases in interest 
rates, and costs associated with meeting potential new environmental 
requirements, are key factors that are difficult for TVA to control. 
TVA has more control over other key factors, such as its decisions on 
whether or not to construct new power generating facilities before 2015 
and to limit operating and maintenance expenses, but these are also 
affected by outside forces and contain an element of uncertainty. 
Future rate increases and a fuel-cost adjustment clause are factors 
that should help cover any unforeseen costs, capital expenditures, or 
revenue shortfalls. 

TVA’s plan includes the capital expenditures it believes will be needed 
to expand capacity of existing generating facilities to meet the 
growing demand for power in its service area through 2015; however, any 
new or unplanned expenditures prior to 2015 could lessen TVA’s ability 
to achieve the $7.1 billion goal. By 2015, TVA has estimated that it 
will need more baseload generation to meet growth in demand. TVA 
officials are considering a number of options to meet this projected 
increase in demand for power, including partnering with outside parties 
to build new generation. TVA’s current projections assume that it will 
not invest in any new generation through 2015 other than restarting 
Browns Ferry Nuclear Plant Unit 1; however, any new or unplanned 
capital expenditures could use cash otherwise intended to be used to 
reduce financing obligations. 

What GAO Recommends: 

GAO makes two recommendations to help TVA (1) augment its data sources 
for estimates of key input variables in its cash flow model, and (2) 
better illustrate the range of outcomes of the model. In comments on a 
draft of this report, TVA agreed with these recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-810]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Robert E. Martin at (202) 
512-6131 or martinr@gao.gov 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

TVA Plans to Increase Revenue, Control Operating Expenses, and Limit 
Capital Expenditures: 

TVA Used a Reasonable Approach to Developing Its Plan to Reduce TFOs: 

Several Key Factors Could Impact TVA's Ability to Successfully Carry 
Out Its Plan for Reducing TFOs: 

Growing Demand for Power Could Affect TVA's Ability to Meet Its TFO 
Reduction Goal: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Comments from the Tennessee Valley Authority: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: TVA's Total Financing Obligations at Year-end for Fiscal Years 
1997 through 2005: 

Table 2: TVA's Actual and Targeted Reduction of Total Financing 
Obligations for Fiscal Years 2004 through 2015: 

Table 3: TVA's Planned Capital Expenditures by Major Category from 
Fiscal Year 2006 through Fiscal Year 2015: 

Figures: 

Figure 1: TVA's Service Territory: 

Figure 2: Generation Capacity by Fuel Type, TVA vs. Nearest NERC 
Regions: 

United States Government Accountability Office: 
Washington, DC 20548: 

August 31, 2006: 

The Honorable John J. Duncan, Jr. 
Chairman, Subcommittee on Water Resources and Environment: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

Dear Mr. Chairman: 

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 remain competitive, the 
Tennessee Valley Authority (TVA) needs to have low fixed costs and the 
flexibility to meet market prices for power. Recognizing this, in 1997, 
TVA embarked on a plan to reduce its debt by one half to about $13.2 
billion by 2007. It will not meet this goal, however, and in fiscal 
year 2004 it issued a strategic plan that included a target to reduce 
debt by $3 to $5 billion from 2004 through 2015. TVA continues to carry 
a relatively high level of debt, currently about $23.1 billion, and 
acknowledges that reducing debt is critical to improving its financial 
condition and competitive prospects. 

Because of concerns that TVA might not meet the targets in its debt 
reduction plan and that this could negatively impact its future 
competitiveness, you asked us to (1) describe how TVA plans to meet the 
debt reduction goal identified in its 2004 strategic plan, (2) assess 
the reasonableness of TVA's approach in developing its debt reduction 
plan, (3) identify key factors that could impact TVA's ability to 
successfully carry out its debt reduction plan, and (4) identify how 
TVA's plans for meeting the growing demand for power in the Tennessee 
Valley may impact its ability to meet its debt reduction goal. 

In performing our work, we interviewed officials from TVA, TVA's 
inspector general's office, the Tennessee Valley Public Power 
Association, the Congressional Budget Office, and the Knoxville 
Utilities Board. We also reviewed TVA's 2004 strategic plan, budget 
submissions, annual reports, and documents and analyses supporting the 
debt reduction plan. To determine the types of revenue and costs TVA 
had reported, we reviewed TVA's audited financial statements. In 
addition, we reviewed prior GAO reports. We conducted our work from 
June 2005 through August 2006 in accordance with generally accepted 
government auditing standards. 

Results in Brief: 

TVA set a goal of reducing statutory debt by $3 to $5 billion in its 
2004 strategic plan. Subsequently, TVA expanded the scope of its debt 
reduction efforts to include debt-like transactions such as lease- 
leasebacks and energy prepayment arrangements, referred to in this 
report as alternative financing. TVA calls this larger group of 
obligations total financing obligations, or TFOs. In its 2007 budget, 
TVA increased its TFO reduction goal to $7.1 billion. This includes 
reducing statutory debt by $6.7 billion and alternative financing 
obligations by $0.4 billion. TVA plans to meet this goal by increasing 
revenue, controlling the growth of its operating expenses, and limiting 
capital expenditures. TVA projects it will gain additional revenue 
through its October 2005 rate increase, a fuel-cost adjustment clause 
to automatically adjust rates up or down when fuel prices change, and 
increased sales from growth in the demand for electricity. TVA's plan 
also calls for controlling the growth of operating costs and limiting 
spending on capital expenditures to $12.1 billion for fiscal years 2006 
through 2015. TVA officials believe that this plan will allow it to be 
financially flexible while continuing to offer competitive electricity 
rates. 

Overall, we found TVA's approach to developing its plan to reduce 
financing obligations to be reasonable. TVA used a strategic planning 
process to develop its plan, which focused on its core mission as a 
long-term provider of low-cost power. As part of this process, TVA 
looked not only at its financing obligations, but at external business 
and market risks. To assess these outside risks, TVA performed detailed 
competitive analyses and modeled different market scenarios to estimate 
its future competitive environment. It considered the results of these 
market risk analyses in formulating its strategic plan and determining 
the initial possible range for reducing financing obligations through 
2015. As part of its annual internal budget process, TVA then used an 
accounting model to project annual cash flows and refine its goal. Many 
of the variables used in the models were based on data from Global 
Insight, The Wall Street Journal, and other recognized sources of 
economic data and forecasts. TVA estimated the price volatility of 
commodities such as coal and natural gas with a combination of 
historical data and projected trends. It did not, however, use prices 
from options markets, which could help identify more accurate estimates 
of the range of possible prices in volatile markets. In using the 
results of the accounting model to refine its TFO reduction goals, TVA 
also made assumptions about actions it would or would not take, such as 
building new baseload generation, and events outside its control, such 
as the speed of electricity market restructuring and the advent of new 
environmental regulations. While these assumptions are reasonable, they 
carry uncertainty that is not reflected in the model. Modeling them as 
variables rather than fixed assumptions might better reflect that 
uncertainty and provide TVA with a broader range of potential outcomes 
for planning purposes. 

We identified several key factors that could impact TVA's ability to 
successfully carry out its plan. The timing of electricity industry 
restructuring, potential increases in interest rates, and costs 
associated with meeting potential new environmental requirements are 
key factors that are difficult for TVA to control. TVA has more control 
over other key factors, such as its decisions not to build new power 
generating capacity before 2015 and to limit operating and maintenance 
expenses, but these are also affected by outside forces and contain an 
element of uncertainty. Rate increases that were not considered in 
TVA's current plan, as well as adding a fuel-cost adjustment clause to 
its customer contracts in fiscal year 2007, are factors that should 
help cover any unforeseen costs, capital expenditures, or revenue 
shortfalls. 

TVA's plan includes the capital expenditures it believes will be needed 
to meet the growing demand for power in the Tennessee Valley through 
2015; however, any additional, unplanned capital expenditures prior to 
2015 could affect TVA's ability to achieve its plan. By 2015, TVA has 
estimated that it will need more electricity generation to meet growth 
in demand and its plan includes the estimated costs to restart one of 
its idle nuclear generating units, Browns Ferry Nuclear Unit 1. TVA 
officials are considering a number of additional options to meet this 
projected increase in demand for power, including partnering with 
outside parties. Since TVA's current projections assume that it will 
not invest in any new generation through 2015, other than restarting 
Browns Ferry Nuclear Unit 1, any new or unplanned capital expenditures 
would use cash otherwise intended to be used to reduce financing 
obligations, thus affecting TVA's ability to meet its planned TFO 
reduction. 

We are making two recommendations to help TVA (1) augment its data 
sources for estimates of key input variables in the model, and (2) 
better illustrate the range of outcomes in its cash flow model for 
planning purposes. In comments on a draft of this report, TVA agreed 
with these recommendations. 

