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continued
9.
Commitments
and contingencies
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Hazardous
substances.
The release and cleanup of hazardous substances are regulated under
the Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA). In a manner similar to many other industries and power
systems, TVA has generated or used hazardous substances over the years.
TVA has been identified as a potentially responsible party with respect
to five off-site disposal areas. TVA’s liability at these sites
has not yet been determined. In addition, TVA is currently investigating
one other TVA-owned site under a state statute similar to CERCLA. TVA
may have cleanup responsibilities at this site by virtue of its control
of the property. TVA’s potential liabilities for its share of cleanup
costs at all of these sites are uncertain but are not expected to have
a significant impact on TVA’s financial position or results of
operations.
Pending litigation.
TVA is a party to various civil lawsuits and claims that have arisen
in the ordinary course of its business. Although the outcome of pending
litigation cannot be predicted with any certainty, it is the opinion
of TVA counsel that the ultimate outcome should not have a material
adverse effect on TVA’s financial position or results of operations.
Decommissioning
costs. Provision for decommissioning costs of nuclear generating
units is based on the estimated cost to dismantle and decontaminate
the facilities to meet NRC criteria for license termination. The Financial
Accounting Standards Board (FASB) has reached several tentative conclusions
with respect to its project regarding the accounting for closure and
removal of long-lived assets, including the decommissioning of nuclear
generating units. Effective for 1998, TVA changed its method of accounting
for decommissioning costs and related liabilities in order to comply
with certain of the FASB’s tentative conclusions, as well as certain
rate-setting actions. The FASB expects to issue an exposure draft in
the first quarter of 2000; however, it is uncertain when a final statement
will be issued and what impact it may ultimately have on TVA’s
financial position or results of operations.
TVA’s current
accounting policy recognizes as incurred all obligations related to
closure and removal of its nuclear units. The liability for closure
is measured as the present value of the estimated cash flows required
to satisfy the related obligation and discounted at a determined risk-free
rate of interest. The corresponding charge to recognize the additional
obligation is effected through the creation of a regulatory asset. TVA
further modified its method of accounting for decommissioning costs
such that earnings from decommissioning fund investments, amortization
expense of the decommissioning regulatory asset, and interest expense
on the decommissioning liability are deferred in accordance with SFAS
No. 71, “Accounting for the Effects of Certain Types of Regulation.”
At September 30, 1999, the present value of the estimated future decommissioning
cost of $882 million was included in other liabilities. The decommissioning
cost estimates from a 1995 study are based on prompt dismantlement and
removal of the plant from service. The actual decommissioning costs
may vary from the estimates because of changes in the assumed dates
of decommissioning, changes in regulatory requirements, changes in technology,
and changes in cost of labor, materials and equipment.
TVA maintains an
investment trust fund to provide funding for the decommissioning of
nuclear power plants. In May 1997, TVA sold the entire $402 million
equity index fund portfolio and transferred the proceeds to trust portfolios
managed by independent money managers. During 1997, TVA recognized $151
million of income related to the fund, which included an $81 million
gain on the sale of fund investments and $70 million in net appreciation
and interest income. As of September 30, 1999, the decommissioning trust
fund investments totaled $724 million and were invested in securities
designed to achieve a return in line with overall equity market performance.
Effective November
23, 1998, the NRC amended its regulations regarding decommissioning
funding. The regulations required TVA to provide financial assurance
for decommissioning funding through the use of certain prescribed mechanisms
such as the trust agreements entered into by TVA in May 1997. These
new regulations did not have a material impact on TVA’s financial
position or results of operations.
Cost-based regulation.
As a regulated entity, TVA is subject to the provisions of SFAS No.
71, “Accounting for the Effects of Certain Types of Regulation.”
Accordingly, TVA records certain assets and liabilities that result
from the effects of the ratemaking process that would not be recorded
under generally accepted accounting principles for non-regulated entities.
Currently, the electric utility industry is predominantly regulated
on a basis designed to recover the cost of providing electric power
to its customers. If cost-based regulation were to be discontinued in
the industry for any reason, profits could be reduced and utilities
might be required to reduce their asset balances to reflect a market
basis less than cost. Discontinuance of cost-based regulation would
also require affected utilities to write off their associated regulatory
assets. Such regulatory assets for TVA total approximately $1.6 billion
at September 30, 1999, along with approximately $6.3 billion of deferred
nuclear plants. Management cannot predict the potential impact, if any,
of the change in the regulatory environment on TVA’s future financial
position and results of operations.
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