Follow-up Review of TVA's Role as a Rate Regulator Use of Electric Revenues for Nonelectric Purposes

The OIG performed a follow up audit of Inspection No. 2005 522I, where we recommended TVA execute contract modifications with distributors who wish to pursue nonelectric business ventures, and TVA management agreed to do so. In addition, TVA management asserted they would formalize procedures to ensure consistent review of (1) distributor financial information and (2) business plans that propose the use of electric system revenues for nonelectric system purposes.Our review found TVA management later decided on an alternative approach to protect its interests and those of all parties. Instead of formal contract modifications, TVA's approach now is to require written agreements with terms to protect the distributors, ratepayers, and TVA when approving the distributor to invest "reserves for renewals, replacements, contingencies, and working capital" in nonelectric business ventures. TVA management believes this approach and the resulting agreements provide greater protections for the involved parties.TVA has designated the request evaluation and subsequent agreements for one distributor in 2008 as the "model" for handling future requests. While the new approach and "model" may prove effective for controlling risks, we noted areas where protection for the distributors, ratepayers, and TVA could be strengthened. Specifically, we found TVA has:Not documented guidelines for the review of business plans that propose the use of electric system revenues for nonelectric system purposes and the terms to be included in subsequent formal agreements.Not established guidelines to indicate when the amount of a distributor's reserves becomes excess revenues that should be returned to the ratepayer through rate reductions as required by the power contract.Not reviewed distributors previously approved to use electric system revenues for nonelectric system purposes or those using funds without approval to determine if appropriate protections (e.g., formal agreements) are in place.We recommended the Group President, Strategy and External Relations (1) formally document procedures and guidelines for evaluating distributor requests to use electric system revenues for nonelectric system purposes, including acceptable limits for certain elements, (2) determine when distributor reserves are excessive and should be returned to the ratepayers in the form of rate reductions, and (3) review and ensure all distributors using electric system revenues for nonelectric system purposes have appropriate protections in place.TVA management stated (1) they plan to have base line criteria/steps for evaluating distributor business plans developed by February 28, 2011; (2) they will present additional metrics to the TVA Board in the coming year for review and approval, and the target date for completing discussions with distributors and submitting revised policies for Board approval is November 2011; and (3) TVA staff will look for electric system use of revenue for nonelectric system purposes when they perform the annual review of distributor financial information. As part of this review, any unapproved use of electric system revenues for nonelectric system purposes will be evaluated for further action. Target completion date for this action is September 2011.