oversight

TVA Expenses and Deductions

Published by the Government Accountability Office on 1977-02-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          DOCUMENT RESUME
00170   -   L A07511681
[TVA Expenses and Deductions]. END-77-14; B-114850. February 2,
1977. Released February 7, 1977. 5 pp.

Report to Rep. Clifford Allen; by Elmer B. Staats, Comptroller
General.
Issue Area: Accounting and Financial Reporting (2800).
Contact: Snergy and Minerals Div.
Budget Function: Natural Resources, Environment, and Ene.rgy:
    Energy (305); General Government: Central Fiscal Operations
     (803) .
Organization Concerned: Tennessee Valley Authority.
Congressional Relevance: Rep. Clifford Allen.
Authority: TVYA Act (16 U.S.C. 831n-4(c)).

          The accuracy and integrity of TVAes accounting
procedures and financial statements for fiscal year 1976 were
questioned, and the reasons why TVAts net income dropped from
$163.2 million on March 31, 1976, to $126.1 million by yearend
were investigated. Findings/Conclusions: TVA's fuel expense
exceeded budget expenses by about $15ยง9 billion. The unit cost
of power generated was higher than budgeted, accounting for
about $5.3 million of the overrun. Another 410.6 million of
unbudgeted fuel expense resulted from a higher than anticipated
coal inventory shortage. Purchased power expenses exceeded
budgeted expense by $50.7 million. Maintenance expenses during
the fourth quarter exceeded budget estimates by about $20.9
million. This overrun was attributable to difficulties in
estimating repair costs and stepped-up maintenance at coal fired
steamplants. It was noted that increases in the cost cf fuel and
purchased power are billed to consumers two months after costs
are incurred. (RRS)
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C)   B-114850                                     E9e                      i       2B1977

     The Honorable Clifford Allen                 -           7
     House of Representatives

     Dear Mr. Allen:

          Your August 25, 1976, letter questioned the accuracy
     and integrity of The Tennessee Valley Authority's (TVA)
     accounting procedures and financial statements for fiscal
     year 1976. You asked us to investigate why TVA's net income
     for the year dropped from $163.2 million at March 31,
     1976, to $126.1 million by yearend.  You also asked us
     to explain several expenses and deductions which you noted
     were itemized in TVA's yearend financial statements, but
     not shown individually in TVA's financial statements at
     March 31, 1976.

     ANALYSIS OF NET INCOME

          TVA's budgeted and actual net income for the pertinent
     periods discuss~ds are shown below.

                                                  .-    ... Net income                .......
                                               Budgete d -Actual                      Difference
                                                  .-.-.-              (millions)


     July 1, 1975, to Maich 31,1976               $164.4                $163.2         $ -1.2
     April 1, to June 30, 1976                        40.2                -37.1             -77.3
          Total                                   $204.6                $126.1         $-7b.5
     Since actual net income approx mately ecualled budgeted net
     income as of March 31, 1976, we limited our examination to
     identifying the differences between budgeted and actual
     fourth quarter operations.

          The major differences occurred in operating expenses--
     fuel, purchased power, and maintenance. Budgeted and actual
     fourth quarter operating expenses are show;n in the following
     table.



                                                                                   EMD-77-14
B-114850
                               Fourth-quarter-FY 1976 (million)
     Operating-expense       Budgeted      Actual      Difference
                                         (millions)

           Fuel               $182.2       $198.1        $15.9
           Purchased power       1.7         52.4         50.7
           Maintenance        --47.6       - 68;5         20.9

               Total          $231.5       $319.0        $87.5

A portion of these higher operating costs was offset by lower
than budgeted interest expenses and slightly higher revenues.
     The following sections discuss the budget estimates Rnd
actual expenses for fuel, purchased power, and maintenance
expenses during the fourth quarter.

Fuel expense

     TVA's fuel expense exceeded budgeted expenses by about
$15.9 million. The unit cost of power generated was higher
than budgeted, accounting for about $5.3 million of the
overrun. TVA's budget assumed an average cost of 7.66
mills per kilowatt-hour generated. Actual costs during
the fourt'h quarter averaged 9.14 mills per kilowatt-hour
generated.   The higher average cost was caused by increased
generation from its higher cost steamplants, rather than
increases in the price of coal purchased. TVA increased
generation at the higher cost plants to compensate for
generation lost from steamplants because of unexpected,
or longer than expected, maintenance outages.

     Another $10.6 million of unbudgeted fuel expense re-
sulted from a higher than anticipated coal inventory shortage.
In June 1976, as a result of physical inventories of coa2
stockpiles, TVA discovered that the physical count differed
from the book inventory by $15.3 million. TVA had anticipated
an inventory difference of $4.7 million during the year and
had adjusted its inventory records by this amount through
May 1976. After the discovery of the coal shortage, TVA
formed a coal task force to identify the cause of the short-
age and develop recommendations and procedures to better
account for coal received, burned, and stored.      The task
force's   preliminary report,  dated September  9, 1976, did
not conclusively   explain the  reasons for the  inventory
shortages, but reported that, at some plants, (1) scales
used for measuring coal burned were inadequate and outmoded,
and v 2 ) administrative procedures should be improved to
insure accurate measurements of the coal burned at plants.

