Review of TVA Demurrage Costs

OIG reviewed demurrage costs incurred from October 1, 2004, through June 13, 2011, totaling $14 million to assess why demurrage costs were incurred and what actions, if any, TVA could take to minimize these costs.We determined (1) $1,036,100 in origin demurrage costs had not been billed back to a contractor as provided for in the contract; (2) TVA had not fulfilled its contractual obligation to provide a contractor with applicable portions of barging agreements, resulting in $537,440 in unrecoverable demurrage costs; (3) $376, 667 in demurrage costs were incurred and billed back to the contractor but had not been paid; (4) TVA's agreement with a contractor lacked the necessary language to hold the contractor accountable for origin demurrage costs until January 1, 2011, when a new contract was put in place, resulting in unrecoverable demurrage costs of $784,000; (5) due to inconsistencies in demurrage contract terms for coal delivered to Cumberland Fossil Plant (CUF), TVA incurred approximately $764,400 in unrecoverable costs; changes to the unload time under this same contract could save TVA about $327,600 annually; (6) a clause in TVA's contract for delivery to Allen Fossil Plant (ALF) was not aligned with the operating conditions at the plant which prevented TVA from using a provision to mitigate demurrage costs; (7) origin and destination demurrage costs were not tracked separately, which prevented TVA from transferring origin demurrage costs to the supplier; (8) eliminating barge damage charges at ALF could reduce costs by at least $145,000 per year; and (9) addressing operational challenges at ALF and CUF could reduce demurrage costs at these plants. As a result of the operational challenge at ALF, we also noted that when the focus of a business unit is on their individual goals rather than TVA goals, the overall strategic business unit's budget and ultimately TVA's expenses can be impacted. This was previously identified in OIG audit, 2002-911E, Review of the Coal Procurement Process.In addition, we determined that more effective knowledge of the contract demurrage terms, monitoring of the contracts, and communication among terminal, barge, and rail contract administrators, the Coal and Gas Services specialist responsible for demurrage payments, and Yard Operations personnel are needed.We made recommendations accordingly to the Senior Vice President, Fossil Power Group. Summary Only