ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)
The Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") explains the results of operations and general financial condition of the Tennessee Valley Authority ("TVA"). The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and TVA's Annual Report on Form 10-K for the year ended September 30, 2021 (the "Annual Report").
Executive Overview
TVA's operating revenues were $2.6 billion for the three months ended December 31, 2021, as compared with operating revenues of $2.3 billion for the three months ended December 31, 2020. Operating revenues increased for the three months ended December 31, 2021, as compared to the same period of the prior year, primarily as a result of higher fuel cost recovery revenue. This increase was a result of higher fuel rates driven by higher natural gas prices.
Total operating expenses increased $469 million for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, primarily as a result of an increase in fuel and purchased power expense and an increase in Depreciation and amortization expense. Fuel and purchased power expense increased $260 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This increase was primarily due to higher effective fuel rates due to higher natural gas prices and less availability of low-cost TVA-owned generation resulting in higher volume of purchased power. Depreciation and amortization expense increased $132 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This increase was driven by the implementation of a new depreciation study during the three months ended December 31, 2021, which included a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035.
TVA continues to closely monitor developments associated with the coronavirus disease 2019 ("COVID-19") pandemic, including impacts from variants. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic to date. TVA also continues to provide support to TVA customers and the communities they serve through various customer pandemic initiatives in 2022. See Key Initiatives and Challenges — COVID-19 Pandemic for an expanded discussion of the impact to TVA and related initiatives and regulatory actions.
TVA's reliability, competitive rates, and economic development efforts continue to help attract or expand businesses and industries in the Tennessee Valley, with companies announcing over $5.1 billion in investments and more than 24,500 jobs created or retained in the first quarter of 2022.
Results of Operations
Sales of Electricity
Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 36,988 million and 36,672 million of kilowatt hours ("kWh") for the three months ended December 31, 2021 and 2020, respectively. TVA sells power at wholesale rates to local power company customers ("LPCs") that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems.
The following chart compares TVA's sales of electricity by customer type for the periods indicated:
The following charts show a breakdown of TVA's energy load:
Note
Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar year 2020, and these graphs will continue to be updated on a calendar year basis.
Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit.
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Degree Days
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Variation from Normal
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Variation from Prior Period
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2021
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Normal
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Percent Change
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2020
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Normal
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Percent Change
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Percent Change
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Heating Degree Days
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Three Months Ended December 31
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1,003
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1,289
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(22.2)
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%
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1,201
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|
1,289
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(6.8)
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%
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(16.5)
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%
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Cooling Degree Days
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Three Months Ended December 31
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104
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43
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|
141.9
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%
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|
46
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43
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|
7.0
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%
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126.1
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%
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Sales of electricity increased approximately one percent for the three months ended December 31, 2021, as compared to the same period of the prior year. The increased sales volume was primarily driven by economic growth, partially offset by milder weather in the three months ended December 31, 2021, than the same period of the prior year. TVA is seeing economic growth in the Tennessee Valley region as a result of migration into the Valley which has driven population growth and load growth. For LPCs, this growth was offset by the overall milder weather during the three months ended December 31, 2021, as December 2021 was one of the mildest Decembers on record and resulted in 16 percent less heating degree days than the same period of the prior year. Sales of electricity increased for industries directly served for the three months ended December 31, 2021, as compared to the same period of the prior year, primarily due to economic growth, as these industries directly served are not driven primarily by weather, but mainly from changes in the economy and respective industry sectors.
Financial Results
The following table compares operating results for the three months ended December 31, 2021 and 2020:
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Summary Consolidated Statements of Operations
(in millions)
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Three Months Ended December 31
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2021
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2020
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Change
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Percent Change
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Operating revenues
|
$
|
2,583
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|
$
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2,304
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|
$
|
279
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12.1
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%
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Operating expenses
|
2,258
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|
|
1,789
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|
469
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26.2
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%
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Operating income
|
325
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|
|
515
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(190)
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(36.9)
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%
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Other income (expense), net
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14
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15
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(1)
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(6.7)
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%
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Other net periodic benefit cost
|
65
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|
65
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—
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—
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%
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Interest expense
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263
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|
281
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(18)
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(6.4)
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%
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Net income (loss)
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$
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11
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|
$
|
184
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$
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(173)
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(94.0)
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%
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Operating Revenues. Operating revenues for the three months ended December 31, 2021 and 2020, were $2.6 billion and $2.3 billion, respectively. The following chart compares TVA's operating revenues for the periods indicated:
TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for eight percent of TVA's total operating revenues for both the three months ended December 31, 2021 and the three months ended December 31, 2020. Certain LPCs, including MLGW, are evaluating options for future energy choices. In 2021, four LPCs filed a complaint and petition with the Federal Energy Regulatory Commission ("FERC") asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. Two LPCs currently remain in the complaint and accounted for one percent of TVA's total operating revenues for the three months ended December 31, 2021. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment for updates to this legal proceeding.
TVA's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage and increase as the peak increases. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure.
In 2019, the TVA Board of Directors (the "TVA Board") approved a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of January 31, 2022, 146 LPCs had signed the 20-year Partnership Agreement with TVA.
In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which is effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. The credit effective for 2022 is expected to approximate $220 million. In addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit.
In addition to base revenues, the rate structure includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments.
The changes in revenue components are summarized below:
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Changes in Revenue Components
(in millions)
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Three Months Ended December 31
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2021
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2020
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Change
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Base revenue
|
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Energy revenue
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$
|
1,057
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$
|
1,060
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|
$
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(3)
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Demand revenue
|
786
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|
|
750
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|
|
36
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|
|
|
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|
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Grid access charge
|
148
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|
|
149
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|
|
(1)
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Long-term partnership credits for LPCs
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(43)
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|
(42)
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(1)
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Pandemic credits
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(50)
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|
(49)
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(1)
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Other charges and credits(1)
|
(162)
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|
(141)
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|
(21)
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|
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Total base revenue
|
1,736
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|
|
1,727
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|
9
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|
|
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Fuel cost recovery
|
801
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|
541
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|
|
260
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|
Off-system sales
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1
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|
2
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|
|
(1)
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|
Revenue from sales of electricity
|
2,538
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|
|
2,270
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|
|
268
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|
|
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Other revenue
|
45
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|
|
34
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|
11
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|
|
|
|
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|
Total operating revenues
|
$
|
2,583
|
|
|
$
|
2,304
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|
|
$
|
279
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|
|
|
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|
|
Note
(1) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 16 — Revenue.
Operating revenues increased $279 million for the three months ended December 31, 2021, as compared to the same period of the prior year, primarily due to a $260 million increase in fuel cost recovery revenue. The $260 million increase in fuel cost recovery revenue was driven by a $255 million increase attributable to higher fuel rates and a $5 million increase attributable to higher sales volume during the quarter. The higher fuel rates were primarily due to higher natural gas prices. In addition, there was a $9 million increase in base revenue driven by an increase of $15 million attributable to higher sales volume, partially offset by a decrease of $6 million attributable to lower effective rates. Sales volume increased as a result of economic growth, but was partially offset by milder weather in the three months ended December 31, 2021, than the same period of the prior year, as December 2021 was one of the mildest Decembers on record.
Operating Expenses. Operating expense components as a percentage of total operating expenses for the three months ended December 31, 2021 and 2020, consisted of the following:
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|
|
Operating Expenses
(in millions)
|
|
|
Three Months Ended December 31
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
Percent Change
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
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|
Fuel
|
$
|
466
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|
|
$
|
369
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|
|
$
|
97
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
Purchased power
|
369
|
|
|
206
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|
|
163
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|
|
79.1
|
%
|
|
|
|
|
|
|
|
Operating and maintenance
|
780
|
|
|
715
|
|
|
65
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
Depreciation and amortization
|
510
|
|
|
378
|
|
|
132
|
|
|
34.9
|
%
|
|
|
|
|
|
|
|
Tax equivalents
|
133
|
|
|
121
|
|
|
12
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
Total operating expenses
|
$
|
2,258
|
|
|
$
|
1,789
|
|
|
$
|
469
|
|
|
26.2
|
%
|
|
|
|
|
|
|
Fuel expense increased $97 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This increase was primarily due to higher effective fuel rates of $106 million due to higher natural gas prices, as well as an increase in fuel cost recovery of $15 million resulting from volatility in the natural gas markets. Partially offsetting these increases was a decrease in fuel volume of $24 million due to a decrease in TVA-owned generation.
Purchased power expense increased $163 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This increase was primarily due to an increase in volume of $160 million driven by less availability of TVA-owned generation as a result of natural gas plant outages due to the timing of natural gas maintenance projects and lower hydroelectric generation resulting from lower rainfall and runoff than the same period of the prior year. In addition, there was an increase in the effective rate of purchased power of $3 million as a result of higher market prices.
Operating and maintenance expense increased $65 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This was primarily due to a $29 million increase in contract labor driven mainly by the timing of natural gas maintenance projects and work to support the company's strategic priorities, $20 million of increased payroll and benefit costs primarily due to labor escalation for cost of living increases and additional headcount to support operational needs and work to support the company's strategic priorities. Additionally, inventory write-offs and reserves increased $6 million as a result of the decline in service life estimates of TVA's coal-fired plants, and outage expense increased $5 million driven by an increase in nuclear outage days.
Depreciation and amortization expense increased $132 million for the three months ended December 31, 2021, as compared to the same period of the prior year. Implementation of a new depreciation study during the three months ended December 31, 2021, resulted in approximately $98 million more depreciation expense. The increase in depreciation expense as a result of the new depreciation rates was primarily driven by a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. See Note 1 — Summary of Significant Accounting Policies — Depreciation.
Tax equivalents expense increased $12 million for the three months ended December 31, 2021, as compared to the same period of the prior year. The change is primarily driven by an increase in the tax equivalents collected in the fuel cost recovery.
Generating Sources. The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated:
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Total Power Supply by Generating Source
For the three months ended December 31
(millions of kWh)
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|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
|
16,170
|
|
|
43
|
%
|
|
16,290
|
|
|
44
|
%
|
|
|
|
|
|
|
Natural gas and/or oil-fired
|
6,829
|
|
|
18
|
%
|
|
8,359
|
|
|
22
|
%
|
|
|
|
|
|
|
Coal-fired
|
3,699
|
|
|
10
|
%
|
|
3,288
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
3,852
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|
|
10
|
%
|
|
4,820
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|
|
13
|
%
|
|
|
|
|
|
|
Total TVA-operated generation facilities(1)(2)
|
30,550
|
|
|
81
|
%
|
|
32,757
|
|
|
88
|
%
|
|
|
|
|
|
|
Purchased power (natural gas and/or oil-fired)(3)
|
4,401
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|
|
12
|
%
|
|
2,301
|
|
|
6
|
%
|
|
|
|
|
|
|
Purchased power (other renewables)(4)
|
1,442
|
|
|
4
|
%
|
|
1,354
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased power (hydroelectric)
|
654
|
|
|
2
|
%
|
|
624
|
|
|
1
|
%
|
|
|
|
|
|
|
Purchased power (coal-fired)
|
591
|
|
|
1
|
%
|
|
221
|
|
|
1
|
%
|
|
|
|
|
|
|
Total purchased power(2)
|
7,088
|
|
|
19
|
%
|
|
4,500
|
|
|
12
|
%
|
|
|
|
|
|
|
Total power supply
|
37,638
|
|
|
100
|
%
|
|
37,257
|
|
|
100
|
%
|
|
|
|
|
|
Notes
(1) Generation from TVA-owned renewable resources (non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above.
(2) Raccoon Mountain Pumped-Storage Plant net generation is allocated against each TVA-operated generation facility and purchased power type for both the three months ended December 31, 2021 and 2020. See Item 1, Business — Power Supply and Load Management Resources — Raccoon Mountain Pumped-Storage Plant in the Annual Report for a discussion of Raccoon Mountain Pumped-Storage Plant.
(3) Purchased power (gas) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia CC was 1,176 million kWh and 1,071 million kWh for the three months ended December 31, 2021 and 2020, respectively.
(4) Purchased power (other renewables) includes purchased power from the following renewable sources: solar, wind, biomass, and renewable cogeneration.
In addition to power supply sources included here, TVA offers energy efficiency programs that effectively reduce energy needs. TVA estimates energy needs could be reduced by approximately 2,500 million kWh in 2022 due to TVA's energy efficiency programs.
