TVA’s power system is generally a dual-peaking system where the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. TVA met an all-time summer peak demand of 33,482 MW on August 16, 2007 at 102 degrees Fahrenheit and an all-time winter peak demand of 32,572 MW on January 16, 2009 at nine degrees Fahrenheit. As a result of a cold wave during the first week of January 2010, TVA set a number of energy demand records. A new total daily energy demand record of 701 GWh was set on January 8, 2010, and a total weekly energy demand record of 4,633 GWh was set for the seven-day period ended January 10, 2010, when TVA experienced an average demand of 27,582 MW per hour for the entire week.
After several years of dry weather and drought conditions in the TVA service area, rainfall and runoff totals improved in the Tennessee Valley during 2009 and 2010. Rainfall in the Tennessee Valley was 93 percent of normal in 2010 and 103 percent of normal in 2009. Runoff was 111 percent of normal in 2010 and 85 percent of normal in 2009. Runoff is the amount of rainfall that is not absorbed by vegetation or the ground which actually reaches the rivers and reservoirs that TVA manages. As a result, TVA’s conventional hydroelectric generation increased 21 percent in 2010 over 2009, and 64 percent in 2009 over 2008. Conventional hydroelectric generation was 103 percent of normal in 2010 and 85 percent of normal in 2009. Se e Item 1A, Risk Factors, for a discussion of the potential impact of weather on TVA.
TVA provides electricity in a service area that is largely free of competition from other electric power providers. This service area is defined primarily by two provisions of law: the “fence” and the “anti-cherrypicking” provision. The fence limits the region in which TVA or distributors of TVA power may provide power. The “anti-cherrypicking” provision limits the ability of others to use the TVA transmission system for the purpose of serving customers within TVA’s service area.
From time-to-time there have been efforts to erode the protection of the anti-cherrypicking provision, and the protection of the anti-cherrypicking provision could be called into question and perhaps eliminated at some time in the future.
On June 15, 2009, TVA initiated an Integrated Resource Plan (“IRP”) entitled TVA's Environmental and Energy Future. The purpose of the IRP is to create a framework for the analysis of alternatives to address the electricity needs in TVA’s service area for the next 20 years. The alternative portfolios developed for this effort will be evaluated using several criteria including capital and fuel costs, reliability, possible environmental impacts, compliance with existing and anticipated future laws and regulations, and other factors. TVA expects to issue a final IRP in early CY 2011. While economic conditions have reduced power demand in recent years, TVA believes power demand will grow under most likely scenarios, and TVA intends to make capital investments in the current year a s well as future years.
Aligned with TVA’s IRP efforts, the TVA Board asked management in 2010 to review TVA’s mission of providing low-cost power, economic development, environmental stewardship, river management, and technological innovation and to develop a vision for TVA’s future based on that mission. In assessing TVA’s current operating environment, which is affected by economic uncertainty, the need for infrastructure investment, and uncertain national energy policy, management adopted a vision for TVA to be one of the nation’s leading providers of low-cost and cleaner energy by 2020 by becoming:
• The nation’s leader in improving air quality,
• The nation’s leader in increased nuclear production, and
• The southeastern United States’s leader in increased energy efficiency.
Improving Air Quality
TVA anticipates that clean air regulations will eventually require all coal-fired plants to install clean air controls, including scrubbers and SCRs for SO2, NOx, and mercury control. TVA also expects that legislation or regulation will eventually require it to reduce CO2 emissions or purchase CO2 allowances. Due to the age, lower capacity, and lower efficiency of some of TVA’s older coal-fired units, it may not be economical to install new clean a ir controls or purchase CO2 allowances, particularly for the 6,800 MW of TVA’s coal-fired units that do not have scrubbers. TVA is studying one of the options in the IRP that calls for 3,000 MW of coal-fired units to be idled by 2017. In September 2010, TVA idled Unit 5 at Widows Creek Fossil Plant (“Widows Creek”), and in October 2010 idled Widows Creek Unit 2 as well as Shawnee Fossil Plant Unit 10. The three units account for nearly 350 MW of summer net capability. TVA may decide to idle other coal-fired units in the future.
TVA is working toward obtaining greater amounts of its power supply from clean (low or zero carbon-emitting) or renewable sources. TVA defines its clean energy portfolio as (1) energy that has a zero or near-zero CO2 emission rate, such as nuclear and renewables (energy production that is sustainable and often naturally replenished), (2) energy efficiency improvements, including demand reduction, and (3) waste heat recovery. In 2010, about 40 percent of TVA’s total power came from non-CO2-emitting sources (nuclear, hydroelectric, and renewable energy) as defined by TVA. TVA’s plans to add clean and re newable power are consistent with increasing expectations that the Environmental Protection Agency (“EPA”) will adopt regulations, in the near-term that require utilities to supply a certain percentage of energy from renewable sources and, possibly, to participate in an economy-wide program to cap and reduce emissions of greenhouse gases (“GHGs”), including CO2. If such regulations are adopted, TVA may be required to reduce or offset emissions, or to purchase emission allowances under a cap-and-trade program, and may be required to contract for or generate an increasing percentage of energy from renewable sources. Since the final outcome of any such legislation or regulations is not known, TVA is presently unable to accurately estimate the cost of future renewable and GHG requirements. The current
process for the development of TVA’s IRP will help to inform future decisions on investment in new renewable and clean generation.
An emerging factor related to air quality is the greater use of electric vehicles. One of the important benefits expected from the switch to electric vehicles is a reduction in the burning of fossil fuels, which could reduce localized air pollution from transportation as well as the threat of climate change. Other potential impacts include faster growth in energy demand, increased peak hour demand due to daytime use of charging stations, and increased congestion on the transmission and distribution infrastructure. Technology adoption rates for electric transportation are difficult to predict, however, and introduce a new source of forecast uncertainty.
Combustion Turbines
It is TVA’s intention to significantly increase production from low-emission generation facilities with the addition of natural gas plants to its generation fleet in the near future.
In September 2010, the Lagoon Creek Combined Cycle Facility began commercial operation with a summer net capability of approximately 550 MW. In addition, TVA is in the process of constructing the John Sevier Combined Cycle Facility in northeast Tennessee. TVA expects to complete the combined cycle facility by mid-CY 2012. The completed facility is expected to add approximately 880 MW of summer net capability to the TVA system at a cost of approximately $820 million. TVA may also decide to make further strategic investments in natural gas-fired facilities in the future.
Certain upgrades planned for TVA’s Gleason Combustion Turbine Plant and a newly planned New Caledonia Combustion Turbine Plant were cancelled by the TVA Board during 2010 based on its decision to construct the John Sevier Combined Cycle Facility. See Note 19.
Increased Nuclear Production
Central to TVA’s vision of becoming one of the nation's leading providers of low-cost cleaner energy by 2020 is an increased focus on nuclear energy. While TVA is planning to idle some of its older coal-fired generation capacity, it looks to both replace the idled capability and expand overall capability with additions to its nuclear generating fleet.
Watts Bar Unit 2. On August 1, 2007, the TVA Board approved the completion of Watts Bar Unit 2. The project is scheduled to be completed in CY 2012. TVA has applied for an NRC operating license, and this process includes opportunity for a public hearing. Contentions against the licensing request have been filed. See Note 20 — Legal Proceedings — Administrative Proceeding Regarding Watts Bar Nuclear Plant Unit 2. Completing Watts Bar Unit 2 is expected to cost approximately $2.5 billion, excluding allowance for funds used during construction (“AFUDC”) and the cost of the initial fue l load. Watts Bar Unit 2 is expected to provide 1,150 MW of summer net capability.
Extended Power Uprate. TVA is undertaking an Extended Power Uprate (“EPU”) project at Browns Ferry which is expected to increase the amount of electrical generation by increasing the amount of steam produced by the reactors. Additional fuel would be added to the reactors during each refueling outage to support the increased steam production. The NRC licenses for each reactor must be modified to allow reactor operation at the higher power level. TVA has submitted license amendment requests and is currently in discussions with the NRC on selected technical issues affecting EPU licensing. The result of these discussions may impact the am ount of power level increase realized by the EPU. Completion of the licensing process will determine the final implementation schedule.
Bellefonte Units 1 and 2. Construction of Bellefonte Nuclear Plant (“Bellefonte”) Units 1 and 2 located in Hollywood, Alabama, began in 1974 but was deferred in 1988 and 1985, respectively. TVA’s construction of Bellefonte Units 1 and 2 had been undertaken pursuant to construction permits issued by the NRC, but in November 2005 TVA cancelled the construction of these units and asked the NRC to withdraw the permits. Subsequently, changes in new generation capacity economics prompted TVA to re-evaluate the feasibility of completing these units, and in August 2008, TVA asked the NRC to reinstate the construction permits for both units in order to preserve the completion option. 0;On March 9, 2009, the NRC issued an order reinstating the construction permits for Bellefonte Units 1 and 2. Following completion of more detailed feasibility studies, on August 20, 2010, the TVA Board approved spending $248 million for additional engineering, design, and licensing activities, as well as the procurement of long lead-time components for the partially completed Bellefonte Unit 1. TVA requested in October 2010 to extend the expiration date of the Bellefonte construction permit from October 2011 to October 2020. While the TVA Board’s action will help maintain Unit 1 as a viable alternative to meet the projected need for generation on the TVA system in the 2018 to 2020 timeframe, this action does not mean TVA can re-commence construction of Unit 1. Further action by the NRC, reviews by TVA, and final approval by the TVA Board after the IRP has been completed are required before construction activities can resume. See Note 20 —Legal Proceedings — Proceedings Regarding Bellefonte Nuclear Plant Units 1 and 2.
Bellefonte Units 3 and 4. TVA is developing options for future nuclear generation at its Bellefonte site. In October 2007, TVA submitted a Combined Construction and Operating License Application to the NRC for two new designed Advanced Passive 1000 reactors to be located at the Bellefonte site and designated as Bellefonte Units 3 and 4. TVA’s application was being supported, in part, by NuStart, an industry consortium comprised of 10 utilities and two reactor vendors the purpose of which is to satisfactorily demonstrate the new NRC licensing process for nuclear plants. The Bellefonte Combined Construction and Operating License Application is one of several Advanced Passive 1000 Westinghouse
standardized plant applications, and other applicants have announced construction schedules that call for their license reviews to be completed prior to Bellefonte’s. As a result, NuStart, with TVA’s agreement, has transitioned its reference plant to the Combined Construction and Operating License Application of another utility. On September 29, 2010, TVA notified the NRC that the recently completed Final Supplemental Environmental Impact Statement had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site. Consequently, with the exception of the ongoing review of hydrology-related portions of the application, TVA requested that the NRC defer review of the Bellefonte Units 3 and 4 Combined Construction and Operating License Application pending a final decision of the TVA Board regarding new generation capacity at the Bellefonte site. Contentions have been filed with respect to the Bellefonte Combined Construction and Operating License Application. See Note 20 — Contingencies Legal Proceedings — Administrative Proceeding Regarding Bellefonte Nuclear Plant Units 3 and 4.
Other Nuclear Initiatives. TVA has signed a letter of intent to begin evaluating a site for the first B&W mPower reactor at its Clinch River site in Oak Ridge, Tennessee. The B&W mPower reactor would have a scalable, modular design, allowing utilities to add electrical generation capacity in increments of 125 megawatts. The B&W mPower reactor is expected to be competitive with and more quickly built than larger reactors on the market.
Hydroelectric
Annual hydroelectric generation is highly dependent on weather conditions and can vary significantly from year to year. TVA is assessing its conventional hydroelectric units for reliability and/or capacity increases through 2030.
