Federal Reports

We reviewed the TVA compliance with the Federal Information Security Management Act (FISMA) of 2002. In summary, we determined that while TVA has made some progress in implementing information technology controls required by FISMA and work on some previously recommended actions continues, additional efforts were needed to strengthen compliance of TVA's security program with existing controls and address additional concerns. We identified opportunities to improve all control areas that we reviewed, except for TVA programs for incident response and reporting and remote access management. In addition, we identified an opportunity for TVA to improve agency-wide security oversight. TVA management agreed with our recommendations. Summary Only

The OIG audited the electric system of Volunteer Energy Cooperative (Volunteer), a distributor based in Decatur, Tennessee. The objective of the audit was to determine compliance with provisions of the power contract between TVA and Volunteer for the period July 2008 through June 2010. For fiscal year (FY) 2010, Volunteer provided power to approximately 110,000 customers resulting in electric sales revenue of approximately $200 million. During the period audited, Volunteer also operated a natural gas division and a wholly owned propane subsidiary.Our audit found Volunteer generally complied with the contract provisions for (1) proper reporting of electric sales and (2) nondiscrimination in providing power. However, we noted instances of noncompliance with other provisions of the power contract. The most important instances were related to the use of electric system revenues and customer classification. We also identified three areas where TVA oversight of distributors could be enhanced. Two areas identified were new oversight issues addressing the lack of (1) guidance related to the due diligence process for cooperatives providing loans to customers from funds provided by Rural Development and (2) review of cooperative distributors' capital credit allocations in the retail rate setting process. The remaining issue, regarding the lack of a current joint cost study, was reported in previous OIG distributor audit reports, and TVA agreed to take corrective action on this issue.With regard to the 18 recommendations related to Volunteer, Volunteer disagreed with three recommendations, but TVA management agreed with all of the recommendations, stating it planned to investigate one finding further. In regards to the recommendations which were specific to TVA, TVA management stated (1) it planned to recommend formal approval by the TVA Board of Directors of a use of revenues policy which expressly approved distributor participation in the United States Department of Agriculture Rural Economic Development and Grant Program, and (2) consideration of Volunteer's capital credit allocations was inherent in TVA's revised retail ratemaking and approval process.

EAC OIG, through the independent public accounting firm of Leon Snead & Company, P.C., audited EAC's financial statements for the fiscal years ended September 30, 2011, and September 30, 2010.

We reviewed the effectiveness of TVA's budget process. Our objective was to review the adequacy of the processes used in preparing, reviewing, and adopting the fiscal year 2011 budget. In general, we determined the overall design of the budget process was sufficient to achieve the desired results. We found nothing to indicate the benchmarking process was not sufficient to allow TVA to benchmark itself against its peers. We also found nothing to indicate the budget review and approval process was insufficient. However, we did identify opportunities where the process could be strengthened and improved. Specifically, we determined:A formal written procedure directing the budget process did not exist.Operating and maintenance (O&M) targets were set using historical data rather than tied to fundamental business drivers.A control to ensure each submitted business plan aligns resources with strategic goals was not operating as intended.The budget process addressed risk management initiatives at the organization level; however, entity-wide risk management was not directly addressed.The process for prioritizing capital and O&M projects among organizations could be improved.The budget process relied heavily on compiling data from multiple spreadsheets which was manually intensive, time consuming, and error-proned. Summary Only

Compliance with Laws and Regulations

Internal Control for 2011

2011 Financial Statement

Cyberscope FY 2011 Submission

We performed four agreed-upon procedures that were requested solely to assist management in determining the validity of the Winning Performance payout awards for the year ended September 30, 2011.Results of the procedures applied follow. In summary,The fiscal year (FY) 2011 WP goals were properly approved, including two changes approved on August 15, 2011 and August 24, 2011. These two changes affected 16 scorecards and resulted in increases to the payout.The actual year to date FY 2011 measures for the Strategic Business Unit and Business Unit scorecards agreed with the respective supporting documentation provided.The two actual year to date incentivized TVA Corporate balanced scorecard measures agreed with the underlying support provided.The mathematical accuracy of the payout percentages and subsequent changes were verified by the OIG through recalculation. Summary Only

This report is Sensitive But Unclassified. To obtain further information, please contact the OIG Office of Counsel at OIGCounsel@oig.treas.gov, (202) 927-0650, or by mail at Office of Treasury Inspector General, 1500 Pennsylvania Avenue, Washington DC 20220.

The OIG evaluated the (1) security controls for protecting TVA data transmitted to and handled by ActiveHealth and (2) adequacy of and compliance with TVA contract terms for security and data protection. In summary, we determined, (1) appropriate controls were in place to effectively protect personally identifiable information and protected health information transmitted to and handled by ActiveHealth, and (2) ActiveHealth complied with the security terms included in the TVA contract. However, we identified opportunities to improve (1) the ActiveHealth control environment, (2) TVA's contract terms for health services, and (3) TVA's communication of ActiveHealth's role in the health benefits package. Summary Only

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

Semiannual Report to Congress

October 2011 Semiannual Report

Management and Performance Challenges

Inspector General Identified Management Challenges

EAC OIG, through the independent public accounting firm of Leon Snead & Co., conducted an evaluation of EAC's compliance with the requirements of the Federal Information Security Management Act for fiscal year 2011.