Interest Expense. Interest expense and interest rates for the three months ended December 31, 2021 and 2020, were as follows:
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|
|
|
|
|
|
|
|
|
|
Interest Expense and Rates
(in millions)
|
|
|
|
Three Months Ended December 31
|
|
|
|
|
|
2021
|
|
2020
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
Interest expense(1)
|
$
|
263
|
|
|
$
|
281
|
|
|
(6.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average blended debt balance(2)
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$
|
20,936
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|
|
$
|
21,287
|
|
|
(1.6)
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%
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Average blended interest rate(3)
|
4.92
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%
|
|
5.17
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%
|
|
(4.8)
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%
|
|
|
|
|
|
|
|
Notes
(1) Includes amortization of debt discounts, issuance, and reacquisition costs, net.
(2) Includes average balances of long-term power bonds, debt of VIE, and discount notes.
(3) Includes interest on long-term power bonds, debt of VIE, and discount notes.
Total interest expense decreased $18 million for the three months ended December 31, 2021, as compared to the same period of the prior year primarily driven by a decrease in lower average balances on long-term debt.
Liquidity and Capital Resources
Sources of Liquidity
TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while seeking to maintain a target range of cash and cash equivalents on hand.
In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), four long-term revolving credit facilities totaling approximately $2.7 billion, and proceeds from other financings. See Note 12 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, or other assets.
The Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee ("TVA Act") authorizes TVA to issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in an amount not to exceed $30.0 billion outstanding at any time. Power bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at December 31, 2021, were $19.7 billion (including current maturities). The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings (see Lease Financings below and Note 9 — Variable Interest Entities), could provide supplementary funding if needed. Currently, TVA expects to have adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decade. See Lease Financings below, Note 9 — Variable Interest Entities, and Note 12 — Debt and Other Obligations for additional information.
TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its balance of Cash and cash equivalents beginning in March 2020. TVA may hold higher balances from time to time in response to potential market volatility or other business conditions. TVA has maintained continued debt market access since the outbreak of the pandemic. TVA’s next significant power bond maturity is $1.0 billion in August 2022.
Debt Securities. TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At December 31, 2021, the average maturity of long-term power bonds was 15.44 years, and the weighted average interest rate was 4.51 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as 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 capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain variable interest entities ("VIEs") outstanding at December 31, 2021. See Lease Financings below, Note 9 — Variable Interest Entities, and Note 12 — Debt and Other Obligations for additional information.
The following table provides additional information regarding TVA's short-term borrowings:
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Short-Term Borrowings
(in millions)
|
|
|
|
At December 31, 2021
|
|
Three Months Ended December 31, 2021
|
|
|
|
At December 31, 2020
|
|
Three Months Ended December 31, 2020
|
|
|
|
Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
$
|
1,066
|
|
|
$
|
1,203
|
|
|
|
|
$
|
112
|
|
|
$
|
146
|
|
|
|
|
Maximum Month-End Gross Amount Outstanding (During Period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
N/A
|
|
$
|
1,526
|
|
|
|
|
N/A
|
|
$
|
115
|
|
|
|
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
0.03
|
%
|
|
0.04
|
%
|
|
|
|
0.07
|
%
|
|
0.06
|
%
|
|
|
Lease Financings. TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 9 — Variable Interest Entities and Note 12 — Debt and Other Obligations for information about TVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain SPEs created for the purpose of facilitating lease financing. TVA may seek to enter into similar arrangements in the future. In 2019, TVA made final rent payments under lease/leaseback transactions involving eight combustion turbine units ("CTs") and terminated these transactions. In 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs. In 2021, TVA made final rent payments under lease/leaseback
transactions involving four additional CTs. Rent payments under the remaining lease/leaseback transactions were made through January 2022.
Summary Cash Flows
A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash totaled $526 million and $529 million at December 31, 2021 and December 31, 2020, respectively. A summary of cash flow components for the three months ended December 31, 2021 and 2020, follows:
Cash provided by (used in):
Operating Activities. TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses.
Net cash flows provided by operating activities decreased $102 million for the three months ended December 31, 2021, as compared to the same period of the prior year. The decrease is primarily due to increased fuel and purchased power payments as a result of higher natural gas prices and lower availability of TVA-owned generation, respectively, which have not yet been collected through fuel cost recovery. Increases in payroll and benefit related costs due to labor escalation for cost of living increases and higher cash used for asset retirement obligation ("ARO") settlements also contributed to the decrease in cash flows from operations.
Investing Activities. The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain
generating and transmission assets, including environmental projects and the purchase of nuclear fuel.
Net cash flows used in investing activities increased $90 million for the three months ended December 31, 2021, as compared to the same period of the prior year driven by the Johnsonville aeroderivative combustion turbine project and nuclear fleet improvement projects. In addition, nuclear fuel expenditures were higher for the three months ended December 31, 2021, as compared to the same period of the prior year. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services. These increases were partially offset by decreased spend related to capacity expansion projects for combustion turbine gas facilities at TVA's Paradise and Colbert Fossil Plant ("Colbert") sites. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Natural Gas-Fired Units.
Financing Activities. TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand.
Net cash provided by financing activities increased $192 million for the three months ended December 31, 2021, as compared to the same period of the prior year, primarily due to higher net issuances of discount notes. Lower net cash flows provided by operating activities and higher net cash used in investing activities in the first quarter of 2022 resulted in the need for net debt issuances to maintain targeted cash balance levels during the first quarter of 2022. Partially offsetting this increase were higher payments on leaseback transactions during the three months ended December 31, 2021.
Impact of COVID-19
To support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA created initiatives such as the Community Care Fund and Pandemic Credits. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. See Key Initiatives and Challenges — COVID-19 Pandemic for an expanded discussion of these initiatives and the impact to TVA.
Contractual Obligations
TVA has certain obligations and commitments to make future payments under contracts. As discussed in Lease Financings above, during the three months ended December 31, 2021, TVA elected to purchase the interests related to eight CTs on the expiration of the related lease terms in 2023 for a total of $155 million. Also, during the three months ended December 31, 2021, TVA entered into a fuel purchase obligation for a total commitment of $204 million from 2022 to 2025, of which $58 million is estimated to be paid during the remainder of 2022. TVA's contractual obligations are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, Note 8 — Leases, Note 11 — Variable Interest Entities, Note 14 — Debt and Other Obligations, and Note 22 — Benefit Plans of the Notes to Consolidated Financial Statements in the Annual Report.
Key Initiatives and Challenges
COVID-19 Pandemic
In 2020, in response to the spread of COVID-19, TVA implemented a company-wide pandemic plan to address specific aspects of the COVID-19 pandemic, and the pandemic plan continually evolves based on medical guidance and federal requirements and guidelines.
The pandemic plan includes telework for those employees and contractors who do not have to be physically present at a TVA facility or office building to provide mission-essential activities or produce safe, reliable power. Based on ongoing monitoring, COVID-19 continues to pose a significant risk in the U.S. and in the Tennessee Valley region, and as a result TVA has extended the timeframe for full workforce reintegration and, for those not fully vaccinated, continues to limit non-essential travel and in-person attendance at non-essential meetings. TVA is currently anticipating a gradual return of teleworkers to corporate sites starting in the second quarter of 2022, subject to close monitoring of the public health situation both in TVA's service territory and nationally. TVA has and will continue to monitor risk and potential impacts throughout the situation, including impacts from variants, and assess whether and how to modify the pandemic plan as and when appropriate.
TVA continues to implement strong physical and cybersecurity measures to ensure that systems remain functional to keep employees, customers, and communities safe and enable TVA to continue achieving its mission to serve the people of the Valley. In addition to measures to protect its workforce, stakeholders, and critical operations, TVA is actively monitoring generation, transmission, and distribution functions. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic to date. The ultimate impact of the COVID-19 pandemic on TVA's financial condition depends on factors beyond TVA's knowledge or control, including the duration and severity, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy.
TVA also continues to assess potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. TVA has experienced an increase in supplier impacts primarily as a result of COVID-19, such as delays and price fluctuations, and availability of supplies, but has been able to manage these impacts through existing contracts and increased lead times and communications with suppliers; therefore, TVA has not experienced significant business disruptions at this time. TVA will continue to monitor the supply base and remain in contact with suppliers to identify potential risks, including impacts on workforce availability as a result of regulatory actions related to COVID-19.
Regulatory Actions. On January 20, 2021, President Biden issued Executive Order ("EO") 13991, directing federal agencies to implement COVID-19 countermeasures consistent with CDC guidance and establishing a Safer Federal Workforce Task Force (“Task Force”) to develop model safety principles to which all federal agencies would subsequently align their pandemic countermeasures. TVA continues to implement these principles and remains in regular contact with the Office of Management and Budget (“OMB”), which chairs the Task Force. On September 9, 2021, President Biden issued two new EOs in response to the COVID-19 pandemic. The first EO required that all federal employees be vaccinated against COVID-19 by November 22, 2021. Only employees entitled to certain accommodations under law were exempt from this requirement. As part of the process to implement the vaccination requirement, TVA and its union partners have negotiated and implemented a standalone disciplinary process for employees who have neither been vaccinated by the deadline nor received an exemption allowed by law. This policy includes a progression of counseling for employees and, for those who do not get vaccinated after counseling, a testing program. On January 21, 2022, the United States District Court for the Southern District of Texas issued an injunction against enforcement of the vaccination mandate. The government has filed a notice of its intent to appeal this decision. TVA is continuing to focus on the safety and health of our employees and will continue to implement applicable recommended guidance as it evolves.
The second EO required that federal agencies include clauses in contracts with federal contractors requiring the contractors to comply with guidance issued by the Task Force concerning contractors. This EO does not apply to TVA, and therefore TVA has not been requiring the clauses. On November 30, 2021, the United States District Court for the Eastern District of Kentucky stayed enforcement of the order in Kentucky, Ohio, and Tennessee. The government has appealed this injunction. On December 7, 2021, the United States District Court of the Southern District of Georgia issued a nationwide
injunction suspending enforcement of this order. Given that TVA has not been requiring implementation of the clauses, the injunctions do not impact TVA but could impact TVA contractors who work for other agencies and were required to comply with the order based on those relationships.
On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard ("ETS") in response to the COVID-19 pandemic. The ETS, among other things, would have mandated employers with at least 100 employees to adopt a vaccination policy that requires employees to either be fully vaccinated or submit to at least weekly testing. On November 5, 2021, the United States Court of Appeals for the Fifth Circuit issued an order staying the ETS pending further action by the court. The Supreme Court has agreed to review this matter. The case was subsequently transferred to the United States Court of Appeals for the Sixth Circuit ("Sixth Circuit"), which lifted the stay on December 17, 2021. On January 13, 2022, the Supreme Court reinstated the stay pending further proceedings. On January 26, 2022, OSHA withdrew the ETS as an enforceable emergency temporary standard, but has retained the ETS as a proposed rule.
Customer Pandemic Initiatives. The COVID-19 pandemic created economic uncertainty for TVA's customers and the communities they serve. To support and strengthen the public power response to the COVID-19 pandemic, TVA has announced several customer pandemic initiatives since 2020. The following initiatives are still in effect in 2022:
Regulatory Flexibility. TVA continues to provide regulatory flexibility for LPCs to halt disconnection of services and respond to the local needs of their customers and communities.
Community Care Fund. TVA continues to partner with LPCs through the Community Care Fund by making available over $9 million in TVA matching funds to support local initiatives that address hardships created by the COVID-19 pandemic. As of December 31, 2021, over $5 million in matching funds had been provided by TVA, with over $1 million provided for the three months ended December 31, 2021.
Pandemic Credits. In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which is effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. The credit effective for 2022 is expected to approximate $220 million. For the three months ended December 31, 2021 and 2020, pandemic credits totaled $50 million and $49 million, respectively. In addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit.
These actions have shown TVA's commitment to support the financial integrity of LPCs along with communities and customers across the Tennessee Valley during these challenging economic conditions caused by the COVID-19 pandemic. The COVID-19 pandemic continues to be an evolving situation that may lead to extended disruption of economic activity and an adverse impact on TVA's results of operations. TVA continues to closely monitor developments and will adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce.
Distributed Energy Resources
Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the distributed energy resources ("DER") market, technologies, and programs evolve.
Fiber Optic Network. In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. As of December 31, 2021, TVA had spent $157 million on installation of the fiber optic lines and expects to spend an additional $143 million.
Electric Vehicles. TVA is partnering with LPCs and others to support the electrification of transportation in the Valley in a multi-year electric vehicle ("EV") initiative. The initiative focuses on reducing or eliminating EV market barriers by setting EV policies, improving charging infrastructure availability, expanding EV availability and offerings, and spreading EV consumer awareness. In November 2020, the TVA Board approved new policies and an optional wholesale EV rate aimed at encouraging the development of charging infrastructure in the Valley. The updated policies enable LPC investment in public charging infrastructure and allow for the conditional resale of electricity, for transportation purposes only, by any charging developer on a kWh basis. The optional wholesale rate was developed with high power EV charging in mind and provides a stable option for those developing charging infrastructure.