Renewable Energy
In December 2008, TVA issued requests for proposals (“RFPs”) for both dispatchable capacity and as-available energy from renewable energy sources for up to a total of 2,000 MW of generation. In May 2010, TVA began receiving up to 300 MW of energy under a 20-year contract from a wind farm in Illinois. TVA currently does not purchase the renewable attributes for this energy, but has the opportunity to obtain them in the future. In September 2010, TVA began receiving up to 115 MW of renewable wind energy under a 20-year contract from a wind farm in Iowa. TVA has entered into six additional 20-year contracts for the purchase of up to 1,166 MW of renewable wind energy from wind farms located in various Midwest states. Power under these six additional wind energy contracts is scheduled to be delivered beginning in CY 2012. Bringing power from distant locations raises transmission issues and costs, and the intermittent nature of wind, solar, and other renewable sources can result in TVA needing backups for those sources or mechanisms.
TVA has also entered into one contract for up to five MW of renewable landfill gas energy from a location inside TVA’s service area. TVA is scheduled to begin receiving over three MW under this contract in January 2011, and this amount is expected to increase up to five MW by January 2013.
There are currently several bills pending before Congress that contain provisions proposing various forms of renewable energy and energy efficiency requirements. Under most legislation proposing a federal renewable energy standard, TVA would be required to ensure that a certain percentage (currently ranging from three percent to 20 percent) of the electricity it sells is produced by renewable energy sources as defined in the legislation. Although TVA considers hydroelectric generation a renewable source, it is unlikely it will contribute to a future renewable portfolio standard requirement. Some proposals would allow utilities to pay alternative compliance payments if that percentage could not be met because of certain restrictions. See Item 1, Bu siness – Environmental Matters.
Technology advancements will be needed to address some of the operational issues associated with renewable energy, such as energy storage to address intermittency. In addition, most renewable energy resources are geographically specific. Some regions of the United States have an abundance of wind and solar resources, whereas other regions have hydroelectric resources. Regional differences and limitations play a primary role in the types and amount of renewable and clean energy developed across the country. Within the area served by TVA, two of the most abundant renewable resources are hydroelectric and biomass. Feasible wind energy in this region is primarily associated with mountain top and ridgeline installations, and the total potential capacity is limited when compared to o ther parts of the nation where wind energy is more abundant. If TVA is required to increase its use of renewable resources and the cost of doing so is greater than the costs of other sources of generation, TVA’s costs may increase.
Power Purchases
Purchasing power from others will likely remain a component of how TVA addresses the power needs of its service area. TVA intends to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, buying, building, and/or leasing assets or entering into purchased power agreements.
Energy Efficiency and Demand Response Programs
Nationally, much attention is being focused on the smart grid, an electric power system that provides increased information and load control for customers, distributors, and grid operators. The smart grid supports behavioral change in a way that reduces system demands and costs and increases energy efficiency. The smart grid is also designed to promote societal benefits such as reduced emissions, lower energy costs, and greater flexibility to accommodate new renewable distributed energy sources. TVA, in partnership with its distributors, is developing a smart grid deployment plan for the TVA service area. This deployment plan is expected to lead to new technology improvements that enhance the performance of the existing transmission and distribution systems. Additionally, the plan is expected to utilize emerging smart grid technology to empower residential, commercial, and industrial customers to more efficiently use electric power and lower their power costs. The TVA service area faces a unique challenge since TVA serves 155 distributor customers at the wholesale level and these distributor customers serve the end-use customers; accordingly, the deployment plan must address the differences of the 155 distributor customers and evaluate the costs and benefits of different technology solutions to determine the best business case for each distributor customer. Also, the cyber security of each system should be addressed.
TVA is implementing a pilot program with some distributor customers to enhance smart grid infrastructure through investment in communication technologies and end-use customer devices. By providing start-up capital, TVA aims to gather information useful for guiding distributor customers through a successful roll-out plan. Products being tested in the pilot program include (1) systems that enable two-way direct load control of water heaters and air conditioners, (2) smart thermostats, (3) smart displays, (4) systems that empower participation in voluntary critical-peak pricing products, and (5) distribution systems that reg ulate voltage. Terms of this pilot program are currently being negotiated with 19 distributor customers.
TVA has an existing portfolio of programs focusing on energy efficiency and demand response which are designed to promote the wise use of energy. See Item 1, Business – Current Power Supply. In July 2010, TVA furthered its demand response portfolio with a new power supply agreement with a third-party aggregator of demand response load. Under this arrangement, the third-party is expected to provide by the end of 2012 up to 560 MW of peak load reduction when requested by TVA. This arrangement is expected to allow TVA to reduce its purchase of more expensive generation as well as to reduce power grid stress.
TVA makes investments in science and technological innovation to help enable TVA to meet future challenges in a variety of areas. TVA is currently focused on the following initiatives:
| • | Evaluation of technologies and development of a utility plan for the integration of electric vehicles onto the distribution and transmission system, including: developing technologies to make electric vehicles and the charging stations that fuel them work together efficiently, dealing with demands on the power grid caused by charging stations, finding ways to minimize demands on the power grid, including solar-assisted charging stations and distributed energy storage, and refining existing processes for power system control to maximize energy efficiency and take full advantage of the environmental benefits of electric transportation; |
| • | Development of smart grid infrastructure for both transmission and distribution systems; |
| • | Development and testing of infrastructure and technologies to enable consumer awareness and access to demand response and energy efficiency tools; |
• Development and demonstration of coal ash utilization technologies;| • | Evaluation, demonstration, and implementation of clean and renewable energy technologies that reduce TVA’s environmental footprint, including participation in technology evaluations for carbon capture and sequestration; |
| • | Evaluation, demonstration, and implementation of technologies that improve the operational efficiency and extend asset life of our generation fleet (fossil, nuclear, and hydro). |
TVA seeks to leverage research and development activities through partnerships with distributors of TVA power, the Electric Power Research Institute (“EPRI”), DOE, Oak Ridge National Laboratory, other utilities, and universities.
TVA’s mission includes managing the Tennessee River, its tributaries, and public lands along the shoreline to provide, among other things, year-round navigation, flood damage reduction, affordable and reliable electricity, and, consistent with these primary purposes, recreational opportunities, adequate water supply, improved water quality, and natural resource protection. There are 49 dams that comprise TVA’s integrated reservoir system. The reservoir system provides 800 miles of commercially navigable waterway and also provides significant flood reduction benefits both within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers. The reservoir system also provides a water supply for residential and industrial customers, as well as cooling water for some of TVA 217;s coal-fired and nuclear power plants. TVA’s Environmental Policy provides objectives
for an integrated approach related to providing cleaner, reliable, and affordable energy, supporting sustainable economic growth, and engaging in proactive environmental stewardship. The Environmental Policy provides additional direction in several environmental stewardship areas, including water resource protection and improvements, sustainable land use, and natural resource management. TVA also manages approximately 293,000 acres of reservoir lands for natural resource protection, recreation, and other purposes. On June 15, 2009, TVA initiated a Natural Resource Plan (“NRP”). The purpose of the NRP is to establish a framework for the management of TVA’s lands and shorelines to meet its environmental stewardship mission for the next 20 years. TVA expects to issue a final NRP in 2011.
Since its creation in 1933, TVA has promoted the development of the Tennessee Valley. TVA works with its distributor customers, regional, state, and local agencies, and communities to showcase the advantages available to businesses locating or expanding in TVA’s service area. At its October 30, 2008 meeting, the TVA Board approved a new economic development initiative, the Valley Investment Initiative. Under the Valley Investment Initiative, TVA and its distributor customers provide an incentive award to new and existing companies in TVA’s service area that demonstrate a multi-year commitment to sustained capital investment, the creation of quality jobs, compatible and efficient power use, and a commitment to remain in the TVA service area. Continued recruitment of desirable companies and retention of the current industrial and manufacturing base also continue to be critical to TVA’s economic development mission.
TVA is governed by the TVA Board. The TVA Board consists of up to nine part-time members, no more than two of whom may be legal residents outside of TVA’s service area. TVA Board members are appointed by the President of the United States with the advice and consent of the U.S. Senate. TVA Board members serve five-year terms, and at least one member’s term ends each year. The TVA Board, among other things, establishes broad goals, objectives, and policies for TVA; establishes long-range plans to carry out these goals, objectives, and policies; approves annual budgets; and establishes a compensation plan for employees. Information about members of the TVA Board and TVA’s executive officers is discussed in Item 10, Direc tors, Executive Officers and Corporate Governance.
Congress
TVA exists pursuant to legislation enacted by Congress and carries on its operations in accordance with this legislation. Congress can enact legislation expanding or reducing TVA’s activities, change TVA’s structure, and even eliminate TVA. Congress can also enact legislation requiring the sale of some or all of the assets TVA operates or reduce the United States’s ownership in TVA. To allow TVA to operate more flexibly than a traditional government agency, Congress exempted TVA from certain general federal laws that govern other agencies, such as federal labor relations laws and the civil service laws related to the hiring of federal employees, the procurement of supplies and services, and the acquisition of land. Other feder al laws enacted since the creation of TVA have been made applicable to TVA, including those related to paying employees overtime and protecting the environment, cultural resources, and civil rights.
Securities and Exchange Commission
Section 37 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires TVA to file with the SEC such periodic, current, and supplementary information, documents, and reports as would be required pursuant to section 13 of the Exchange Act if TVA were an issuer of a security registered pursuant to section 12 of the Exchange Act. Section 37 of the Exchange Act exempts TVA from complying with section 10A(m)(3) of the Exchange Act, which requires each member of a listed issuer’s audit committee to be an independent member of the board of directors of the issuer. Since TVA is an agency and instrumentality of the United States, securities issued or guaranteed by TVA are “exempted securities” under the Securities Act of 1933, as amended ( the “Securities Act”), and may be offered and sold without registration under the Securities Act. In addition, securities issued or guaranteed by TVA are “exempted securities” and “government securities” under the Exchange Act. TVA is also exempt from sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy solicitations) insofar as those sections relate to securities issued by TVA, and transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act. Also, since TVA securities are exempted securities under the Securities Act, TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for these securities.
Federal Energy Regulatory Commission
Under the FPA, TVA is not a “public utility,” a term which generally includes investor-owned utilities. Therefore, TVA is not subject to the full jurisdiction that FERC exercises over public utilities under the FPA. TVA is, however, an “electric utility” and a “transmitting utility” as defined in the FPA and, thus, is directly subject to certain aspects of FERC’s jurisdiction.
| | • | Under section 210 of the FPA, TVA can be ordered to interconnect its transmission facilities with the electrical facilities of qualified generators and other electric utilities that meet certain requirements. It must be found that the requested interconnection is in the public interest and would encourage conservation of energy or capital, optimize efficiency of facilities or resources, or improve reliability. The requirements of section 212 concerning the terms and conditions of interconnection, including reimbursement of costs, must also be met. |
| | • | Under section 211 of the FPA, TVA can be ordered to transmit power at wholesale provided that the order does not impair the reliability of the TVA or surrounding systems and likewise meets the applicable requirements of section 212 concerning terms, conditions, and rates for service. Under section 211A of the FPA, TVA is subject to FERC review of the transmission rates and the terms and conditions of service that TVA provides others to ensure comparability of treatment of such service with TVA’s own use of its transmission system and that the terms and conditions of service are not unduly discriminatory or preferential. The anti-cherrypicking provision of the FPA precludes TVA from being ordered to wheel another supplier’s power to a customer if the power would be consumed within TVA’s defined service territory. |
| | • | Sections 221 and 222 of the FPA, applicable to all market participants, including TVA, prohibit (i) using manipulative or deceptive devices or contrivances in connection with the purchase or sale of power or transmission services subject to FERC’s jurisdiction and (ii) reporting false information on the price of electricity sold at wholesale or the availability of transmission capacity to a federal agency with intent to fraudulently affect the data being compiled by the agency. |
| | • | Under section 215 of the FPA, TVA must comply with certain standards designed to maintain transmission system reliability. These standards are approved by FERC and enforced by the Electric Reliability Organization. |
| | • | Section 206(e) of the FPA provides FERC with authority to order refunds of excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including TVA, in market manipulation and price gouging situations if such sales are under a FERC-approved tariff. |
| | • | Section 220 of the FPA provides FERC with authority to issue regulations requiring the reporting, on a timely basis, of information about the availability and prices of wholesale power and transmission service by all market participants, including TVA. |
| | • | Under sections 306 and 307 of the FPA, FERC may investigate electric industry practices, including TVA’s operations previously mentioned that are subject to FERC’s jurisdiction. |
| | • | Under sections 316 and 316A of the FPA, FERC has authority to impose civil penalties of up to $1 million a day for each violation on entities subject to the provisions of Part II of the FPA, which includes the above provisions applicable to TVA. Criminal penalties may also result from such violations. |
Finally, while not required to do so, TVA has elected to implement various FERC orders and regulations pertaining to public utilities on a voluntary basis to the extent that these are consistent with TVA’s obligations under the TVA Act.
