Distributor Review of Electric Power Board (Chattanooga)

The OIG performed a review of the City of Chattanooga Electric Power Board (Chattanooga) which is based in Chattanooga, Tennessee and a distributor of TVA power. Our review of Chattanooga found issues involving customer classification and metering that could impact (1) the proper reporting of electric sales and (2) nondiscrimination in providing power to members of the same rate class. In addition, we found Chattanooga had more than enough cash on hand to cover planned capital projects and provide a cash reserve of about 13 percent. While TVA has established guidelines to determine if a distributor has adequate cash reserves (cash ratio of 5 to 8 percent), TVA has not established guidelines to determine if a distributor's cash reserves are excessive. We also found improvements were needed to (1) comply with contract provisions regarding the establishment of written contracts with customers and (2) improve Chattanooga's internal controls related to monitoring of data changes. Finally, we identified certain opportunities to enhance TVA oversight of the distributors. TVA is in the process of addressing these findings which include the lack of (1) guidance on what constitutes prudent expenditures, (2) a joint cost study addressing allocation of costs between the electric department and other municipal lines of business, and (3) criteria for evaluating when a distributor's cash reserves are excessive. We recommended the Group President, Strategy and External Relations, work with Chattanooga to (1) remediate classification and metering issues, (2) better comply with identified contract provisions related to customer contracts, and (3) add additional controls related to certain billing system data. TVA and Chattanooga management generally agreed with and are taking actions to address recommendations (1) and (2). Chattanooga plans to implement an additional quarterly test for misclassifications and quarterly review of customers with demand of 1 MW or more to determine if a contract is on file. The first tests are to be completed by September 30, 2010. Chattanooga believes billing system controls are in place to minimize the risk of a material misstatement in the data.