TVA is also working with state agencies, LPCs, and third-party charging developers to create a network of public fast charging stations along major travel corridors in its seven-state region, known as the Fast Charge Network program. In 2021, TVA began a partnership with the State of Tennessee to develop funding programs for a statewide EV fast charging network with plans for fast charging stations every 50 miles along Tennessee's interstates and major highways. Also in 2021, TVA and five other major utilities formed the Electric Highway Coalition to develop a network of fast charging stations along all major highway routes within their service territories. Since formation, the Electric Highway Coalition has gained significant interest from additional utilities and other EV collaboratives. In December 2021, the Electric Highway Coalition merged with the Midwest Electric Vehicle Charging Infrastructure Collaboration to create the National Electric Highway Coalition with members committed to coordination on the development of EV charging infrastructure across the central U.S.
Changing Customer Preferences
As more consumers and businesses are demanding cleaner energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business through the pricing of products, transmission of energy, and development of new products and services for its customers in support of changing customer preferences and its economic development efforts. End-use customers are becoming more technologically sophisticated and want greater control over their energy usage. Many companies are focusing on sustainability and requiring more energy efficiency and renewable energy options. In addition, TVA also seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions. As a result, TVA is increasing its renewable energy portfolio by investing in existing assets and securing power purchase agreements from out-of-Valley wind and in-Valley solar generation facilities. New utility-scale solar is increasing, in part driven by customers’ demand. TVA also encourages renewable power and offers renewable solutions through various current programs and offerings.
Renewable Power Solutions. TVA encourages renewable power through various current programs and offerings. These solutions include:
Small-scale Solutions. The Green Connect Program connects residential customers interested in on-site solar installations with qualified solar installers. Qualified solar installers are members of TVA’s Green Connect Quality Contractor Network, which requires installers to have certain qualifications such as certifications and meeting insurance guidelines, among other things, and to install systems to TVA’s program standards.
Utility-scale Solutions. The Green Invest Program matches customer demand with renewable supply through a Green Invest Agreement. The goal of the Green Invest program is to meet the long-term sustainability needs of customers at scale. TVA will procure the needed renewable supply through a diversified approach, which could include a competitive procurement process, strategic partnerships, or construction of renewable facilities to meet these needs. In addition, Generation Flexibility is a solution available to long-term LPC partners and supports the deployment of up to 2,000 megawatts ("MW") of distributed solar to provide clean, local generation. See Ratemaking below.
Other Renewable Solutions. The Green Switch Program allows customers to support solar renewable resources through purchasing renewable solar energy generated in the Tennessee Valley, sold in 200 kWh blocks. The Green Flex Program gives commercial and industrial customers the ability to meet sustainability goals and to make renewable energy claims through Renewable Energy Certificates ("RECs") from wind generation located outside TVA's service area.
Renewable Power Purchase Agreements. In recent years, TVA has issued request for proposals ("RFP") in order to meet customer preferences and requirements for cleaner energy. As a result of those RFPs, TVA entered into certain PPAs with renewable resource providers, which are summarized below:
Notes
(1) The 2017 RFP consists of three active solar PPAs. Of the three projects, one came online in 2021, one is expected to come online in 2022, and one is expected to come online in 2023.
(2) The 2019 RFP consists of six solar PPAs. Of these six projects, five are expected to come online in 2023, and one is expected to come online in 2024.
(3) The 2020 RFP consists of eight solar PPAs. Of these eight projects, six are expected to come online in 2023, one is expected to come online in 2024, and one is expected to come online in 2025.
(4) In addition, the 2019 RFP includes 50 MW of battery storage and the 2020 RFP includes 196 MW of battery storage that are not included in the chart above.
TVA issued an additional RFP during 2021 for up to 200 MW of new renewable energy and anticipates making selections in 2022. TVA will procure the renewable energy and sell the resulting RECs to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other TVA customers. These agreements help to align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. Of the renewable PPAs above, more than 2,000 MW has been matched to customers through TVA’s Green Invest Program to meet their needs for new-to-the-world renewable energy.
Self-Directed Solar. During 2019, the TVA Board approved the opportunity for TVA to explore being directly involved in the development of a utility-scale solar project, contingent on the successful completion of environmental reviews under the National Environmental Policy Act ("NEPA") and other applicable laws. A tentative project structure has been developed which will allow TVA to work with financial partners for solar development, and in 2021, TVA purchased land for this planned 200 MW development. As of December 31, 2021, TVA had spent approximately $24 million on the project and expects to spend an additional $293 million through 2024.
Low-Income Energy Efficiency Programs. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, third-party contributors, and the Tennessee Valley Public Power Association ("TVPPA") to complete home evaluations and make high-impact home energy upgrades for qualifying homeowners. In addition, TVA and LPCs conduct workshops to educate homeowners about low and no-cost energy efficiency upgrades that improve their quality of life. Through the School Uplift Program pilot, TVA is partnering with LPCs as well as state and local governments to assist schools with adopting strategic energy management practices. The engagement with each school includes monthly virtual workshops and fosters performance through competitions for energy efficiency grants and grants for solar pavilions. Finally, through the Community Centered Growth Program, TVA is partnering with LPCs to assist small businesses located within underserved communities with energy evaluations and no-cost energy improvement investments.
Automated Energy Exchange Platform
In October 2021, an automated energy exchange, the Southeast Energy Exchange Market, took effect as a result of a tie vote by FERC commissioners. The exchange was created to facilitate more short-term power exchanges and will be an enhancement to the existing market. TVA’s participation is subject to TVA Board approval and the completion of appropriate environmental reviews. TVA has now completed the appropriate environmental review, and participation will be further subject to TVA Board approval.
Sustainability Reports
Sustainability has been a critical part of TVA’s mission since the TVA Act was signed in 1933 and continues to be a focus in TVA's mission to deliver affordable and reliable energy, steward the environment, and create sustainable economic growth. In 2021, TVA highlighted its sustainability efforts with issuances of its Corporate Sustainability Report, a supplemental Carbon Report, and an Edison Electric Institute Environmental, Social, Governance ("EEI ESG") Sustainability Report, among others. TVA anticipates continuing to highlight its sustainability efforts in 2022.
Strategic Financial Plan
In 2019, the TVA Board approved an annual budget that reflects the first year of a new Strategic Financial Plan. This Strategic Financial Plan, which extends from 2020 through 2030, is flexible in aligning customer preferences and TVA's mission while at the same time establishing a long-term forecast of financial results. Key focus areas of the Strategic Financial Plan include maintaining flat rates, stabilizing debt, establishing alignment between the length of LPC contracts and TVA's long-term commitments, driving efficiencies into the business, and advancing the public power model. As TVA executes the plan, key assumptions and focus areas may change.
Workplace Flexibility
Recognizing the changing work environment, largely fostered by the COVID-19 pandemic, and responding to employee appreciation of flexibility in work location in 2021, TVA established a workplace flexibility initiative called “Reimagining How We Work.” The objective of the initiative is to promote workplace flexibility guided by safety, performance, inclusion, and engagement. In the second quarter of 2022, subject to close monitoring of the public health situation in both TVA's service territory and nationally, TVA plans to begin a hybrid exploration period, to explore how to best work in a hybrid environment in the future, which will allow for more informed long-term decisions around areas such as real estate, technology, and best practices.
Generation Resources
Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under "probable maximum flood" conditions, some of TVA's dams might not have been capable of regulating the higher flood waters. A "probable maximum flood" is an extremely unlikely event; however, TVA has a responsibility to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at four dams.
Since 2009, TVA has performed further hydrology modeling of portions of the TVA watershed using updated modeling tools. The revised hydrology models were reviewed and approved by the Nuclear Regulatory Commission ("NRC") for Watts Bar Nuclear Plant ("Watts Bar") Units 1 and 2. However, TVA identified an error in the modeling that will require the models for Watts Bar Units 1 and 2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 in 2022. In addition, TVA submitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in 2020. As a result of the recently identified necessary changes to dam stability assumptions, TVA will submit a revision to the Sequoyah model in 2022. TVA will subsequently address conditions at Browns Ferry Nuclear Plant ("Browns Ferry") as needed. As of December 31, 2021, TVA
had spent $155 million on the modifications and improvements related to extreme flooding preparedness. TVA is deferring the decision on the need for additional modifications until after the modeling work is complete.
Mitigation of Beyond-Design-Basis Events. NRC rulemaking has been developed to codify the requirements promulgated by orders related to beyond-design-basis events. The NRC Commissioners approved the final rule in 2019. As of December 31, 2021, TVA has implemented the requirements for Sequoyah, Watts Bar, and Browns Ferry. A gap review of the revised rule has been performed, and no new gaps to compliance were identified.
Apparent Violations of NRC Regulations. On March 2, 2020, the NRC issued a letter to TVA identifying four apparent violations of NRC regulations that prohibit licensees from retaliating against employees for their having raised protected nuclear safety concerns. In June 2020, TVA participated in a pre-decisional enforcement conference before the NRC, and in August 2020, the NRC issued violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA submitted a written response to the NRC that denied the violations and opposed the imposition of civil penalties. In October 2020, the NRC issued an order imposing civil penalties in an amount less than $1 million. In November 2020, TVA responded to the NRC, opposing the order and civil penalty and requesting an evidentiary hearing before the NRC's Atomic Safety and Licensing Board ("ASLB"). In August 2021, TVA filed two Motions for Summary Disposition with the ASLB seeking to have the four violations dismissed. In September 2021, the NRC Staff filed a response to TVA's Motions for Summary Disposition. The ASLB held oral argument on TVA's Motions for Summary Disposition on October 14, 2021. On November 3, 2021, the ASLB granted summary disposition on three of the four violations and in part on the fourth violation. On November 8, 2021, the NRC notified TVA that it was rescinding all four violations, and the NRC and TVA jointly filed a motion to terminate the enforcement proceeding. On November 10, 2021, the ASLB granted this motion.
Tritium-Producing Burnable Absorber Rods. TVA and the Department of Energy ("DOE") are engaged in a long-term interagency agreement under which TVA will, at the DOE's request, irradiate tritium-producing burnable absorber rods ("TPBARs") to assist the DOE in producing tritium for the Department of Defense. TVA has provided irradiation services using Watts Bar Unit 1 since 2003 and began tritium production in Watts Bar Unit 2 in 2021. The agreement also allows for irradiation of TPBARs at Sequoyah in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term. TVA does intend to increase its production in both Watts Bar Unit 1 and Watts Bar Unit 2, beginning in November 2024 for Watts Bar Unit 1 and April 2025 for Watts Bar Unit 2, to align with a DOE request for increased tritium. TVA is currently working to submit a license amendment request with the NRC to fulfill this request.
Watts Bar Unit 2. During 2014, the TVA Board approved a project for the replacement of the steam generators at Watts Bar Unit 2. During the refueling outage in the first quarter of 2021, TVA identified degraded steam generator conditions on Watts Bar Unit 2. Watts Bar Unit 2 remained at 90 percent of rated output until assessments were complete and the mid-cycle outage began in September 2021. The mid-cycle outage concluded in October 2021 and focused on an inspection protocol with multiple contingency repair strategies such that safe and reliable operation can be assured until the permanent steam generator replacement occurs. Watts Bar Unit 2 will remain at or below 95 percent of rated thermal output until the permanent replacement occurs, which is projected for March 2022. As of December 31, 2021, TVA had spent $319 million related to this project and expects to spend an additional $237 million through 2022.
Optimum Energy Portfolio. TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. TVA is also making investments in its generating portfolio to modernize its fleet while also allowing TVA to maintain competitive rates and high reliability and work toward carbon emission reductions.
Based on results of assessments presented to the TVA Board in 2019, the retirement of Bull Run by December 2023 was approved. See Note 6 — Plant Closures. During 2019, the TVA Board also approved the Integrated Resource Plan, which recommended an action to evaluate the engineering end-of-life of aging fossil units. In 2021, this evaluation confirmed that the aging coal fleet is among the oldest in the nation and is experiencing deterioration of material condition and performance challenges. The performance challenges are projected to increase due to the coal fleet’s advancing age and the difficulty of adapting the coal fleet’s generation within the changing generation profile. Therefore, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035.