Nuclear Regulatory Commission
TVA operates its nuclear facilities in a highly regulated environment and is subject to the oversight of the NRC, an independent agency which sets the rules that users of radioactive materials must follow. The NRC has broad authority to impose requirements relating to the licensing, operation, and decommissioning of nuclear generating facilities. In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA’s operating licenses.
Environmental Protection Agency
TVA is subject to regulation by the EPA in a variety of areas, including air quality control, water quality control, and management and disposal of hazardous wastes. See Item 1, Business — Environmental Matters.
States
The Supremacy Clause of the U.S. Constitution prohibits states, without congressional consent, from regulating the manner in which the federal government conducts its activities. As a federal agency, TVA is exempt from regulation, control, and taxation by states except in certain areas such as air and water quality where Congress has given the states limited powers to regulate federal activities.
Other Federal Entities
TVA’s activities and records are also subject to review to varying degrees by other federal entities, including the Government Accountability Office and the Office of Management and Budget (“OMB”). There is also an Office of Inspector General which reviews TVA’s activities and records.
TVA is not subject to federal income taxes. In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions. Section 13 of the TVA Act does, however, require TVA to make tax equivalent payments to states and counties in which TVA conducts power operations or in which TVA has acquired power-producing properties previously subject to state and local taxation. The total amount of these payments is five percent of gross revenues from the sale of power during the preceding year excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances. Except for certain direct payments TVA is required to mak e to counties, distribution of tax equivalent payments within a state is determined by individual state legislation.
TVA’s power generation activities, like those across the utility industry and in other industrial sectors, are subject to most federal, state, and local environmental laws and regulations. Major areas of regulation affecting TVA’s activities include clean air control, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent and to apply to additional emissions and sources, with a particular emphasis on climate change, renewable generation, and energy efficiency.
Clean Air Regulations
The Clean Air Act (“CAA”) establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions. The major CAA programs that affect TVA’s power generation activities are described below.
National Ambient Air Quality Standards. The CAA requires EPA to set minimum national ambient air quality standards (“NAAQS”) for certain air emissions including ozone, particulate matter, SO2, and nitrogen dioxide (“NO2”). The CAA established two types of NAAQS: (1) primary standards, which set limits to protect public health, and (2) secondary standards, which set limits to protect public welfare. Most NAAQS require measurement over a defined period of time (typically one hour, eight hours, twenty-four hours, or one year) to determine the average concentration of the polluta nt present in a defined geographic area.
When a NAAQS has been established, each state must recommend, and EPA must designate, the areas within its boundaries that meet NAAQS (“attainment areas”) and those that do not (“non-attainment areas”). Each state must develop a state implementation plan (“SIP)” to bring non-attainment areas into compliance with NAAQS and maintain good air quality in attainment areas. Non-attainment designations can have serious repercussions by, among other things, causing states to impose stricter controls on industrial facilities, including TVA’s power plants, and complicating the air permitting process for the construction, expansion, or modification of industrial facilities. If counties in which TVA facilities are located are designated as non-attainment for one or more types of emissions, TVA’s expansion or modification plans could be affected, possibly resulting in increased costs or schedule delays. The NAAQS that affect or potentially affect TVA operations are summarized below.
NAAQS for Ozone. In March 2008, EPA issued final rules adopting new, more stringent eight-hour NAAQS for ozone. EPA lowered the primary standard from 84 parts per billion to 75 parts per billion and promulgated a new secondary standard that is the same as the primary standard. Virtually all of the larger cities in the TVA service area, as well as those rural counties where ozone monitors are present, will likely be designated as non-attainment areas under the new standard. States must submit to EPA no later than CY 2014 plans that demonstrate attainment with the standard. Areas must reach attainment by deadlines that vary (C Y 2016 to CY 2030) depending on the severity of the ozone problem.
On January 19, 2010, EPA published a proposed rule that would establish more stringent primary and secondary ozone NAAQS standards. EPA announced that it expects to publish the final rule with the new ozone standards before the end of CY 2010. As the ozone standards become more stringent, utilities are expected to come under increasing pressure to further reduce NOx emissions from their existing fossil plants.
NAAQS for Particulate Matter. EPA has developed annual NAAQS for coarse particulate matter (defined as particles of 10 micrometers or larger) and both annual and 24-hour NAAQS for fine particulate matter (particles with a size of up to 2.5 micrometers). On October 8, 2009, EPA issued non-attainment designations for areas not meeting the 24-hour NAAQS for fine particulate matter. In the TVA service area, Anderson, Blount, Knox, and Loudon Counties in Tennessee, and a portion of Roane County, also in
Tennessee, were designated as non-attainment. TVA operates coal-fired power plants in Anderson and Roane Counties. TVA also operates a coal-fired plant in Jackson County, Alabama, and part of that county is designated non-attainment for the annual fine particulate standard. State and some local governments will be required to take steps to control fine particulate pollution affecting these non-attainment areas. Those steps may include stricter controls on industrial facilities, possibly including TVA’s power plants, and additional planning requirements for transportation-related sources. States must submit their SIPs to EPA within three years after EPA makes final nonattainment area designations. Areas are required to attain the standard no later than five years afte r the effective date of the designations. EPA may grant attainment date extensions for up to five additional years in areas with more severe fine particulate matter problems as well as in areas where emissions control measures are not available or feasible.
EPA is currently reconsidering the annual fine particulate standard, and if lowered as expected, additional non-attainment designations are likely. EPA expects its reconsideration of the adequacy of the annual fine particulate standard to be completed in October 2011.
NAAQS for SO2. On June 2, 2010, EPA established a new one-hour SO2 NAAQS at 75 parts per billion and revoked the 24 hour and annual SO2 NAAQS. EPA expects to designate areas as attainment, non-attainment, or unclassifiable by January 2012 based on the existing monitoring network and modeling. Non-attainment designations are expected to result in lower SO2 emission limits for sources of SO2 in or near those areas. Several areas in the TVA service area are expected to be designated non-attainment, and the new standard is expected to make permitting for some new and modified sources, including TVA sources, more difficult.
NAAQS for NO2. On January 22, 2010, EPA established a new one-hour NAAQS for NO2 at the level of 100 parts per billion. To determine compliance with the new standard, EPA is establishing new ambient air monitoring requirements near major roads as well as in other locations where maximum concentrations are expected. Although existing air quality monitors do not currently show exceedances of this new standard in the TVA service area, additional community and roadside monitoring is expected to result in the designation of new non-att ainment areas. EPA intends to re-designate areas in CY 2016 or CY 2017, as appropriate, based on the air quality data from the new monitoring network. This new short-term standard could make permitting new and modified sources, including TVA sources, more difficult. Several areas in the TVA service area are expected to be designated non-attainment.
New Source Review. The New Source Review (“NSR”) provisions of the CAA require persons constructing new major air emission sources or making major modifications to existing air pollution sources to obtain a permit prior to such construction or modifications. Major modifications are non-routine physical or operational changes that increase the emissions from an air emission source above specified thresholds. In order to proceed with a project, the facility must first obtain a permit which requires the identification and implementation of Best Available Control Technology (“BACT”) for all regulated air pollutants emitted above the prescribed thresholds and an analysis of the ambient air quality impacts of the new construction or major modification. In 1999, EPA announced plans to actively pursue NSR enforcement actions against electric utilities for making changes to their coal-fired power plants without obtaining an NSR permit. Under section 114 of the CAA, EPA has the authority to request from any person who owns or operates an emission source information and records about operation, maintenance, and emissions as well as other data relating to such source for the purpose of developing regulatory programs, determining if a violation occurred (such as the failure to comply with NSR), or carrying out other statutory responsibilities. If violations are found to have occurred, EPA or, possibly, other enforcement authorities could require the installation of new pollution control equipment and could impose fines and penalties. See Note 20 – Legal Proceedings – Case Involving Alleged Violations of the New Source Review Regulations at Bull Run for a discussion of litigation under the NSR provisions affecting TVA.
Clean Air Interstate Rule. EPA promulgated the Clean Air Interstate Rule (“CAIR”) in 2005. CAIR proposed to reduce utility SO2 and NOx emissions to address ozone and fine particulate matter attainment issues in 28 eastern states, including all of TVA’s service area, and the District of Columbia through an emissions cap-and-trade program.
On July 11, 2008, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued a decision in State of North Carolina vs. EPA that vacated CAIR in its entirety and directed EPA to promulgate a new rule that is consistent with the D.C. Circuit’s opinion. On December 23, 2008, the D.C. Circuit, in response to EPA’s petition for a rehearing, ordered EPA to develop a new rule but allowed CAIR to remain in effect during this process. This decision reinstated CAIR, including the cap-and-trade program, until EPA issues a final new rule consistent with the D.C. Circuit’s decision.
On August 2, 2010, EPA published a proposed replacement rule for CAIR referred to as the Transport Rule. The Transport Rule is more stringent than CAIR and would require reduction of SO2 and NOx emissions from electric generating units (“EGUs”) in 32 states in the eastern United States, including all of TVA’s service area. Under this proposed rule, SO2 and NOx emission reductions from the EGUs in al l 32 states would take effect in CY 2012, and further SO2 emission reductions would be required in CY 2014 for EGUs in certain states, including Tennessee and Kentucky.
TVA expects that the final CAIR replacement rule – either the Transport Rule, as currently proposed, or another replacement rule - will require additional SO2 and NOx emission reductions from many of TVA’s power plants and/or require TVA to purchase emission credits or allowances. These requirements may result in increased capital expenditures, increased operating expenses, and schedule delays as compared to TVA’s plans to comply with the original CAIR program. TVA will adjust its emission reduction plans as required to comply with the Transport Rule, or other replacement rule, when it becomes final and effective. EPA expects to finalize the Transport Rule by June 2011.
Hazardous Air Pollutants. In 2005, EPA issued the Clean Air Mercury Rule (“CAMR”), which set mercury limits via a cap-and-trade program. The D.C. Circuit vacated CAMR. EPA now plans to regulate hazardous air pollutants from utilities under section 112(d) of the CAA, which requires emission standards to be based on the maximum achievable control technology (“MACT”) and the use of command-and-control permit programs instead of a cap-an d-trade program such as the one proposed by CAMR and rejected by the D.C. Circuit. Further, EPA is expected to regulate not just mercury but also other hazardous pollutants such as non-mercury metals, acid gases, and organics in a future section 112(d) rule establishing MACT standards for these pollutants. The cost to comply with the future MACT standards for mercury emissions is not known at this time, but is expected to be higher than what the cost would have been to comply with CAMR.
On June 4, 2010, EPA published a proposed rule to establish standards for hazardous air pollutants emitted from industrial, commercial, and institutional boilers and process heaters. Some of TVA’s startup and auxiliary boilers may be required to install monitors and/or controls to meet these standards by CY 2014. Until the final rule is published, specific requirements are too uncertain to predict.