Background: 

TVA is an independent, wholly owned federal corporation established by 
the TVA Act of 1933 (TVA Act), as amended.[Footnote 1] 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. To meet the subsequent need for 
more electric power, TVA expanded beyond hydropower to other types of 
power generation such as natural gas, coal, and nuclear plants. As of 
September 30, 2005, TVA sold electricity at wholesale rates to 158 
retail distributors that resell electricity to consumers, and sold 
electricity directly to 61 large retail customers. As illustrated in 
figure 1, TVA's service territory includes most of Tennessee and parts 
of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and 
Virginia. The area covers 80,000 square miles with a population of more 
than 8.6 million. 

Figure 1: TVA's Service Territory: 

[See PDF for image] 

Source: TVA. 

[End of figure] 

From its inception in 1933 through fiscal year 1959, TVA received 
appropriations to finance its internal cash and capital requirements. 
In 1959, however, the Congress amended the TVA Act to provide TVA the 
means to self-finance its power program and required it to repay a 
substantial portion of appropriations[Footnote 2] it had received to 
pay for its capital projects. At the same time, the Congress required 
that TVA's power programs be self-financing through revenues from 
electricity sales. For its capital needs in excess of funds generated 
from operations, TVA was authorized to borrow by issuing bonds and 
notes. TVA's authority to issue bonds and notes is set by the Congress 
and cannot exceed $30 billion outstanding at any given time. 

Until recently, TVA had been administered by a three-member board of 
directors appointed by the President of the United States and confirmed 
by the U.S. Senate. An Executive Committee worked with the board to 
determine TVA's strategic mission and future direction, provide 
management oversight, and ensure policies of the board were carried 
out. The Consolidated Appropriations Act, 2005, which was signed into 
law in December 2004, changed the structure of TVA's management. The 
act contained provisions that restructured the board from three full- 
time members to nine part-time members, established the position of 
Chief Executive Officer (CEO) to be appointed by the board, required 
TVA to begin filing financial reports with the Securities and Exchange 
Commission (SEC), and required TVA's new board to create an Audit 
Committee to be composed solely of board members independent of 
management. The audit committee will be responsible for reviewing 
inspector general and external audit reports and making recommendations 
to the board. The legislation specifies that seven of the nine board 
members must be legal residents of TVA's service area and that the 
members will be appointed by the President and confirmed by the Senate. 
After a transition period, members will serve 5-year rather than the 
current 9-year terms. In general, the board will establish TVA's 
strategic direction and policies while the CEO will oversee their 
implementation as well as TVA's overall operations. The new board 
became effective on March 31, 2006, when six new board members took the 
oath of office and joined two existing members to hold the first board 
meeting under the new governance structure.[Footnote 3] 

Along with annual reporting to the SEC, in fiscal year 2006 TVA will 
also be required to comply with certain provisions of the Sarbanes- 
Oxley Act of 2002, including the requirement that its officers certify 
annual and quarterly financial reports and report on the effectiveness 
of internal controls over financial reporting. TVA's external auditor, 
in addition to auditing and issuing an opinion on TVA's financial 
statements, will be required to issue an opinion on the effectiveness 
of TVA's internal controls over financial reporting. Based on the 
current guidance from the SEC, TVA will file the first report on 
internal controls with its September 30, 2007, financial statements. 

Under the TVA Act, as amended, TVA has not been subject to most of the 
regulatory oversight requirements that commercial utilities must 
satisfy. Legislation has also limited 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 service area that it and its distributors were serving on 
July 1, 1957. This is commonly referred to as the "fence" because it 
limits TVA's ability to expand outside its July 1, 1957, service area. 
In addition, the Energy Policy Act of 1992 (EPAct) exempted TVA from 
being required to allow other utilities to use its transmission lines 
to send power to customers within its service area, effectively 
reducing the opportunities for TVA's wholesale customers to choose 
other suppliers. This exemption is often referred to as the "anti- 
cherrypicking" provision. TVA is still subject to some forms of 
indirect competition common to all utilities. For example, the cost of 
power would affect decisions by TVA's customers to move or expand 
outside TVA's service area or by businesses to move into its service 
area. In addition, customers can decide to generate their own power for 
on-site use. However, as long as the legislative framework continues to 
insulate TVA from direct competition for its wholesale customers, it 
will remain in a position similar to that of a regulated utility 
monopoly. 

For more than 20 years, the federal government has been taking a 
variety of steps to restructure the electricity industry with the goal 
of increasing competition in wholesale markets and thereby increasing 
benefits to consumers, including lower electricity prices and a wider 
variety of retail services. Electricity restructuring is evolving 
against a backdrop of constraints and challenges, including shared 
responsibility for implementing and enforcing local, state, and federal 
laws affecting the electricity industry and an expected substantial 
increase in electricity demand by 2025, which will require significant 
investment in new power plants and transmission lines. 

Prior to this restructuring, electricity was generally provided by 
electric utilities that exclusively served all customers within a 
specific geographic region. Under these conditions, the federal 
government, through the Federal Energy Regulatory Commission (FERC) and 
its predecessors, regulated wholesale electricity sales (sales for 
resale) and interstate transmission by electric utilities[Footnote 4] 
and set prices at cost-based rates. Because the utilities were 
monopolies, states regulated retail markets, approving utility company 
investments and rates paid by customers. In 1978, the federal 
government laid the groundwork for restructuring and competition in the 
electricity industry with the Public Utility Regulatory Policies Act, 
which opened wholesale power markets to electricity producers that were 
not regulated utility monopolies. In the 1990s the federal government 
greatly expanded these efforts. First the EPAct provided for broader 
participation in wholesale electricity markets by nonutilities[Footnote 
5] and allowed these entities to produce and sell electricity at market 
prices. Second, in 1996 the FERC issued Orders 888 and 889, which 
greatly expanded opportunities for competition by requiring utilities 
to provide access to their transmission lines to all users under the 
same prices, terms, and conditions. This change allowed the new 
nonutilities to compete with utilities and others for the opportunity 
to sell electricity in wholesale markets on more equal terms.[Footnote 
6] By 2002 a number of states had made efforts to introduce competition 
to the retail markets that they oversee, allowing nonutilities to 
compete with utilities and others for the opportunity to sell 
electricity directly to consumers. 

Beginning in 2000, some restructured wholesale and retail electricity 
markets encountered a number of problems. From the summer of 2000 
through early 2001, California saw a sharp increase in wholesale 
electricity prices, electricity shortages leading to rolling blackouts, 
and the deteriorating financial stability of its three major investor- 
owned utilities. These problems, along with the largest blackout in 
U.S. history along the East Coast in 2003, drew attention to the need 
to examine the operation and direction of the industry. Efforts to 
expand restructuring slowed down as many states analyzed the factors 
that contributed to these problems, among them failure to meet 
increasing demand for electricity with new generation and transmission 
capacity. 

TVA management and many industry experts, however, expect that TVA will 
eventually be drawn into the restructuring of the electric utility 
industry and will eventually lose its legislative protections from 
competition. There have already been some indications of such changes. 
For instance, S.1499, introduced in July 2005, would remove any area 
within Kentucky from coverage by the "anti-cherrypicking" provision in 
the EPAct. If the bill becomes law, TVA would be required to transmit 
power from another supplier over its transmission lines for use inside 
the Kentucky portion of its service area without being able to 
similarly expand its service area. The bill was referred to the Senate 
Energy and Natural Resources Committee, where it remained as of August 
15, 2006. 

Our prior reports have indicated that TVA's high debt and related 
interest expense could place it at a disadvantage in continuing to 
offer competitively priced power if it were to lose its legislative 
protections from competition.[Footnote 7] TVA's management has also 
recognized the need to reduce its debt and other financing obligations 
to increase its flexibility to meet competitive challenges. In July 
1997, TVA issued a 10-year business plan with steps necessary to 
improve its financial position for an era of increasing competition. 
Two key strategic objectives of the plan were (1) to reduce the cost of 
power by reducing debt and the corresponding financing costs, and (2) 
increase financial flexibility by reducing fixed costs. To help meet 
these objectives, the plan called for TVA to reduce its debt by half 
over a 10-year period to about $13.2 billion by increasing its 
electricity rates beginning in 1998, reducing certain expenses, and 
limiting capital expenditures. 

TVA did not meet the 1997 debt reduction goal because it used cash 
intended for debt reduction to cover greater than estimated annual 
operating costs and capital expenditures. In fiscal year 2000, TVA 
began entering into alternative financing in the form of lease- 
leaseback arrangements to obtain a lower cost of capital than it could 
by selling bonds. TVA entered into these arrangements in fiscal years 
2000, 2002, and 2003 to refinance 24 existing power generators that 
were designed for use during periods of peak power demand. TVA financed 
and built the generating units and leased them to investors in exchange 
for cash. It then leased the generators back and is making payments to 
investors. TVA also implemented other alternative financing 
arrangements that allowed its customers to prepay for power in exchange 
for discounted rates. For example, in November 2003, TVA entered into 
an energy prepayment agreement with its largest customer, Memphis 
Light, Gas, and Water Division (MLGW). Under this agreement, MLGW 
prepaid TVA $1.5 billion for electricity to be delivered over a 15-year 
period. TVA also offered a discounted energy units program in fiscal 
years 2003 and 2004, under which TVA customers could purchase power, 
usually in $1 million increments, in return for a discount on a 
specified quantity of power over a certain period of years. TVA did not 
offer the DEU program in 2005. During our review, TVA's 
management[Footnote 8] told us they have no current plans to enter into 
additional alternative financing arrangements. 

