Federal Reports

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

This report summarizes the oversight work performed by EAC OIG during the 6-month period ended September 30, 2009.

EAC OIG, through the independent public accounting firm of Clifton Gunderson LLP, audited $16.6 million in funds received by the Rhode Island 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 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.

EAC OIG, through the independent public accounting firm of Clifton Gunderson LLP, audited $28.7 million in funds received by the Iowa 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 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.

We conducted four reviews to determine whether each coal supplier was in compliance with weighing and sampling provisions of the respective contract. We performed tests to verify that shipment weight documentation maintained at each mine supported the amounts used to support invoices to TVA for tonnage shipped. In summary, our reviews found documentation maintained at the respective mine for ten randomly selected shipments agreed with the information provided to TVA regarding tons shipped. Each supplier was also found to be in general compliance with the weighing and sampling requirements of the contracts. However, we did identify a few issues requiring management action related to bias testing. Specifically, we recommended the General Manager, TVA Fuel Supply:Include in future coal contracts a specific frequency requirement pertaining to the periodic bias testing of samplers.Follow up with one coal supplier to either identify a method of bias testing that is acceptable or amend the contract to extend the period in which the samplers need to be bias tested.Follow up with one coal supplier regarding correction of the qualified opinion received from the independent lab in its 2009 dynamic bias test of Sampler #2 and determine whether any further corrective actions are warranted when current bias test results are received.TVA management generally agreed with our findings and recommendations and plans to take corrective action. Summary Only

We performed a pre-implementation review of the Enterprise Asset Management (EAM) System, Phase 1 implementation, which provided for supply chain and work management processes. We determined plans and processes in place were adequate after actions were completed to address our concerns, regarding application access controls, system security, system testing, data conversion, and general controls. During our audit, the EAM Project Team and Information Services took actions to address our findings and initiated plans to implement additional corrective actions and address remaining concerns during subsequent system implementation phases. Summary Only

The OIG performed a review of the Hickman-Fulton Counties Rural Electric Cooperative Corporation (Hickman-Fulton) which is a distributor for TVA power based in Hickman, Kentucky. Our review of Hickman-Fulton found metering issues that could result in (1) inaccurate billing of electric sales by the distributor to their customers and therefore, impact the electric sales reported on the distributor's financial reports to TVA and (2) disparate treatment among similarly situated customers that could be construed, under Section 5 Resale Rates of the power contract, as discrimination in providing power to members of the same rate class. We were unable to estimate the monetary effect because sufficient information was not available.In addition, we found Hickman-Fulton had more than enough cash on hand to cover planned capital projects and provide a cash reserve. The cash reserve after planned capital projects was about 6 percent which was within the guidelines (cash ratio of 5 percent to 8 percent) TVA established to determine if a distributor has adequate cash reserves. We also found improvements were needed to comply with contract provisions in the area of customer contracts.Finally, we also identified opportunities to enhance TVA oversight of the distributors. Specifically, TVA has not provided guidance for distributors on (1) what types of appurtenances are allowed or at what point in time the use must be predominately residential and (2) what constitutes prudent expenditures.We recommended the Chief Financial Officer (CFO) work with Hickman-Fulton to (1) develop and implement a process to test in-house any meters identified during independent testing with a power factor below 85 percent and install demand meters that measure kVA as needed and (2) ensure all customers with appurtenances used for commercial operations are metered the same. In addition, the CFO should establish guidance for distributors on allowable appurtenances and at what point in time the use must be predominately residential to qualify for a residential rate. TVA is in the process of addressing findings from previous reviews that we also found at Hickman-Fulton related to a lack of guidance for distributors on what constitutes prudent expenditures.TVA and Hickman-Fulton management agreed and are taking actions to address the first recommendation. However, TVA and Hickman-Fulton management disagreed with the recommendation related to ensuring all customers with appurtenances are metered the same and the recommendation to provide additional guidance to distributors on appurtenances.

We audited the costs billed to TVA by a contractor for providing (1) modification and supplemental maintenance services at TVA nuclear plants (operating unit work) and (2) construction services for the restart of Browns Ferry Nuclear Plant Unit 1 (BFN U1). The scope of our review included $272.2 million of noncraft costs billed by the contractor through December 31, 2007, including (1) $89.6 million for modification and supplemental maintenance services and (2) $182.6 million for the BFN U1 services.In summary, we found TVA had overpaid the contractor (1) from $876,519 to $1,579,575 for BFN U1 performance fees due to an overstated fee base and inflated fee rates, (2) $268,538 due to ineligible and unsupported billings for labor costs, (3) $54,633 due to overbillings for temporary living and relocation costs, and (4) $6,650 due to miscellaneous overbilled costs. We recommended TVA management recover up to $1,909,396 in overpaid costs from the contractor. Summary Only