TVA is also considering plans for additional generating facilities to replace retiring or expiring capacity and to support a low cost, reliable, flexible, and increasingly clean power system. As TVA continues to evaluate the impact of retiring its coal-fired fleet by 2035, it is also evaluating adding flexible lower carbon-emitting gas plants as a bridging strategy to maintain reliability, such as the ongoing CT projects at TVA's Paradise and Colbert sites and the aeroderivative CT project at TVA's Johnsonville site. In addition, TVA is committed to investing in the future of nuclear with the evaluation of emerging advanced nuclear technologies, such as small modular reactors, and is increasing its renewable energy portfolio by securing power purchase agreements for out-of-Valley wind and in-Valley solar as well as with projects such as TVA's Self-Directed Solar. See Generation Resources — Natural Gas-Fired Units and Small Modular Reactors, in addition to Changing Customer Preferences.
TVA will prepare environmental reviews pursuant to NEPA prior to retiring or building a plant. Environmental reviews evaluating the potential retirement of the Cumberland Fossil Plant ("Cumberland") and Kingston Fossil Plant ("Kingston") and replacement with other generation are now underway. In addition, on November 10, 2021, the TVA Board authorized the CEO to
evaluate, decide upon, and complete, if necessary, the retirements of Cumberland and Kingston plants and replacement generation projects, subject to complying with all required environmental reviews, periodically updating the TVA Board on plans and actions, and notifying the TVA Board before making final decisions. The TVA Board approved spending up to $3.5 billion for these projects to develop generation and transmission assets and complete required demolition activities.
Decarbonization. TVA seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions and is making investments in its generating portfolio to modernize the fleet while also allowing TVA to maintain competitive rates and high reliability. In addition, TVA's decarbonization initiative commenced in 2022 and is aimed at understanding and applying clean resources to support the reduction of carbon emissions from its power supply. Related to its carbon reduction efforts, TVA has established six guiding principles which are as follows:
•Prioritize the needs of Valley stakeholders as TVA works to achieve its goals by maintaining low rates and high reliability, and attracting new jobs in the Valley.
•Use best-available science and support research and policies that further carbon-free dispatchable technologies.
•Partner with long-term LPCs and other customers and communities to support economy-wide decarbonization efforts and the strategic electrification of other sectors, such as transportation.
•Maintain nuclear generation, hydro generation, and a strong transmission grid as key enabling assets.
•Be transparent with stakeholders in measuring and sharing TVA's progress, and listen and work effectively with all its stakeholders to understand their priorities and needs.
•Adapt to new technologies and changing policies, and be willing and open to changing TVA's plans and projects to achieve deep carbon reduction.
See also Environmental Matters — Climate Change for a discussion on the impact of executive actions and climate related regulations on TVA.
Natural Gas-Fired Units. During 2019, the TVA Board approved an expansion of approximately 1,500 MW of peaking gas replacement capacity at two combustion turbine gas facilities to coincide with the retirement of Allen CTs 1-20 and Johnsonville CTs 1-16, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began at TVA’s Paradise and Colbert sites to further scope out the projects and supply information needed for the NEPA review. In 2021, environmental reviews under NEPA and other applicable laws were complete, and TVA received the air permits for the Paradise and Colbert facilities. Each project is expected to increase combustion turbine generation capacity by 750 MW at a cost not to exceed approximately $503 million per project. As of December 31, 2021, TVA had spent approximately $364 million on these expansions, and TVA expects to spend an additional $642 million. Both projects are anticipated to enter commercial operations by the end of CY 2023.
A 500 MW aeroderivative CT project at TVA’s Johnsonville site has been approved for $599 million, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began to further scope out the project and supply information needed for the NEPA review. As of December 31, 2021, TVA had spent approximately $148 million on the design and engineering work and for long lead time equipment that could be used at any site. TVA expects to spend an additional $451 million on these expansions and expects the project to enter commercial operations by the end of CY 2024.
Coal Combustion Residuals Facilities. TVA has committed to a programmatic approach for the elimination of wet storage of coal combustion residuals ("CCR") within the TVA service area. Under this program ("CCR Program"), TVA performed stability remediation, completed the conversion of all operational coal-fired plants to dry CCR storage, and is now closing all remaining wet storage facilities.
Dry generation and dewatering projects. TVA has accomplished the conversion from wet to dry handling of CCR materials at all operating coal plants with the completion of dry generation and/or dewatering projects at Bull Run, Cumberland, Gallatin Fossil Plant ("Gallatin"), Kingston, and Shawnee Fossil Plant ("Shawnee").
Landfills. TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at some TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Lined and permitted landfills are operational at Bull Run, Gallatin, Kingston, and Shawnee; construction of a new lined and permitted landfill at Gallatin is expected to start in 2022; and TVA continues to work through the permitting process for a new landfill at Cumberland and expects construction to begin in 2023. Construction of additional lined and dry storage facilities may occur to support future business requirements.
CCR facilities closures. TVA is working to close CCR facilities in accordance with federal and state requirements. Closure project schedules and costs are driven by the selected closure methodology (such as closure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure methodology is closure-in-place, with exceptions at certain facilities. TVA issued an environmental impact statement ("EIS") in June 2016 that addresses the closure of CCR impoundments at TVA's coal-fired plants. TVA issued its associated Record of Decision in July 2016. Although the EIS was designed to be programmatic in order to address the mode of impoundment closures, it specifically addressed closure methods at 10 impoundments. TVA subsequently decided to close those impoundments. The method of final closure for each of these facilities will depend on various factors, including approval by appropriate state regulators and applicable closure requirements of state and federal regulations. Additional site-specific NEPA studies will be conducted as other facilities are designated for closure. See Note 11 — Asset Retirement Obligations.
Groundwater monitoring. Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") required implementation of a groundwater monitoring program, additional engineering, and ongoing analysis. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. These costs cannot reasonably be predicted until a final remedy is selected, if necessary.
The final Part A revision to the CCR Rule became effective September 28, 2020. Among other things, the final Part A rule requires unlined CCR surface impoundments to stop receiving CCR and non-CCR waste streams and to initiate closure or retrofit by no later than April 11, 2021. TVA ceased sending CCR and non-CCR waste streams to, and initiated closure of, unlined CCR surface impoundments by the specified deadline.
In compliance with the CCR Rule, TVA published the results of 2020 groundwater testing at its CCR facilities during the second quarter of 2021. The results included values above groundwater protection standards for some constituents at certain CCR units. TVA previously identified several CCR units with constituents at statistically significant levels above site-specific groundwater protection standards. TVA has completed an assessment of corrective measures (“ACM”), which analyzes the effectiveness of potential corrective actions, and has published ACM reports to its CCR Rule Compliance Data and Information website. Based on the results of the ACM, TVA is required to select a remedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the status of remedy selection until the final remedy is selected.
As of December 31, 2021, TVA had spent approximately $2.4 billion on its CCR Program. Through 2026, TVA expects to spend an additional $720 million on the CCR Program. Estimates for these amounts and spend after 2026 may change depending on the final closure method selected for each facility. While the conversion portion of the CCR Program is completed, TVA will continue to undertake CCR closure and storage projects, including building new landfill cells under existing permits and closing existing cells once they reach capacity.
TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the U.S. Court of Appeals for the Sixth Circuit, and the other case was resolved by the entry of a consent order in Davidson County Chancery Court that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing ash facility by removal, either to an onsite landfill or to an offsite facility. TVA may also consider options for beneficial reuse of the CCR. TVA has submitted the removal plan to the Tennessee Department of Environment and Conservation ("TDEC") and other applicable parties pursuant to the consent order. See Note 11 — Asset Retirement Obligations.
In October 2019, TDEC released amendments to its regulations which govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years.
Allen Groundwater Investigation. The CCR Rule required TVA to implement a comprehensive groundwater monitoring program at units subject to the rule. As a result of this groundwater monitoring program, TVA reported to TDEC in 2017 elevated levels of arsenic, lead, and fluoride in groundwater samples collected from two shallow-aquifer groundwater monitoring wells around the Allen East Ash Disposal Area. TVA, under the oversight of TDEC, conducted a remedial investigation into the nature and extent of the contamination. In 2018, TVA submitted a draft Remedial Investigation Report to TDEC which was revised after discussions with TDEC and additional investigation. TVA submitted the Final Updated Remedial Investigation Report to TDEC in 2019.
The remedial investigation confirmed that the high arsenic, fluoride, and lead concentrations are limited to the shallow alluvial aquifer in the north and south areas of the Allen East Ash Disposal Area. These areas are not adversely impacting the Memphis aquifer, which is the source of the public drinking water supply. All samples taken from the Memphis aquifer through TVA production wells were within the Environmental Protection Agency ("EPA") drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant ("Allen CC") by the United States Geological Survey and the University of Memphis, TVA is committed to not operating these production wells until additional data supports safe use. TVA constructed water tanks on site and is purchasing cooling water from MLGW. Purchasing cooling water
in combination with the use of water tanks, rather than wells, could impose some operational restrictions, such as limitations on capacity, on the Allen CC due to lower availability of cooling water.
TVA is taking steps to close both of the CCR storage facilities at the Allen Fossil Plant and initiate remediation of the groundwater at the East Ash Disposal Area. TVA evaluated closure options for both the East Ash Disposal Area and the nearby West Ash Disposal Area through an EIS pursuant to NEPA. In March 2019, TVA released its public scoping report, which eliminated closure-in-place as an alternative. TVA published the final EIS on March 13, 2020, and its Record of Decision on April 14, 2020, which documents the final decision to remove CCR from the above identified areas and transport the CCR to an existing permitted offsite landfill. TVA conducted two virtual public outreach meetings in September 2021 to discuss the project and selected landfill. As part of this closure, TVA will continue to dewater the East Ash Disposal Area and treat the water before it is discharged to the NPDES outfall.
In parallel with the evaluation of closure options, TVA has also initiated an Interim Response Action Plan which includes a groundwater extraction system and treatment system. A feasibility study to evaluate remedial actions for the site was submitted to TDEC on September 4, 2020. A virtual public meeting to present the Interim Response Action as the Proposed Plan for the site was held on November 17, 2020. The public was invited to review the remediation documents and encouraged to comment on the Proposed Plan during the public comment period. TVA submitted the public comments along with responses to TDEC for consideration. After considering public comments, TDEC signed the Record of Decision on August 16, 2021.
TVA prepared a Remedial Action Plan ("RAP") to outline remediation actions at the site and submitted this plan to TDEC for review and approval. After review, consideration, and associated plan revisions, TDEC accepted the RAP and provided written approval to begin relocation of CCR materials to an offsite, lined landfill on November 19, 2021. Removal of CCR from the site began November 29, 2021. Monthly progress meetings with TDEC began in December 2021 and will continue as the site is remediated.
TVA's Remedial Investigation/Interim Response Action Groundwater Monitoring Plan is reviewed and modified annually. The 2021 Remedial Investigation/Interim Response Action Groundwater Monitoring Plan was submitted to TDEC on April 1, 2021. TVA continues to sample the monitoring wells at the site as described by the plan quarterly. TVA prepares a memorandum after each quarterly event and prepares an annual report to evaluate the sampling results. The last groundwater samples for CY 2021 were collected in December 2021; the annual report will be prepared when the results are available and submitted to TDEC.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. On August 24, 2021, the U.S. Court of Appeals for the Sixth Circuit accepted Jacobs's petition for interim appeal on issues relating to the availability of derivative governmental immunity as a defense to the plaintiffs' claims. On September 29, 2021, the Eastern District certified four questions to the Tennessee Supreme Court regarding the applicability of the Tennessee Silicosis Claims Priority Act to the plaintiffs' claims. The Eastern District's order also stayed all proceedings pending the Tennessee Supreme Court's decision. If the litigation proceeds to the second phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. No trial date has been set for the second phase.
Other contractor employees and family members have filed lawsuits against Jacobs that are pending in the Eastern District. These pending lawsuits are stayed and raise similar claims to those being litigated in the case referenced above.
While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition. See Note 20 — Contingencies and Legal Proceedings — Contingencies.
Coal Supply. TVA experienced challenges in 2021 related to coal supply, as a result of supply limitation and transportation challenges. Coal supply and transportation continue to be constrained; however, TVA is utilizing its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies. In October 2021, one of TVA's fuel storage locations and coal handling service providers experienced an event that damaged a number of systems and resulted
in the inability to unload trains for a period of time. This disruption is projected to continue at least into February. To mitigate the issue, TVA implemented terminal service options at other locations which have met and are expected to continue to meet TVA's interim coal handling needs. Plant operations still could be affected by the limited offsite coal blending options, limited available inventory capacity, and longer locational lead times associated with the alternative terminals. At this time, however, TVA has been able to manage such impacts, and TVA's coal generation fleet has continued to meet operational needs. TVA will continue to monitor the situation and respond to potential risks as the situation resolves.
