Distributor Review: Lewisburg Electric System

The OIG performed a review of Lewisburg Electric System (LES) which is a distributor for TVA power based in Lewisburg, Tennessee. Our review of LES found no material issues related to (1) the proper reporting of electric sales and (2) nondiscrimination in providing electricity to members of the same rate class. However, we found a contract compliance issue regarding LES's execution of contracts with customers with demand greater than 50 kW.In addition, we found that LES had more than enough cash on hand to fund planned capital expenditures and provide a cash reserve. 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. As of June 30, 2008, LES reported cash of $7.5 million and planned capital expenditures of about $4.8 million which left cash reserves of about $2.7 million.Finally, we also identified opportunities to enhance TVA oversight of the distributors. Specifically, TVA has not (1) provided definitive guidance for distributors on what constitutes prudent expenditures and (2) defined criteria for determining when a distributor's cash reserves are excessive.We recommended the Chief Financial Officer (CFO) take action to ensure LES complies with contract provisions for formal customer contracts. In addition, the CFO, in collaboration with the TVA Board of Directors, where necessary, should (1) provide additional guidance on proper use of funds and (2) develop criteria to be used in determining whether a distributor's cash reserves are excessive.TVA and LES management generally agreed with and are taking actions to address the recommendations.