Generally accepted accounting principles require that lease-leaseback 
and other alternative financing arrangements be classified as 
liabilities. In 2003 we reported[Footnote 9] that the lease-leaseback 
arrangements, while not considered debt for purposes of financial 
reporting, had the same effect on TVA's financial condition as 
traditional debt financing. The Office of Management and Budget (OMB) 
treats the cash proceeds TVA receives from private parties at the 
inception of lease-leaseback arrangements as borrowing. Accordingly, in 
the President's Budget for fiscal year 2004, OMB began classifying 
TVA's lease-leaseback arrangements as debt. Table 1 shows that although 
TVA reduced its outstanding statutory debt by about $4.3 billion from 
fiscal years 1997 through 2005, its use of alternative financing 
arrangements rose, adding nearly $2.5 billion to its total financing 
obligations as of September 30, 2005, resulting in a net reduction of 
about $1.8 billion. 

Table 1: TVA's Total Financing Obligations at Year-end for Fiscal Years 
1997 through 2005: 

Dollars in millions. 

Debt and obligations: Statutory debt; 
1997: $27,379; 
1998: $26,684; 
1999: $26,376; 
2000: $25,985; 
2001: $25,375; 
2002: $25,255; 
2003: $24,875; 
2004: $23,250; 
2005: $23,088. 

Debt and obligations: Lease-leaseback; 
1997: 0; 
1998: 0; 
1999: 0; 
2000: 300; 
2001: 271; 
2002: 559; 
2003: 1,238; 
2004: 1,178; 
2005: 1,143. 

Debt and obligations: Energy prepayments; 
1997: 0; 
1998: 0; 
1999: 0; 
2000: 0; 
2001: 0; 
2002: 0; 
2003: 47; 
2004: 1,455; 
2005: 1,350. 

Total financial obligations; (Debt + alternative financing); 
1997: ; $27,379; 
1998: ; $26,684; 
1999: ; $26,376; 
2000: ; $26,285; 
2001: ; $25,646; 
2002: ; $25,814; 
2003: ; $26,160; 
2004: ; $25,883; 
2005: ; $25,581. 

Source: GAO analysis of information obtained from TVA. 

[End of table] 

In fiscal year 2004, burdened with total financing obligations of 
almost $26 billion, TVA's board adopted a new strategic plan for 
reducing debt that called for increasing revenue, controlling costs, 
and reducing the growth of capital expenditures. However, TVA also 
began measuring its debt reduction more realistically and transparently 
in terms of TFOs, which, as shown in table 1, are comprised of its 
statutory debt as well as its liabilities under alternative financing 
arrangements. 

Since issuing its strategic plan in 2004, TVA has raised its power 
rates twice--a 7.52 percent increase in firm wholesale electric rates 
effective October 1, 2005, and a 9.95 percent increase effective April 
1, 2006. On July 28, 2006, TVA's board approved a 4.5 percent decrease 
in firm wholesale power rates in conjunction with a fuel-cost 
adjustment clause. Utilities surrounding the Tennessee Valley also 
increased rates in 2005, and 12 of the 14 surrounding utilities have 
fuel-cost adjustment clauses that allow them to pass increases in the 
price of fuel to customers automatically. TVA is working with 
distributors and the Tennessee Valley Public Power Association 
(TVPPA)[Footnote 10] to develop future wholesale pricing options and 
new long-term contract options. 

Scope and Methodology: 

To determine how TVA plans to meet the debt reduction goal identified 
in its 2004 strategic plan, we: (1) interviewed TVA officials, (2) 
reviewed documentation and analyses supporting TVA's debt reduction 
plan including its 2004 strategic plan and budget submissions for 
fiscal years 2006 and 2007, and (3) reviewed TVA's fiscal years 2004 
and 2005 annual reports, information statements, and audited financial 
statements. 

To assess the reasonableness of TVA's approach in developing its debt 
reduction plan, we interviewed TVA officials responsible for developing 
the 2004 Strategic Plan and performing analyses with the Competitive 
Risk Model and the Enterprise Risk Model. To assess these models, we 
obtained documentation describing the structure of the models and the 
sources of variables used in the models, and discussed this information 
with relevant TVA staff. We examined the structure of the models in 
order to ascertain whether the relationships between the variables in 
the models were logical and included the most important sources of 
costs and revenues, and considered the extent to which the data are 
independent, widely used, and relevant. 

To identify the key factors that could impact TVA's ability to 
successfully carry out its debt reduction plan we (1) interviewed 
officials from TVA, TVA's Office of Inspector General, the Tennessee 
Valley Public Power Association, and the Knoxville Utilities Board; (2) 
reviewed prior GAO reports on issues confronting TVA; (3) reviewed 
TVA's fiscal years 2004 and 2005 annual reports, information 
statements, and audited financial statements to determine the types of 
revenue and costs TVA had reported; and (4) interviewed an official 
from CBO with expertise in issues pertaining to TVA. 

To identify the impact that growth in demand for power in the Tennessee 
Valley may have on TVA's ability to meet its debt reduction plan, we 
(1) interviewed officials from TVA, TVA's Office of Inspector General, 
the Tennessee Valley Public Power Association, and the Knoxville 
Utilities Board; (2) reviewed prior GAO reports on issues confronting 
TVA; (3) reviewed TVA's fiscal years 2004 and 2005 annual reports, 
information statements, and audited financial statements to determine 
the types of revenue and costs TVA had reported; and (4) interviewed an 
official from CBO with expertise in issues pertaining to TVA. 

During the course of our work, we contacted the following 
organizations: 

* Congressional Budget Office: 

* Tennessee Valley Authority: 

* Tennessee Valley Authority, Office of Inspector General: 

* Tennessee Valley Public Power Association, Chattanooga, Tennessee: 

* Knoxville Utilities Board, Knoxville, Tennessee: 

We provided a draft of this report to officials at TVA for their review 
and incorporated their comments where appropriate. We conducted our 
work from June 2005 through August 2006 in accordance with generally 
accepted government auditing standards. 

TVA Plans to Increase Revenue, Control Operating Expenses, and Limit 
Capital Expenditures: 

TVA set a goal of reducing statutory debt by $3 to $5 billion in its 
2004 strategic plan. Subsequently, TVA expanded the scope of its debt 
reduction efforts to include debt-like transactions such as lease- 
leasebacks and energy prepayment arrangements, referred to in this 
report as alternative financing. TVA calls this larger group of 
obligations total financing obligations, or TFOs. In its 2007 budget, 
TVA increased its TFO reduction goal to $7.1 billion.[Footnote 11] This 
includes reducing statutory debt by $6.7 billion and alternative 
financing obligations by $0.4 billion. TVA plans to meet this goal by 
increasing revenue, controlling the growth of its operating expenses, 
and limiting capital expenditures. TVA projects it will gain additional 
revenue through its October 2005 rate increase, a fuel-cost adjustment 
clause to adjust rates up or down automatically when fuel prices 
change, and increased sales from growth in the demand for electricity. 
TVA's plan also calls for controlling the growth of operating costs and 
limiting spending on capital expenditures to $12.1 billion through 
fiscal year 2015. 

TVA's management told us that they are committed to reducing TFOs and 
that achieving the $7.1 billion TFO reduction goal would give TVA an 
estimated 3.1 interest rate coverage ratio[Footnote 12] by fiscal year 
2015. As of fiscal year 2005, TVA's interest coverage ratio was 2. The 
interest coverage ratio is a quick way to identify a company's ability 
to pay interest on debt, which TVA uses to gauge its financial health. 
TVA officials said the 3.1 ratio would allow TVA to be a financially 
flexible enterprise and continue to offer competitive electricity 
rates. Table 2 shows TVA's annual and cumulative targets for reducing 
total financing obligations for fiscal years 2004 through 2015. 

Table 2: TVA's Actual and Targeted Reduction of Total Financing 
Obligations for Fiscal Years 2004 through 2015: 

Dollars in millions. 

Actual and Projected reductions by fiscal year: Alternative financing; 
2004[A,B]: $(1,347); 
2005[A]: $140; 
2006: $140; 
2007: $142; 
2008: $148; 
2009: $147; 
2010: $152; 
2011: $160; 
2012: $165; 
2013: $172; 
2014: $169; 
2015: $176; 
Total: $364. 