River Management. The Tennessee Valley experienced near normal rainfall and runoff for the first quarter of 2022 helping TVA meet its river system commitments, including managing minimum river flows and minimum depths for navigation, generating low-cost hydroelectric power, maintaining flows that support habitat for fish and other aquatic species, maintaining water supply, and providing recreational opportunities for the Tennessee Valley. In addition, having cool water available helps TVA to meet thermal compliance and support normal operation of TVA's nuclear and fossil-fueled plants, while oxygenating water helps fish species remain healthy. Rainfall and runoff in the Tennessee Valley during the first quarter of 2022 were 95 percent and 105 percent of normal, respectively.
Aquatic Vegetation. In 2020, the unprecedented growth and breakaway of aquatic vegetation in Wheeler Reservoir challenged the Browns Ferry intake structures and impacted the source of cooling water for the plant. Two units were removed from operation and power was reduced on the third unit to accommodate the decreased capability of the cooling systems. Nuclear safety was not challenged during the event. Breakaway of aquatic vegetation will continue to be a concern until a permanent solution is finalized. However, mitigation solutions have been identified to eliminate marine biofouling of the plant intake system, and permanent design solutions are expected to be implemented by the end of CY 2025.
Small Modular Reactors. In December 2019, TVA became the first utility in the nation to successfully obtain approval for an early site permit from the NRC to potentially construct and operate small modular reactors ("SMRs") at TVA’s Clinch River Nuclear Site. The permit is valid through 2039 and therefore provides TVA a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors. In 2021, TVA initiated a Programmatic Environmental Impact Statement that will evaluate a variety of alternatives for a proposed advanced nuclear technology park at the Clinch River Nuclear Site and will provide additional flexibility for future decision making. The decision to potentially build SMRs is an ongoing discussion as part of the asset strategy for TVA’s future generation portfolio.
TVA is committed to investing in the future of nuclear and evaluating the economic feasibility of advanced nuclear reactors. TVA is also partnering with like-minded organizations and has entered into memorandums of understanding with Oak Ridge National Laboratory and the University of Tennessee that allow for mutual collaboration to explore advanced reactor designs as a next-generation nuclear technology while leveraging the expertise of federally funded research and development centers and academic institutions. Further, in 2021, TVA entered a cooperative development agreement with Kairos Power to provide defined engineering, operations, and licensing services in support of a low-power demonstration reactor Kairos Power plans to deploy at the East Tennessee Technology Park in Oak Ridge, TN.
Any future decision to construct any reactor, advanced or otherwise, would require approval by the TVA Board and the NRC. As of December 31, 2021, TVA had spent $94 million on work regarding SMRs, including work to complete the early site permit application for the Clinch River Nuclear Site, of which the DOE had reimbursed TVA $29 million. Additional expenditures will be determined based on future project development.
System Operations Center. A new system operations center has been approved for $289 million. The new secured facility is being built to accommodate a new energy management system and adapt to new regulatory requirements, and will have improved physical security from the previous center. The facility is expected to be constructed by the third quarter of 2023 and fully operational in 2025. As of December 31, 2021, TVA had spent approximately $108 million on the project and expects to spend an additional $181 million.
Energy Management System. A new energy management system has been approved for $90 million. As the current energy management system is nearing the end of its life cycle, this project will replace the existing analog system with a digital system. The new digital system will have higher capacity and speed, for communications with the TVA grid and for inputs from monitoring equipment, which will also network the new control center with existing locations and enable better remote visibility and control. The system is expected to be complete in 2026. As of December 31, 2021, TVA had spent approximately $39 million on the project and expects to spend an additional $51 million.
Dam Safety and Remediation Initiatives
Assurance Initiatives. TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety, with the objective of reducing the risk of a dam safety event. The program analyzes, evaluates, and manages risks through a systematic and thorough process that facilitates decision making for the safety of a structure, identifying necessary actions to reduce risk, including remediation projects, and prioritization of actions for TVA's river dams. Prioritization is driven by reducing risk to the public and asset preservation. TVA also continues to provide routine care of the dams as part of the dam safety program through inspections, monitoring, and maintenance, among other activities.
Boone Dam Remediation. In 2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam's earthen embankment. TVA has completed grouting, construction of an upstream and downstream buttress, installation of the concrete cut-off wall, and raising of the reservoir for fluctuation testing of the repair. TVA is currently constructing a floodwall to return the embankment to its original height. Construction of the floodwall as well as site restoration activities are planned for completion in 2022.
As of December 31, 2021, TVA had spent $306 million related to this project and expects to spend an additional $31 million through 2023. TVA expects the reservoir to return to normal operations in 2022 and is continuing to work with the community to help mitigate local impacts of the extended drawdown.
Pickwick South Embankment Remediation. Reassessments of Pickwick Landing Dam ("Pickwick") found low safety factors for post-earthquake stability indicating that the dam is at significant risk for slope stability failure following a seismic event in portions of the south embankment. Slope stability failure could lead to a breach of the south embankment and loss of the reservoir, resulting in loss of life and damage to property downstream, disruption to navigation, and loss of generation and recreation.
TVA is currently working on a project with the local water utility to relocate an affected water intake system, which will allow for completion of the remaining upstream berm work. This work is estimated to be complete in 2022. As of December 31, 2021, TVA had spent $118 million related to this project and expects to spend an additional $10 million through 2022.
Real Property Portfolio
TVA continues to study its real property portfolio as part of the Strategic Real Estate Plan, which is aimed at reducing cost, right-sizing the portfolio, and aligning real estate holdings with TVA's strategic direction. In addition, as TVA continues to implement telework for those who do not have to be physically present during the COVID-19 pandemic, it is also assessing and reviewing the pandemic's long-term impacts to real estate.
Regional Consolidations — Knoxville Region. Consolidation of the centralized field offices in Norris, Tennessee, is expected to be completed in early CY 2022. Additional consolidations from the Greenway Area Office were performed along with the public auction sale of the property in December 2021.
Supply Chain
Buy American Executive Order. On January 25, 2021, President Biden issued EO 14005, "Ensuring the Future Is Made in All of America by All of America’s Workers." EO 14005 imposes new reporting and procedural requirements, as well as additional executive oversight, for federal agency purchases of foreign goods and services. OMB issued guidance in connection with EO 14005 in June 2021, and in July 2021 TVA submitted its report in response. TVA will continue to comply with new reporting requirements as applicable.
Inflation. TVA continues to see an increase in supplier impacts as a result of COVID-19, including price fluctuations. TVA has actively managed spend to mitigate inflationary pressures; however, broader inflationary pressures are expected to persist in 2022. TVA will continue to monitor these pressures and spend to lower TVA’s risk.
Ratemaking
TVA, LPCs, and directly served industries have worked collaboratively in recent years to develop changes to rates that focus on TVA's long-term pricing efforts and the changing needs of customers in the Tennessee Valley. These changes have improved pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable.
TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. In 2019, the TVA Board approved a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. In 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate or purchase up to approximately five percent of average total hourly energy sales over 2015 - 2019 in order to meet their individual customers' needs. As of January 31, 2022, 146 LPCs had signed the 20-year Partnership Agreement with TVA, and 76 LPCs had signed a Flexibility Agreement.
Board Quorum
The terms of John L. Ryder and Kenneth E. Allen as members of the TVA Board ended January 3, 2022, with the adjournment of the most recent session of Congress. There are currently five TVA Board members, and the terms of two additional TVA Board members – Jeff W. Smith and A.D. Frazier – expire on May 18, 2022, although they are permitted under the TVA Act to remain in office until the earlier of the end of the current session of Congress or the date a successor takes office. Under the TVA Act, a quorum of the TVA Board is five members. The TVA Board is responsible for, among other things, establishing the rates TVA charges for power as well as TVA's long-term objectives, policies, and plans. Accordingly, loss of a quorum for an extended period of time would impair TVA's ability to change rates and to modify these objectives, policies, and plans. See Item 1A, Risk Factors – Loss of a quorum of the TVA Board could limit TVA’s ability to adapt to meet changing business conditions in the Annual Report.
Safeguarding Assets
Physical Security — Non-Nuclear Asset Protection. TVA utilizes a variety of security technologies, security awareness activities, and security personnel to prevent sabotage, vandalism, and thefts. Any of these activities could negatively impact the ability of TVA to generate, transmit, and deliver power to its customers. TVA's Police and Emergency Management personnel are active participants with numerous professional and peer physical security organizations in both the electric industry and law enforcement communities.
Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA continues to work with the North American Electric Reliability Corporation ("NERC"), the SERC Reliability Corporation, the North American Transmission Forum, and other utilities to implement industry approved recommendations and standards.
Nuclear Security. Nuclear security is carried out in accordance with federal regulations as set forth by the NRC. These regulations are designed for the protection of TVA's nuclear power plants, the public, and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has security forces to guard against such threats.
Cybersecurity. TVA operates in a highly regulated environment with respect to cybersecurity. TVA's cybersecurity program aligns or complies with the Federal Information Security Management Act, the NERC Critical Infrastructure Protection requirements, and the NRC requirements for cybersecurity, as well as industry best practices. As part of the U.S. government, TVA coordinates with and works closely with the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") and the U.S. Computer Emergency Readiness Team ("US-CERT"). CISA serves as the agency assisting other federal entities in defending against threats and securing critical infrastructure. US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats.
The risk of cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify across all industries, including the energy sector. Over the last few years, TVA has observed a significant increase in malicious activity including phishing campaigns, malicious websites, distributed denial of service attacks, and activity specific to the COVID-19 pandemic, among others. These types of malicious activity have also been observed by TVA's external vendors, stakeholders, and partners. This activity has caused the need for heightened awareness and preparedness. In addition, TVA has a robust vulnerability and patch management program in place. When vulnerabilities are identified, the program is utilized to identify and prioritize remediation and mitigation activities to reduce the risk to TVA.
On May 12, 2021, President Biden signed EO 14028, "Improving the Nation's Cybersecurity." This EO is intended to improve the nation's cybersecurity posture and protect federal government networks by improving information-sharing between the U.S. government and the private sector on cyber issues and strengthening the United States' ability to respond to incidents when they occur. This EO is focused on specific goals and requirements including actions for zero trust architectures; cloud services; FedRAMP programs; supply chain and contracts; secure software development; endpoint detection and response, standardized vulnerability, and incident response operational plans; threat and vulnerability analysis; assessment and threat-hunting; event logging, monitoring, and retention; and information sharing. TVA continues to evaluate and respond to the EO, associated OMB memorandums, and other emerging requirements in alignment with the order. TVA has submitted all reports as required, established response teams and an oversight structure, and initiated projects as necessary to address the required actions.
In December 2021, TVA was notified of a potential cyber vulnerability, known as Log4j, that had the ability to impact many applications and services. TVA immediately responded and through its vulnerability and patch management program, implemented remediations and mitigations to address potential impact. TVA is continuing to work with vendors to ensure all services and applications are secure. At this time, this event has not impacted TVA’s ability to operate as planned.
TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. While TVA and its third-party vendors and service providers have been, and will likely continue to be, subjected to such attacks
and attempts to disrupt operations, to date the attacks have not had a significant or material impact on business or operations and have not impacted TVA's ability to operate as planned. See Item 1A, Risk Factors — Cybersecurity Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations in the Annual Report.
Transmission Assets. In addition to physical and cybersecurity attacks, TVA's transmission assets are vulnerable to various types of electrically charged energy disruptions such as those from geomagnetic disturbances ("GMDs") and electromagnetic pulses ("EMPs"). TVA meets all existing NERC Standards for GMD, and has evaluated the effects of solar storms ranging from NERC's reference case to possible extreme levels. TVA continues as an active participant with NERC in this field. The most serious threats from EMP are those caused by high-altitude nuclear explosions. Like others in the industry, TVA is coordinating with federal and state authorities, NERC, Electric Power Research Institute, and other grid owners and operators to address this concern.
Bulk-Power System Assets. On May 1, 2020, the Trump Administration issued EO 13920, "Securing the United States Bulk-Power System." Among other things, the EO prohibits the acquisition or installation of any bulk-power system electric equipment where the transaction (1) involves any property in which any foreign country or a national thereof has any interest and (2) poses an undue risk to the bulk-power system in, or national security of, the U.S. On December 17, 2020, the DOE issued a Prohibition Order Securing Critical Defense Facilities, which was suspended and then revoked. EO 13920 has expired and is no longer in effect. EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis," directs DOE and OMB to consider whether to recommend the issuance of a replacement EO to EO 13920. The DOE issued a Request for Information on April 22, 2021, to help inform any recommendation that it may make for a replacement EO. At this time, it is uncertain to what extent a future EO that may potentially address risks associated with the bulk-power system may impact TVA's operations.