On August 20, 2010, EPA published a final rule regulating the emissions of hazardous air pollutants from reciprocating internal combustion engines, including existing stationary spark ignition reciprocating internal combustion engines located at power plant sites. This final rule, which became effective October 19, 2010, will require the reduction of emissions of hazardous air pollutants from covered engines. TVA's reciprocating engines will be covered by this new rule, and TVA is currently evaluating compliance options, including the installation of emissions control technology. TVA does not expect that the costs to comply with this new rule will be material.
Multi-Pollutant Legislation. The U.S. Congress has expressed interest recently in adopting multi-pollutant control legislation focused on the electric power sector. Among other things, such an approach could seek to establish coordinated caps for power plant emissions of mercury, SO2, NOx, and, in some cases, CO2. TVA cannot predict whether multi-pollut ant legislation will ultimately become law. The legislative and regulatory landscape is continuing to change for these and other issues, and the outcome cannot be predicted accurately at this time.
North Carolina’s Petition to EPA. In 2005, North Carolina petitioned EPA under section 126 of the CAA to impose additional emission reduction requirements for SO2 and NOx on coal-fired power plants in 13 states, including the states where TVA’s coal-fired power plants are located. In March 2006, EPA denied the North Carolina petition primarily on the basis that CAIR remedied the problem. In June 2006, North Carolina filed a petition for review of EPA’s decision with the D.C. Circuit. In Sierra Club v. EPA, the D.C. Circuit remanded the petition back to EPA in March 2009 for reconsideration in light of the court’s decision to remand CAIR.
Acid Rain Program. Congress established the Acid Rain Program to achieve reductions in emissions of SO2 and NOx, the primary causes of acid rain. The program includes a cap-and-trade emission reduction program for SO2 emissions from power plants. By CY 2000, the program established a nationwide cap on power plant SO2 emissions of 8.9 million tons per year. The program also contains requirements for power plants to reduce NOx emissions through the use of available combustion controls.
Regional Haze Program. On June 15, 2005, EPA issued the Clean Air Visibility Rule, amending its CY 1999 regional haze rule, which had established timelines for states to improve visibility in national parks and wilderness areas throughout the United States. Under the amended rule, certain types of older sources may be required to install best available retrofit technology ("BART"). To comply with this requirement, certain utilities, including TVA, may have to install additional controls for particulate matter, SO2, and NOx emissions.
Opacity. Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO2 and NOx emissions can adversely affect opacity performance, and TVA and other utilities are addressing this issue. The evaluation of a utility’s compliance with state opacity requirements is coming under incr eased scrutiny, especially compliance during periods of startup, shutdown, and malfunction. SIPs developed under the CAA typically provide for allowances during periods of startup, shutdowns, and malfunctions. EPA is currently reconsidering its previous approval of the state of Alabama’s SIP for opacity.
Climate Change
Legislation. In 2009, both the U.S. House of Representatives and the U.S. Senate considered separate climate bills requiring reductions of GHGs across the economy through a cap-and-trade program.
| • | On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009. This bill, if enacted, would impose a cap on emissions of GHGs from covered sources, including TVA, of three percent, 17 percent, 40 percent, and 83 percent below CY 2005 emission levels by CY 2012, CY 2020, CY 2030, and CY 2050, respectively. |
| • | On November 5, 2009, the U.S. Senate’s Environmental & Public Works Committee passed S.1733, the Clean Energy Jobs and American Power Act. The GHG cap-and-trade provisions in this bill are slightly more stringent than those in H.R. 2454. |
Although it is unlikely that climate change legislation will pass during the 111th Congress, the 112th Congress may consider climate change and energy-related proposals. It is not unreasonable to anticipate that new EPA regulations or laws may set limits on GHG emissions for the electric utility sector. Prospects for future proposals becoming law, and the resulting potential impact on electric rates, are not clear at this time. However, if GHG emission reductions from electricity generating facilities become mandatory, the costs and impacts are expected to be significant, especially for coal-fired plants.
Regulation. On April 2, 2007, the U.S. Supreme Court issued a decision in Massachusetts v. EPA holding that GHG emissions, including CO2, are “air pollutants” under the CAA and requiring EPA to determine whether GHGs from new motor vehicles pose a threat to health and welfare. On December 15, 2009, EPA published its finding under the CAA that GHGs contribute to air pollution that may endanger public health or welfare. In the endangerment finding, EPA declared that the six identified GHGs – CO2, methane, nitrous oxide, hydro-fluorocarbons, perfluorocarbons, and sulfur hexafluoride – cause or contribute to global warming, and that the effects of climate change endanger public health and welfare by increasing the likelihood of severe weather events and other related consequences of climate change. The issuance of the endangerment finding triggered the statutory requirement that EPA regulate emissions of GHGs from motor vehicles. These regulations were finalized on April 1, 2010, when EPA and the U.S. Department of Transportation issued a joint final rule imposing GHG emission standards on light-duty vehicles (cars and light trucks). These regulations take effect on January 2, 2011.
On March 29, 2010, EPA affirmed its position that the CAA permitting requirements under the Prevention of Significant Deterioration (“PSD”) and Title V permit programs are not triggered for a pollutant until a regulatory requirement to control emissions of that pollutant becomes effective. (The PSD program requires permits before commencement of construction of new major stationary sources or major modifications of such sources, and the Title V program requires operating permits for all major stationary sources.) As a result of this EPA determination, new or modified plants that are subject to PSD or Title V programs will have to address GHG emissions in new permit applications as of January 2, 2011, which is the date the new motor vehicle rule takes effect . Similarly, GHGs emitted above certain thresholds from existing plants would be covered under the Title V program beginning on January 2, 2011.
On May 13, 2010, EPA issued a final rule to establish applicability thresholds that trigger reviews under the PSD and Title V permitting programs for GHG emissions from major sources. The threshold levels established by this rule, known as the Tailoring Rule, include both a mass-based calculation and a metric known as the carbon dioxide equivalent (“CO2e”), which incorporates the global warming potential for each of the six individual gases identified in the endangerment finding.
Under the Tailoring Rule, EPA will phase in the CAA permitting requirements for emissions of GHG from stationary sources in at least three phases.
The first phase becomes effective January 2, 2011, and applies only to sources that are already subject to PSD and/or Title V programs because of their emission levels of other regulated pollutants. Under the first phase, a source will be subject to PSD requirements for GHGs if (1) the source is already subject to PSD requirements for another pollutant and (2) the source increases its GHG emissions by at least 75,000 tons per year on a CO2e basis. Sources that are subject to PSD requirements for GHGs will be required to conduct a BACT review for their GHG emissions. EPA has issued guidance, which is out for comment, on the technologies or operations that would constitute BACT for GHGs. Pending the commercial demonstration of technologies such as carbon capture and sequestration, it is expected that the use of energy efficiency measures will constitute BACT. Additionally, under the first phase, any source that is required to have a Title V permit for a non-GHG pollutant will be required to address GHG requirements, including monitoring, record keeping, and reporting requirements, when it applies for, renews, or revises its Title V permit.
The second phase of the Tailoring Rule becomes effective July 1, 2011, and, unlike the first phase, is not limited to sources that are already subject to PSD and/or Title V programs. Under the second phase, EPA has established different thresholds for construction and modification activities. Construction of a major source will become subject to PSD requirements for GHGs if the construction results in an increase in GHG emissions of at least 100,000 tons per year on a CO2e basis. The modification of an existing major source will
become subject to PSD requirements for GHGs if the modification results in an increase in GHG emissions of at least 75,000 tons per year on a CO2e basis. Additionally, under the second phase, sources that emit GHGs in an amount equal to at least 100,000 ton per year on a CO2e basis will be required to obtain a Title V permit if they do not have one already.
The EPA has not yet established thresholds or an effective date for the third phase of the Tailoring Rule.
| | On October 30, 2009, EPA published the final rule for mandatory monitoring and annual reporting of GHG emissions from various categories of facilities, including fossil fuel suppliers, industrial gas suppliers, direct GHG emitters (such as electric generating facilities), and manufacturers of heavy-duty and off-road vehicles and engines. This rule does not require controls or limits on emissions, but requires data collection beginning January 1, 2010, with the first annual reports due on March 31, 2011. The requirements for monitoring, reporting, and record keeping with respect to GHG emissions from existing units should not have a material impact on TVA. |
Executive Orders. On October 5, 2009, President Obama signed Executive Order 13514, which requires federal agencies to establish GHG emission reduction targets and prepare inventories for three main categories of GHG emissions. The emission reduction targets do not apply to direct emissions of GHGs associated with electricity generation. As required by the executive order, TVA submitted its Sustainability Plan on June 2, 2010, and OMB approved that plan in August 2010. Consistent with this executive order, TVA has established GHG reduction targets of between 17 percent and 21 percent by 2020 compared to a 2008 baseline, depending on the category of emissions. TVA intends to achiev e these reductions primarily by (1) improving the energy efficiency of its buildings, (2) improving the reliability and efficiency of its hydro-generation portfolio, (3) reducing solid waste disposal, (4) utilizing higher fuel efficiency standards for new cars and light trucks, and (5) increasing the use of employee telecommuting and employee car-pooling. The executive order also requires developing and reporting inventories of GHG emissions by January 31, 2011. The inventory must include emissions of CO2, methane, nitrous oxide, hydroflourocarbons, perfluorocarbon gases, and sulfur hexafluoride. The White House Council on Environmental Quality released final Federal Greenhouse Gas Accounting and Reporting Guidance on October 6, 2010, which is the basis for these inventories.
International Accords. The Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change by reducing emissions of CO2 and other GHGs. Although the United States has not adopted the Kyoto Protocol, the United States pledged to reduce its GHG emissions in the range of 17 percent below CY 2005 levels by CY 2020 in connection with the 15th Conference of the Parties to the United Nations Framework Convention on Climate Change. An act of the U.S. Congress is required to make such a reduction in GHG emissions enforceable. The pledged reduction is in line with a climate bill that passed the U. S. House of Representatives in June 2009. TVA is unable to predict whether this climate bill or other climate-related legislation requiring such reductions in GHG emissions ultimately will become law.
Litigation. In addition to legislative activity, climate change issues are the subject of a number of lawsuits, including lawsuits against TVA. See Note 20 —Legal Proceedings.
Indirect Consequences of Regulation or Business Trends. Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and subsequent impacts to business reputation and public opinion. See Item 1, Business – Integrated Resource Plan and Future Power Supply.
Physical Impacts of Climate Change. In November 2009, EPRI published a report entitled Potential Impacts of Climate Change on Natural Resources in the Tennessee Valley Authority Region (the “EPRI Report”). TVA co-sponsored this report, with the objective of providing preliminary information on climate change impacts across the TVA service area. The EPRI Report was based on data from the Fourth Assessment Report of the Interagency Panel on Climate Change published in CY 2007. Subject to substantial uncertainties, the EPRI Report predicted that future (2020-2100) precipitation in the TVA service area will increase approximate ly three percent during the winter and will be unchanged over the summer in the eastern portion of the TVA service area, but will decline six to seven percent over the western portion of TVA’s service area. In addition, extreme weather events such as droughts and floods are also expected to become more frequent, although their frequency is difficult to quantify. The EPRI Report also predicted that temperatures could increase across the TVA service area by approximately one degree Celsius by 2020, two degrees Celsius by 2050, and three to four degrees Celsius by 2100.
If realized, projected changes in precipitation and increasing temperatures could impact future TVA management of water resources in the Tennessee Valley in the following ways:
Power generation. Power generation depends on having sufficient water flow available for hydroelectric generation. Hydroelectric generation will depend on the precipitation runoff within each reservoir drainage basin and the upstream flow into each reservoir. Power generation also depends on having water available for cooling fossil and nuclear power plants. Cooling water is withdrawn and then returned to the source. Increasing water temperatures would require withdrawing more water to achieve the same amount
of cooling at fossil and nuclear power plants, increasing the cooling capacities of plants, or reducing power generation to match the available water supply. See Water Quality Control Developments.