Actual and Projected reductions by fiscal year: Statutory debt; 
2004[A, B]: 1,625; 
2005[A]: 161; 
2006: 200; 
2007: 387; 
2008: 404; 
2009: 545; 
2010: 556; 
2011: 537; 
2012: 605; 
2013: 654; 
2014: 412; 
2015: 649; 
Total: 6,735. 

Actual and Projected reductions by fiscal year: Total annual TFO 
reduction; 
2004[A, B]: 278[C]; 
2005[A]: 301[C]; 
2006: 340; 
2007: 529; 
2008: 552; 
2009: 692; 
2010: 708; 
2011: 697; 
2012: 770; 
2013: 826; 
2014: 581; 
2015: 825; 
Total: $7,099. 

Actual and Projected reductions by fiscal year: Cumulative TFO 
reduction; 
2004[A, B]: $278; 
2005[A]: $579; 
2006: $919; 
2007: $1,448;
2008: $2,000; 
2009: $2,692; 
2010: $3,400; 
2011: $4,097; 
2012: $4,867; 
2013: $5,693; 
2014: $6,274; 
2015: $7,099; 
Total: [Empty]. 

Source: GAO analysis of information obtained from TVA. 

[A] Reflects actual amount. 

[B] During fiscal year 2004, TVA reduced the balance of its TFOs by 
$278 million by using $1.5 billion from a prepayment agreement with 
Memphis Light, Gas, and Water Division (MLGW) plus $125 million 
generated from operations to reduce statutory debt by $1.625 billion. 
At the same time, the balance of TVA's alternative financing 
arrangements increased by $1.5 billion from the MLGW prepayment 
agreement minus a reduction in the balance of other alternative 
arrangements of $153 million for a net increase of $1.347 billion. 

[C] Targeted reduction was $225 million. 

[End of table] 

TVA exceeded its targets for reducing TFOs for the first 2 years of the 
plan. In fiscal year 2004, TVA reduced its TFOs by $278 million, or 24 
percent more than its target of $225 million. In fiscal year 2005, TVA 
reduced its TFOs by $301 million, or 34 percent more than its target of 
$225 million. 

TVA Projects Several Sources of Additional Revenue: 

The projections supporting TVA's current TFO reduction goal show that 
the annual increases in operating revenue over the fiscal year 2004 
level for fiscal years 2005 through 2015 will total $16.7 billion. TVA 
plans to use the additional revenue to cover projected increases in 
operating costs and capital expenditures, and to reduce TFOs. About 
$9.6 billion of this additional revenue will come primarily from 
increased sales from growth in demand. TVA also projects that about 
$5.7 billion will come from the October 1, 2005, rate increase. From 
fiscal years 2007 through 2015, TVA expects about $1.4 billion to come 
from the fuel-cost adjustment (FCA) clause that will be added to 
customer contracts in fiscal year 2007. The FCA will automatically 
increase or decrease rates to cover changes in the cost of fuel and 
purchased power. TVA plans to use the budgeted fuel and purchased power 
estimates for fiscal year 2006 as the baseline for fuel and purchased 
power prices it pays. In subsequent years, it will compare those prices 
to the baseline and automatically adjust rates upward or downward for 
changes in these expenses. Although the FCA will not generate 
additional cash that can be applied to TFO reduction, it will prevent 
increases in the cost of fuel and purchased power from eroding cash 
balances that TVA planned to apply toward TFO reduction. 

The revenue projections supporting the current TFO reduction goal do 
not include several factors, such as the 9.95 percent rate increase 
that took effect on April 1, 2006, the 4.5 percent decrease approved on 
July 28, or any future rate increases. The April 1, 2006, increase took 
effect after TVA approved its 2007 budget and was undertaken to cover 
projected increases in the cost of fuel and purchased power. The rate 
decrease was approved in conjunction with the FCA. Future rate 
increases (excluding the FCA) were not included because TVA plans to 
use them as necessary to cover increases in operating costs (excluding 
fuel and purchased power) that exceed estimates that were used in 
formulating the current TFO reduction goal. The revenue projections 
also assume that an environmental surcharge that was added to rates on 
October 1, 2003, to fund anticipated clean air compliance costs for the 
next 10 years will be discontinued at fiscal year end 2013, as 
originally planned. 

TVA Plans to Control the Growth of Its Operating Costs: 

TVA's TFO reduction plan includes an emphasis on controlling the growth 
of operating costs. Management plans to constrain TVA's baseline 
operating and maintenance (O&M) costs, excluding fuel and purchased 
power, by limiting the growth of these expenses to one-half of a 
percentage point below inflation, as measured by the consumer price 
index (CPI). TVA estimates that this will make about $1.1 billion in 
cash available from fiscal year 2007 through fiscal year 2015. TVA 
plans to hold O&M expenses down by implementing better discretionary 
spending discipline through top-down budgeting guidance and performance 
measures, and then maintaining the efficiency gains throughout the 
planning period. The plan includes establishing overall financial 
targets and allocating them to TVA's individual business units. 

TVA officials also project that bringing Browns Ferry Nuclear Unit 1 
(BFN 1)[Footnote 13] on line will help control the growth of operating 
costs. A 2002 analysis prepared by TVA shows that the completion of BFN 
1 will allow TVA to reduce the cost of its fuel, purchased power, and 
other operating costs. Because completion of BFN 1 is embedded in TVA's 
current forecasts, it could not provide current projections of the 
incremental savings from completing and bringing BFN 1 on line. The 
2002 analysis projected that TVA's cash flow would improve when BFN 1 
is brought on line in May 2007, and TVA would recover all of its costs 
from the project, including interest expense, by 2015. This analysis, 
however, could not consider subsequent changes, such as the significant 
increases in power supply costs that have occurred since 2002, which 
will increase TVA's projected savings from bringing BFN 1 on line. TVA 
also projects that its interest expense will be reduced over time as it 
lowers the balance of its outstanding debt. 

TVA Plans to Spend $12.1 Billion on Capital Expenditures through Fiscal 
Year 2015: 

TVA's TFO reduction plan includes $12.1 billion from fiscal year 2006 
through fiscal year 2015 for capital expenditures to complete BFN 1, 
meet known requirements of the Clean Air Act, and cover ongoing efforts 
to uprate its generating assets and maintain transmission assets. Any 
changes in this amount would affect the cash available for TFO 
reduction. Table 3 shows TVA's planned capital expenditures by major 
category from fiscal year 2006 through fiscal year 2015. 

Table 3: TVA's Planned Capital Expenditures by Major Category from 
Fiscal Year 2006 through Fiscal Year 2015: 

Dollars in millions. 

Category: Browns Ferry Nuclear Unit 1; 
Planned expenditures: $501; 
Percentage of planned expenditures: 4. 

Category: Clean Air Act Requirements; 
Planned expenditures: 3,481; 
Percentage of planned expenditures: 29. 

Category: Fossil; 
Planned expenditures: 2,552; 
Percentage of planned expenditures: 21. 

Category: Nuclear; 
Planned expenditures: 1,462; 
Percentage of planned expenditures: 12. 

Category: Transmission; 
Planned expenditures: 2,828; 
Percentage of planned expenditures: 24. 

Category: Hydro; 
Planned expenditures: 762; 
Percentage of planned expenditures: 6. 

Category: Corporate; 
Planned expenditures: 529; 
Percentage of planned expenditures: 4. 

Total; 
Planned expenditures: $12,115; 
Percentage of planned expenditures: 100. 

Source: TVA. 

[End of table] 

To help meet its capital expenditure goals, TVA will consider deferring 
or canceling capital projects when necessary and adjusting its 
investment criteria to reflect changes in its customer contracts and 
commitments. 

TVA's plan includes estimated capital expenditures for its current 
environmental program to reduce sulfur dioxide, nitrogen oxide, and 
particulates, which are expected to reach a cumulative total of about 
$5.7 billion by 2010. TVA had already spent about $4.4 billion, or 77 
percent of this amount, by September 30, 2005. TVA's plan, however, 
does not factor in costs for additional reductions in airborne 
pollutants that it may be required to meet in the future, or the 
potential cost to comply with proposed legislation that would require 
reductions in carbon dioxide. Projections for meeting TVA's TFO 
reduction goal do not include capital expenditures for building any 
major new generating assets through 2015, other than completing BFN 1. 

TVA Used a Reasonable Approach to Developing Its Plan to Reduce TFOs: 

Overall, we found TVA's approach to developing its TFO reduction goal 
was reasonable. TVA used a strategic planning process to develop its 
current goal, which focused on its core mission as a long-term provider 
of low-cost electricity. As part of this process, TVA looked not only 
at its financing obligations, but at external business and market 
risks. To assess these outside risks, TVA performed detailed 
competitive analyses and modeled different market scenarios to estimate 
its future competitive environment. It considered the results of these 
market risk analyses in formulating its strategic plan and determining 
the initial range of possible debt reduction through 2015. As part of 
its annual internal budget process, TVA used an accounting model to 
project annual cash flows and refine its goal. TVA continues to project 
cash flows annually and to analyze changing market conditions as 
necessary using the accounting model. 

