United States General Accounting Offke Washington, D.C. 20548 Accounting and Information Management Division B-278576 November 19, 1997 The Honorable Zach Wamp House of Representatives Subject: Financial Management: Briefing on Federal Eleetricitv Activities-TVA Dear Mr. Wamp: On October 20, 1997, we briefed Ms. Helen Hardin, Mr. Bob Castro, and Mr. Dick Kopper of your office on the results of our recently completed review of federal electricity activities. This work was done at the request of the House Committee on the Budget and the Subcommittee on Water and Power Resources, House Committee on Resources, and resulted in our September 19, 1997, report entitled, Federal Eleticitv Activities: The Federal Government’s Net Cost and Potential for Future Losses (GAO/Al&ID-97-110 and 97-1lOA). The enclosed briefing slides highlight the findings in that report. The review responded to congressional concerns about (I) any ongoing expenses incurred by the federal government to support the electricity-related activities of the Power Marketing Administrations (PMAs),’ the Department of Agriculture’s Rural Utilities Service (RUS), and the Tennessee Valley Authority (TVA) and (2) potential future losses &om these activities given the move toward deregulation and increased competition in the electricity industry. The federal government incurred net costs of over a billion dollars annually for fiscal years 1992 through 1996to support the electricity-related activities of RUS and the PM& We estimated that the net costs to the federal government for fiscal year 1996 totaled about $2.5 billion-$0.4 billion for BPA, $0.2 billion for the three PMAs, and about $1.9 billion for RUS, including about $982 milhon in RUS loan write-offs. Cumulatively, for fiscal years 1992 through 1996, we estimated that the net costs were about $8.6 billion in constant 1996 dollars, ‘We reviewed four of the five PEAS: the Bonneville Power Administration (BPA) and the Southeastern, Southwestern, and Western Area Power Administrations (which we refer to as the three PMAs). The fifth PMA, the Alaska Power Administration, was excluded from our review because legislation has been enacted to sell it to nonfederal entities. GAO/m-9836R Federal Electricity Activities-TVA B-278576 including over $1 billion in RUS loan write-offs. The net costs associated with TVA were minimal. Under current policies and law, the federal government will likely continue to incur many of the same types of costs; however, future ‘RUS loan write-offs cannot be accurately predicted. We also reported that there is risk to the federal government of future losses from each of these entities because of financial difficulties faced by RUS borrowers, TVA, BPA, and one or a few projects at each of the other three PMAs. As of September 30, 1996, the federal government was exposed in varying degrees to the risk of future losses because of its more than $84 billion in direct and indirect financial involvement in the electricity-related activities of RUS, the PMAs, and TVA. The risk of future losses relates to the possibility that RUS borrowers, the PhIAs, or TVA would be unable to repay the full $53 billion in debt owed to the federal government or that the federal government would incur unreimbursed costs as a result of actions it took to prevent default or breach of contract on the $31 billion in nonfederal debt owed by these entities. We are sending copies of this letter to interested congressional committees, and copies will also be made available to others upon request. We appreciated the opportunity to share the results of our work. If you have questions or desire additional assistance on any of these matters, please contact me at (202) 512-8341. Sincerely yours, Linda M. Calbom Director, Civil Audits Enclosure (913758) 2 GAO/AI&ID-98-36R Federal Electricity Activities-TVA -_ 0 0 I- c) a err )I I Q) t c 0 en c) ul a aL I- Q) IA CD r- c) > I 0) 0 0 W 0) I (3 W 0 8% I cu aa (I a W Q n 0 W 0 IA 0 0 i3 m Background 0 Requesters raised concerns about: l The significant ongoing expenses incurred by the federal government to support the electricity-related activities of the PMAs and RUS and l Potential future losses from the PMAs, RUS, and TVA given the move toward d.eregu1atio.n and increased competition in the electricity’ ’ industry 2 GA0 Overall Objectives l For the federal government’s electricity- related activities, we designed our work to l Estimate the fiscal year 1996 net recurring cost and, where possible, fiscal years 1992 through 1996 cumulative net recurring cost and l Assess the likelihood of future losses beyond the net recurring costs 3 l Rural Utilities Service l 4 Power Marketing Administrations . 