TVA's Nuclear Fuel Sale and Leaseback Arrangement Needs Further Analysis and Congressional Oversight

EMD-82-52: Published: Mar 18, 1982. Publicly Released: Mar 18, 1982.

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As part of a continuing oversight of the Tennessee Valley Authority (TVA), GAO evaluated the financial soundness of the TVA sale and leaseback of nuclear fuel. GAO was requested to include as part of its evaluation: (1) a complete chronology of the events leading up to the sale and leaseback agreement; (2) information on whether this is a standard utility practice and a comparison of the TVA agreement with other utility agreements; and (3) an analysis of the financial transactions between the Seven States Energy Corporation, which purchased the nuclear fuel, and the Federal Financing Bank (FFB).

Through the early 1970's, demand for the TVA electric power increased about 7 percent annually with projections that demand would continue to increase at this rate. Based upon past growth and projected increases in electric demand, TVA embarked upon a nuclear construction program of 17 units. TVA also contracted for nuclear fuel to be supplied to the plants when needed in the future. TVA and Seven States entered into a sale and leaseback arrangement which provided that: (1) TVA would pay legal fees to handle the transaction; (2) TVA would pay a management fee of $96,000 per year; (3) TVA would maintain physical possession of and be responsible for all risks associated with the nuclear fuel and would pay all insurance and fees required for such; (4) TVA would pay the audit costs of Seven States; and (5) Seven States would have legal ownership of the fuel. GAO found the agreements to be similar to fuel sale and leaseback arrangements made by other utilities even though the reasons for entering such arrangements are different. The nuclear sale and leaseback arrangement is financed through a $2 billion line of credit from FFB to Seven States through TVA, a complex and unique transaction for TVA; however, a detailed analysis was not performed by TVA prior to agreement. The only study performed at the time the TVA Board approved the sale and leaseback proposal was a 10-year revenue requirement analysis, even though the contract is for 30 years.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The recommendation impacts on the use of the Federal Financing Bank by TVA. This is a highly controversial area and it will be difficult to obtain action.

    Matter: The legislative oversight committees of Congress should review and establish an approval mechanism for similar type transactions in the future because of their potential impact on the Federal Government's overall borrowing. The current transaction will need additional money by the late 1980's, when TVA exceeds the $2 billion loan commitment approved. Congressional review should decide if an increase is warranted.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: TVA has stated it does not intend to perform the analysis because the arrangement can be terminated upon 120 days notice. As TVA reviews its operation on a continuing basis, it will evaluate the arrangement.

    Recommendation: TVA should include as part of its ongoing analysis a 30-year benefit and cost study which assesses the full cost of the transaction to TVA and to the ratepayer. In conducting this study, TVA, at a minimum, should include: the most current demand forecast including the low, medium, and high forecast; the current nuclear power plant construction schedule; the cost of money including sources of financing when the $2 billion Federal Financing Bank ceiling is reached; and the full effect of deferring interest.

    Agency Affected: Tennessee Valley Authority


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