TVA's Coal Procurement Practices--More Effective Management Needed

EMD-81-65: Published: Aug 14, 1981. Publicly Released: Aug 14, 1981.

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Because the coal purchases of the Tennessee Valley Authority (TVA) have a major impact on its costs and power rates, GAO reviewed the coal purchasing practices of TVA over the past 10 years and analyzed the timing of TVA coal purchases, the process used in buying coal including the type and length of contract, TVA quality assurance practices, and the level of coal inventories at the powerplants.

TVA contracted for about 74 percent of the total coal contracted for in the 1970's during periods when a sellers' market existed and when TVA had to pay premium prices for the coal. TVA often negotiated the contracts for these purchases on an emergency basis, but GAO questioned whether the negotiated procurements qualified as emergency procurements. Because most of the coal contracts held by TVA contain escalation clauses, the high base prices are ballooning. Continued escalation could be reduced by renegotiating those contracts that are still active. A TVA policy of buying coal only from producers east of the Mississippi River is costly. TVA has frequently endorsed support of small coal operators as a means of maintaining competition in the coal industry and restraining cost increases. A Small Coal Operators Assistance Program has not been operating long enough to be fully evaluated. However, the program may not be as effective as possible because not all set-asides provided under the program will be established and potential participants are excluded because of the definition of a small operator. The acquisition and development of TVA-owned coal reserves have experienced problems. Quality assurance practices are not fully adequate to detect delivery of inferior quality coal, TVA has not aggressively enforced measures to make sure it receives the quality of coal paid for, and TVA is not adequately compensated for differences in coal quality. Because of inflexible term contracts, TVA has acquired coal inventories well in excess of target quantities at many steamplants.

Recommendations for Executive Action

  1. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should revise its coal purchasing practices and implement a better program of forward planning to minimize the award of contracts during periods when coal demand is high and to limit the duration of contracts that must be awarded during these periods.

    Agency Affected: Tennessee Valley Authority

  2. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should work for the success of the Small Coal Operator Assistance Program by establishing all set-asides possible.

    Agency Affected: Tennessee Valley Authority

  3. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should consider all responsive offers from coal suppliers regardless of geographic location, and the economics of the source should be the primary consideration as to whether the offer is accepted or rejected.

    Agency Affected: Tennessee Valley Authority

  4. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should renegotiate at the earliest opportunity long-term contracts with reopeners entered during unfavorable conditions. If better prices cannot be renegotiated, TVA should consider cancellation.

    Agency Affected: Tennessee Valley Authority

  5. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should exercise caution in proceeding with development of the Ewing-Northern Coal Association (ENCA) reserves, particularly the economic feasibility of producing the desired quality and quantity of coal from ENCA. It should avoid the problems encountered at Breckenridge in developing ENCA. Specifically, ENCA production levels should be realistically established; the coal quality of ENCA should be thoroughly analyzed to determine if it will need to be washed. If so, the expense of another wash plant should be factored into the feasibility determination and, if transportation is contracted for separately, the contract should not be tied to optimum production levels and should allow for reopeners.

    Agency Affected: Tennessee Valley Authority

  6. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should discontinue using the current coal quality price adjustment formula. Instead, it should review the alternate formula GAO developed or should develop another formula that will reflect actual costs. In addition, the formula should be included in any planned procurements as soon as possible.

    Agency Affected: Tennessee Valley Authority

  7. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should install effective sampling facilities at the Kingston Steam Plant and take action against those vendors that continually provide lower quality coal. TVA should also assign someone to monitor the sampling at Breckinridge. In the future, TVA should also avoid contract provisions that allow contractors to do sampling.

    Agency Affected: Tennessee Valley Authority

  8. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should revise its coal procurement procedures to make greater use of spot purchases at all steamplants and satisfy a specific percentage of forecasted coal requirements through spot purchases, and it should include provisions in all term contracts which give it the option to cut back on deliveries when needs are not as great as forecast.

    Agency Affected: Tennessee Valley Authority

  9. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should incorporate new density figures, based on density surveys recently completed and those now being conducted, into inventory calculations.

    Agency Affected: Tennessee Valley Authority

  10. Status:

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: TVA should exercise its option to reduce deliveries by 10 percent to steamplants with inventories that exceed target levels.

    Agency Affected: Tennessee Valley Authority

 

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