Agricultural, municipal, and industrial uses. Agricultural, municipal, and industrial water uses are driven by temperature and extreme weather. Warmer temperatures and drought will increase water demand for these purposes.
Navigation. Commercial navigation relies on maintaining the minimum channel depth as well as reasonable flow rates. Increasingly frequent extreme weather events (drought episodes and flooding) may create more challenges to maintaining the entire length of a commercial navigation channel.
Aquatic life. Water quality impacts the aquatic life dependent on the river system. Changes in water flow due to the increasing frequency of extreme weather events may impact the habitats and biodiversity of the Tennessee River system.
As changes in future precipitation and temperature develop, the current river management system employed by TVA may require periodic re-evaluations to balance the competing water use interests across the Tennessee Valley.
Actions Taken by TVA to Reduce GHG Emissions. TVA has taken significant voluntary steps to reduce GHG emissions, including the following:
As discussed earlier in Item 1, Business, TVA has increased its nuclear capacity, modernized its hydroelectric program, increased its purchases of renewable resources, and helped reduce demand for electricity through its energy efficiency initiatives.
In CY 1995, TVA was the first utility in the nation to participate in Climate Challenge, a DOE-sponsored voluntary GHG reduction program. Over the past decade, TVA has reduced, avoided, or sequestered over 300 million tons of CO2 under this program.
TVA participates in DOE’s Climate VISION program, a public-private partnership that calls on the electric utility sector, along with other industry sectors, to help meet a national goal of reducing the GHG intensity of the U.S. economy by 18 percent from CY 2002 to CY 2012.
TVA is a member of the Southeast Regional Carbon Sequestration Partnership and is working with EPRI and other electric utilities on projects investigating technologies for CO2 capture and geologic storage, as well as carbon sequestration via reforestation.
TVA’s CO2 Emissions. In FY 2010, TVA produced about 84 million tons of CO2. Historically, TVA has produced about 100 million tons of CO2 per year. TVA produced less CO2 in 2010 because of a decrease in coal-fired generation.
Renewable Energy Standards
In CY 2009, both the U.S. House of Representatives and the U.S. Senate considered separate energy bills that would require compliance with renewable energy standards.
In July 2009, the U.S. Senate Committee on Energy and Natural Resources reported S. 1462, the American Clean Energy Leadership Act of 2009, which would require electricity suppliers to meet 15 percent of their electricity sales through renewable sources of energy or energy efficiency by CY 2021. The legislation would also set interim minimum annual percentage requirements for renewable generation of three percent by CY 2011, six percent by CY 2014, nine percent by CY 2016, and 12 percent by CY 2019. The legislation would allow demonstrated electricity savings from energy efficiency measures to meet up to 26.67 percent of the annual renewable generation requirements. Full U.S. Senate consideration of this bill is not expected in the 111th Congress.
In June 2009, the U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009, which, in addition to mandated GHG reductions, would require electricity suppliers to meet 20 percent of their electricity sales through renewable sources of energy or energy efficiency by CY 2020. The bill would set interim minimum annual percentage requirements for renewable generation of six percent by CY 2012, 9.5 percent by CY 2014, 13 percent by CY 2016, and 16.5 percent by CY 2018. The bill would allow demonstrated electricity savings from energy efficiency measures to meet up to 25 percent of the annual renewable generation requirements, or up to 40 percent upon FERC’s approval of a governor’s petition to allow a higher percentage through energy efficiency.
It is unclear whether the U.S. Congress will adopt a law that mandates a certain percentage of electric generation from a specified list of eligible renewable energy technologies. To date, 29 states have established requirements for electric utilities to generate a certain amount of electricity from renewable sources, including one state in the TVA
service area (North Carolina). The North Carolina program does not apply to TVA but does apply to TVA distributor customers located in that state. Each state has adopted unique definitions of qualifying renewable resources.
Water Quality Control Developments
EPA is expected to propose a new rule by the end of CY 2010 designed to minimize the adverse impacts to fish and shellfish from the design and operation of cooling water intake structures at existing power plants. The new rule is expected to require changes in the operation of cooling water intakes and modifications to their design. These changes could potentially result in significant increases in capital costs and operating and maintenance costs. All of the intakes at TVA’s existing coal and nuclear generating facilities are likely to be subject to the new rule. Because of the uncertainty of the changes to be made by EPA, the impacts of the rulemaking are uncertain at this time.
EPA and many states are taking increased interest in potential effects of hydrothermal discharges. TVA is working with states and EPA to demonstrate that the data collected in the vicinity of TVA plants is sufficient to assess the impacts of thermal discharges on the aquatic environment and validate existing thermal limits. TVA expects to collect substantially more in-stream biological and temperature data than in the past to justify current thermal limits. Specific data requirements in the future will be determined based on negotiations between TVA and regulators.
Water temperature issues at TVA’s Cumberland Fossil Plant continue to be complicated by reduced flows in the Cumberland River due to ongoing repairs at Wolf Creek and Center Hill dams initiated by the U.S. Army Corps of Engineers in CY 2007. The greatly reduced flows combined with thermal discharges at the Cumberland Fossil Plant have resulted in increased stress to aquatic organisms and have contributed to a portion of Barkley Reservoir being included on the State of Tennessee’s CY 2008 list of impaired waters. The lower river flows are expected to continue to impact TVA’s ability to operate the Cumberland Fossil Plant at normal rates, which may result in increased spending for power purchases. TVA continues to work with the U.S. Army Corps of Engineers and the Tennessee Department of Environment and Conservation (“TDEC”) to alleviate aquatic impacts in the Barkley Reservoir and to improve the conditions in the reservoir.
The effluent guidelines required by the Clean Water Act for the Steam Electric Power Generating Category were last revised by EPA in CY 1982. EPA is currently conducting studies and surveys of wastewater discharges from the industry, and is expected to issue a proposed rule to revise the existing guidelines in CY 2012. A future rule is expected to focus on wastewaters from ash handling and clean air control systems. The revised effluent guidelines are likely to require more restrictive discharge limitations through more advanced wastewater treatment, resulting in significant additional expenditures to meet the new requirements.
As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities, new water quality criteria for nutrients and other pollutants, wastewater analytical methods, and regulation of herbicide discharges. In addition, other new environmental requirements under the Clean Water Act related to mountain top mining of coal in the Appalachian region may result in additional increases in the costs of fuel for TVA’s coal-fired power plants.
Cleanup of Solid and Hazardous Wastes
Liability for releases and cleanup of hazardous substances is primarily regulated under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years.
Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at 11 non-TVA areas for which it may have some liability. TVA has reached agreements with EPA to settle its liability at two of these non-TVA areas for a total of less than $23,000. There is little or no known evidence that TVA contributed any significant quantity of hazardous substances to six of the non-TVA areas, and there has been no recent assertion of potential TVA liability for five of these six areas. There is evidence that TVA sent some materials to the remaining three non-TVA sites: the David Witherspoon site in Knoxville, Tennessee, the Ward Transformer site in Raleigh, North Carolina, and the General Waste Products site in Evansville, Indiana.
David Witherspoon Site. The David Witherspoon site was contaminated with radionuclides, polychlorinated biphenyls (“PCBs”), and metals. DOE admitted to being the main contributor of materials to the site and cleaned the site up at a reported cost of about $35 million. Although DOE asked TVA to “cooperate” in completing the cleanup, TVA believes it sent only a relatively small amount of equipment to the site and that none of it was radioactive; accordingly, TVA believes that its liability for these cleanup costs is limited.
Ward Transformer Site. The Ward Transformer site in Raleigh, North Carolina, is contaminated by PCBs from electrical equipment. There is documentation showing that TVA sent a limited amount of electrical equipment containing PCBs to the site in CY 1974. A working group of potentially responsible parties (the “PRP Work Group”) is cleaning up
on-site contamination in accordance with an agreement with EPA. The cleanup effort has been divided into four areas: two phases of soil cleanup; cleanup of off-site contamination in the downstream drainage basin; and supplemental groundwater remediation. The cost estimate for the first phase of soil cleanup is approximately $55 million. The cost estimate for the second phase of soil cleanup is $10 million. Estimates for cleanup of off-site contamination in the downstream drainage basin range from $6 million to $25 million. There are no reliable estimates for the supplemental groundwater remediation phase. On April 30, 2009, the PRP Work Group filed an amended complaint in federal court against potentially responsible parties who had not yet settled, including TVA, regardin g the two phases of soil cleanup. TVA settled this lawsuit and its potential liability for the two phases of soil cleanup for $300,000 and has been dismissed as a party. Although the settlement with respect to the first two phases does not prohibit TVA from having liability in connection with the other two phases or any natural resource damages, the U.S. Department of Justice is attempting to negotiate a government-wide settlement of the liability of all federal agencies (including TVA) for cleanup of offsite contamination in the downstream drainage basin and the investigative portion of the supplemental groundwater remediation.
General Waste Products Site. General Waste Products, located in Evansville, Indiana, operated from the 1930s until CY 1998 scrap metal salvage yards that contain contamination from lead batteries and PCB transformers. The original defendants in a CERCLA action for the sites have filed a third-party complaint in the U.S. District Court for the Southern District of Indiana against TVA and others seeking cost contribution for cleanup of the yards. There is evidence that TVA sent scrap metal to General Waste Products, but TVA has not found any records indicating that it sent batteries or PCB equipment. Counsel for the original plaintiffs has informed TVA that the first yard has been cleaned up at a cost of $3.2 million, and cleanup estimates for the second yard range from $2 million to $7 million. TVA settled the claims against it for a minimal amount and was dismissed from the case on September 8, 2010. TVA did not admit to any liability for the site contamination as part of the settlement.
TVA Sites. TVA operations at some TVA facilities have resulted in oil spills and other contamination that TVA is addressing.
Estimated Liability. As of September 30, 2010, TVA’s estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate is approximately $23 million and is included in Other liabilities on the Balance Sheet.
Coal-Combustion Wastes
On May 4, 2010, EPA released the text of a proposed rule describing two possible regulatory options it is considering under the Resource Conservation and Recovery Act (“RCRA”) for the disposal of coal ash generated from the combustion of coal by electric utilities and independent power producers. Under either option, EPA would regulate the construction of impoundments and landfills, and seek to ensure both the physical and environmental integrity of disposal facilities.
Under the first proposed regulatory option, EPA would list coal ash destined for disposal in landfills or surface impoundments as “special wastes” subject to regulation under Subtitle C of RCRA. Subtitle C regulations set forth EPA’s hazardous waste regulatory program, which regulates management and disposal of wastes. The proposed rule would create a new category of waste so that coal ash would be subject to many of the Subtitle C regulatory requirements. Under this option, coal ash would be subject to technical requirements from the point of generation to final disposal. Transporters and treatment, storage, and disposal facilities would be subject to federal requirements and permits. EPA is considering imposing disposal facility requirements such as liners, ground water monitoring, fugitive dust controls, financial assurance, corrective action, closure of units, and post-closure care. This first option also proposes requirements for dam safety and stability for surface impoundments, land disposal restrictions, treatment standards for coal ash, and a prohibition on the disposal of treated coal ash below the natural water table. This first option would not apply to certain beneficial reuses of coal ash.
Under the second proposed regulatory option, EPA would regulate the disposal of coal ash under Subtitle D of RCRA, the regulatory program for non-hazardous solid wastes. Under this option, EPA is considering issuing national minimum criteria to ensure the safe disposal of coal ash, which would subject disposal units to location standards, composite liner requirements, groundwater monitoring, corrective action standards for releases, closure and post-closure care requirements, and requirements to address the stability of surface impoundments. Existing surface impoundments would not have to close or install composite liners and could continue to operate for their useful life. This second option would not regulate the storage or treatment of coal ash prior to disposal, and no federal permits would be require d.
