Fuel Cost Adjustment Calculation

TVA has both fixed and variable costs that it must recover. Since fuel and purchased power cost can fluctuate significantly with changes in weather and shifts in global supply and demand, TVA recovers these variable costs through a monthly fuel cost adjustment (FCA). The TVA Act assigns rate setting duties to the TVA Board of Directors (Board). The rates approved by the Board include the formula used to calculate the monthly FCA, which represents approximately one-third of the wholesale rate. Due to the importance of TVA correctly calculating the FCA, we performed an evaluation to determine whether the FCA was calculated according to the Board-approved formula. Based on our independent recalculation of the January 2017 FCA rates, we determined all but one calculation within the FCA was performed in accordance with the Board-approved formula, with the exception being the resource cost allocation (RCA). The RCA assigns variable costs based on usage and power supply cost to one of two customer categories. These categories, Non-Standard Service and Standard Service, are defined by the Board-approved formula and are generally based on a customer's demand. We noted TVA's method of calculating the RCA used in the FCA calculation was not in agreement with the approved methodology. Specifically, while calculating the RCA, TVA did not appropriately categorize some direct-served, federal, and interdivisional customers, based on their contract demand. TVA subsequently determined that over a 16-month period (October 2015 through January 2017), the miscalculation of the RCA led to errors of about (1) $449,000 too much deferred cost in the Non-Standard Service Customer deferred account and (2) $462,000 too little deferred cost in the Standard Service Customer deferred account.