TVA Assessed Its Business and Market Risks to Prepare Its Strategic 
Plan: 

TVA assessed its competitive environment and performed detailed 
analyses of business and market risks to determine the effect of 
possible future conditions on its ability to reduce debt. Among the 
tools used in TVA's strategic planning process was a competitive risk 
model (CRM). The CRM is a scenario model that shows the range of 
financial outcomes TVA might face if electricity industry restructuring 
moved forward and its distributors were free to choose alternative 
suppliers. Scenario analysis develops a set of potential events and 
conditions that management may wish to consider, and calculates the 
likely impact on cash flow and debt reduction in each. TVA's CRM shows 
the probability of loss of load, or customer demand for energy, over 
many market scenarios. The model calculated the potential impact of 
each market scenario on TVA assuming that distributors could choose 
other suppliers and modeled the potential for loss of load using three 
pricing scenarios: 

* holding prices flat at current levels, 

* setting prices equal to TVA's projected costs, and: 

* setting prices equal to the projected average competitor price. 

The results were then used to produce probabilities of different 
potential financial outcomes to identify types of market conditions 
under which load loss was likely to occur. 

TVA included the following assumptions in the CRM: 

* it would begin facing competitive pressures in 2008; 

* its contracts would include provisions for distributors to satisfy 
some of their power needs from sources other than TVA, referred to as 
partial requirements; and: 

* it could sell power elsewhere. 

TVA conducted its competitive risk analysis in 2003. In a little less 
than one-third of the scenarios, the CRM showed that TVA could lose 
load if other utilities had both cheap natural gas and high reserve 
margins, or unused available capacity. Because natural gas prices have 
risen and movement toward electricity competition has slowed, TVA has 
not considered it necessary to run the model again. 

TVA used the results of its competitive risk analysis as well as 
professional judgment in developing its 2004 strategic plan and the 
initial range of $3 billion to $5 billion for its statutory debt 
reduction goal. The plan looks at the larger picture of what TVA needs 
to do to succeed in a more competitive environment. It concluded that 
TVA needs to concentrate on four areas over the next few years. These 
are: 

* developing new, more differentiated pricing structures, services, and 
contract terms that more closely tie the cost and risk of TVA's 
products to their terms and pricing; 

* addressing issues related to wholesale market design and transmission 
pricing, including how it will interface with surrounding markets to 
ensure reliable power and how it will charge for transmitting power 
inside its service area when distributors can choose other suppliers; 

* accelerating debt reduction to increase financial flexibility; and: 

* maintaining and operating company assets to continue to meet 
electricity supply obligations safely and reliably. 

TVA Uses an Accounting Model to Refine Its TFO Reduction Targets by 
Determining Likely Cash Flow: 

TVA uses the Enterprise Risk Model (ERM) as part of its annual internal 
budgeting process to refine its TFO reduction targets by determining 
likely cash flow in given situations. The ERM is a simplified cash- 
based accounting model that can project key financial data by modeling 
TVA's system based on a power supply plan and a long-range financial 
plan. The ERM uses Monte Carlo simulation[Footnote 14] to assess the 
probable range of uncertain inputs, or variables, such as interest 
rates or coal prices, redispatch the TVA system,[Footnote 15] and 
recalculate cash flows multiple times while showing a range of probable 
values for each variable. 

The ERM's Monte Carlo simulations use 13 variables that include key 
costs and key determinants of revenue: 

* electricity market peak ($/MWh): 

* electricity market off-peak ($/MWh): 

* natural gas prices ($/mmBtu): 

* coal prices ($/mmBtu): 

* long-term interest rates (%): 

* short-term interest rates (%): 

* total operating and maintenance expenses: 

* capital expenditures: 

* selling, general and administrative expenses: 

* benefits expense: 

* coal plant availability: 

* nuclear plant availability: 

* hydro generation: 

For example, a simulation might use key costs such as prices for coal 
and natural gas, and combine this information with key determinants of 
revenue, such as peak and off-peak electricity prices, and quantities 
sold at those prices. The output of the model is an estimate of the 
annual net cash flow for TVA. For each scenario estimated, the model 
shows net cash flows and financing obligations repayment over each of 
the next 20 years for the values assumed in that scenario. Assuming 
that this net cash flow is applied to reducing financing obligations, 
the model provides an estimate of the level of obligations at the end 
of the simulation, which can then be used to refine projections used in 
coming up with its goals. 

The model uses a variety of reliable sources for estimates of the key 
input variables. For instance, the variability of rainfall for 
hydropower is calculated using historical data. Interest rates are 
based on forecasts from Global Insight and the Wall Street Journal. The 
volatility of commodity prices for coal or natural gas is estimated 
with a combination of historical data and projected trends. Other 
sources may also provide reasonable estimates for key variables in the 
model, however. For example, some of the commodities used in the model, 
such as natural gas, have active options markets, which could help 
identify more accurate estimates of the range of possible future prices 
in volatile markets. For example, when Hurricane Katrina destroyed a 
large number of natural gas rigs in the Gulf of Mexico, there was an 
enormous increase in implied volatility for natural gas prices. This 
was because no one knew how long it would take to repair the rigs or 
what the market consequences would be of a sudden withdrawal of a large 
percentage of the natural gas supply. In such a case, the options 
market may provide a more accurate estimate of price volatility than 
historical activity and might result in a more comprehensive 
characterization of the distribution of possible TFO reduction 
levels.[Footnote 16] 

In designing the ERM and using its output to devise its current goal 
for reducing financing obligations, TVA made the following key business 
assumptions: 

* Brown's Ferry Nuclear Unit 1 will be completed on time, 

* TVA will not self-fund any new baseload generation, 

* distributors who have given notice they will not be renewing 
contracts are excluded, 

* TVA will meet or exceed current environmental regulations, 

* TVA's credit rating remains AAA,[Footnote 17] and: 

* distributors do not gain rights to partial requirements or 
transmission. 

TVA has generally made reasonable assumptions concerning the level and 
variability of the key inputs to its Monte Carlo model. As with any 
modeling effort, there are some inherent limitations, and areas in 
which the modeling may be improved. TVA's key business assumptions, 
while reasonable, limit the range of outcomes from the model by making 
certain events appear more fixed or settled than they are. Allowing the 
range of possible outcomes attached to some of the fixed assumptions to 
be modeled as variables may better reflect the uncertainty attached to 
TVA's TFO reduction estimates. For example, TVA could determine a range 
of likely dates for the completion of Brown's Ferry Nuclear Unit 1, and 
use these dates as part of the Monte Carlo simulation. Another example 
might be to use the range of possible costs from potential 
environmental legislation as inputs to the model. Modeling these and 
other fixed assumptions as variables might better illustrate the range 
of outcomes for TVA to evaluate in setting and refining its TFO 
reduction goals. 

Several Key Factors Could Impact TVA's Ability to Successfully Carry 
out Its Plan for Reducing TFOs: 

We identified several key factors that could impact TVA's ability to 
successfully carry out its plan. Some factors are more difficult for 
TVA to control than others. The timing of electricity industry 
restructuring, potential increases in interest rates, and costs 
associated with meeting potential new environmental regulations are 
factors outside TVA's control. Future rate increases and a fuel-cost 
adjustment clause are factors that will help TVA cover unforeseen 
costs, which will help TVA meet its TFO reduction goal. TVA's planned 
reduction in interest expense could be affected by increases in 
interest rates. Although the TFO reduction plan includes the capital 
expenditures TVA estimates it will need to comply with all existing 
environmental regulations, the plan does not include potential capital 
expenditures needed to comply with any changes to the current 
environmental regulations. Building new generating capacity could 
require capital expenditures not included in the plan. 

The Timing of Restructuring within the Electricity Industry and the 
Changes It May Impose Are Key Variables in TVA's TFO Reduction Plan: 

Restructuring is the major reason TVA has undertaken TFO reduction, and 
its timing and the organizational and structural changes it may impose 
are key variables in TVA's plans. TVA's management and industry experts 
believe TVA may eventually lose its legislative protections from 
competition and have to compete with other utilities. Even if TVA does 
not lose its legislative protections, its management has recognized the 
need to take action to better position the agency to be competitive in 
an era of increasing competition and customer choice. TVA management 
undertook both the 1997 business plan and the 2004 strategic plan to 
position TVA to meet the challenges it would likely face in the coming 
restructured marketplace. 

The extent to which TVA would be affected by loss of its legislative 
protections from competition would be influenced by (1) when TVA loses 
its protections, which would affect how much time it has to continue to 
improve its competitive position; (2) how TVA would be structured to 
operate in a competitive environment, including whether it would be 
given the ability to compete for customers outside its service area; 
and (3) how TVA's financial condition compares to its competitors at 
the time it loses its protections from competition. Loss of its 
protections from competition could affect TVA's ability to set rates at 
levels sufficient to recover all costs, which could negatively impact 
the amount of cash available to reduce TFOs. 