The proposed rule also states that EPA is considering listing coal ash as a hazardous substance under CERCLA, and includes proposals for alternative methods to adjust the statutory reportable quantity for coal ash. The extension of CERCLA to coal ash could significantly increase TVA’s liability for cleanup of past and future coal ash disposal.
EPA has not decided which regulatory approach it will take with respect to the management and disposal of coal ash. TVA is therefore unable to determine the effects of this proposed rule at this time.
Kingston Ash Spill
See Note 8 for a discussion of the environmental issues associated with the Kingston ash spill.
Environmental Investments
From 1977 to 2010, TVA spent approximately $5.3 billion to reduce emissions from its power plants, including $58 million, $172 million, and $274 million in 2010, 2009, and 2008, respectively. Among other things, TVA has taken the following steps to reduce emissions:
SO2 Emissions. To reduce SO2 emissions, TVA installed scrubbers on 17 of its coal-fired units, and switched to lower-sulfur coals at 41 coal-fired units.
NOx Emissions. To reduce NOx emissions, TVA installed SCRs on 21 of its largest coal-fired units, installed selective non-catalytic reduction systems on two coal-fired units (although TVA is no longer operating one of these systems because of technical challenges), installed High Energy Reagent Technology (“HERT”) sy stems on seven coal-fired units, installed low-NOx burners (“LNB”) or low-NOx combustion systems on 47 of its 59 coal-fired units, optimized combustion on 10 coal-fired units, and began operating NOx control equipment year round when units are operating (except during maintenance periods) starting in October 2008.
Particulate Emissions. To reduce particulate emissions, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, or baghouses.
Primarily on account of the actions described above, emissions of NOx on the TVA system have been reduced by 89 percent below peak 1995 levels, and emissions of SO2 on the TVA system have been reduced by 90 percent below 1977 levels. In addition, the actions described above have also provided a co-benefit of reducing hazardous air pollutants, including mercury, at some units.
TVA estimates that compliance with future CAA requirements (excluding GHG requirements) could lead to additional costs of $3.8 billion in the decade beginning in CY 2011. There could be additional material costs if reductions of GHGs, including CO2, are mandated under the CAA or by legislation, or if future legislative, regulatory, or judicial actions lead to more stringent emission reduction requirements for conventional pollutants. These costs cannot reasonably be predicted at this time because of the uncertainty of such potential actions.
In addition to the costs described above, TVA is planning to invest between $1.5 billion and $2.0 billion over an eight to ten year period to convert wet ash and gypsum facilities to dry storage facilities. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – 2010 Challenges – Coal Combustion Product Facilities.
To meet strategic clean air objectives, TVA is also planning to idle certain of its coal-fired units. In September 2010, TVA idled Unit 5 at Widows Creek and in October 2010, TVA idled Widows Creek Unit 2 and Shawnee Fossil Plant Unit 10. TVA is evaluating its remaining coal-fired portfolio and may make decisions to idle more coal-fired capacity in the future. See Item 1, Business – Integrated Resource Plan and Future Power Supply – Improving Air Quality.
Estimated Required Environmental Expenditures
The following table contains information about TVA’s current estimates on projects related to environmental
laws and regulations.
On September 30, 2010, TVA had 12,457 employees, of whom 4,776 were trades and labor employees. Under the TVA Act, TVA is required to pay trades and labor workers hired by TVA or certain of its contractors the rate of wages for work of a similar nature prevailing in the vicinity where the work is being performed. Neither the federal labor relations laws covering most private sector employers nor those covering most federal agencies apply to TVA. However, the TVA Board has a long-standing policy of acknowledging and dealing with recognized representatives of its employees, and that policy is reflected in long-term agreements to recognize the unions (or their successors) that represent TVA employees. Federal law prohibits TVA employees from engaging in strikes against TVA.
The risk factors described below, as well as the other information included in this Annual Report, should be carefully considered. Risks and uncertainties described in these risk factors could cause future results to differ materially from historical results as well as from the results anticipated in forward-looking statements. Although the risk factors described below are the ones that TVA considers significant, additional risk factors that are not presently known to TVA or that TVA presently does not consider significant may also impact TVA’s business operations. Although the TVA Board has the authority to set TVA’s own rates and may thus mitigate some risks by increasing rates, there may be instances in which TVA would be unable to partially or completely eliminate one or more of these risk s through rate increases over a reasonable period of time or at all. Accordingly, the occurrence of any of the following could have a material adverse effect on TVA’s cash flows, results of operations, and financial condition.
New laws, regulations, and administrative orders may negatively affect TVA’s cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.
Because TVA is a corporate agency and instrumentality established by federal law, it may be affected by a variety of laws, regulations, and administrative orders that do not affect other electric utilities. For example, Congress may enact legislation that expands or reduces TVA’s activities, changes its governance structure, requires TVA to sell some or all of the assets that it operates, reduces or eliminates the United States’s ownership of TVA, or even liquidates TVA. Although it is difficult to predict exactly how new laws, regulations, and administrative orders may impact TVA, some of the possible effects are described below.
TVA may lose its protected service territory.
TVA’s service area is defined by the fence and protected by the anti-cherrypicking provision. If Congress were to eliminate or reduce the coverage of the anti-cherrypicking provision but retain the fence, TVA could more easily lose customers that it could not replace within its specified service area. The loss of these customers could adversely affect TVA’s cash flows, results of operations, and financial condition.
The TVA Board may lose its sole authority to set rates for electricity.
Under the TVA Act, the TVA Board has the sole authority to set the rates that TVA charges for electricity and these rates are not subject to further review. If the TVA Board loses this authority or if the rates become subject to outside review, there could be material adverse effects on TVA including, but not limited to, the following:
The TVA Board might be unable to set rates at a level sufficient to generate adequate revenues to service TVA’s financial obligations, properly operate and maintain its power assets, and provide for reinvestment in its power program; and
TVA might become subject to additional regulatory oversight that could impede its ability to manage its business.
TVA may lose responsibility for managing the Tennessee River system.
TVA’s management of the Tennessee River system is important to effective operation of the power system. TVA’s ability to integrate management of the Tennessee River system with power system operations increases power system reliability and reduces costs. Restrictions on how TVA manages the Tennessee River system could negatively affect its operations.
Congress may take actions that lead to a downgrade of TVA’s credit ratings.
TVA’s current credit ratings are not based solely on its underlying business or financial condition but are based to a large extent on the legislation that defines TVA’s business structure. Key characteristics of TVA’s business defined by legislation include (1) the TVA Board’s ratemaking authority, (2) the current competitive environment, which is defined by the fence and the anti-cherrypicking provision, and (3) TVA’s status as a corporate agency and instrumentality of the United States. Accordingly, if Congress takes any action that effectively alters any of these characteristics, TVA’s credit ratings could be downgraded. Although TVA Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bond s, TVA’s credit ratings could be downgraded if the sovereign credit ratings of the United States are downgraded.
TVA may become subject to additional environmental regulation.
New environmental laws, regulations, and orders may become applicable to TVA or the facilities it operates, and existing environmental regulations may be revised or reinterpreted in a way that adversely affects TVA. Possible areas of future regulation include, but are not limited to, the following:
Greenhouse gases. Costs to comply with future regulation of CO2 and other GHGs may reduce TVA’s cash flows and negatively impact TVA’s financial position and results of operations. The cost impact of legislation or regulation cannot be determined at this time.
Coal combustion products. The federal government has proposed stronger regulations concerning coal-combustion products, and state governments may impose additional regulations. These regulations may require TVA to make additional capital expenditures, increase operating and maintenance costs, or even lead it to shut down certain facilities.
Renewable energy portfolio standards. TVA is not currently obligated to provide a percentage of the power it sells from renewable sources but may be required to do so in the future. In such a case, depending on the amount required, TVA may have to build or purchase additional facilities that use renewable resources to produce the power itself, purchase renewable power from other companies, or offset some of its renewable requirements through energy efficiency. Such developments could require TVA to make significant capital expenditures, increase its purchased power costs, or make changes in how it operates its facilities.
Existing laws, regulations, and orders may negatively affect TVA’s cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.
TVA is required to comply with comprehensive and complex laws, regulations, and orders. The costs of complying with these laws, regulations, and orders are expected to be substantial, and costs could be significantly more than TVA anticipates, especially in the environmental area. In fact, the cost to install the necessary equipment to comply with existing environmental laws, regulations, and orders at some facilities may render some facilities uneconomical, which may cause TVA to shut down or idle certain facilities. In addition, TVA is required to obtain numerous permits and approvals from governmental agencies that regulate its business, and TVA may be unable to obtain or maintain all required regulatory approvals. If there is a delay in obtaining required regulatory approvals or if TVA fail s to obtain or maintain any approvals or to comply with any law, regulation, or order, TVA may have to change how it operates certain facilities, may be unable to operate certain facilities, or may have to pay fines or penalties.
TVA may be responsible for environmental clean-up activities.
TVA may be responsible for on-site liabilities associated with the environmental condition of facilities or property that TVA has acquired or that TVA operates regardless of when the liabilities arose, whether they are known or unknown, and whether they were caused by TVA, prior owners or operators, or a third party.
The costs associated with remediating the Kingston ash spill as well as other coal combustion product facilities may be significantly higher than TVA anticipates.
TVA estimates that the cost of remediating the Kingston ash spill will be between $1.1 billion and $1.2 billion. Actual costs could substantially exceed expected costs if, among other things, TVA has to remove more ash than currently anticipated, additional environmentally sensitive material is uncovered in the river sediment, there are delays in the ash removal process, or the methods of final remediation change. Also, certain costs, such as any damages associated with Kingston-related litigation, natural resources damages, and additional penalties, are not included in the current estimate. In addition, TVA expects to spend between $1.5 billion and $2.0 billion to convert its wet fly ash, bottom ash, and gypsum facilities to dry collection facilities and to remediate or eliminate the coal combustion prod uct facilities that are classified as high risk. Actual costs may substantially exceed expected costs.
TVA may have to make significant contributions in the future to fund its pension benefit plan.
At September 30, 2010, TVA’s pension plan had assets of $6.8 billion compared to liabilities of $10.4 billion, even after a $1.0 billion contribution by TVA in September 2009. The ability of the plan’s funded status to improve quickly is limited by the maturity of the plan. With approximately 23,000 retirees, there are almost twice as many retirees as current employee participants. As a result, a significant portion of the plan’s assets is required to fund the annual retiree benefits. The costs of providing pension benefits depend upon a number of factors, including, but not limited to:
| • | Provisions of the pension plan; |
| • | Changing employee demographics; |
| • | Rates of increase in compensation levels; |
| • | Rates of return on plan assets; |
| • | Discount rates used in determining future benefit obligations and required funding levels; |
| • | Future government regulation; and |
| • | Level of contributions made to the plan. |
Any of these factors or any number of these factors could keep at high levels or even increase the costs of providing pension benefits and require TVA to make significant contributions to the pension plan. Recent financial market conditions may result in lower expected rates of return on plan assets and lower discount rates used in determining future benefit obligations. These changes would negatively impact the funded status of the plan. Additional contributions to the plan and absorption of additional costs would negatively affect TVA’s cash flows, results of operations, and financial condition.
Approaching or reaching TVA’s debt ceiling could limit TVA’s ability to carry out its business. Additionally, TVA’s debt ceiling could be made more restrictive.
The TVA Act provides that TVA can issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. At September 30, 2010, TVA had $23.7 billion of Bonds outstanding (not including noncash items of foreign currency exchange loss of $14 million and net discount on sale of Bonds of $216 million).
