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As those of you who read our Semiannual Report (SAR) know, the Office of Inspector General (OIG) at the Tennessee Valley Authority (TVA) selects a theme for each SAR and this SAR is no different. Our theme for this edition is "Navigating Risk." In many ways, our theme for every SAR could be about risk as this is the heart of our work and what drives our audit plan every year. This is the first edition of our SAR devoted to the topic of risks, but it will not be our last.

TVA's challenges are great with the need for financial flexibility to ensure the TVA mission of delivering low cost power is achieved. The current debt ceiling could limit TVA's financial flexibility and require TVA to seek higher cost financing options or require significant rate increases that could adversely affect the economic development of the Tennessee Valley region.

The objective of this review was to determine if the fire protection systems were adequately maintained and mitigating actions are taken to minimize the impacts of fires at TVA fossil plants. During our review, we identified a number of issues related to fire protection at TVA fossil plants. We found numerous impairments exist with fire protection systems at a number of sites, and most systems are not returned to service in a timely manner. During calendar year 2010, there were 30 impairments at Cumberland, 10 at Gallatin, 6 at John Sevier, 20 at Paradise, and 49 at Shawnee.

The objective of this review was to determine whether TVA was meeting all requirements and planned actions for the removal of equipment containing polychlorinated biphenyls (PCBs). We found there were currently no requirements for the removal of PCB equipment, and previous planned actions for PCB equipment removal were not always completed.

The OIG audited the electric system of BVU Authority (BVU), a distributor of TVA power based in Bristol, Virginia. The objective of the audit was to determine compliance with key provisions of the power contract between TVA and BVU for the period July 2008 through June 2010. For fiscal year 2010, BVU provided power to approximately 16,500 customers resulting in electric sales revenue of approximately $49 million.

We audited $9.58 million of costs billed to Bechtel Power Corporation (Bechtel) and subsequently to TVA by Williams Specialty Services, LLC (WSS) for asbestos abatement and valve refurbishment services at Watts Bar Nuclear Plant Unit 2 (WBN U2) under a subcontract agreement. We found the costs billed to Bechtel were inflated by at least $624,800 because the hourly rates WSS billed for craft and non-manual labor included overstated cost allowances.

The OIG evaluated key aspects of TVA's Section 26a process for effectiveness and efficiency. We determined (1) costs may not be fairly and consistently applied and opportunities exist to improve the cost-recovery process, (2) processes could be improved in the examination and use of customer satisfaction survey results, and (3) fee waivers were not properly documented. We also identified two other issues related to the segregation of duties for receiving and refunding application fees.

As part of our annual audit plan, the OIG (Office of the Inspector General) audited the Oak Ridge, Tennessee, electric system for compliance with the power contract with the Tennessee Valley Authority (TVA) for the period July 2007 through June 2009. Key contract provisions included (1) proper reporting of electric sales, (2) nondiscrimination in providing power, and (3) use of electric revenue for approved purposes. For fiscal year (FY) 2009, Oak Ridge provided power to approximately 16,000 customers that resulted in electric sales revenue of approximately $52 million.

As part of our annual audit plan, we reviewed the inspection and maintenance programs for TVA's transmission lines and structures.

The OIG audited Sevier County Electric System's compliance with the power contract between the TVA and Sevier, a power distributor based in Sevierville, Tennessee, for the period July 2008 through June 2010. For fiscal year 2010, Sevier provided power to approximately 54,000 customers that resulted in revenues of approximately $134 million.Our audit found Sevier generally complied with the contract provisions for (1) proper reporting of electric sales, (2) nondiscrimination in providing power, and (3) use of electric revenue for approved purposes.