According to a TVA official, one option TVA could pursue to help meet 
its goal for reducing TFOs is to negotiate long-term contracts with its 
customers. Long-term contracts would help reduce TVA's risk by 
providing a steady revenue stream for a certain period of time. If 
TVA's distributors were to gain the rights to purchase a portion of 
their electric power requirements from other utilities, it could have a 
negative material effect on TVA's ability to meet its TFO reduction 
goal. For example, excluding the Kentucky portion of TVA's service area 
from the anti-cherrypicking provision of the EPAct is currently under 
consideration.[Footnote 18] In the event this legislation is enacted, 
TVA officials believe other distributors would seek similar treatment. 

Future Rate Increases and a Fuel-cost Adjustment Clause Will Help TVA 
Reduce Total Financing Obligations: 

Future rate increases and a fuel-cost adjustment clause allowing TVA to 
adjust rates for the rise and fall in the prices of fuel and purchased 
power that result from changes in market conditions will help TVA meet 
its TFO reduction goal. TVA's TFO reduction goal reflects the October 
2005 rate increase and the FCA that TVA plans to implement in fiscal 
year 2007. The plan does not reflect any additional rate increases 
through 2015. TVA estimates that the FCA will cover net increases in 
the cost of fuel and purchased power of $1.4 billion from fiscal year 
2007 through 2015, which will free this amount of cash to apply toward 
TFO reduction. In addition, TVA's management told us that they would 
consider additional rate increases if necessary to cover increases in 
operating costs other than fuel and purchased power. In determining 
whether to raise rates, TVA's management recognizes that they would 
need to consider current markets and any potential negative 
consequences, such as the impact on power sales and the regional 
economy. The April 2006 rate increase and any future increases will 
help TVA cover any unforeseen increases in projected operating costs or 
capital expenditures, as well as shortfalls in projected revenue. 

Limiting the Growth of Operating and Maintenance Expenses Will Be 
Difficult for TVA to Achieve: 

TVA will be challenged to meet its goal of reducing projected O&M 
expenses by $1.1 billion from fiscal year 2007 through 2015. TVA has 
been focusing on reducing O&M expenses since it issued its 1997 
business plan, and has already taken many steps to trim these expenses. 
TVA officials have said that the $1.1 billion savings will come from 
baseline O&M expenses, which TVA defines as the ongoing costs of 
operating and maintaining its internal business units that are routine 
and recurring. In fiscal year 2005, these expenses represented about 
$1.3 billion, or about 54 percent of the $2.4 billion reported for O&M 
expenses, and about 20 percent of TVA's total operating expenses. 
According to a TVA official, the growth limit for the baseline O&M 
expenses will be applied to the total for all business units and any 
excess increases in these expenses by one unit will have to be absorbed 
by the other business units. For example, the amount budgeted for one 
of TVA's business units in fiscal year 2007 was $30.7 million over what 
it would have been if it had been limited to projected inflation less 
one half of a percentage point, and according to a TVA official, this 
excess will have to be absorbed by the other business units in order 
for TVA to meet its overall growth limit. 

Planned Reduction in Interest Expense Could Be Affected by Increases in 
Interest Rates: 

TVA projects that it will continue to reduce annual interest expense as 
it reduces the balance of outstanding debt and, if the situation 
presents itself, refinance debt at lower interest rates. Like all 
outstanding debt approaching maturity dates, TVA's interest expense is 
subject to interest rate risk. As TVA's outstanding debt matures, the 
portion that is not repaid will need to be refinanced at current rates, 
thus exposing TVA to the risk of rising interest rates and higher 
interest costs. TVA has reduced its annual interest expense from more 
than $2 billion in fiscal year 1997 to about $1.3 billion in fiscal 
year 2005, a 35 percent reduction. TVA was able to lower its interest 
expense by refinancing debt at lower interest rates, reducing the 
outstanding balance of debt, and entering into alternative financing 
arrangements. Alternative financing arrangements help reduce interest 
expense because they are classified as liabilities in TVA's financial 
statements. This means that rather than being classified as interest on 
debt, the costs of these arrangements are recorded as increases in 
operating expenses or reductions in revenue. TVA attributes 
approximately 80 percent of the reduction of interest expense from 
fiscal year 1997 to 2005 to refinancing debt at lower interest rates. 

As of September 30, 2005, TVA had about $8.3 billion in outstanding 
debt that will mature and either need to be repaid or refinanced over 
the next 5 years ($3.1 billion in long-term debt and about $5.2 billion 
in short-term debt). By the end of this 5-year period, for every 1 
percentage point change in TVA's average borrowing costs for the $8.3 
billion, its annual interest expense would increase or decrease by 
about $83 million. If future interest rates are higher than the rates 
used in TVA's projections, TVA may have difficulty meeting its targets 
for reducing interest expense. 

Changes to Current Environmental Regulations Could Require Substantial 
Capital Expenditures: 

Although TVA's TFO reduction plan includes all of the capital 
expenditures it projects will be needed to comply with existing 
environmental regulations, the plan does not include potential capital 
expenditures needed to comply with any changes to the current 
environmental regulations. According to TVA's 2005 Information 
Statement, several existing regulatory programs are being made more 
stringent in their application to fossil-fuel units[Footnote 19] and 
additional regulatory programs affecting fossil-fuel units have been 
announced. According to TVA, its TFO reduction plan does not include 
the estimated future costs to comply with more stringent regulations 
because it is difficult to predict how these regulations would affect 
TVA. However, TVA officials estimate that the cost to comply with 
future regulations could run between $3.0 billion and $3.5 billion 
through 2020. TVA officials said they would include an estimate of 
these costs in the plan if their level of certainty ever increases. The 
plan also does not include the potential cost of complying with 
legislation that has been introduced, but not yet passed, in the 
Congress to require reductions in carbon dioxide. If this legislation 
is enacted, TVA estimates that the cost of complying with it could be 
substantial. 

The extent to which new environmental regulations affect any utility 
depends on several factors, including the type and condition of its 
generating equipment, the portion of its power generated by fossil 
fuels, the types of controls it chooses to meet the new environmental 
regulations, and the availability of excess generating capacity. 
Compared to surrounding regions, TVA has roughly the same amount of 
coal-fired capacity, nearly twice as much nuclear, nearly four times as 
much hydro, and less than half as much natural gas fired capacity. 
Figure 2 shows TVA's generation mix compared to the surrounding North 
American Electric Reliability Council (NERC) regions. 

Figure 2: Generation Capacity by Fuel Type, TVA vs. Nearest NERC 
Regions: 

[See PDF for image] 

Source: TVA. 

[End of figure] 

The extent to which different producers will be affected by new 
environmental regulations, and the resultant impact on their power 
prices, is unknown at this time. Although new environmental regulations 
would likely present challenges to TVA in meeting its TFO reduction 
goal, they may not necessarily affect its competitive position relative 
to its neighboring utilities. 

Building New Generating Capacity Could Require Capital Expenditures Not 
Included in the Plan: 

Building new generating capacity during the current TFO reduction 
period to meet the projected demand for power beginning in 2015 would 
likely cause TVA to incur new debt and use cash that is currently 
projected to be available to reduce TFOs. TVA officials told us they 
plan to meet load growth in the TVA service area through 2015 by 
completing BFN 1, increasing the capacity of existing generating units, 
and purchasing power from the marketplace. TVA's current projections 
include the capital expenditures it projects will be needed to meet 
this plan. TVA also projects that it will need additional generating 
capacity beginning in 2015. TVA plans to satisfy this need by 
partnering with other power providers. Its current goal assumes that it 
will not finance any new baseload plants,[Footnote 20] other than BFN1, 
through 2015. If growth in demand or market changes force TVA to build 
new generation, as happened after its 1997 plan, TVA's ability to 
reduce TFOs could be affected. 

TVA Will Require Continued Management Commitment to Reducing TFOs: 

TVA officials told us they recognize that in order to improve TVA's 
financial situation, it will need to operate within its means and 
reduce TFOs. TVA will require continued management commitment to 
continue reducing financing obligations. According to officials, TVA 
did not meet the debt reduction goal in the 1997 business plan because 
the amount of cash left over after meeting its other business needs was 
not sufficient to meet the goal. Since issuing its 2004 strategic plan, 
TVA's management has demonstrated its commitment by exceeding the 
planned targets for the first 2 years of the TFO reduction plan. In 
addition, their actions have included adding annual TFO reduction 
targets as revenue requirements in the budgets used for its annual rate 
reviews, tying portions of its overall incentive payroll compensation 
to accomplishing the TFO reduction goal, and demonstrating a 
willingness to raise rates to meet the goal. Although TVA has a new 
board structure as of March 31, 2006, the continued commitment of the 
board toward TFO reduction will be needed to meet the current goal. 