We audited $25 million of costs billed to TVA by a contractor for providing research and development activities. In summary, we found (1) TVA made invoice payments in advance of the work being performed, thus losing an estimated $1,125,000 in interest over the audit period, (2) project status reports submitted by the contractor were incomplete and inaccurate, and (3) TVA was delinquent in recovering overfunded project amounts.We recommended TVA management (1) discontinue the use of advanced payments unless the contractor is required to pay interest on the advanced payments; (2) require the contractor to provide a final status report for all projects worked, and (3) recover all unspent funds and institute procedures for ensuring the timely collections of all future overpayments. Summary Only

We audited $2.8 million in subcontractor costs billed to TVA by a contractor for work related to the restart of Browns Ferry Nuclear Plant Unit 1. Our preliminary review of the costs billed by the subcontractors caused us to have concerns that certain costs that were billed may have also been billed to TVA under other contracts. We identified two direct contracts TVA had with the companies and expanded our review to include $985,984 TVA had paid to the companies under these contracts.In summary, we found TVA had been overbilled $1,075,020 including (1) $174,912 of unsupported and ineligible labor and per diem costs, (2) $621,428 of unsupported and ineligible equipment costs, (3) $199,180 of unsupported material costs, and (4) $79,500 of overstated task costs. Summary Only

The OIG performed a review of the City of Oxford Electric Department (Oxford) which is a distributor for TVA power based in Oxford, Mississippi. Our review of Oxford found issues involving customer classification and metering that could impact (1) the proper reporting of electric sales and (2) nondiscrimination in providing electricity to members of the same rate class. We were unable to estimate the monetary effect of all the classification and metering issues because in some instances information was not available; however, for those where information was available, the monetary effect on Oxford and TVA would not be material.In addition, we found Oxford had more than enough cash on hand to cover planned capital projects and provide a cash reserve. The cash reserve after planned capital projects was about 6.6 percent which was within the guidelines (cash ratio of 5 percent to 8 percent) TVA established to determine if a distributor has adequate cash reserves. We also found improvements were needed to comply with contract provisions in the areas of (1) co-mingling of funds, (2) customer bill adjustments, (3) Oxford's accounting practices, and (4) customer contracts.Finally, we noted opportunities to enhance TVA oversight of the distributors. Specifically, we noted TVA has not (1) performed a joint cost study in over 20 years when the TVA Accountant's Manual calls for one to be performed every three to four years or when major changes occur that affect joint operations, (2) provided adequate guidance on when a demand meter is required, (3) provided definitive guidance for distributors on what constitutes prudent expenditures, and (4) adequately defined how often meters should be tested by the distributors.We recommended the Chief Financial Officer (CFO) work with Oxford to improve compliance with the contract. In addition, we recommended that the CFO (1) put procedures in place to perform joint cost studies with each distributor that shares costs with other entities at least every three to four years, and (2) develop guidance to indicate when a distributor should require that a demand meter be installed for GSA Part 2 customers. TVA is in the process of addressing findings from previous reviews that we also found at Oxford related to (1) a lack of guidance for distributors on what constitutes prudent expenditures and (2) how often meters should be tested by the distributors.TVA and Oxford management generally agreed with and are taking actions to address the recommendations with the exception of our finding of co-mingling of funds where no management action is planned. If TVA management accepts the mingling of electric system funds and accounts with other funds and accounts of the Municipality, we suggest TVA consider modifying Section 1 of the power contract in their planned formal implementation of a rate change to no longer prohibit such actions.

In accordance with our Fiscal Year (FY) 2009 annual plan, the Office of lnspector General (OIG) conducted an audit to determine (1) the applicable laws, United States Capitol Police (USCP or Department) directives governing operational and sworn deployments outside of the USCP geographical jurisdiction, (2) the internal decision making process to ensure deployments are in compliance with applicable regulations and laws, (3) if the Department has a process for determining whether deployments outside the jurisdiction for any purpose, especially for ceremonial purposes, are worth the cost, and (4) the affect of deployments on overtime costs. Our scope included deployments that occurred during the 27-month period of October l, 2006 through December 31, 2008.

Audit of the Executive Secretary functions.

We audited the cost billed to TVA by a contractor for performing preheat and post-weld heat treatment services and found the contractor (1) had billed certain tasks at lump sum prices instead of using the time and material billing rates provided for by the contract and (2) overbilled or could not provide support for $1,350 that had been billed as time and material.We recomended TVA Supply Chain Management ensure the (1) contract documents how Procurement Agents will determine whether to use time and materials pricing or fixed prices for task assignments, and (2) Procurement Agents maintain documentation of how TVA assessed the reasonableness of the price for any work performed as fixed price. Additionally, we recommended TVA recover the $1,350 of overbilled/unsupported cost.

