TVA established a 10-year horizon for implementing the key changes  outlined in the plan largely because TVA officials expect to be facing  greater competitive pressures within that time frame and many of its long- term contracts with customers could begin to expire in 2007. Plan Objectives Address Key Issues Confronting TVA

Implementation of the 10-year plan is moving TVA in the right direction and  addresses important issues facing TVA: its high fixed financing costs and  limited financial flexibility to respond to competitive pressure and the large  amount of deferred assets that have not been recovered through rates. However, the plan does not  include certain major costs. The plan assumes that TVA would  meet the increasing demand for power over the plan period by  purchasing power from other utilities. Plan Does Not Include Costs of Complying With Environmental Regulations

The 10-year plan does not include estimated costs of complying with recent  and proposed environmental regulations because TVA did not believe the  costs were estimable at the time the plan was developed. Debt Reduction and Deferred Assets Recovery Goals Are Unachievable

The 10-year plan calls for reducing debt by about one-half to about $14 billion by 2007. However, as discussed previously, the plan excluded additional capital  costs related to investing in new generating capacity to meet growth in  demand for power, complying with new environmental regulations, and  funding nonpower programs that were previously funded through  appropriations. This revised goal is reflected in TVA’s fiscal  year 2000 federal budget request. However, TVA has not formally updated the  plan to reflect these and other changes. TVA has acknowledged that its debt reduction goal  will not be achieved until at least 2009. To the extent it does not  sufficiently reduce debt and related fixed costs and increase financial  flexibility during the 10-year period, TVA’s ultimate strategic objective—to  be able to offer competitively priced power by the end of 2007—could be  jeopardized, depending on market conditions at the time. Conversely, TVA could achieve all of its objectives and not be competitive if  its cost of producing power is higher than market. One option would be for TVA to expand its  discussion of the 10-year plan in its annual reports, including reporting how actual results compare to all of the plan’s key goals and  assumptions, including those for revenues, debt reduction, capital  expenditures, cost savings, and the market price of power; progress toward achieving performance measures related to the plan, an overall assessment of whether TVA is on course to provide  competitive power in 2007. Specifically, we were asked to determine whether the  10-year plan (1) addresses key issues facing TVA, (2) takes into  consideration all applicable costs and revenue sources, (3) contains  assumptions that are reasonable and in line with industry estimates and  expectations, and (4) has been updated to reflect significant changes in key  assumptions or actual experience that differs from TVA’s expectations  when the plan was developed. Specifically, we assessed the achievability and reasonableness  of the following goals and assumptions: the future market price of wholesale power will be 3.4 to 3.5 cents per annual growth in demand through 2007 will average 2 percent; fuel costs will increase 1.7 percent annually through 2007; improvements in supply chain management will save $50 million
TVA’s labor force will be reduced, and additional costs savings will be  achieved through the creation of shared services and other initiatives; debt will be reduced by about one-half to about $14 billion, and the  balance of deferred assets will be reduced from $8.5 billion to $500 million—TVA’s estimated net realizable value of these assets; capital expenditures will be limited to about $600 million annually and  increases in demand through 2007 will be met primarily through  purchased power; $200 million will be saved annually through cost improvement initiatives  primarily related to refinancing Federal Financing Bank (FFB) and  public bond debt, pursuing changes to its retirement plan, and  improving business processes; revenues from power sales will be increased by about $325 million  annually by implementing a rate increase in 1998 and maintaining it  through 2007; and customer relations will improve through new contract and pricing  options.
Why GAO Did This Study

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

What GAO Found

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