Approaching or reaching the debt ceiling may adversely affect TVA’s business by limiting TVA’s ability to access capital markets and increasing the amount of debt TVA must service. Also, Congress may lower TVA’s debt ceiling or broaden the types of financial instruments that are covered by the ceiling. Either of these scenarios may also restrict TVA’s ability to raise capital to maintain power program assets, to construct additional generation facilities, to purchase power under long-term purchase power agreements, or to meet regulatory requirements. In addition, approaching or reaching the debt ceiling may lead to increased legislative or regulatory oversight of TVA’s activities and could lead to negative credit rating actions.
Demand for electricity may be significantly reduced, negatively affecting TVA’s cash flows, results of operations, and financial condition.
Some of the factors that could reduce the demand for electricity include the following:
Economic downturns. Sustained economic downturns in TVA’s service area or other parts of the United States could reduce overall demand for power and thus reduce TVA’s power sales and cash flows, especially as TVA’s industrial customers reduce their operations and thus their consumption of power.
Loss of customers. During 2010, two distributor customers terminated their power contracts with TVA. The loss of additional customers could have a material adverse effect on TVA’s cash flows, results of operations, or financial condition, and could result in higher rates.
Change in technology. Research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including gas turbines, wind turbines, fuel cells, microturbines, solar cells, and distributed generation devices. It is possible that advances in these or other alternative technologies could reduce the costs of electricity production from alternative technologies to a level that will enable these technologies to compete effectively with traditional power plants like TVA’s. To the extent these technologies become a more cost-effective option for certain customers, TVA’s sales to these customers could be reduced, negatively affecting TVA’s cash flows, results of operations, and financial con dition.
Catastrophic events may affect TVA’s ability to supply electricity or reduce demand for electricity.
TVA may be adversely affected, directly or indirectly, by catastrophic events such as fires, earthquakes, solar events, droughts, floods, tornadoes, wars, national emergencies, terrorist activities, pandemics, and other similar events. These events, the frequency and severity of which are unpredictable, may negatively affect TVA’s cash flows, results of operations, and financial condition by, among other things, limiting TVA’s ability to generate and transmit power, reducing the demand for power, disrupting fuel or other supplies, requiring TVA to produce additional tritium, leading to an economic downturn, or creating instability in the financial markets. Some recent studies have predicted that climate change may cause certain catastrophic events, such as droughts and floods, to occur more frequently in the Tennessee Valley region.
Weather conditions may influence TVA’s ability to supply power and its customers’ demands for power.
Extreme temperatures may increase the demand for power and require TVA to purchase power at high prices to meet the demand from customers, while unusually mild weather may result in decreased demand for power and lead to reduced electricity sales. In addition, in periods of below normal rainfall or drought, TVA’s low-cost hydroelectric generation may be reduced, requiring TVA to purchase power or use more costly means of producing power. Furthermore, high river water temperatures in the summer may limit TVA’s ability to use water from the Tennessee or Cumberland River systems for cooling at certain of TVA’s generating facilities, thereby limiting its ability to operate these generating facilities.
TVA may incur delays and additional costs in power plant construction and may be unable to obtain necessary regulatory approval.
TVA is completing the construction of Watts Bar Nuclear Unit 2, planning major upgrades to and modernization of current generating plants, and evaluating construction of more generating facilities in the future. These activities involve risks of schedule delays and overruns in the cost of labor and materials. In addition, if TVA does not obtain the necessary regulatory approvals, is otherwise unable to complete the development or construction of a facility, decides to cancel construction of a facility, or incurs delays or cost overruns in connection with constructing a facility, TVA’s cash flows, financial condition, and results of operations could be negatively affected. In addition, if construction projects are not completed according to specifications, TVA may suffer, among other things, reduced plant efficiency and higher operating costs.
TVA is the sole power provider for its customers within its service area, and if demand for power in TVA’s service area increases, TVA is contractually obligated to take steps to meet this increased demand.
If demand for power in TVA’s service area increases, TVA may need to meet this increased demand by purchasing additional power from other sources, building new generation and transmission facilities, or purchasing existing generation and transmission facilities. Purchasing power from external sources, as well as acquiring or building new generation and transmission facilities, may negatively affect TVA’s cash flows, results of operations, and financial condition.
Failure to meet TVA’s energy efficiency and demand reduction goals may negatively impact TVA’s cash flows, results of operations, and financial condition.
TVA’s energy efficiency and demand reduction initiatives are important components of TVA’s plan to meet future power needs in its service territory. It is possible, however, that results from these programs may be less favorable than TVA anticipates. If TVA fails to meet its energy efficiency and demand reduction goals, TVA may, among other things, need to purchase additional power from third parties or build or purchase additional generation facilities.
Owning and operating nuclear units may subject TVA to nuclear risks and significant costs that adversely affect its cash flows, results of operations, and financial condition.
TVA has six operating nuclear units and has resumed construction of one nuclear unit that is scheduled to be placed in service in CY 2012. Risks associated with these units include the following:
Nuclear Risks. A nuclear incident at a TVA facility could have significant consequences including loss of life, damage to the environment, damage to or loss of the facility, and damage to non-TVA property. Although TVA carries certain types of nuclear insurance, the amount that TVA is required to pay in connection with a nuclear incident could significantly exceed the amount of coverage provided by insurance. Also, any nuclear incident, even at a facility that is not operated by or licensed to TVA, has the potential to impact TVA adversely by obligating TVA to pay up to $105 million per year and a total of $671 million per nuclear incident under the Price-Anderson Act. In addition, a nuclear incident could negatively affect TVA by, among other things, obligating TVA to pay retrospective insurance premiums, reducing the availability and affordability of insurance, increasing the costs of operating nuclear units, or leading to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities. Moreover, Congress could impose revenue-raising measures on the nuclear industry to pay claims exceeding the limit for a single incident under the Price-Anderson Act.
Decommissioning Costs. TVA maintains a Nuclear Decommissioning Trust (“NDT”) for the purpose of providing funds to decommission its nuclear facilities. The NDT is invested in securities generally designed to achieve a return in line with overall equity market performance. The NDT was 94 percent funded as of September 30, 2010. TVA might have to make unplanned contributions to the trust if, among other things:
| • | The value of the investments in the trust declines significantly, as it did during the recent financial crisis, or the investments fail to achieve the assumed real rate of return; |
| • | The decommissioning funding requirements are changed by law or regulation; |
| • | The assumed real rate of return on plan assets, which is currently 5 percent, is lowered by the TVA Board or is optimistic; |
| • | The actual costs of decommissioning are more than planned; |
| • | Changes in technology and experience related to decommissioning cause decommissioning cost estimates to increase significantly; or |
| • | TVA is required to decommission a nuclear plant sooner than it anticipates. |
If TVA makes additional contributions to the NDT, the contributions may negatively affect TVA’s cash flows, results of operations, and financial condition.
Increased Regulation. The NRC has broad authority to adopt requirements related to the licensing, operation, and decommissioning of nuclear generation facilities that can result in significant restrictions or requirements on TVA. If the NRC modifies existing requirements or adopts new requirements, TVA may be required to make substantial capital expenditures at its nuclear plants or make substantial contributions to its NDT. In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA’s operating licenses.
TVA’s generation and transmission assets or their supporting infrastructure may not operate as planned.
Many of TVA’s generation and transmission assets have been operating since the 1950s or earlier and have been in nearly constant service since they were completed. If these assets or their supporting infrastructure fail to operate as planned, TVA, among other things:
| • | May have to invest a significant amount of resources to repair or replace the assets or the supporting infrastructure; |
| • | May be unable to operate the assets for a significant period of time; |
| • | May have to purchase replacement power on the open market; |
| • | May not be able to meet its contractual obligations to deliver power; |
| • | May have to remediate collateral damage caused by a failure of the assets or the supporting infrastructure; and |
| • | May have to increase its efforts to reduce vegetation intrusions onto transmission lines to comply with applicable regulations. |
In addition, the failure of TVA’s generation and transmission assets or their supporting infrastructure to perform as planned may cause health, safety, and environmental problems and may even result in events such as the failure of a dam, the failure of a containment pond, or a nuclear incident. Any of these potential outcomes may negatively affect TVA’s cash flows, results of operations, and financial condition.
TVA’s information technology assets may not operate as planned.
TVA’s operations are extensively computerized, and a failure of TVA’s information technology assets may significantly disrupt operations. Among other things, such a failure may negatively impact TVA’s accounting and administrative systems as well as TVA’s ability to generate and transmit power, and may also lead to the loss or inappropriate release of critical data. Such a failure may be caused by, among other things, a cyber attack, a natural disaster, a solar event, an electromagnetic event, the age and condition of TVA’s information technology assets, and human error. Any of these occurrences could negatively affect TVA’s cash flows, results of operations, and financial condition.
TVA’s organizational transformation efforts may fail.
Following the Kingston ash spill, the TVA Board directed TVA to develop a plan to improve its control systems, operating standards, and corporate culture. The failure to make improvements in these areas may contribute to other incidents or challenges that could adversely affect TVA’s cash flow, results of operations, and financial condition as well as TVA’s reputation. Any deterioration in TVA’s reputation may harm TVA’s relationships with its customers and stakeholders and may potentially lead to the imposition of additional laws and regulations that negatively affect the way TVA conducts its business.
TVA’s service reliability could be affected by problems at other utilities or at TVA facilities or by the increase in intermittent sources of power.
TVA’s transmission facilities are directly interconnected with the transmission facilities of neighboring utilities and are thus part of the larger interstate power transmission grid. Accordingly, problems at other utilities or at TVA’s facilities may cause interruptions in TVA’s service to its customers. In addition, the increasing contribution of intermittent sources of power such as wind and solar may place additional strain on TVA’s system as well as on surrounding systems. If TVA suffers a service interruption, TVA’s cash flows, results of operations, financial condition, and reputation may be negatively affected.
Events which affect the supply of water in the Tennessee River system and Cumberland River system may interfere with TVA’s ability to generate power.
An inadequate supply of water in the Tennessee River system and Cumberland River system could negatively impact TVA’s cash flows, results of operations, and financial condition by reducing generation not only at TVA hydroelectric plants but also at its coal-fired and nuclear plants, which depend on water from the river systems near which they are located for cooling and for use in boilers where water is converted into steam to drive turbines. An inadequate supply of water could result, among other things, from periods of low rainfall or drought, the withdrawal of water from the river systems by governmental entities, and incidents affecting bodies of water not managed by TVA. While TVA manages the Tennessee River and large portions of its tributary system in order to provide much of the water necessary for the operation of its power plants, the U.S. Army Corps of Engineers operates and manages other bodies of water upon which some TVA facilities rely. Events at these non-TVA managed bodies of water or their associated hydroelectric facilities may interfere with the flow of water and may result in TVA’s having insufficient water to meet the needs of its plants. If TVA has insufficient water to meet the needs of its plants, TVA may be required to reduce generation at its affected facilities to levels compatible with the available supply of water.
TVA’s fuel and purchased power supplies may be disrupted.
TVA purchases coal, uranium, natural gas, fuel oil, and electricity from a number of suppliers. Disruption in the acquisition or delivery of fuel or purchased power may result from a variety of physical and commercial events, political developments, or environmental regulations affecting TVA’s fuel and purchased power suppliers as well as from transportation or transmission constraints. If one of TVA’s fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might have to purchase replacement fuel or power, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In some circumstances, TVA may not be able to recover this difference from the supplier. In addition, any disruption of TVA’s fuel and purchased power supplies could require TVA to operate higher cost plants, thereby adversely affecting TVA’s cash flows, results of operations, and financial condition. Moreover, if TVA is unable to acquire enough replacement power or fuel and does not have enough reserve generation capacity available to offset the loss of power or fuel, TVA may not be able to supply enough power to meet demand, resulting in power curtailments, brownouts, or even blackouts.
Failure to attract and retain an appropriately qualified workforce may negatively affect TVA’s results of operations.