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B-114850
                                                  differences
The task :orce did not identify any significant
                                        and received.
between the quantity of coal purchased
                                               manager con-
     TVA's chairman of the board and general represented the
cludel that the annual inventory  adjustment
                                       operations and was
cumulative effect of an entire year's
                                        for a given month.
:not r-perly classified as a fuel cost       for fiscal year
Ther. f.re, the annual inventory adjustment      under TVA's
1976 was not passed through to power customersfuture  revenues
fuel adjustment clause, which reAuced TVA's
by $12.5 million.

Purchased power expense
                                               budgeted expense
     TVA's purchased power expenses exceeded overruns re-
                                           the
by $50.7 million. About $10.8 million of than budgeted,
sulted from unit costs which were higher
                                         15.87 mills per
TVA's budget assumed an average cost of   20 mills Der
kilowatt-hour, but actual costs averaged
kilowatt-hour of purchased power.
                                              budgeted to
     TVA required more purchased power than accounting for
meet consumer demand in the fourth quarter,
                                           overrun. Actual
the remaining $39.9 million of the budget       by approximately
purchase power exceeded the budgeted estimate
                                           in  purchased  power
2.6 billion kilowatt-hours. The increase      the Browns  Ferry
resulted directly from delays in restarting
                                      '         Ferry  would
                                      : Browns
nuclear plant. TVA had estimated tha                 of elec-
generate approximately 3.4 billion  kilowatt-hours
tricity during the fourth quarter    When the nuclear plant
                                            TVA had to
remained out of service the entire period,
                                            to meet consumer
purchase power from other electric systems
demand.

 Maintenance expenses
                                                      of rela-
      Historically, the fourth quarter is a period        TVA
                                      Valley,  therefore,
 tively low demand in the Tennessee
                                            its  maintenance
 generally does a considerable portion of during the period
 during the period.  Maintenance   expenses
                                            million. TVA
 exceeded budget estimates by about $20.9
                           overrun to (1) difficulties in
 officials attributed the and
 estimating repair costs       (2) stepped up maintenance
                                                  for the fact
 at TVA's coal fired steamplants to compensatenot be available
 that the Browns Ferry nuclear plant would
                                         high consumer demand.
 during the following summer months of
                                               Ferry nuclear
      When it became apparent that the Browns      power
                                  help meet summer
 plant would not be available to              scheduled  at
 demands, TVA did maintenance not  previously

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B-114850

some plants to assure maximum system availability during
the peak period. As a result, system availability for
Juiy 1976 was 87.5 percent, compared to 79.5 percent during
the fourth quarter of fiscal year 1976. An estimate 1-percent
increase in annual system availability saves the consumer
about $8.6 million in purchased power costs.

PRESENTATION OF EXPENSE ACCOUNTS IN
TVArs FINANCIAL STATEMENTS

     You .1oted six items of expenses and deductions--
Transmission, Customer Accounts, Demonstration of Power
Use, Administrative and General, Other Interest Expenses,
and Social Security Taxes--which were itemized in TVA's
y arend Ainancial statements, but not shown individually
in TVA's report for the 9 months ended March 31, 1976.
We found that these items were consolidated with each
other or with other accounts in the March 31, 1976, report.
Transmiysion, Customer Accounts, Demonstration of Power
Use, and Administrative and General Expenses were con-
solidated at March 31, 1976, as Other Expenses. Social
$ecur ty Taxes was combined with Payments in Lieu of Taxes
and shown a; Taxes and Payments in Lieu of Taxes. Also
at March 31, 1976, Other Interest Expenses was combined
with Interest on Long-Term Debt and presented as Interest
on Debt.

CONCLUSIONS

     As required by the Government Corporation Control
Act (31 U.S.C. 850), we periodically examine TVA's financial
statements.   In addition, since 1960, as provided by section
15d(c) of the TVA Act (16 U.S.C. 831n-4(c)), TVA has
employed a firm of certified public accountants to audit
its accounts and financial statements for each fiscal year
to facilitate its issuance and sale of revenue bonds.
As a part of our examination, we also observe and test
the firm's audit work. The firm completed its audit on
August 25, 1976, and expressed its opinion that TVA's
financial statements present fairly the results of its
operations for the year ended June 30, 1976, in conformity
with generally accepted accounting principles applied
on a consistent basis.

     We have completed our examination of TVA's financial
statements for the year ended June 30, 1976, and expect
to report that TVA's reported net income of $126.1 million
presents fairly the results of its operations for the year
ended June 30, 1976, in conformity with generally accepted

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B-114850

accounting principles applied on a consistent basis.

     Variations between estimated net income and actual net
income for the fourth quarter of fiscal year 1976 resulted
from unanticipated operating problems. It should be noted,
however, that as provided by TVA's fuel adjustment addendum,
increases in the cost of fuel and purchased power are
billed to consumers 2 months after the costs are incurred.
In July and August 1976, TVA received, through customer
billings, about $62.4 million from fuel adjustment clause
increases based on unanticipated increases in fuel and
purchased power costs incurred during the fourth quarter
of fiscal year 1976. Additional information regarding
TVA's fuel adjustment addendum is provided in the report
on our examination of TVA's financial statements for
fiscal year 1975 (FOD-76-6).

     In accordance with arrangements with you, we will sub-
sequently send copies of this report to the oversight
committees, TVA, and other interested par'ies.

                                 'S     I your s




                                Comptroller General
                                of the United States




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