Growing Demand for Power Could Affect TVA's Ability to Meet Its TFO 
Reduction Goal: 

The growing demand for power could affect TVA's ability to meet its 
goal since TVA's current projections assume that it will not invest in 
any new generation through 2015, other than restarting BFN 1. TVA's 
plan includes the capital expenditures needed to expand generating 
capacity in existing generating facilities to meet projected increases 
in demand for power through 2015. By 2015, however, TVA estimates that 
it will need more baseload generation to meet growth in demand. As a 
result, it will need to take action to meet that need during the 
current TFO reduction period. TVA officials are considering a number of 
options to meet this projected increase in demand for power, including 
partnering with outside parties. 

TVA's current plan assumes that one option for meeting the growth in 
demand for electricity is by uprating, which is the process of 
increasing the capacity of existing generating assets. To its 30,644 
megawatts of generating capacity, TVA currently plans to add: 

* 1,280 total megawatts of capacity a year by restarting Browns Ferry 
Unit 1 in fiscal year 2007; 

* 125 megawatts each, for a total of 250 megawatts a year, by uprating 
or adding capacity to Browns Ferry Units 2 and 3; 

* approximately 15-30 megawatts of capacity a year through 2015, or a 
total of approximately 150 to 300 megawatts of annual capacity by the 
end of the TFO reduction period, by continuing to modernize its 
hydropower facilities; 

* 36 total megawatts a year by uprating the Raccoon Mountain Pumped 
Storage Plant; and: 

* 16 total megawatts a year by uprating the Cumberland Fossil Plant 
through 2010. 

TVA also plans to meet future needs by continuing to purchase low-cost 
power from the Southeastern Power Administration and through other long-
term contracts. In addition, TVA plans to purchase power from the 
market when it is cheaper than generating its own power. 

Even with these plans in place, TVA expects that it will still need new 
baseload capacity beginning in 2015. TVA officials told us they will 
consider partnering with others to help finance the acquisition of new 
assets or they will consider building new assets themselves if they 
cannot find a suitable partner. TVA expects a partner would help share 
risk. Although the benefits, costs, and risks would vary depending on 
the type of partnership it eventually enters into, according to TVA 
officials, forming a partnership would help meet new demand for 
electricity while reducing the cash requirements for building new 
generating assets. As of April 2006, TVA management did not have any 
firm plans for a partnership, but were discussing potential 
partnerships with several interested parties. 

One partnering option TVA is considering includes working with the 
NuStart Consortium,[Footnote 21] which selected TVA's Bellefonte site 
as one of the two potential sites in the country for a new advanced 
design nuclear plant. In the late 1980s, TVA stopped construction on 
Bellefonte, a nuclear plant which has never been operated. NuStart 
plans to use the Bellefonte site, as well as one other potential site, 
on applications for licenses it plans to submit for new nuclear plants, 
but currently there have been no decisions to construct a plant. 
Another option being considered by TVA is entering into a partnership 
with another industry consortium[Footnote 22] to build an Advanced 
Boiling Water Reactor on the Bellefonte site. 

TVA and TVPPA also indicated that TVA's customers are interested in 
partnering with TVA. Partnering with a customer would allow TVA to earn 
fee income for operating a new generating asset, while its customer 
would finance and own all or a share of the asset. TVA officials also 
noted that TVA's customers have not owned generating assets before and, 
as a result, may not have the needed in-house expertise, or be familiar 
with the risks involved. Despite ongoing conversations between TVA and 
potential partners, however, there are no current firm plans to partner 
with another party, and TVA could not provide us with criteria it would 
use in selecting partners. As a result, it is difficult to determine 
TVA's likelihood of finding suitable partners to help meet the growth 
in demand projected in its service territory. 

One of TVA's largest distributors noted that TVA could also pursue 
other options to reduce the demand for power. These include giving 
customers access to obtaining a portion of their power needs from other 
suppliers or changing the rate structure to provide incentives to 
reduce the peak demand for electricity. In 2002, we reported that TVA's 
demand-side management programs, which are designed to reduce the 
amount of energy consumed or to change the time of day when it is 
consumed, were limited in scope and impact when compared to similar 
programs managed by other utilities and recommended that, as 
appropriate, TVA expand its demand-side management programs.[Footnote 
23] TVA officials told us they have continued to expand the use of 
demand-side-management programs, which will reduce the amount of power 
TVA would need to generate or purchase from the market. 

TVA's decision to complete BFN 1 reversed a policy dating from the late 
1990s to rely primarily on purchasing power from other power suppliers 
when its own power system cannot meet demand. Building new capacity 
itself provides two potential key benefits for TVA. First, TVA would 
likely be able to generate power at a lower cost than purchasing a like 
amount of power from other utilities, thereby reducing its cost of 
power. Second, a decision to build new generating capacity would give 
TVA control over its source of power and remove the uncertainty of 
having to rely on other utilities for power. It would reduce the 
chances that TVA would need to purchase power from the market when 
there may be limited excess capacity and high prices, but increases the 
risk that its generating costs could be higher than market prices. 
According to TVA, if it can recover the cost of building new generating 
assets through rates, increased demand would have no effect on its 
ability to meet its TFO reduction goal. However, TVA officials 
acknowledged the need to be sensitive to rate increases, stating that 
raising rates too quickly could trigger action that would jeopardize 
its relationship with customers and ultimately threaten its current 
monopoly status. 

TVA's $7.1 billion goal for reducing TFOs through 2015 assumes that any 
demand for power not met by its generating capacity will be purchased 
from the marketplace. TVA's 1997 business plan also assumed that it 
would not invest in any new generating capacity. Ultimately, the need 
to build its own additional generating capacity in lieu of purchasing 
power from the market in the late 1990s meant that TVA increased its 
capital expenditures and reduced the amount of cash available for debt 
reduction, which contributed to its failure to meet the debt reduction 
goal in its 1997 business plan. Although TVA currently has no specific 
plans to build new generation, any decision to build new generating 
assets would likely affect its ability to fully meet its TFO reduction 
goal. 

Conclusions: 

TVA's TFO reduction goal was based on a strategic planning approach and 
an assessment of market risks and projected cash flow. As with any 
effort that incorporates economic models, there are some limitations 
and areas where they could be improved. While TVA's key business 
assumptions are reasonable, holding them fixed, rather than modeling 
them as variable assumptions, limits the range of outcomes from the 
model. Modeling different scenarios under which TVA may need to meet 
new environmental regulations or pay for new capacity, for instance, 
would allow TVA to better illustrate the possible range of outcomes, 
and thus the uncertainties of many factors in its plan. In addition, 
while TVA uses a variety of factors to estimate key variables, in the 
case of commodity prices, expanding the sources would provide a more 
comprehensive characterization of the range of possible TFO reduction 
levels in situations where markets are volatile. Finally, given the 
numerous factors that could affect TVA's ability to meet its goal, 
management's continued commitment to reducing TFOs will be necessary to 
keep TVA on course. 

Recommendations: 

We are making two recommendations to the Chairman of the Board of 
Directors of the Tennessee Valley Authority to (1) explore additional 
data sources for estimates of key input variables in the Enterprise 
Risk Model, and (2) better illustrate the range of outcomes in the 
Enterprise Risk Model used for planning purposes. Specifically, we are 
recommending that: 

* TVA 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. 

* TVA 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. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, TVA's Acting Chief 
Executive Officer, President, and Chief Operating Officer agreed with 
our report and recommendations. We also discussed technical comments 
with TVA officials, which we have incorporated into the final report as 
appropriate. TVA's written comments are reproduced in appendix I. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its date. At that time, we will send copies of this report to 
appropriate House and Senate committees, interested members of the 
Congress, TVA's board of directors, 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 [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions on matters discussed in this 
report, please contact me at (202) 512-6131, or martinr@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 who 
made major contributions to this report are listed in appendix II. 

Sincerely yours, 

Signed by: 

Robert E. Martin: 
Director, Financial Management and Assurance: 

[End of section] 

Appendix I: Comments from the Tennessee Valley Authority: 

Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, 
Tennessee 37902-1401: 

July 7, 2006: 

Mr. Robert E. Martin: 
Director, Financial Management & Assurance: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Martin: 

Thank you for the opportunity to review GAO's draft report entitled 
Tennessee Valley Authority - Plans to Reduce Debt While Meeting Demand 
for Power. The staff has told me of the professional manner with which 
GAO conducted the audit. We appreciate GAO's efforts to thoroughly 
understand TVA's work to achieve greater financial flexibility, and we 
commend your fair analysis. 

Regarding GAO's specific financial modeling recommendations, we agree 
with the suggestion to strengthen the range of modeled outcomes by 
incorporating variability on assumptions that were previously held 
fixed in scenarios. Variability in the start dates for new TVA 
generating assets or in future environmental costs can be implemented 
to improve the range of outcomes used in TVA's planning. Structural 
changes to the expected increased competitive market environment, 
however, would be more speculative than we feel comfortable using in 
base planning efforts. TVA will continue to monitor both regulatory and 
market forces which would impact the current planning assumptions. 