As those of you who read our Semiannual Report (SAR) know, the Office of Inspector General (OIG) at the Tennessee Valley Authority (TVA) selects a theme for each SAR and this SAR is no different. Our theme for this edition is "Navigating Risk." In many ways, our theme for every SAR could be about risk as this is the heart of our work and what drives our audit plan every year. This is the first edition of our SAR devoted to the topic of risks, but it will not be our last. Hopefully, you will see why.In this semiannual period, our audit, inspection, and investigation activities resulted in almost $16 million in recoveries, fines/penalties, waste, potential savings, questioned costs, or funds which could be put to better use, as well as numerous recommendations to help TVA become better and recognize areas where additional controls may be necessary to adequately control risks.

This report summarizes the oversight work performed by EAC OIG during the 6-month period ended September 30, 2011.

Patch Management

Audit of purchase card internal controls.

EAC OIG, through the independent public accounting firm of Clifton Gunderson LLP, audited $23.1 million in funds received by the Nevada Secretary of State under the Help America Vote Act. The objectives of the audit were to determine whether the Secretary of State (1) used payments authorized by Sections 101, 102, and 251 of HAVA in accordance with HAVA and applicable requirements; (2) accurately and properly accounted for property purchased with HAVA payments and for program income; and (3) met HAVA requirements for Section 251 funds for an election fund and for a matching contribution except for the requirements for maintenance of a base level of state outlays, commonly referred to as Maintenance of Expenditures (MOE).

TVA's challenges are great with the need for financial flexibility to ensure the TVA mission of delivering low cost power is achieved. The current debt ceiling could limit TVA's financial flexibility and require TVA to seek higher cost financing options or require significant rate increases that could adversely affect the economic development of the Tennessee Valley region. Although TVA is in the process of evaluating options, TVA's position is that a financial metric (e.g., something similar to the debt service coverage ratio), rather than a debt ceiling stated in terms of an arbitrary dollar amount, would provide control of TVA's borrowing authority that is tied to TVA's ability to pay outstanding debt, similar to investor owned utilities, while still providing Congress with oversight and control.The Inspector General agrees with TVA management in their efforts to maintain maximum financial flexibility, including (1) the adoption of sound financial principles, (2) ensuring multiple options and strategies are pursued to achieve the most economical approach, and (3) seeking to ensure that debt remains a viable option in future financing decisions.TVA should be able to support additional debt to help meet energy demands as long as the TVA Board maintains its ratemaking authority, TVA maintains its service territory and customer base, and TVA uses the debt proceeds to successfully build generating capacity.

The objective of this review was to determine if the fire protection systems were adequately maintained and mitigating actions are taken to minimize the impacts of fires at TVA fossil plants. During our review, we identified a number of issues related to fire protection at TVA fossil plants. We found numerous impairments exist with fire protection systems at a number of sites, and most systems are not returned to service in a timely manner. During calendar year 2010, there were 30 impairments at Cumberland, 10 at Gallatin, 6 at John Sevier, 20 at Paradise, and 49 at Shawnee. The impairments in 2010 that have since been closed lasted between 40 and 158 days, depending on the site. We also found some fire brigade members have concerns about fire response preparedness. These concerns included poor fitting equipment, the condition of fire trucks, an inadequate staging area, bad communication equipment, not enough training, and insufficient staffing. Additionally, we found that lessons learned from fire events were not being consistently communicated across the fleet. Lessons learned were shared in different ways and were not always shared with fire brigade members. We also identified opportunities for improvement with fire prevention. During our review, we observed areas of significant coal dust accumulation and evidence of smoking at several sites. Lastly, we found instances of noncompliance with TVA policy regarding testing, inspection, and maintenance of fire protection equipment, pre-fire plans, and use of fire equipment. We identified some systems that were not inspected and tested as required, pre-fire plans were in need of updating, and fire equipment was being misused.We recommended the Senior Vice President, Fossil Generation 1) take immediate steps to restore all impaired fire protection systems to service and determine if additional personnel or resources are needed to expedite repairs of fire protection systems in the future; 2) determine (a) the equipment needs of fire brigade members, including protective equipment and emergency communication devices, and take steps to provide that equipment, (b) what additional training is needed for fire brigade members and take steps to provide that training, and (c) if increased staffing is warranted for fire brigades; (3) create and implement a formal process for capturing and sharing lessons learned from fire events across the fleet, and capture all fire incidents and report them in a consistent manner in the OIC; (4) perform regular coal washdowns at all plants to minimize coal dust accumulations, and strictly enforce TVA's "No Smoking" policy; and (5) evaluate whether additional personnel are needed to properly inspect, test, and maintain fire protection equipment, update pre-fire plans to reflect current conditions, and reinforce that fire equipment is only to be used by fire brigade personnel. TVA management agreed with the recommendations.

Incident Management

The objective of this review was to determine whether TVA was meeting all requirements and planned actions for the removal of equipment containing polychlorinated biphenyls (PCBs). We found there were currently no requirements for the removal of PCB equipment, and previous planned actions for PCB equipment removal were not always completed. We believe continued use of PCB-containing equipment poses significant risk to TVA, as (1) TVA maintains one of the largest inventories of PCB equipment in the electric utility industry; (2) the condition of some PCB equipment at TVA increases the risk of an incident; and (3) TVA does not have an accurate inventory of its PCB-contaminated equipment.We recommended the Chief Operating Officer (1) expedite removal of PCB equipment by (a) providing dedicated funding and (b) developing a standard methodology for assessing risk of PCB contaminated equipment to prioritize its removal; and (2) provide dedicated funding to expedite efforts to determine PCB-contaminated equipment inventory to prioritize and allocate funding, accordingly, for the removal of this equipment. Until the PCB-contaminated equipment inventory is completed, TVA should treat all fires involving electrical equipment as if it contained PCBs until determined otherwise.