Providing grants to the Appalachian Region to improve life for the residents of Appalachia was the reason for the creation of ARC

We found that SLMA’s billing for its NLMA subsidiary for SAP under the 9.5 percent floor, complied with the TTPA and HERA. However, SLMA’s billing for NLMA did not comply with other requirements for the 9.5 percent floor calculation. Specifically, SLMA continued to bill loans under the 9.5 percent floor after the eligible tax-exempt bonds, from which the loans derived their eligibility for the 9.5 percent floor, had matured and been retired, and after the loans were refinanced with funds derived from ineligible sources. We estimate that this noncompliance resulted in special allowance overpayments of about $22.3 million.

On December 22, 2008, a major dike failure occurred on the north slopes of the ash pond at the Tennessee Valley Authority's (TVA) Kingston Fossil Plant. This failure resulted in the release of approximately 5.4 million cubic yards of coal ash spilling onto adjacent land and into the Emory River. TVA's Chief Executive Officer (CEO) directed the TVA Office of the General Counsel to contract with a firm to do a root cause analysis of the spill, and AECOM Technology Corporation (AECOM) was commissioned with the task. The objectives of our review were to (1) provide an independent peer review of AECOM's root cause analysis and (2) review TVA's ash management for weaknesses. To assist us with technical aspects of this review, we hired Marshall Miller & Associates (Marshall Miller) to independently peer review TVA's root cause analysis and provide other observations about ash management practices at TVA. In summary, we found:TVA management handled the root cause analysis in a manner that avoided transparency and accountability in favor of preserving a litigation strategy. TVA elected not to publicly disclose management practices that may have contributed to the Kingston Spill.TVA could have possibly prevented the Kingston Spill if it had taken recommended corrective actions. TVA was aware of "red flags" that were raised over a long period of time signaling the need for safety modifications to TVA ash ponds.AECOM overemphasized the "slimes" layer as a trigger for the Kingston Spill. Marshall Miller concluded that factors other than the "slimes" layer may have been of equal or greater significance.Despite internal knowledge of risks associated with ash ponds, TVA's formal Enterprise Risk Management process, which began in 1999, had not identified ash management as a risk. While over the years there was internal discussion about placing the ash ponds under the TVA's Dam Safety Program, ultimately, TVA did not place the ash ponds under its Dam Safety Program. Treating the ash ponds like dams would have required more rigorous inspections and engineering.Attitudes and conditions at TVA's fossil fuel plants that emanate from a legacy culture impacted the way TVA handled coal ash. Ash was relegated to the status of garbage at a landfill rather than treating it as a potential hazard to the public and environment.In addition, this Office of the Inspector General report was presented to the TVA Board on July 14, 2009. After the OIG briefed the Board on its findings, a specially called Board meeting was held on July 21, 2009. A report prepared by McKenna Long and Aldridge that was commissioned by the Audit Committee of the Board in February of 2009 was released. TVA management acknowledged at the July 21, 2009, meeting many of the management failures that we identify in this report. These admissions reflect the type of transparency and accountability for TVA that the OIG has pressed for some time. We applaud the Board's leadership in this matter and TVA management's acknowledgement of TVA's role in the Kingston Spill.TVA's CEO provided comments on a draft to this report. The CEO generally agreed with our recommendations and, in addition to identifying actions already taken, stated that actions in-process or planned include (1) implementing a cultural focusing initiative across the agency, incorporating lessons learned from the Kingston Spill, (2) using the detailed, technical explanation of what and how the Kingston dike failure occurred to ensure that it never happens again and to safely close the failed cell, (3) developing and implementing (a) more detailed and rigorous policies and procedures for storing, handling, and maintaining ash and ash disposal facilities and (b) a comprehensive program for future Coal Combustion Product remediation and conversion, and (4) implementing enterprise risk management improvements to better achieve the goals of the program.

We reviewed $9.98 million in costs billed to TVA by a contractor for right-of-way clearing and land restoration services for transmission line projects. In summary, we found the contractor overbilled TVA $34,678 including: (1) $28,925 in unallowable rental costs, and (2) $5,753 due to miscellaneous invoice errors. Additionally, we could not determine if price changes had been accurately accounted for under the contract because the contract's provisions relating to price changes were unclear. We recommended TVA recover $34,678 in overbilled costs and revise the price change clause in the contract to clarify when and how price changes should occur.