We appreciate your further recommendation to explore additional data 
sources for estimates of key input variables, including volatility 
estimates based on commodities futures and options prices. This is 
likely to be especially valuable where the commodity market has 
adequate depth and liquidity for a significant period forward, 
particularly for the purpose of model simulation to estimate ranges on 
financial outcomes. 

On March 31, 2006, six new TVA Board members were sworn into office 
marking the transition from a full-time, three-member Board to a part- 
time nine-member Board. While GAO's report is consistent with the 
information available at the time of GAO's research, TVA continues to 
evaluate its budget and rate policy. The Board met on June 28, 2006, 
and approved parameters with which staff will develop the fiscal year 
2007 budget that will be voted on by the Board on July 28, 2006. Among 
these parameters are the implementation of a fuel cost adjustment 
clause, a rate decrease in the range of 3%2 - 5 percent, and a 
reduction in total financing obligations of $529 million during FY 
2007. The Board also discussed its plans to develop a new strategic 
plan for TVA prior to the development of TVA's FY 2008 budget. TVA's 
future debt reduction plans will be addressed in the context of this 
new strategic plan. 

Thank you again for the opportunity to comment on what we believe 
overall is a fair report. 

Sincerely, 

Signed by: 

Tom Kilgore: 
Acting Chief Executive Officer: 
President and Chief Operating Officer: 

cc: Mr. William B. Sansom: 
Chairman: 
Board of Directors Tennessee Valley Authority: 
400 West Summit Hill Drive, WT 7B: 
Knoxville, Tennessee 37902-1401: 

Mr. Dennis C. Bottorff: 
Chairman, TVA Finance, Strategy & Rates Committee: 
Tennessee Valley Authority: 
400 West Summit Hill Drive, WT 7B: 
Knoxville, Tennessee 37902-1401: 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Robert E. Martin, (202) 512-6131 or martinr@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Donald Neff (Assistant 
Director), Lisa Crye, Austin Kelly, Mary Mohiyuddin, and Brooke 
Whittaker made key contributions to this report. 

FOOTNOTES 

[1] 16 U.S.C. §§ 831-831ee. 

[2] 16 U.S.C. § 831n-4(e). TVA makes annual principal payments to 
Treasury from net power proceeds plus interest expense on the balance 
of this amount, which was about $428 million as of September 30, 2005. 
The annual principal payments, which totaled $20 million for fiscal 
year 2005, are to continue until the unpaid balance of the 
appropriation debt is paid down to $258.3 million. TVA is to continue 
paying interest on the remaining balance each year. The interest on the 
unpaid appropriation balance was $16 million in fiscal year 2005. 

[3] As of August 15, 2006, the ninth member of the board had been 
nominated by the President, but not yet confirmed by the Senate. 

[4] Some entities such as utilities owned by municipalities, rural 
electric cooperatives, and others were not generally subject to federal 
oversight on rates. 

[5] Nonutility generators or power producers can be corporations, 
persons, or other entities that own electric-generating capacity and 
are not electric utilities. They can include mining and manufacturing 
establishments, railroads, and other small or independent power 
producers that do not have a designated service area. 

[6] Although it was not required by the Federal Power Act to comply 
with these orders, TVA took steps to do so, consistent with its 
obligations under the TVA Act. 

[7] GAO, Tennessee Valley Authority: Financial Problems Raise Questions 
About Long-Term Viability, GAO/AIMD/RCED-95-134 (Washington, D.C.: Aug. 
17, 1995); Federal Electricity Activities: The Federal Government's Net 
Cost and Potential for Future Losses, Volumes 1 and 2, GAO/AIMD-97-110 
and 110A (Washington, D.C.: Sept. 19, 1997); Tennessee Valley 
Authority: Assessment of the 10-Year Business Plan, GAO/ AIMD-99-142 
(Washington, D.C.: Apr. 30, 1999); Tennessee Valley Authority: Debt 
Reduction Efforts and Potential Stranded Costs, GAO-01-237 (Washington, 
D.C.: Feb. 28, 2001); and Tennessee Valley Authority: Information on 
Lease-Leaseback and Other Financing Arrangements, GAO-03-784 
(Washington, D.C.: June 30, 2003). 

[8] The majority of our field work was conducted before the 
restructured board took office on March 31, 2006, and included 
interviews with key members of TVA's management, including the Chairman 
of the Board; Chief Operating Officer; Executive Vice President and 
General Counsel; Chief Financial Officer; Senior Vice President for 
Strategic Planning and Analysis; and Vice President, Risk Management 
and Economic Analysis. Our references to TVA management in this report 
apply to the TVA management team in place before the new board took 
effect on March 31, 2006. 

[9] GAO, Tennessee Valley Authority: Information on Lease-Leaseback and 
Other Financing Arrangements, GAO-03-784 (Washington, D.C.: June 30, 
2003). 

[10] TVPPA is a nonprofit, regional service organization that 
represents the interests of consumer-owned electric utilities operating 
within the TVA service area. 

[11] GAO was asked to look at TVA's 2004 Strategic Plan, which 
addressed debt reduction plans through 2015. This report is based on 
information supporting the $7.1 billion figure made public in December 
2005, which covers the original debt reduction period. Subsequently, 
TVA expanded its debt reduction period to 2016 and raised its TFO 
reduction goal to $7.8 billion. This increased TVA's goal for reducing 
statutory debt to $7.3 billion and alternative financing arrangements 
to $0.5 billion. 

[12] An interest coverage ratio of 1.5 is considered the minimum for 
any company in any industry. For an established utility, an interest 
coverage ratio of 2 is acceptable, while 3 is the minimum for more 
volatile industries. This ratio is generally calculated by dividing a 
company's earnings before interest expense and taxes by its interest 
expense. Because TVA's capital structure differs from investor-owned 
utilities, it calculates this ratio by dividing the sum of cash from 
operations plus interest expense by interest expense, which we believe 
is reasonable. 

[13] BFN 1 was taken off line in 1985 for plant modifications and 
regulatory improvements. In May 2002, TVA's Board determined the 
restart of BFN 1 could reduce TVA's delivered cost of power relative to 
the market and initiated activities to return BFN 1 to service. 

[14] Monte Carlo simulation is an approach to risk assessment that 
allows an analyst to assess the probable range of various uncertain 
inputs, such as interest rates or coal prices, and recalculate cash 
flows multiple times while drawing values that fall within a 
probability distribution for each of the uncertain inputs. The results 
are examined in the context of their probability distribution covering 
all potential outcomes of the analysis as well as reporting the average 
or other values. 

[15] Dispatch is the process of allocating load among the available 
generation units so that the cost of operation is minimized. The ERM 
uses an economic dispatch routine to simulate the operation of TVA 
generating assets to achieve the lowest possible cost of generation. 

[16] In many energy markets, options are traded that give purchasers 
the right to buy or sell commodities in the future at a set price. From 
the prices on these options, it is possible to determine traders' 
expectations about the extent to which prices are likely to fluctuate 
in the future. At times of fundamental changes in a market, such as 
storm damage to production facilities, traders may reasonably believe 
that price fluctuations in the future will be larger than those based 
on past history. 

[17] AAA is a bond rating category assigned to an electric utility by 
bond analysts to represent their opinion on the general 
creditworthiness of an entity. AAA is the highest bond rating category 
representing the smallest degree of investment risk and an extremely 
strong ability to pay interest and principal. 

[18] In July 2005, Senators Jim Bunning and Mitch McConnell introduced 
S.1499, which would remove any area within Kentucky from coverage by 
the "anti-cherrypicking" provision in EPAct. 

[19] Fossil-fuel plants use coal, petroleum, or gas as their source of 
energy. 

[20] Baseload plants are normally operated to take all or part of the 
minimum load of a system, and consequently run continuously, producing 
electricity at an essentially constant rate. These units are operated 
to maximize system mechanical and thermal efficiency and minimize 
system operating costs. 

[21] NuStart Energy Development, LLC, is a limited liability company 
formed in 2004 with nine member companies. These members, plus TVA and 
two reactor vendors, form the NuStart Consortium. The consortium 
objectives are to: 1) demonstrate the U.S. Nuclear Regulatory 
Commission's licensing process for obtaining a combined Construction 
and Operating License for an advanced nuclear power plant, and 2) 
complete the design engineering for the two selected reactor 
technologies. 

[22] TVA led an industry consortium that prepared a cost and schedule 
study on building an Advanced Boiling Water Reactor on the Bellefonte 
site. This consortium included Toshiba Corp., General Electric Corp., 
Bechtel Corp., United States Enrichment Corp., and Global Nuclear 
Fuels--Americas. 

[23] GAO, Air Quality: TVA Plans to Reduce Air Emissions Further, but 
Could Do More to Reduce Power Demand, GAO-02-301 (Washington, D.C.: 
Mar. 8, 2002). 

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