Management’s
Discussion
and Analysis |
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Pending
Litigation
The Environmental
Protection Agency (EPA) has issued TVA an administrative order directing
TVA to put new source controls on 14 of its units and to evaluate whether
more controls should be installed on other units. TVA has challenged
the validity of this order. See Environmental Matters for
a further discussion of this order.
TVA is also a party
to various other civil lawsuits and claims that have arisen in the ordinary
course of business. Although the outcome of these lawsuits and claims
cannot be predicted with any certainty, it is the opinion of TVA counsel
that their ultimate outcome should not have a material adverse effect
on TVA’s financial position or results of operations.
Environmental
Matters
TVA’s
activities are subject to various Federal, state and local environmental
statutes and regulations. Major areas of regulation affecting TVA’s
activities include air pollution control, water pollution control and
management and disposal of solid and hazardous wastes.
TVA has incurred
and continues to incur substantial capital expenditures and operating
expenses to comply with environmental requirements. Because these requirements
change frequently, the total amount of these costs in the future is
not now determinable. It is anticipated that environmental requirements
will become more stringent and that compliance costs will increase,
perhaps by substantial amounts.
Under the Clean
Air Act, the EPA has promulgated national ambient air quality standards
for certain air pollutants, including sulfur dioxide, particulate matter
and nitrogen oxides (NOx). Coal-fired generating units such
as TVA’s are major sources of these pollutants. The 1990 Amendments
to the Clean Air Act established a number of new requirements relating
to acid rain control, including additional requirements for sulfur dioxide
and NOx emissions that are to be met in two phases. Through
2000 TVA had invested approximately $1 billion in capital for Phase
I and Phase II compliance. TVA estimates it will spend roughly an additional
$100 million in capital through 2003 to finalize the Phase II compliance
measures. This will complete TVA’s program for reducing sulfur
dioxide and NOx to comply with the acid rain control requirements
of the Clean Air Act.
During 1998 TVA
adopted a new clean air strategy to install ten selective catalytic
reduction systems (SCRs) to reduce NOx emissions from its
coal fired plants. In 2000 TVA committed to an additional eight SCRs
to further reduce its NOx emissions. The cost of implementing
this strategy is expected to be between $800 million and $900 million
in addition to amounts TVA has already spent to comply with the 1990
Clean Air Act Amendments. TVA’s new strategy should bring TVA into
compliance with EPA’s ozone-transport regulations. However, recent
court decisions have overturned or delayed other ozone related regulations.
While these court decisions may have some effect on TVA’s plans,
TVA is committed to improving the air quality of the region, and TVA’s
NOx strategy was developed in part to help TVA’s region
continue to improve its air quality.
Although TVA cannot
with certainty project the costs for additional reductions of NOx,
sulfur dioxide and particulate matter emissions beyond those required
by the acid rain provisions of the 1990 Clean Air Act Amendments, the
costs for these additional reductions could exceed $2.5 billion.
EPA is investigating
whether coal-fired utilities in the eastern U.S., including TVA, may
have modified their coal-fired boilers without complying with new source
review requirements. The outcome of this investigation is ongoing and
uncertain. TVA contends EPA’s investigation is based on a new interpretation
of an old rule and that TVA has routinely maintained its power plants
to ensure efficient, reliable power generation while complying with
all requirements. However, EPA has issued TVA an administrative order
directing TVA to put such new source controls on 14 of its units and
to evaluate whether more controls should be installed on other units.
TVA has challenged the validity of this order and the Eleventh Circuit
Court of Appeals has stayed the order pending its review. It is not
possible to predict with certainty what impact implementation of EPA’s
order would have on TVA if TVA’s challenge is unsuccessful. If
EPA substantially prevails, TVA could be required to incur capital costs
in excess of $3 billion (net present value) by 2010 to 2015. Any additional
controls that TVA could be required to install on units as a result
of this matter would, however, also be sufficient to comply with reduction
requirements that are anticipated under other air quality programs discussed
above. Thus, because of the other environmental program requirements,
TVA would, in any event, likely have to incur a substantial portion
of the costs that might result from the EPA enforcement action, albeit
the schedule for the installation of the controls could be substantially
accelerated by the EPA enforcement action. TVA fully supports the need
to further reduce emissions from coal-fired plants and seeks a resolution
that will not put TVA customers and the region at a disadvantage.
[insert
charts “Operating Revenue & Interest Expense as a Percent of
Revenue” and “Capital Spending” from p. 22]
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