Environmental Matters
TVA's activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other matters. Emissions from all TVA-owned and operated units (including small CTs of less than 25 MW) have been reduced from historic peaks. Emissions of nitrogen oxide ("NOx") have been reduced by 97 percent below peak 1995 levels and emissions of sulfur dioxide ("SO2") have been reduced by 99 percent below 1977 levels through CY 2020. For CY 2020, TVA's emissions of carbon dioxide ("CO2") from its owned and operated units, including purchased power and REC retirement adjustments which reduce the CO2 emissions, were 43 million tons, resulting in a TVA system average, as delivered, CO2 emission rate of 562 lbs/MWh. This represents a 63 percent reduction in mass carbon emissions from 2005 levels. To remain consistent and to align with the EPA's reporting requirements, TVA intends to continue reporting CO2 emissions on a calendar year basis.
Additional quantitative emissions data is as follows:
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Emissions and Intensity Rates (1)
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2020
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2019
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Nitrogen Oxide (NOx)(2)
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Total NOx Emissions (MT)
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12,577
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19,430
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Total NOx Emissions Intensity (MT/Net MWh)
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0.000094
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0.000140
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Sulfur Dioxide (SO2)(2)
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Total SO2 Emissions (MT)
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17,082
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26,972
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Total SO2 Emissions Intensity (MT/Net MWh)
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0.000127
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0.000194
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Mercury (Hg)
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Total Hg Emissions (kg)
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17.5
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50.1
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Total Hg Emissions Intensity (kg/Net MWh)
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0.0000001
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0.0000004
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Notes
(1) Intensity rates are calculated based on generation from TVA's most recent fiscal year for years indicated and emissions data from the most recent calendar years.
(2) Emissions data is consistent with EEI ESG Sustainability Report standards, which are based on metric tons ("MTs") whereas overall CO2 emission rates and baseline reductions from historical levels are based on short tons.
Clean Air Act
The Clean Air Act ("CAA") establishes a comprehensive program to protect and improve the nation's air quality and control sources of air pollution. The major CAA programs that affect TVA's power generation activities are described below.
National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM"), SO2, nitrogen dioxide, carbon
monoxide, and lead. Over the years, the EPA has made the NAAQS more stringent. Each state must develop a plan to be approved by the EPA for achieving and maintaining NAAQS within its borders. These plans impose limits on emissions from pollution sources, including TVA fossil fuel-fired plants. Areas meeting a NAAQS are designated as attainment areas. Areas not meeting a NAAQS are designated as non-attainment areas, and more stringent requirements apply in those areas, including stricter controls on industrial facilities and more complicated permitting processes. TVA fossil fuel-fired plants can be impacted by these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS.
Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in 2011 requiring several states in the eastern U.S. to improve air quality by reducing power plant emissions that contribute to pollution in other states. In 2016, the EPA issued an update to CSAPR to address cross-state air pollution (the "CSAPR Update Rule"). The EPA subsequently issued an additional rule to resolve any remaining cross-state air pollutant issues ("CSAPR Close-Out Rule"). The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") remanded a portion of the CSAPR Update Rule back to the EPA to address its failure to require upwind states to eliminate substantial contributions to downwind non-attainment areas by the statutory deadline. The D.C. Circuit also vacated the CSAPR Close-Out Rule. On March 15, 2021, the EPA Administrator signed the final revisions to the CSAPR Update Rule. The revisions address the defects identified by the D.C. Circuit and took effect on June 29, 2021. In this final action, the EPA reduced ozone-season NOx allowances for a group of 12 states, including Kentucky, and required sources in those states to surrender most of their allowance inventory. TVA’s Shawnee Fossil Plant ("Shawnee") facility is affected by these revisions. TVA is monitoring forecasted needs and has purchased allowances with plans to continue doing so as needed to comply with the rule in 2022. A longer-term compliance strategy for the facility is being developed that could include a combination of NOx control upgrades, operational changes, and allowance purchases.
Mercury and Air Toxics Standards for Electric Utility Units. In 2020, the EPA issued a final rule which revokes the agency's earlier finding that regulation of hazardous air pollutants ("HAP") emitted from steam electric utilities is appropriate and necessary. The rule does not remove electric generating units from the source categories listed under Section 112 of the CAA nor does it rescind the Mercury and Air Toxics Standards ("MATS") requirements. Additionally, the EPA determined that further restrictions on HAP emissions are not warranted based on a residual risk and technology review ("RTR") for this source category. TVA does not anticipate that the final rule will change TVA's MATS compliance requirements or strategy. Certain states and environmental groups filed petitions in the D.C. Circuit challenging the "appropriate and necessary" finding and the RTR finding. On February 16, 2021, the EPA filed a motion requesting the D.C. Circuit to hold the cases in abeyance pending the agency's review of the final rule under EO 13990, which, among other things, requires the EPA to reconsider the final rule by August 2021. The EPA did not meet the August 2021 deadline, but is expected to issue a proposed rule that provides the results of its review of the 2020 final rule. On December 3, 2021, the EPA filed a motion requesting the D.C. Circuit to continue holding the cases in abeyance. TVA will evaluate the EPA's proposal when it is issued.
Environmental Agreements. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings — Environmental Agreements for a discussion of two substantively similar agreements into which TVA entered in April 2011: one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"), which discussion is incorporated herein by reference.
Acid Rain Program. The Acid Rain Program is intended to help reduce emissions of SO2 and NOx, which are the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO2 emissions from power plants. TVA continues to reduce SO2 and NOx emissions from its coal-fired plants, and the SO2 allowances allocated to TVA under the Acid Rain Program are sufficient to cover the operation of its coal-fired plants. In the TVA service area, the limitations imposed on SO2 and NOx emissions by the CSAPR program are more stringent than the Acid Rain Program. Therefore, TVA does not anticipate that the Acid Rain Program will impose any additional material requirements on TVA.
Regional Haze Program. The EPA issued the Clean Air Visibility Rule, which required certain older sources to install best available retrofit technology. No additional controls or lower operating limits are required for any TVA units to meet best available retrofit technology requirements. In 2017, the EPA published the final rule that changed some of the requirements for Regional Haze State Implementation Plans ("SIPs"). Specific impacts cannot be determined until future Regional Haze SIPs are developed for the next decennial review under the visibility haze provisions of the CAA. States were required to submit their Regional Haze SIPs to the EPA by July 31, 2021. In response to requests from state air pollution control agencies in Tennessee and Kentucky, TVA submitted regional haze analyses for Cumberland and Shawnee. The reports evaluate SO2 emission reduction options for these facilities and will be used by these state agencies in preparing their Regional Haze SIPs.
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 have addressed this issue. The evaluation of utilities' compliance with opacity requirements is coming under increased scrutiny, especially during periods of startup, shutdown, and malfunction. Historically, SIPs developed under the CAA typically excluded periods of startup, shutdowns, and malfunctions, but in June 2015, the EPA finalized a rule to eliminate such exclusions ("2015 Rule"). The 2015 Rule required states to modify their implementation plans by November 2016. Kentucky, Tennessee, and Mississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the 2015 Rule before the D.C. Circuit. In April
2017, the D.C. Circuit, at the request of the EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the 2015 Rule. On October 9, 2020, the EPA issued a guidance memorandum ("2020 Memorandum") that superseded and replaced policy statements outlined in the 2015 Rule. On September 30, 2021, the EPA withdrew the 2020 Memorandum, reinstating the agency's prior policy as set out in the 2015 Rule. The EPA's evaluation of state SIPs will be undertaken in light of the considerations outlined in the September 30, 2021 memorandum. TVA cannot predict the outcome of future SIP evaluations.
New York Petition to Address Impacts from Upwind High Emitting Sources. In 2018, the State of New York filed a petition with the EPA under Section 126(b) of the CAA to address ozone impacts on New York from the NOx emissions from sources emitting at least 400 tons of NOx in CY 2017 from nine states including Kentucky. The New York petition requests that the EPA require daily NOx limits for utility units with selective catalytic reduction systems ("SCRs") such as Shawnee Units 1 and 4 and emission reductions from utility units without SCRs such as Shawnee Units 2, 3, and 5-9. Kentucky utility unit NOx emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional requirements to reduce Kentucky NOx emissions are necessary. In 2019, the EPA finalized its denial of New York's petition because the state did not demonstrate, and the EPA could not independently establish, that sources in the states listed in the petition contribute to exceedances of the 2008 and 2015 ozone NAAQS in New York. The State of New York filed a petition in the D.C. Circuit for judicial review of the EPA's denial of the petition. In July 2020, the D.C. Circuit vacated the EPA's denial of the petition and remanded the petition to the EPA for reconsideration. In its recently published Unified Regulatory Agenda, the EPA indicated that it will publish a proposed rule in July 2022 that provides a revised response to New York's Section 126(b) petition. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition.
Affordable Clean Energy Rule. In 2019, the EPA finalized the Affordable Clean Energy ("ACE") rule and repealed the EPA's previous regulation addressing greenhouse gas ("GHG") emissions from existing fossil fuel-fired units. The ACE rule established guidelines for GHG emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. Several industry, environmental, and state and local petitioners filed for judicial review of the ACE rule. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule, and specified that the court's mandate will not issue with regard to the portion of the ACE rule that repeals the Clean Power Plan until after the EPA develops a replacement for the ACE rule. On October 29, 2021, the U.S. Supreme Court accepted the request filed by a coalition of states and other parties to review the D.C. Circuit's decision to vacate the ACE rule. Petitioners are asking the Supreme Court to rule on the extent of the EPA's authority to regulate GHG emissions from existing power plants under Section 111(d) of the CAA. In its recently published Unified Regulatory Agenda, the EPA indicated that it expects to publish a proposed rule to replace the ACE rule in July 2022. TVA is unable to predict the future course of the litigation on appeal, nor the direction that the EPA may take in the future to regulate GHG emissions from existing fossil fuel-fired units.
New Source Performance Standards. In 2018, the EPA proposed revisions to the 2015 GHG emission standards for new, modified, and reconstructed electric utility generating units required under Section 111(b) of the CAA. For coal-fired units, the EPA proposed to revise the current new source standards such that carbon capture and sequestration technology is no longer necessary to meet the standards of performance that reflect the best system of emission reduction. The resulting limits are less stringent than limits under the 2015 rule and can be met by modern coal-fired units (e.g., supercritical steam generators) in combination with best operating practices, but without carbon capture and sequestration. The EPA is not proposing to revise the new source performance standard in the 2015 rule for GHG emission from gas-fired units. In January 2021, the EPA published criteria in the Federal Register for making a significant contribution finding for GHGs from a source category for the purpose of regulating those emissions under Section 111(b) of the CAA, but the EPA did not take final action on the 2018 proposed revisions in this rulemaking. On March 17, 2021, the EPA asked the D.C. Circuit to vacate and remand the "significant contribution" finding since the rule was promulgated without public notice or opportunity to comment. On April 5, 2021, the D.C. Circuit vacated and remanded the January 2021 final rule. In its recently published Unified Regulatory Agenda, the EPA indicated that it is undertaking a comprehensive review of the new source performance standards for GHG emissions from electric utility steam generating units, including a review of all aspects of the 2018 proposed amendments and requirements in the 2015 rule that the agency did not propose to amend in the 2018 proposal. The EPA expects to issue the results of this review in a proposed rule in June 2022. TVA is unable to predict the direction that the EPA may take in the future to regulate GHG emissions from new, modified, or reconstructed fossil fuel-fired units.
Climate Change
Executive Actions. On January 20, 2021, President Biden issued EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis." EO 13990 directs federal agencies to review and revise regulations consistent with broad policy goals to improve public health and the environment, reduce GHG emissions, and prioritize environmental justice. On March 8, 2021, a coalition of 12 states filed a lawsuit in the U.S. District Court for the Eastern District of Missouri challenging President Biden's authority to establish interim values for the social cost of GHGs under EO 13990. On August 31, 2021, the court dismissed the matter, but the plaintiffs have appealed the decision to the U.S. Court of Appeals for the Eighth Circuit. A similar lawsuit is pending in the U.S. District Court for the Western District of Louisiana. EO 13990 also requires the EPA to review several environmental regulations to determine their consistency with the goals and policies prescribed in the EO. Specific impacts to TVA of EO 13990 cannot be determined at this time.
