Federal Reports

We reviewed TVA's contracts with a contractor that provided boiler pressure parts and burner parts and determined the contracts' compensation clauses were not adequate for determining and evaluating prices to be billed for the parts. We recommended TVA management (1) incorporate specific pricing criteria in the contracts for use in determining and evaluating prices and (2) revise/supplement the cost reimbursable payment terms under one of the contracts to specifically address costs/rates to be paid by TVA. TVA management agreed the contracts' pricing criteria should be revised and took appropriate action. Summary Only

We assessed the adequacy of controls applicable to the accounting for costs associated with non-nuclear insurable losses. TVA has negotiated and obtained insurance to cover two areas of non-nuclear operations: (1) non-nuclear property and (2) unplanned outages. The unplanned outage insurance covers Fossil's nine baseload units. In summary, we found that the Corporate Insurance Risk & Analysis Group (CIR&A) is in the process of developing policies and procedures to ensure identification of non-nuclear insurable losses and the accounting for associated costs. According to CIR&A, interim actions have been undertaken to capture the costs of non-nuclear insurable losses, including:The Risk Management Information System was implemented in 2002 for the purpose of capturing insurable loss information as it relates to TVA's non-nuclear operations.Insurable loss incidents are identified by maintaining contact with designated site personnel. CIR&A also reviews various reports and data generated within TVA to identify potential insurable loss incidents. CIR&A has trained TVA business managers and designated site personnel to identify the costs that need to be captured in the event an insurable loss occurs. Since this process is currently in a development stage, we plan to defer any further audit work until the process is fully implemented.

This Semiannual Report to Congress summarizes the activities of our office for the 6-month period

This is my first report to TVA’s newly constituted Board since the new Board members were sworn in on March 31, 2006. Legislation signed by President Bush in 2004 expanded the Board from three full-time members to nine part-time members, with a full-time chief executive officer to run TVA on a day-to-day basis. As has been noted by many, this is a historic change to the governance structure of TVA.The impetus for this change was a growing sentiment over the years that TVA’s governance structure had become anachronistic. For 73 years, TVA was managed by three full-time board members. United States Senate Majority Leader Bill Frist, who introduced and helped secure passage of the restructuring legislation, has commented that the change is a matter of “common sense.” As the nation’s largest public utility, TVA will now have a corporate structure similar to that of its competitors. The hope is that the new governance structure will help position TVA to compete on a level playing field if as expected the traditional “fence” that has historically protected TVA’s market disappears.The focus of this governance change is accountability. We also focus on accountability as well as economy and efficiency. The OIG performs audits, inspections, and investigations that are designed to assist TVA in achieving its mission of providing affordable, reliable power, being a good steward of the environment, and fostering economic development. The work highlighted in this report is indicative of the efforts we take to help TVA achieve its goals. I am pleased to report that my experience has been that TVA management works collaboratively with the OIG and conscientiously implements our recommendations. There is a demonstrable commitment to excellence at TVA.I offer my sincere congratulations to the new board members and acting Chief Executive Officer Tom Kilgore. I want to extend my personal thanks to Directors Harris and Baxter who have demonstrated a commitment to supporting an independent OIG at TVA. I look forward to experiencing the same spirit of cooperation and partnership with the new board members.The challenges facing TVA are great, but the honor to serve the citizens of the Tennessee Valley is even greater. On this historic occasion, the OIG renews our pledge to provide independent, objective, and competent reports as TVA moves forward into a new era.