Federal Reports

Assessment of open grants

Supporting and ARC initiative to assess open grants subject to close

As part of our annual audit plan, the OIG (Office of the Inspector General) audited the Oak Ridge, Tennessee, electric system for compliance with the power contract with the Tennessee Valley Authority (TVA) for the period July 2007 through June 2009. Key contract provisions included (1) proper reporting of electric sales, (2) nondiscrimination in providing power, and (3) use of electric revenue for approved purposes. For fiscal year (FY) 2009, Oak Ridge provided power to approximately 16,000 customers that resulted in electric sales revenue of approximately $52 million. The Oak Ridge electric system is operated as part of the city municipal government rather than as a separate entity.Oak Ridge and TVA management agreed with recommendations to (1) revise the account structure to comply with the Federal Energy Regulatory Commission (FERC) Uniform System of Accounts or prepare and maintain a reconciliation of the current account structure and the prescribed FERC account structure, (2) prepare the distributor annual report using (a) line item reporting guidance contained in the Accountants' Reference Manual and (b) amounts supported by the trial balance, (3) correct the general ledger to properly record the amounts due to the general fund as a payable, (4) correct billing system programming to use entire contract demand amount when classifying General Services Administration (GSA) customers, (5) correct customer misclassifications identified and implement procedures to assist in identifying residential accounts that need to be reclassified as commercial, (6) obtain TVA approval of allocation of joint costs currently being used, (7) obtain and maintain properly executed customer contracts for all GSA Part 3 and higher customers, (8) obtain appropriate approval for customer contracts on file without signatures, (9) obtain certification from customers under manufacturing schedules that meet the requirements of the schedule, and (10) implement a process to ensure all customers with contracts have the appropriate contract demand entered into the billing system and the contract demand values in the system agree with the customer's contract. TVA also agreed to implement process(es) for verifying the accuracy of distributors' annual report information to adequately identify and address reporting errors.Oak Ridge and/or TVA management generally disagreed with recommendations to (1) review retail rates and/or operating costs and revise retail rates and/or operating costs as appropriate, (2) review and revise annual payment in lieu of tax amounts, (3) maintain a reasonable reserve before making payments in lieu of taxes, (4) revise billing system programming to use fractional data obtained from meter readings to classify customers, calculate bills, and report wholesale information to TVA, and (5) review TVA comprehensive services meter accuracy testing standards for tests performed on behalf of the distributor to ensure they comply with the standards stated in the power contract. Although Oak Ridge and TVA management interpreted the facts on which these recommendations were based differently than the OIG, we concur with actions taken and/or planned by Oak Ridge and/or TVA to correct the identified issues. Oak Ridge and TVA management disagreed with the recommendation to replace meters that do not meet accuracy standards. However, TVA management offers a new determination for accuracy of meters tested in the field versus meters tested under more accurate laboratory conditions in their comments to another recommendation in the report. The OIG suggests TVA communicate this new determination to all distributors.

As part of our annual audit plan, we reviewed the inspection and maintenance programs for TVA's transmission lines and structures. Specifically, we identified (1) instances in which transmission lines were not assigned a preventive maintenance inspection interval, (2) improvements that could be made to the manual and system documentation to allow recording of inspection results and additional trending of recurring maintenance issues, and (3) improvements that could be made in scheduling preventive maintenance inspections of tower lighting.TVA management stated they agree with the facts found during the audit and with all of the recommendations. TVA management also provided clarifications related to the OIG's use of the word "assets" versus "locations" when referring to transmission line facilities and how trending of recurring maintenance issues is currently being performed. We revised the report, as necessary, to address these comments.

The OIG audited Sevier County Electric System's compliance with the power contract between the TVA and Sevier, a power distributor based in Sevierville, Tennessee, for the period July 2008 through June 2010. For fiscal year 2010, Sevier provided power to approximately 54,000 customers that resulted in revenues of approximately $134 million.Our audit found Sevier generally complied with the contract provisions for (1) proper reporting of electric sales, (2) nondiscrimination in providing power, and (3) use of electric revenue for approved purposes. However, areas for improvement in contract compliance were noted relating to customer classification and customer contract maintenance. Sevier and TVA management agreed with our recommendations and have taken or are taking corrective actions. The target completion date for all corrective actions is June 2012.

The OIG audited Warren Rural Electric Cooperative Corporation's (WRECC) compliance with its power contract with TVA. WRECC is a power distributor based in Bowling Green, Kentucky. For fiscal year 2010, WRECC provided power to approximately 60,000 customers that resulted in revenues of approximately $157 million. WRECC also owns and/or operates nonelectric businesses including a security system and monitoring service division, a propane sales subsidiary, and a natural gas distribution subsidiary, and partially owns a nonelectric bill processing company. In addition, WRECC provides billing services for a water utility.Our audit found WRECC was generally in compliance with the contract provisions for proper reporting of electric sales and nondiscrimination in providing power. However, we noted instances of noncompliance with other provisions of the power contract. The most important instances were related to use of electric revenues. Other areas for improvement in contract compliance were noted regarding co-mingling of electric and nonelectric funds, customer classification, and metering. We also identified one area where TVA's oversight of the distributor should be enhanced. This issue, regarding the lack of a current joint cost study, has been reported in previous OIG distributor audit reports.WRECC and TVA management generally agreed with our recommendations and have taken or are taking corrective actions, except for our recommendation to create an independent general ledger and corresponding accounts for the security system and monitoring service division. The target completion date for all corrective actions is May 2012.