In addition, on January 27, 2021, President Biden issued EO 14008, "Executive Order on Tackling the Climate Crisis at Home and Abroad." Among other things, EO 14008 expresses the following policies of the federal government: (1) to organize and deploy the full capacity of its agencies to combat the climate crisis to implement a government-wide approach that reduces climate pollution in every sector of the economy, (2) to align the management of federal procurement and real property, public lands and waters, and financial programs to support robust climate action, (3) to use all available procurement authorities to achieve or facilitate (a) a carbon pollution-free electricity sector no later than 2035 and (b) clean and zero-emission vehicles for federal, state, local, and tribal government fleets, (4) to put the U.S. on a path to achieve net-zero emissions, economy-wide, by no later than 2050, (5) to accelerate the deployment of clean energy and transmission projects in an environmentally stable manner, (6) to ensure that, to the extent consistent with applicable law, federal funding is not directly subsidizing fossil fuels, (7) to promote the flow of capital toward climate-aligned investments and away from high-carbon investments, (8) improve air and water quality, and (9) secure an equitable economic future by making environmental justice part of an agency's mission. TVA is closely monitoring these developments, including the Justice40 Initiative, the Department of Treasury effort to establish a carbon market, establishment and development of the Civilian Climate Corps, and establishment of several White House comprehensive plans. In addition, EO 14008 created the Special Presidential Envoy for Climate and called for an early Leaders' Climate Summit aimed at raising climate ambition and making a positive contribution to the 26th United Nations Climate Change Conference of the Parties and beyond. EO 14008 also stated the U.S. would reconvene the Major Economies Forum on Energy and Climate, beginning with the Leader's Climate Summit. Federal agencies were directed to update their Climate Change Action Plans, and TVA chose to submit its draft plan in May 2021 and its final plan in August 2021. In addition to submitting these plans, TVA is voluntarily pursuing multiple policies and programs in the Tennessee Valley that align with the goals and policies of the EO.
On May 20, 2021, President Biden also issued EO 14030, “Climate-Related Financial Risk,” which calls for a governmental-wide strategy on the disclosure of climate-related financial risk. EO 14030 requires the development of this strategy regarding the following: (1) the measurement, assessment, mitigation, and disclosure of climate-related financial risk to federal government programs, assets, and liabilities in order to increase the long-term stability of federal operations; (2) financing needs associated with achieving net-zero GHG emissions for the U.S. economy by no later than 2050, limiting global average temperature rise to 1.5 degrees Celsius, and adapting to the acute and chronic impacts of climate change; and (3) areas in which private and public investments can play complementary roles in meeting these financing needs while advancing economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities and communities of color. The specific impacts of EO 14030 on TVA cannot be determined at this time, as the regulations required by the EO have not yet been finalized.
On December 8, 2021, President Biden signed EO 14057 detailing the administration’s policy to take a whole of government approach to lead by example to achieve a carbon pollution-free electricity sector by 2035 and net-zero emissions economy-wide by no later than 2050. EO 14057 instructs virtually all elements of the federal government to demonstrate how innovation and environmental stewardship can protect the planet, safeguard federal investments, respond to the needs of American communities, and expand American technologies, industries, and jobs. TVA is voluntarily pursuing multiple policies and programs in the Tennessee Valley that align with the goals and policies of the EO.
International Accords. In September 2016, the U.S. formally accepted the Paris Agreement. The agreement met the threshold of at least 55 countries that account for at least 55 percent of global GHG emissions and formally entered into force in November 2016. On November 4, 2019, the U.S. formally notified the United Nations that it would withdraw from the agreement. Under the terms of the agreement, the effective date for the withdrawal was November 4, 2020.
On January 20, 2021, President Biden formally rejoined the Paris Agreement on behalf of the U.S. The means for tracking emissions targets under the Paris Agreement are nationally determined contributions ("NDCs"). Each nation that is a party to the Paris Agreement is asked to prepare five-year, successive NDCs that it plans to achieve. On April 22, 2021, the Biden Administration announced its GHG NDCs for 2030 under the Paris Agreement, and these NDCs establish a new target for the U.S. to achieve a 50 to 52 percent reduction from 2005 levels in economy-wide net GHG pollution in 2030. Specific impacts to TVA cannot be determined at this time.
Litigation. In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA, and TVA may be subject to additional lawsuits in the future. See Note 20 — Contingencies and Legal Proceedings for additional information.
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 clean generation from alternative energy sources, and subsequent impacts to business reputation and public opinion.
Physical Impacts of Climate Change. Physical impacts of climate change may include, but not be limited to, changing weather patterns, extreme weather conditions, and other events such as flooding, droughts, wildfires, and snow or ice storms, and these events can impact TVA's system in terms of system operability, customer demand, and the health of regional economies. TVA has a Climate Change Action Plan which it updated in 2021 in support of EO 14008. TVA submitted its draft Climate Change Action Plan to the White House in May 2021 and its final plan in August 2021. The goal of the action planning process is to ensure TVA continues to achieve its mission and program goals and to operate in a secure, effective, and efficient manner in a changing climate by integrating climate change adaptation efforts in coordination with state and local partners, tribal governments, and private stakeholders. TVA manages the potential effects of climate change on its mission, programs, and
operations within its environmental management processes.
Actions Taken by TVA to Reduce GHG Emissions. TVA has reduced GHG emissions from both its generation facilities and its operations. TVA Board actions have focused on TVA's plan to balance its coal-fired generation by increasing its nuclear capacity, modernizing its hydroelectric generation system, increasing natural gas-fired generation, installing emission control equipment on certain of its coal-fired units, increasing its purchases of renewable energy, building solar facilities, and investing in energy efficiency initiatives to reduce energy use in the Tennessee Valley. Additionally, TVA has invested to increase energy efficiency in its operations. The combination of more stringent environmental regulations, lower natural gas prices, and lower demand for energy across the Tennessee Valley has reduced the utilization of coal-fired generation. These factors have resulted in lower CO2 emissions from the TVA system, as previously discussed in this section. As TVA evolves its generation portfolio, and after appropriate environmental review under NEPA, the TVA Board could make decisions about the timing, retirement, and replacement of aging fossil units or other expiring capacity, which may further TVA’s CO2 and other emissions reductions. The Environmental Policy also provides additional direction in several environmental stewardship areas related to reducing environmental impacts on the Valley's natural resources, including reducing carbon intensity and air emissions.
Renewable/Clean Energy Standards
Thirty states and the District of Columbia have established enforceable or mandatory requirements for electric utilities to generate a certain amount of electricity from renewable sources. Two states within the TVA service area, North Carolina and Virginia, have mandatory renewable standards that, while not applying directly to TVA, do apply to TVA's LPCs serving retail customers in those states. TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the covered LPCs that sell TVA power in North Carolina. In 2020, Virginia signed into law the Clean Economy Act. The Act establishes a mandatory requirement for utilities to generate a certain amount of electricity from renewable sources. At this time, TVA is not impacted by the legislation due to the relatively small amount of electricity that TVA provides in Virginia compared to other utilities. Likewise, the Mississippi Public Service Commission adopted an energy efficiency rule applying to electric and natural gas providers in the state, and TVA is supplying information on participation in TVA's energy efficiency programs to support the covered Mississippi LPCs.
Water Quality Control Developments
Waters of the United States. In 2015, the EPA and the U.S. Army Corps of Engineers ("USACE") issued the Clean Water Rule, which redefined waters of the United States ("WOTUS") in the agencies' regulations for the first time since the 1980s and was intended to clarify the regulatory jurisdiction of the EPA and the USACE ("2015 WOTUS Rule"). In April 2020, the USACE and the EPA issued the Navigable Waters Protection Rule ("NWPR"), which established a new regulatory definition of WOTUS and replaced the definition set forth in the 2015 WOTUS Rule. The NWPR established four categories of waters considered jurisdictional under the Clean Water Act ("CWA"): (1) territorial seas and traditional navigable waters, (2) perennial and intermittent tributaries to those waters, (3) certain lakes and ponds, and impoundments of jurisdictional waters, and (4) wetlands adjacent to jurisdictional waters. The rule excluded twelve categories of waters, including ephemerals, groundwater, many ditches, and waste treatment systems. The NWPR reduced the jurisdictional reach of the CWA and could potentially reduce permitting and mitigation requirements for TVA projects that impact waters that were previously considered jurisdictional under the 2015 WOTUS Rule. The NWPR was challenged in multiple courts, and on August 30, 2021, it was vacated by the United States District Court for the District of Arizona. The United States District Court for the District of New Mexico also vacated it on September 27, 2021. Two other courts declined to vacate the rule, but remanded it to the EPA and the Army Corps of Engineers. Previously, on June 9, 2021, the EPA and the Department of the Army announced their intention to initiate a new rulemaking process to restore the definition of WOTUS that was in place prior to the 2015 WOTUS Rule and to develop a new rule to establish a new definition of WOTUS. A proposed rule was published in the Federal Register on December 7, 2021, with the public comment period open until February 7, 2022. The impact of the rulemaking process cannot be ascertained fully at this time. Pending the completion of the rulemaking process, the EPA and the USACE are interpreting WOTUS consistent with the pre-2015 definition.
Cooling Water Intake Structures. In 2014, the EPA released a final rule under Section 316(b) of the CWA relating to cooling water intake structures ("CWIS") for existing power generating facilities. The rule requires changes in CWIS used to cool the vast majority of coal, gas, and nuclear steam-electric generating plants and a wide range of manufacturing and industrial facilities in the U.S. The final rule requires CWIS to reflect the best technology available for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a CWIS. These new requirements will potentially affect a number of TVA's fossil- and nuclear-fueled facilities and will likely require capital upgrades to ensure compliance. Most TVA facilities are projected to require retrofit of CWIS with "fish-friendly" screens and fish return systems to achieve compliance with the new rule. The rule is being implemented through permits issued under the NPDES in Section 402 of the CWA. State agencies administer the NPDES permit program in most states including those in which TVA's facilities are located. In addition, the responsible state agencies must provide all permit applications to the U.S. Fish and Wildlife Service for a 60-day review prior to public notice and an opportunity to comment during the public notice. As a result, the permit may include requirements for additional studies of threatened and endangered species arising from U.S. Fish and Wildlife Service comments and may require additional measures be taken to protect threatened and endangered species and critical habitats directly or indirectly related to the plant cooling water intake. TVA's review of the final rule indicates that the rule offers adequate flexibility for cost-effective compliance. The required compliance timeframe is linked to plant-specific NPDES permit renewal cycles (i.e., technology retrofits), and compliance is expected to be required beginning in the CY 2022 - 2024 timeframe.
The EPA has never previously applied the requirements under Section 316(b) to hydroelectric facilities. However, on September 30, 2021, EPA Region 10, which covers an area outside TVA’s service area, issued NPDES permits to four hydroelectric plants that include Section 316(b) requirements. In determining the best technology available (“BTA”) to minimize adverse impacts on the environment using best professional judgment, Region 10 analyzed the existing controls that the hydroelectric facilities were already implementing and concluded that those controls constitute BTA. It is not clear whether this approach will be adopted nationwide or how the BTA standard would be applied to TVA's hydroelectric facilities; accordingly, the specific impacts to TVA from the new Region 10 permits cannot be determined at this time.
Hydrothermal Discharges. The EPA and many states continue to focus regulatory attention on potential effects of hydrothermal discharges. Many TVA plants have variances from thermal standards under Section 316(a) of the CWA that are subject to review as NPDES permits are renewed. Specific data requirements in the future will be determined based on negotiations between TVA and state regulators. If plant thermal limits are made more stringent, TVA may have to install cooling towers at some of its plants and operate installed cooling towers more often. This could result in a substantial cost to TVA.
Steam-Electric Effluent Guidelines. In 2015, the EPA revised existing steam-electric effluent limitation guidelines ("ELGs"), which regulate water discharge pollutants and require the application of certain pollutant control technologies. The 2015 ELGs established more stringent performance standards for existing and new sources and required major upgrades to wastewater treatment options at all coal-fired plants. Compliance with new requirements was originally required in the CYs
2018 - 2023 timeframe, but the EPA delayed the compliance dates for flue gas desulfurization ("FGD") wastewater and bottom ash transport water until CYs 2020 - 2023 to allow the EPA time to review and potentially revise the ELGs with regard to these waste streams.
In October 2020, the EPA issued final revised ELGs for bottom ash transport water and FGD wastewater. The primary impact for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs could impact long-term investment decisions being made relative to the long-term compliance and operability of these plants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. In addition, the revised ELGs could cause TVA to reduce utilization of its coal-fired generation facilities or even close such facilities. The revision also includes a subcategory for which Cumberland would qualify that provides TVA greater flexibility in meeting the ELGs. The revision includes two additional subcategories for low utilization units and units that cease coal combustion by the end of CY 2028. TVA is evaluating the applicability of those subcategories to its plants as appropriate. In October 2021, TVA filed Notices of Planned Participation preserving the option for TVA's Bull Run, Cumberland, and Kingston plants to participate in the subcategory for units that cease coal combustion by the end of CY 2028.
