The federal Government Accountability Office (GAO) released a report in December that takes a hard look at the Tennessee Valley Authority’s (TVA) energy efficiency efforts and capital expenditure planning. The report recommends that (1) TVA complete its energy efficiency potential study and use that to inform its future energy efficiency efforts, and (2) that the agency prepare a formal capital expenditure plan that would help TVA forecast the true cost of planned asset additions and the source of funding for those expenditures.
The GAO is an independent, nonpartisan agency that works for Congress to investigate how the federal government uses taxpayer dollars. As a federally-owned corporation, TVA is subject to federal oversight and the GAO periodically reports on various aspects of TVA, usually at the request of members of the Senate Committee on Environment and Public Works (EPW) that has oversight authority for TVA.
To those of us that keep a close eye on TVA and have seen them struggle to develop the Valley’s efficiency resources and make sound financial decisions, GAO’s recommendations come as no surprise. In fact, GAO’s recommendation mirror what SACE has been advocating for several years now: A more sophisticated and transparent approach to to both energy efficiency and financial planning.
The report, entitled TENNESSEE VALLEY AUTHORITY: Full Consideration of Energy Efficiency and Better Capital Expenditures Are Needed, stems from a request made by Senator Barbara Boxer, who chairs the EPW Committee, that GAO examine:
- How TVA plans to meet future demand for electricity and how TVA’s resource planning and forecasts compare to those from other sources;
- TVA’s efforts to use energy efficiency to meet demand for electricity; and
- TVA’s financial condition and how it impacts TVA’s ability to meet its operational and financial goals.
GAO analyzed data from TVA and third parties, reviewed agency documents and interviewed federal and state officials and industry stakeholders to complete this report.
Although TVA is expanding its energy efficiency programs, it may not be fully considering this resource.
As you may recall, in August of 2010, TVA announced a new vision that included, among other things, for TVA to be a leader among Southeastern utilities in energy efficiency. SACE obviously applauded this decision and the subsequent hire of Bob Balzar as TVA’s Vice President of Energy Efficiency and Demand Response. However, as SACE continued to engage with TVA through its integrated resource planning process, it became clear that TVA had a lot of catching up to do before it would be able to capture energy efficiency’s full potential in the Valley. GAO’s report agrees with this assessment.
The report details TVA’s anemic efforts at energy efficiency prior to 2010, detailing both TVA’s low level of commitment to this resource and the utility’s inability to capture much, if any of this resource compared to its retail energy sales:
Perhaps more importantly, however, the GAO report details how TVA’s failure to conduct an energy efficiency potential study (typically considered the first steps towards effective efficiency programs) continues to constrain the utility’s efforts. A potential study takes a robust and sophisticated look at a utility’s service territory, including all the possible ways that energy efficiency can be achieved and then breaks the resource down into what is cost-effective and what the utility can realistically expect to achieve with a robust set of programs.
The lack of a potential study was one of key flaws to TVA’s recently completed integrated resource plan (IRP), and has been something SACE has been pushing TVA to do for years. Without a potential study, TVA doesn’t know how much efficiency is out there and how much of it is cost effective. Also, because this study wasn’t completed prior to the IRP, TVA’s planning process may not have captured the full potential of efficiency to cost-effectively meet the Valley’s future energy demand. The GAO report identifies two key areas where the lack of a potential study may have improperly skewed the IRP’s results towards more costly generation resources:
(1) TVA’s IRP process did not use the model to identify the most cost-effective levels of energy efficiency. Instead, TVA used defined model inputs of what they thoughts was achievable at an “attractive” cost; and
(2) TVA’s assumptions regarding contributions from efficiency programs may have been too conservative, especially after 2020 where TVA’s assumptions that energy efficiency technologies will remain at existing levels is contrary to the historic trends and to future projections.
To TVA’s credit, a true energy efficiency potential study is now underway and expected to be completed by the end of the year. Assuming this study is done correctly, it should help inform TVA’s energy efficiency efforts moving forward and will prove to be an invaluable resource during the next IRP process to define efficiency’s role in meeting future energy demand. We eagerly await the results of that study and urge TVA to make the full study available to Valley stakeholders.
TVA’s financial condition may hamper its ability to fund capital improvements.
TVA is currently constrained by a statutorily-set $30 billion debt cap, meaning that the utility cannot have more than $30 billion in outstanding bonds at any given time. Other than issuing bonds, the only other way for TVA to raise capital is to increase the rates it charges to its customers — not an attractive option during the current economic downturn (or ever for that matter). As of September 30, 2010, TVA had almost $24 billion in outstanding debt, but plans to spend almost $10 billion on capital projects over the next 2 years and has also agreed to spend an estimated $3 to $5 billion in the next ten years to upgrade its aging coal-fired fleet. None of these numbers include TVA’s plan to spend an estimated $5 billion to complete the first reactor at the Bellefonte Nuclear Facility.
It’s simple math to figure out that TVA has a lot of planned expenses and not a lot of money to spend.
The report also makes note of TVA’s historical inability to accurately predict the cost and schedule of its planned capital projects, primarily its nuclear projects:
“TVA and other utilities have historically experienced significant delays or cost overruns with nuclear plant construction projects, and could potentially face similar issues in the future. . . According to senior TVA officials, as of April 2011, the construction of Watts Bar Unit two was on schedule and within budget. However, they did not provide any documentation supporting the completion of construction by 2013 or detailed estimates of the remaining costs. Based on TVA’s historical experiences with the construction of nuclear power plants, and because Watts Bar Unit Two was never fully operational, we are concerned that TVA’s estimates of the total cost of bringing the unit into production by 2013 may be low.”
Of course we now know that Watt’s Bar Unit Two has been delayed and may be experiencing some cost overruns, and, as SACE has detailed, there are significant risks associated with TVA’s plan to restart construction at the Bellefonte nuclear facility.
As a way to help address these uncertainties, the GOA report recommends that TVA develop what’s known as a “formal capital expenditure management plan” that would lay out how the utility plans to fund significant capital investments it expects to make over a period of time. The federal Office of Management and Budget (OMB) also recommends capital expenditure management plans for federal agencies.
The report also identifies several potential problems that can occur when an agency has no formal capital expenditure plan, including: poor planning, acquisition of assets that are not fully justified, higher acquisition costs, cancellation of major investments, loss of sunk costs and inadequate funding to maintain and operate the assets. Unfortunately, this sounds a bit like chapter titles to a book on TVA’s history. Let’s hope TVA takes GAO’s recommendation to develop a formal capital expenditure management plan and makes that plan available to Valley stakeholders so that we can all feel confident that TVA is heading in the right direction.
GAO took a long, hard look at a couple elements of TVA that are near and dear to SACE’s heart and will likely affect the pocket books of Valley residents and business for years to come. So far it appears that TVA is listening and has taken GAO’s recommendations seriously. We look forward to increased sophistication and a higher level of transparency from TVA as we continue towards our clean energy future.