Federal Reports

TVA's Board of Directors approved a Financial Trading Pilot Program in September 2003 to hedge or otherwise limit the economic risks associated with the price of commodities covered by TVA's Fuel Cost Adjustment (FCA). At that time, the maximum Value at Risk (VaR) was not to exceed $5 million on an annual basis without the approval of the TVA Board. In May 2005 the TVA Board approved the request to expand and fully implement the Financial Trading Program (FTP). The FTP currently has an aggregate transaction limit of $130 million (based on one-day VaR) of which $90 million is allocated to natural gas hedging.TVA's hedge strategy requires a minimum of 50 percent to a maximum of 75 percent of the forecasted natural gas volume for the fiscal year be hedged. From FY 2006 through the first quarter of FY 2012, TVA's natural gas-related costs have been $3.14 billion; the FTP hedging program contributed another $840 million for total costs of $3.98 billion. This contribution reflects the difference between the locked-in price of natural gas and the market price of natural gas at the time of delivery. TVA management stated the $840 million is a result of the dramatic drop in the price of natural gas over the period. In addition, TVA, as of December 31, 2011, expects the hedging program to add $421 million to natural gas costs of $3.7 billion for the period January 2012 to December 2017 for total natural gas costs of $4.1 billion. Although this situation could reverse in an environment with rising gas prices, it illustrates the significant potential impact, positive and negative, the FTP can have on TVA's FCA. As a result of the growth in FTP financial positions and the inherent risk with the program, we audited the program to evaluate (1) management oversight and the design of controls in place to mitigate operational risk exposure, (2) the program objectives and related performance measures, (3) whether TVA was meeting defined performance objectives, and (4) how the FTP impacts TVA's overall risk tolerance.In summary, we determined the design of TVA's FTP control structure was appropriate. However, we identified several areas where improvement is needed to validate the usefulness and effectiveness of the program as well as to ensure TVA's stakeholders' understanding of the program. Specifically,TVA has not conducted a comprehensive cost benefit analysis to determine whether the benefits derived from the FTP are greater than the inherent risks of the program.TVA does not currently measure the performance of the FTP against defined program objectives.a back-testing was not performed on a routine basis.TVA's communications with its customers did not sufficiently convey the FTP's impact on rates.TVA Management generally agreed and plans to take appropriate action.

Because of the importance of successful capital project management, and in light of recent capital project cost overruns and schedule delays, we initiated a review of Tennessee Valley Authority's (TVA's) capital project management. The objective of our work was to determine whether the Project/Portfolio Management (PPM) function of PowerPlant meets the needs of the strategic business units (SBU).PowerPlant replaced TVA's Project Justification System on March 7, 2011, at a cost of about $7 million. PowerPlant was implemented to replace the assets module within the Enterprise Financial Management System, while also providing the functionality to centralize project and portfolio management. TVA achieved some project and portfolio management capability with the new system, but considerable opportunity for improvement exists. Specifically, as a result of our review, we identified (1) the PowerPlant PPM tools do not currently meet all needs identified by the SBUs, (2) users feel they have not been adequately trained on some functions of the system, and (3) communication of defects that have been resolved would benefit users.We recommended management consider (1) implementing additional project management functionality available in the PowerPlant system or purchasing another system to provide a PPM tool to more efficiently and effectively manage TVA's capital projects, (2) completing additional PowerPlant training as planned, and (3) developing a strategy for communicating system changes, upgrades, and modifications.

TVA established the Direct Load Control (DLC) program in the 1970s as a means to shift load from on-peak/high-priced periods to off-peak/low-priced periods. At the time of our audit, there were 12 distributors participating in the DLC program. Credits provided to these distributors during 2011 ranged from $5,909 to more than $1 million for a total cost to TVA of $2,365,819. The OIG audited TVA's DLC program to address concerns received regarding the benefits of the program. Our specific audit objectives were to assess the effectiveness of the program and TVA's oversight of the program. In summary, we determined the DLC program was not operating effectively, and TVA was not employing two key oversight mechanisms afforded by the DLC contract.The program was not operating effectively because much of the DLC program equipment was outdated and in disrepair, and the program cost was substantially higher than the savings TVA achieved.TVA was not using two key contractual oversight mechanisms for verifying the program was operating as intended and distributor reports to TVA were accurate.We made three recommendations that pertained to determining whether the DLC program was cost-beneficial and TVA used contractual oversight mechanisms available. TVA management generally agreed with our recommendations and findings.