Petitions for judicial review of the October 2020 ELG rule were filed in the D.C. Circuit and the U.S. Court of Appeals for the Fourth Circuit (the "Fourth Circuit") and have been consolidated in the Fourth Circuit in the case Appalachian Voices, et al. v. EPA. On August 3, 2021, the EPA announced a supplemental rulemaking to revise the Steam Electric Power Generating Effluent Limitations Guidelines and Standards. As part of the rulemaking process, the EPA will determine whether more stringent limitations and standards are appropriate and consistent with the technology-forcing statutory scheme and the goals of the CWA. The impact of the proposed rulemaking cannot be fully determined at this time. Because this rulemaking could result in more stringent ELGs, the EPA has requested that the Appalachian Voices, et al. v. EPA litigation in the Fourth Circuit be held in abeyance.
Consistent with the 2020 rule, on January 8, 2021, TVA submitted requests to state regulatory authorities to modify NPDES permits for Kingston, Cumberland, Bull Run, Shawnee, and Gallatin Fossil Plant ("Gallatin") to incorporate into the permits limitations in the 2020 rule. The Kentucky Department for Environmental Protection issued a final revised permit for Shawnee in the fourth quarter of 2021, and TDEC issued a final revised permit for Kingston in the first quarter of 2022. TVA anticipates TDEC will issue draft permits for Cumberland, Bull Run, and Gallatin during 2022.
The Sierra Club and the Center for Biological Diversity administratively appealed the NPDES permit issued for Kingston. See Note 20 — Contingencies and Legal Proceedings — Administrative Proceeding Regarding National Pollutant Discharge Elimination System Permit for Kingston.
Nationwide Permits for Dredge and Fill. On January 12, 2021, the USACE published notice of a final rule that reissued and modified 16 Nationwide Permits (“NWPs”) that authorize discharges of dredge and fill material into waters of the U.S. from certain designated activities. The final rule limits applicability of NWP 12, which previously authorized discharges from all utility line activities, to oil and natural gas pipelines, creates new NWPs for certain utility line activities, including NWP 57 for electric utility line and telecommunication activities, and modifies certain pre-construction notification requirements. The new NWP 12 is being challenged in court on the same grounds that were litigated in Northern Plains Resource Council v. U.S. Army Corps of Engineers, where the U.S. District Court for the District of Montana found the permit unlawful and vacated it. Although the new lawsuit does not challenge NWP 57, the NWP upon which TVA is most likely to rely for its utility line activities, the lawsuit raises claims that apply with equal force to NWP 57. However, the impact on TVA from this litigation cannot be evaluated fully until the legal challenge is resolved. On December 21, 2021, the EPA and the U.S. Army Corps of Engineers reissued 41 NWPs in a final rule. The reissued permits go into effect on February 25, 2022. This reissuance has little impact on TVA operations, and the reissued permits will not be available for use by TVA until states issue a 401 certification for these permits.
Other Clean Water Act 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, new wastewater analytical methods, and changes in regulation of pesticide application.
Recent CWA Supreme Court Decision
On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund, the Supreme Court held that the CWA requires a permit when there is a direct discharge of pollutants from a point source to waters of the U.S. and when there is "the functional equivalent" of a direct discharge to such waters. The Court suggested seven factors for determining when such a discharge is the functional equivalent of a direct discharge and acknowledged that the new test would be somewhat difficult to apply, potentially requiring evaluation of multiple factors. The Court noted that "time and distance" of pollutant migration often will be the most important factor but that other relevant factors may include, for example, the nature of the material through which the pollutant travels and the extent to which the pollutant is diluted or chemically changed as it travels. After evaluating the potential impact of the decision, TVA determined that this decision will not require TVA to change its operations.
Cleanup of Solid and Hazardous Wastes
Liability for releases and cleanup of hazardous substances is imposed under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other governmental entities, industries, and power systems, TVA has generated or used hazardous substances over the years that have resulted in releases to the environment.
TVA Sites. TVA historical operations at certain facilities have resulted in releases of contaminants that TVA is addressing, including at TVA's Environmental Research Center at Muscle Shoals, Alabama. TVA has completed several removal, remedial, and characterization actions at the site, as required by a hazardous waste permit issued by the Alabama Department of Environmental Management. At December 31, 2021, TVA's estimated liability for required cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate was approximately $18 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheet. TVA must submit an application for renewal of the RCRA permit by September 27, 2022, and both the renewal process and the resulting renewed permit may include additional mandates for further remedial activities. TVA has evaluated the potential impact that a permit renewal could have on its operations and does not believe that the renewal will have any adverse impacts at this time. In addition, the Environmental Research Center has an active groundwater monitoring program as part of a permitted corrective action plan.
Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at certain non-TVA areas for which it may have some liability. See Note 20 — Contingencies and Legal Proceedings — Environmental Matters.
Coal Combustion Residuals. The EPA published its final rule governing CCR in 2015. The rule regulates CCR as nonhazardous waste under Subtitle D of the RCRA. While states may adopt the rule's requirements into their regulatory programs, the rule does not require states to adopt the requirements. The initial version of the rule provided for self-implementation by utilities and allows enforcement through citizen suits in federal court. The Water Infrastructure Improvements for the Nation Act ("WIIN Act") subsequently allowed state or federal-based permitting to implement the CCR Rule as an alternative to self-implementation and citizen suits. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities for a discussion of the impact on TVA's operations, including the cost and timing estimates of related projects.
In July 2018, the EPA issued a final CCR rule which provided additional flexibility and an extension of certain deadlines. In March 2019, the D.C. Circuit granted the EPA's request to remand the final rule to allow the EPA to reconsider the amendments. The remand also allowed the EPA time to complete a new rulemaking to establish revised timelines for unlined impoundments to initiate closure and to reexamine the October 2020 deadline for closing some unlined impoundments. In August 2019, the EPA issued a proposed rule to amend portions of the CCR Rule regarding beneficial use, temporary piles, and public access to information.
On November 4, 2019, the EPA announced a proposed rule that will revise portions of the CCR Rule requiring closure of unlined surface impoundments. The final Part A rule was published in the Federal Register on August 28, 2020, and became effective September 28, 2020. Among other things, the final Part A rule required all unlined CCR surface impoundments to stop receiving CCR and non-CCR waste streams and to initiate closure or retrofit by no later than April 11, 2021, and TVA ceased doing so, and initiated closure, by the specified deadline. Additionally, the final rule provides a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR surface impoundment until October 15, 2023, and possibly longer under certain circumstances. The final rule also includes requirements that enhance the public's access to groundwater monitoring and corrective action reports. TVA does not currently anticipate the final rule will have a significant impact because TVA initiated closure of its unlined CCR surface impoundments by the regulatory deadline and already makes groundwater monitoring and corrective action reports publicly available. A separate final Part B rule was published in the Federal Register on November 12, 2020. This rule provides an alternative liner demonstration procedure for utilities with clay lined units which are being forced to close under the Part A rule. However, TVA does not have any units which qualify for this demonstration.
In August 2015, the TDEC issued an order that (1) established a process for TDEC to oversee TVA's implementation of the EPA's CCR rule and to ensure coordination and compliance with Tennessee laws and regulations that govern the management of CCR and (2) required TVA to investigate and assess CCR contamination risks at seven of TVA's eight coal-fired plants in Tennessee and to remediate any unacceptable risks. The TDEC order does not allege that TVA is violating any CCR regulatory requirements nor does it assess TVA penalties. The TDEC order sets out an iterative process through which TVA and TDEC will identify and evaluate any CCR contamination risks and, if necessary, respond to such risks. TVA submitted to TDEC an environmental assessment report (“EAR”) for Allen in the fourth quarter of 2021. TVA is currently conducting environmental investigations for the remaining six sites in accordance with the TDEC-approved Environmental Investigation Plans and will submit EARs to TDEC upon completion of the related investigations.
Groundwater Contamination. Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages CCR at some of its plants, potentially resulting in higher costs. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and — Allen Groundwater Investigation and Note 11 — Asset Retirement Obligations.
Environmental Investments
From 1970 to 2021, TVA spent approximately $6.8 billion on controls to reduce emissions from its coal-fired power plants. In addition, TVA has reduced emissions by idling or retiring coal-fired units and relying more on cleaner energy resources including natural gas and nuclear generation.
TVA currently anticipates spending significant amounts on environmental projects in the future, including investments in new clean energy generation including renewables to reduce TVA's overall environmental footprint. TVA environmental project expenditures could also result from coal-fired plant decommissioning and from effective ash management modernization. Based on TVA's decisions regarding certain coal-fired units, the amount and timing of expenditures could change.
SO2 Emissions and NOx Emissions. To reduce SO2 emissions, TVA operates scrubbers on 18 of its coal-fired units and switched to lower-sulfur coal at certain coal-fired units. To reduce NOx emissions, TVA operates SCRs on 18 coal-fired units, operates low-NOx burners or low-NOx combustion systems on 21 units, optimized combustion on all 25 units, and operates NOx control equipment year round when units are operating (except during start-up, shutdown, and maintenance periods). TVA has also retired 34 of 59 coal-fired units. Except for seven units at Shawnee, the remaining coal-fired units in the TVA fleet have scrubbers and SCRs.
Particulate Emissions. To reduce particulate emissions of air pollutants, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, and/or bag houses.
Greenhouse Gas Emissions. Various federal agencies, including the EPA and the Department of Commerce, may issue regulations establishing more stringent air, water, and waste requirements, as well as GHG accounting requirements, and these requirements could result in significant changes in the structure of the U.S. power industry, especially in the eastern half of the country. There could be additional material costs if further reductions of GHGs, including CO2, are mandated by legislative, executive, regulatory, or judicial actions and if more stringent emission reduction requirements for conventional pollutants are established. These costs cannot reasonably be predicted at this time because of the uncertainty of these actions.
Estimated Required Environmental Expenditures
The following table contains information about TVA's current estimates on projects related to environmental laws and regulations.
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Estimated Potential Environmental Expenditures(1)(2)
As of December 31, 2021
(in millions)
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Remaining 2022
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2023
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2024-2026(3)(4)
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Total
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Coal Combustion Residual Program(5)
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$
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163
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$
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189
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$
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368
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$
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720
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Clean Air Act control projects(6)
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23
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38
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90
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151
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Clean Water Act requirements(7)
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74
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64
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7
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145
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Notes
(1) These estimates are subject to change as additional information becomes available and as regulations change.
(2) These estimates include $123 million, $74 million, and $52 million for the remainder of 2022, 2023, and thereafter, respectively, in capital expenditures.
(3) See Note 20 — Contingencies and Legal Proceedings — Contingencies.
(4) These estimates do not include expenditures expected to be incurred after 2026.
(5) Includes costs associated with the closure of facilities and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projects. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and Note 11 — Asset Retirement Obligations.
(6) Includes air quality projects that TVA is currently performing to comply with existing air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations or transmission upgrades.
(7) Includes projects that TVA is currently planning to comply with revised rules under the Clean Water Act regarding CWIS and ELGs for steam electric power plants.
Legal Proceedings
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 its activities, as a result of catastrophic events or otherwise. At December 31, 2021, TVA had accrued $12 million with respect to Legal Proceedings. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.
For a discussion of certain current material Legal Proceedings, see Note 20 — Contingencies and Legal Proceedings — Legal Proceedings, which discussions are incorporated into this Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Off-Balance Sheet Arrangements
At December 31, 2021, TVA had no off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements. Although the financial statements are prepared in conformity with accounting principles generally accepted in the U.S., TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting estimates and policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates and Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Annual Report.
New Accounting Standards and Interpretations
For a discussion of new accounting standards and interpretations, see Note 2 — Impact of New Accounting Standards and Interpretations, which discussion is incorporated into this Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Legislative and Regulatory Matters
TVA continues to monitor how regulatory agencies are interpreting and implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010. As a result, TVA has become subject to
recordkeeping, reporting, and reconciliation requirements related to its derivative transactions. In addition, depending on how regulatory agencies interpret and implement the provisions, TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions.
For additional discussion on legislative and regulatory matters, including a discussion of environmental legislation and regulation, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges and — Environmental Matters.
TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 ("Exchange Act"), which requires certain issuers to disclose certain activities relating to Iran involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the U.S., TVA does not believe its disclosure obligations, if any, under Section 13(r) extend to the activities of any other departments, divisions, or agencies of the U.S.