0 Southeastern l Southwestern l Western 0 Bonneville l Tennessee Valley Authority 4 GAo Scope Limitations l GAO did not: l Estimate the’forgone revenue for federal, state, or local governments resulting from the tax-exempt status of the RlJS borrowers, the PMAs, and TVA e Assess the’reasonableness of the methodologies used by the operating i’ j, agencies to allocate power-related costs to the PMAs for recovery 5 w Net Costs l For fiscal year 1996, the federal government incurred net costs of about $2.5 billion for BPA, the 3 PMAs, and RUS l For fiscal years 1992 through 1996, the federal government’s net cost of operating these entities was about $8.6 billion, in constant 1996 dollars l The net costs incurred by the federal government to operate TVA for fiscal years 1992 through 1996 were minimal w Net Costs l Criteria used to determine net cost l Federal accounting standards \ Full l OMB Circular A-25 cost l Industry Practice / 7 GAO Net Costs Estimated Net Costs to the Federal Government (Dollars in millions) .:.,: .:; I:‘:’ .,. .,,::.:, :.., :.::. :.: .,:,,:. t.: :. :.:.:.:. ‘: :“’ : .,. .’ .:.:.::..i. : :::. ‘.......“..“i.., ,i,: ;& ;:: 1.1. : :‘yjjjlj .“‘l:rdt~,:,:.:,,i:: :j;l,,.j,Giliii’Uj~t,~e,~ : j. :::j; :,,:,,,:, :: : ‘.. ::: .::r ........ ..:: :,.g.:; :, :: “. ..: .:::.::. :::::,::::::..:‘:. ::‘,I : . . . . .._.... ,:: ..,... :.:: ,.__.. :..:.::: :.::,:..:.::.:‘.::.:..::~i:i.:’ ::._::,:. . . . ::::. . .‘: :::‘::‘.‘.‘-’ . . . .:.:.::.: :: .::: .. .. ~~~~:i):JJp:jijljij .., :.I .j,, ,,I : .:.:..:.. : j::j .,::::,,:.: ‘::. . . . . . . ::: ,..::..:. :L::‘:“’ : :::.. : .,: ..... :, .“. “. : : ::: ;..::.:,: .__. ::.;:::. ..,,...,,.,...,,.... .._,,._.,.,..__. :,.,: . . .:.:...:.:::_::::::: . . .. . c:::.::: ::::::.::::::::::::::::::::::::::: Fina-&g “” $874 $3,812 $1,459 $6,941 I II I Loan write-offs 982 1,049 982 1 1,049 I I II III I Benefits I 1 1 3 16 82 21 110 $1 1 $4 11 39 1 199 Construction 30 138 1 30 139 Other 21 ll? (48) :: 269 I I Total $1,878 $4,976 f $1 $4 $2,462 $8,597 GAs3 Federal Financial Involvement Dollars in billions Entity Direct Indirect Total RUS $32.3 $32.3 Three PMAs 7.0 $0.2 7.2 I BPA 10.1 7.1 17.2 ITVA . 381 24 . 1 1 Total $53.2 $31.4 $84.6 I 9 ~-~~~- MO, Federal Financial Involvement l The federal government would incur a future loss: * Direct involvement - to the extent the RUS borrowers, the PMAs, or TVA fail to make payments on federal debt l Indirect involvement - to the extent it,incurs unreimbursed costs as a result of .actions iti took to prevent default or breach of contract’ on nonfederal debt 10 GAO Federal Financial Involvement --TVA Treasury (FFB) bonds (Direct) 3.2 billion) 2% Appropriated debt (Direct) ($0.6 billion) ;I 1 4, Public ’ debt (Indirect) ($24.1 billion) 11 MII Risk of Loss l Criteria for assessing risk l Statement of Federal Financial Accounting Standards (SFFAS) No. 5, Accounting for Liabilities of the Federal Government a Probable, reasonably possible, or remote 0 Consistent with criteria used by bond rating services to assess credit risk for nonfederal utilities 12 MCI Risk of Loss l For RUS, we reviewed the loan portfolio, assessed the production costs of key borrowers relative to their respective markets, and considered state regulatory actions l For the PMAs and TVA, we considered the cost of electricity production and rates, key financial ratios, generating mix, competitive environment, management actions, and ” ’’ legislative and other factors 13 G&I Risk of Loss - RUS $10.5 billion owed by 13 financially stressed G&Ts 0 4 borrowers owing $7 billion are in bankruptcy l 9 borrowers have invested in uneconomical plants and/or have formally requested debt forgiveness ,, from ‘RUS 14 GACJ Risk of Loss - RUS l Some currently viable borrowers are likely to face future financial difficulty due to l High production costs (27 of 33 G&Ts had average revenues per kilowatt hour higher than neighboring IOUs) 0 Competitive and/or regulatory pressures ; i II 15 GAO Risk of Loss -- RUS l Despite certain mitigating factors, it is probable that l the federal government will continue to incur losses on loans to financially stressed borrowers l additional losses will be incurred on borrowers that are not currentlyStroubled,, i ,, but will likely become troubled in the future 16 . w Risk of Loss - Three PMAs a Three PMAs competitively sound overal l Production costs average more than 40 perce.nt below IOUs and POGs in the primary NERC regions in which they operate l If required to recover all power-related costs, ability to remain competitive might be impaired 17 MO Risk of Loss - Three PMAs ’ l All three PMAs have at least one project or rate-setting system with problems that, taken as a whole, make risk of some loss to the federal government probable l In aggregate, these problem projects or rate-setting systems represent 19 percent (about $1.4 billion) of the federal government’s involvement in the’ three PMAs 16 GAo Risk of Loss - BPA l Risk of loss through fiscal year 2001 is remote l Contracts through FY2001 with preference and industrial customers provide for stable revenues l Fish cost funding responsibility capped through FY2001 l Current substantial financial reserve balance provides flexibility 19 cAs3 Risk of Loss - BPA l Risk’of loss after fiscal year 2001 is reasonably possible l Expiration of customer contracts l Risks from market uncertainties l High fixed costs l Substantial upward pressure on operating expenses 20 MI Risk of Loss - TVA l GAO report issued in 1995 concluded that l TVA has far more financing costs and deferred assets than its likely competitors .which limits its flexibility to meet competitive challenges 0 To the extent that TVA cannot compete effectively and improve its financial condition, , , the federal government is at risk for some portion of TVA’s debt.. 21 GAD Risk of Loss -- TVA l Under current monoDolv-twe . I . structure, risk of loss to the federal government from its involvement in TVA is remote 0 Long-term contracts provide stability and ensured cash flow a Exemption from the “wheeling” provisions of the Energy Policy Act of 1992 protects; , ( against outside competition TVA can set rates with minimum oversight 22 MO Risk of Loss -- TVA 0 Risk of loss is reasonablv possible absent protection from competition l TVA has chosen to defer costs related to its substantial nuclear investment to future years rather than including them in current or prior year costs being recovered from ratepayers l This cost deferral has resulted in a high level, ! ‘ 1I r r’ OT Taxedcosts and deferred assets which Ieaves’TVA vulnerable to future competition 23 ‘~0 Risk of Loss -- TVA l To assess TVA’s financial condition relative to its likely competitors, we compared the following ratios for TVA and 11 neighboring investor-owned utilities: l Financing costs to revenue l Fixed financing costs to revenue l Accumulated depreciation to gross PP&E, l Deferred assets to gross PP&E 24 CSQ Risk of Loss -- TVA Financing costs to revenue Percent The financing costs 40 to revenue ratio 35.3 indicates the 30 - percentage of operating revenues 20 - needed to cover the financing costs IO - of the entity ’ 0 25 w Risk of Loss -- TVA Fixed financing costs to revenue The fixed financina Percent costs to revenue rUati0 35.3 indicates the 30 -. percentage of operating revenues 20‘- needed to cover the - fixed portion of the 10.- financing costs 0 26 QUID Risk of Loss -- TVA Ace. depreciation to gross PP&E Percent Accumulated 40 depreciation to gross PP&E ratio 30 - shows how much PP&E had been 20 - 1 recovered through 10 - rates at September 30,1996 0 27 GM) Risk of Loss -- TVA Deferred assets to gross PP&E Percent Deferred assets t6 25 gross PP&E ratio 20 - 19.5 shows how much of total PP&E has not 15 - yet begun to be IO - depreciated and taken into rates 5- 0 28 GAO Risk of Loss -- TVA l Other factors could negatively affect TVA l Five municipal distributors that account for over 34 percent of TVA’s total sales to distributors want to renegotiate their contracts with TVA to obtain more favorable terms I l Twelve of TVA’s distributors are interconnected with other utilities 29 CKJ Risk of Loss -- TVA l TVA’s vulnerability to wholesale competition without protections was recently demonstrated when the Bristol Virginia Utilities Board announced that it is going to leave the TVA system for Cinergy, Inc l Cinergy offered firm wholesale power at 2.59 cents per kWh for 7 years,-40 percent lower than TVA’s.comparable wholesale f : ’I rate of 4.3 cents per kWh 30 MI Mitigating Factors -- TVA l Mitigating factors reduc’e risk of loss l Inherent cost advantages l Management actions to increase revenues, cut operating expenses, and reduce debt l Extensive transmission system . 31 Mitigating Factors -- TVA l TVA recently released a IO-year business plan that calls for: l Increasing power rates enough to increase annual revenues by about 5.5 percent ($325 million) l Limiting annual capital expenditures to $595 million l Reducing debt by about 50 percent from $27.9 billion as of g/30/96, to $13.8 billion by FY 2007 l Reducing its total cost of power by about 16 percent ’’ by FY 2007 32 :’ ‘\P G&D Mitigating Factors - TVA While the. mitigating factors reduce the risk of loss, we believe the risk of loss is still reasonably possible. 33 Ordering Information The fbst copy of each GAO report and testimony is free. 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Financial Management: Briefing on Federal Electricity Activities--TVA
Published by the Government Accountability Office on 1997-11-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)