TVA’s business depends on its ability to recruit and retain key executive officers as well as skilled professional and technical employees. The inability to attract and retain an appropriately qualified workforce could adversely affect TVA’s ability to, among other things, operate and maintain generation and transmission facilities, complete large
construction projects such as Watts Bar Nuclear Unit 2, and successfully implement its organizational transformation efforts.
TVA is involved in various legal and administrative proceedings whose outcomes may affect TVA’s finances and operations.
TVA is involved in various legal and administrative proceedings and is likely to become involved in other legal proceedings in the future in the ordinary course of business, as a result of catastrophic events or otherwise. Although TVA cannot predict the outcome of the individual matters in which TVA is involved or will become involved, the resolution of these matters could require TVA to make expenditures in excess of established reserves and in amounts that could have a material adverse effect on TVA’s cash flows, results of operations, and financial condition. Similarly, resolution of any such proceedings may require TVA to change its business practices or procedures and may require TVA to reduce emissions from its coal-fired units, including emissions of GHGs, to a greater extent than TVA had planned.
TVA is subject to a variety of market risks that may negatively affect TVA’s cash flows, results of operations, and financial condition.
TVA is subject to a variety of market risks, including, but not limited to, commodity price risk, investment price risk, interest rate risk, counterparty credit and performance risk, and currency exchange rate risk.
Commodity Price Risk. Prices of commodities critical to TVA’s operations, including coal, uranium, natural gas, fuel oil, crude oil, construction materials, emission allowances, and electricity, have been extremely volatile in recent years. If prices of these commodities increase, TVA’s rates may increase.
Investment Price Risk. TVA is exposed to investment price risk in its NDT, its Asset Retirement Trust (“ART”), and its pension fund. If the value of the investments held in the NDT or the pension fund either decrease or fail to increase in accordance with assumed rates of return, TVA may be required to make substantial contributions to these funds.
Interest Rate Risk. Changes in interest rates may increase the amount of interest that TVA pays on new Bonds that it issues, decrease the return that TVA receives on its short-term investments, decrease the value of the investments in TVA’s pension fund and trusts, and increase the losses on the mark-to-market valuation of certain derivative transactions into which TVA has entered.
Counterparty Credit and Performance Risk. TVA is exposed to the risk that its counterparties will not be able to perform their contractual obligations. If TVA’s counterparties fail to perform their obligations, TVA’s cash flows, results of operations, and financial condition may be adversely affected. In addition, the failure of a counterparty to perform may make it difficult for TVA to perform its obligations, particularly if the counterparty is a supplier of electricity or fuel.
Currency Exchange Rate Risk. Over the next several years, TVA plans to spend a significant amount of capital on clean air projects, capacity expansion, and other projects. A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies. The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, and, if not effectively managed, foreign currency exposure could negatively impact TVA’s cash flows, results of operations, and financial condition.
TVA’s ability to use derivatives to hedge certain risks may be limited.
TVA currently uses derivatives to hedge a variety of risks. Depending on how regulatory agencies interpret and implement the provisions of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, TVA’s hedging costs may increase and its ability to use derivatives to hedge certain risks may be limited. These occurrences may, among other
things, cause TVA to change its operations, increase the risks to which TVA is exposed, and negatively affect TVA’s cash flows.
TVA may be unable to meet its current cash requirements if TVA’s access to the debt markets is limited.
TVA uses cash provided by operations together with proceeds from power program financings to fund its current cash requirements. It is critical that TVA continues to have access to the debt markets in order to meet its cash requirements. The importance of having access to the debt markets is underscored by the fact that TVA, unlike many utilities, relies almost entirely on debt capital since TVA is not authorized to issue equity securities.
TVA, together with owners of TVA securities, may be impacted by a downgrade of TVA’s credit ratings.
A downgrade of TVA’s credit ratings may have material adverse effects on TVA’s cash flows, results of operations, and financial condition as well as on investors in TVA securities. Among other things, a downgrade may have the following effects:
| • | A downgrade would increase TVA’s interest expense by increasing the interest rates that TVA pays on new Bonds that it issues. An increase in TVA’s interest expense may reduce the amount of cash available for other purposes, which may result in the need to increase borrowings, to reduce other expenses or capital investments, or to increase power rates. |
| • | A downgrade may result in TVA’s having to post collateral under certain physical and financial contracts that contain rating triggers. |
| • | A downgrade below a contractual threshold may prevent TVA from borrowing under two credit facilities totaling $2.0 billion. |
| • | A downgrade may lower the price of TVA’s securities in the secondary market. |
TVA’s financial control system cannot guarantee that all control issues and instances of fraud or errors will be detected.
No financial control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system are met, and no evaluation of financial controls can provide absolute assurance that all control issues and instances of fraud or errors can be detected. The design of any system of financial controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Payment of principal and interest on TVA securities is not guaranteed by the United States.
Although TVA is a corporate agency and instrumentality of the United States government, TVA securities are not backed by the full faith and credit of the United States. If TVA were to experience extreme financial difficulty and were unable to make payments of principal or interest on its Bonds, the federal government would not be legally obligated to prevent TVA from defaulting on its obligations. Principal and interest on TVA securities are payable solely from TVA’s net power proceeds. Net power proceeds are the remainder of TVA’s gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capita l expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein.
The market for TVA’s securities might be limited.
All of TVA’s Bonds are listed on the New York Stock Exchange except for TVA’s discount notes, which have maturities of less than one year, the 2009 Series A and B power bonds, and the power bonds issued under TVA’s electronotes® program, which is TVA’s medium-term retail notes program. In addition, some of TVA’s Bonds are listed on foreign stock exchanges.
Although many of TVA’s Bonds are listed on stock exchanges, there can be no assurances that any market will develop or continue to exist for any Bonds. Additionally, no assurances can be made as to the ability of the holders to sell their Bonds or as to the price at which holders will be able to sell their Bonds. Future trading prices of Bonds will depend on many factors, including prevailing interest rates, the then-current ratings assigned to the Bonds, the amount of Bonds outstanding, the time remaining until the maturity of the Bonds, the redemption features of the Bonds, the market for similar securities, and the level, direction, and volatility of interest rates generally, as well as the liquidity of the market for those securities.
If a particular series of Bonds is offered through underwriters, those underwriters may attempt to make a market in the Bonds. Dealers other than underwriters may also make a market in TVA securities. However, the underwriters and dealers are not obligated to make a market in any TVA securities and may terminate any market-making activities at any time without notice.
In addition, legal limitations may affect the ability of banks and others to invest in Bonds. For example, national banks may purchase TVA Bonds for their own accounts in an amount not to exceed 10 percent of unimpaired capital and surplus. Also, TVA Bonds are “obligations of a corporation which is an instrumentality of the United States” within the meaning of section 7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent of assets limitation applicable to U.S. building and loan associations.
Not applicable.
TVA holds personal property in its own name but holds real property as agent for the United States of America. TVA may acquire real property as an agent of the United States by negotiated purchase or by eminent domain.
At September 30, 2010, generating assets operated by TVA consisted of 58 active coal-fired units and one idled coal-fired unit, six nuclear units, 109 conventional hydroelectric units, four pumped storage units, 87 simple-cycle combustion turbine units, seven combined cycle units, nine diesel generator units, one digester gas site, one wind energy site, and 14 solar energy sites. Two additional coal-fired units were idled during October 2010. See Item 1, Business — Current Power Supply – Net Capability for a chart that indicates the location, capability, and in-service dates for each of these properties, which chart is incorporated into this Item 2, Properties. As of September 30, 2010, 24 of the simple-cycle combustion turbine units were leased by private entities and leased back to TVA under long-term leases, and TVA is leasing the three Caledonia combined cycle units under a long-term lease. In addition, as of September 30, 2010, SSSL owned an undivided 90 percent interest in the three Southaven combined cycle units, and TVA has entered into a lease with SSSL under which TVA leases SSSL’s undivided 90 percent interest in the facility and operates the entire facility through April 23, 2013. For additional details, see Note 12. TVA is also in the process of constructing additional generating assets. For a discussion of these assets, see Item 1, Business — Integrated Resource Plan and Future Power Supply.
TVA’s transmission system interconnects with systems of surrounding utilities and consists primarily of the following assets:
| | • | Approximately 15,940 circuit miles of transmission lines (primarily 500 kilovolt and 161 kilovolt lines); |
| | • | 498 transmission substations, power switchyards, and switching stations; and |
| | • | 1,240 customer connection points (customer, generation, and interconnection). |
As of September 30, 2010, certain qualified technological equipment and other software related to TVA’s transmission system was leased by private entities and leased back to TVA under long-term leases.
TVA operates and maintains 49 dams and manages the following natural resource stewardship properties:
| | • | Approximately 11,000 miles of reservoir shoreline; |
| | • | Approximately 293,000 acres of reservoir land; |
| | • | Approximately 650,000 surface acres of water; and |
| | • | Over 100 public recreation facilities. |
As part of its stewardship responsibilities, TVA approval is required to be obtained before any obstruction affecting navigation, flood control, or public lands can be constructed in or along the Tennessee River and its tributaries.
TVA has a variety of buildings throughout its service area in addition to the buildings located at its generation and transmission facilities, including office buildings, customer service centers, power service centers, warehouses, visitor centers, and crew quarters. The most significant of these buildings is the Knoxville Office Complex. TVA also leases buildings, including its Chattanooga Office Complex, which consists of approximately 1.2 million square feet of office space. The initial term of TVA's lease of approximately 1.05 million square feet of the Chattanooga Office Complex expires on January 1, 2011. On February 8, 2008, TVA finalized an agreement to purchase this portion of the Chattanooga Office Complex upon the expiration of the exis ting lease term on January 1, 2011. The lease on the Monteagle Place, the remaining portion of the Chattanooga Office Complex (approximately 131,979 square feet), expires on September 30, 2012. On May 18, 2009, TVA finalized a purchase agreement for the Monteagle Place portion of the Chattanooga Office Complex with closing to occur October 1, 2012, upon the expiration of the existing lease term. TVA also has a significant number of buildings in Muscle Shoals, Alabama, and is currently evaluating strategies for long-term solutions to further reduce its Muscle Shoals portfolio.
Under the TVA Act, TVA has broad authority to dispose of personal property but only limited authority to dispose of real property. TVA’s primary sources of authority to dispose of real property are briefly described below:
| | • | Under section 31 of the TVA Act, TVA has authority to dispose of surplus real property at a public auction. |
| | • | Under section 4(k) of the TVA Act, TVA can dispose of real property for certain specified purposes, including providing replacement lands for certain entities whose lands were flooded or destroyed by dam or reservoir construction and to grant easements and rights-of-way upon which are located transmission or distribution lines. |
| | • | Under section 15d(g) of the TVA Act, TVA can dispose of real property in connection with the construction of generating plants or other facilities under certain circumstances. |
| | • | Under 40 U.S.C. § 1314, TVA has authority to grant easements for rights-of-way and other purposes. |
In addition, the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992, prohibits TVA from mortgaging any part of its power properties and from disposing of all or any substantial portion of these properties unless TVA provides for a continuance of the interest, principal, and sinking fund payments due and to become due on all outstanding Bonds, or for the retirement of such Bonds.
From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters (“Legal Proceedings”) that have arisen in the ordinary course of conducting TVA’s activities, as a result of catastrophic events or otherwise. While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA’s cash flows, results of operations, and financial condition.
For a discussion of Legal Proceedings involving TVA, see Note 20 — Legal Proceedings, which discussion is incorporated into this Item 3 by reference.
ITEM 4. RESERVED
Not applicable.
The following selected financial data for the years 2006 through 2010 should be read in conjunction with the audited financial statements and notes thereto (collectively, the “Financial Statements”) presented in Item 8, Financial Statements and Supplementary Data. Certain reclassifications have been made to the 2006, 2007, 2008, and 2009 financial statement presentation to conform to the 2010 presentation.
