Air Quality: TVA Plans to Reduce Air Emissions Further, but Could
Do More to Reduce Power Demand (08-MAR-02, GAO-02-301). 	 
                                                                 
The Tennessee Valley Authority (TVA) relied on its 11		 
coal-burning plants to supply 60 percent of its electric power in
fiscal year 2001. These plants account for almost all of TVA's	 
emissions of two key air pollutants--sulfur dioxide (SO2), which 
has been linked to reduced visibility, and nitrogen oxides (NOx),
which contribute to the formation of harmful ozone. To meet an	 
increase in demand of 1.7 percent annually through 2010, TVA	 
estimates that it will need to expand its current generating	 
capacity of 30,365 megawatts by 500 megawatts annually. Building 
new generating capacity can produce more emissions, which raises 
environment concerns. To lessen the need for new capacity, TVA	 
and other electricity suppliers promote the efficient use of	 
electricity through "demand-side management" programs, which seek
to reduce the amount of energy consumed or to change the time of 
day when it is consumed. Even though TVA intends to increase its 
capacity to generate electricity through 2005, it also expects to
reduce its SO2 and NOx emissions during the same time period,	 
primarily by burning lower-sulfur coal, installing devices to	 
control emissions at its existing plants, and relying on fuels	 
other than coal for new capacity. Although TVA's demand-side	 
management programs have allowed customers to cut their 	 
electrical consumption, these programs have made only modest	 
contributions to reducing peak-time demand. TVA has limited the  
scope of its key program to reduce peak-time consumption by	 
residential customers because TVA believes the program is not	 
cost-effective. TVA projects that its demand-side programs will  
produce nearly twice as much in savings between 2001 and 2005 as 
was achieved in the previous five years. Other large utilities	 
have more fully implemented the types of programs that TVA now	 
has in place and have also implemented a greater array of	 
demand-side management tools. These programs have involved a much
higher proportion of their residential customers and established 
different prices for electricity used during different times of  
the day.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-301 					        
    ACCNO:   A02716						        
  TITLE:     Air Quality: TVA Plans to Reduce Air Emissions Further,  
but Could Do More to Reduce Power Demand			 
     DATE:   03/08/2002 
  SUBJECT:   Air pollution control				 
	     Electric powerplants				 
	     Energy consumption 				 
	     Energy demand					 
	     Energy supplies					 
	     Environmental monitoring				 
	     TVA Cycle and Save Program 			 
	     TVA Energy Right Program				 

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GAO-02-301
     
United States General Accounting Office

GAO Report to the Chairman, Subcommittee on Legislative, Committee on
Appropriations, House of Representatives

March 2002

AIR QUALITY

TVA Plans to Reduce Air Emissions Further, but Could Do More to Reduce Power
Demand

GAO-02-301

Contents

Letter

Results in Brief
Background
TVA Plans to Reduce SO2 and NOx Emissions but Increase

Generating Capacity TVA's Demand-Side Management Programs Have Realized Few
Savings to Date, but TVA Projects Bigger Savings in the Future Other
Utilities More Aggressively Pursue Demand-Side

Management Programs Conclusions Recommendations for Executive Action Agency
Comments Scope and Methodology

                                     1

                                    2 3

                                     8

12

17 19 19 20 20

Appendix I TVA's SO2 Emissions, 1974-2010

Appendix II TVA's NOx Emissions, 1974-2010

Appendix III Comments from the Tennessee Valley Authority

Table

Table 1: Peak Load Reductions from TVA's Demand-Side Management Programs,
Fiscal Years 2000 and 2005

Figures

Figure 1:  Location of TVA's Principal  Power Generating Facilities 4 Figure
2: TVA's Power Supply, by Source, Fiscal Year 2001 5 Figure 3: TVA's Sources
of Electricity Supply, by Hour, on a High-

Demand Day 7 Figure 4: TVA Expects Its SO2 and NOx Emissions to Decrease,
and Its Capacity to Increase, Through 2005 9 Figure 5: TVA Plans to Rely
Primarily on Sources Other Than Coal to Meet Demand, 2001-05 11 Figure 6:
TVA's Peak Load Reductions from Demand-Side Management Programs, Fiscal
Years 1996-2000 13

Figure 7: TVA's SO2 Emissions at Coal-Fired Plants: Actual

Emissions, 1974-2000, and Estimated Emissions,

2001-10 22
Figure   8:    TVA's   NOx   Emissions   at    Coal-Fired   Plants:   Actual

Emissions,    1974-2000,     and    Estimated    Emissions,    2001-10    24

United States General Accounting Office Washington, DC 20548

March 8, 2002

The Honorable Charles H. Taylor
Chairman, Subcommittee on Legislative
Committee on Appropriations
House of Representatives

Dear Mr. Chairman:

The Tennessee Valley Authority (TVA) operates the nation's largest public
power system, supplying electricity to about 8 million customers across a
7-state region. TVA directly serves 62 large federal and industrial
customers and serves other commercial, industrial, and residential
customers through a network of 158 power distributors. TVA relied on its
11 coal-burning plants to supply about 60 percent of its electric power in
fiscal year 2001. These plants account for almost all of TVA's emissions of
two key air pollutants-sulfur dioxide (SO2), which has been linked to
reduced visibility, and nitrogen oxides (NOx), which contribute to the
formation of harmful ozone.1

Demand for TVA's electricity will increase about 1.7 percent annually
through 2010, according to TVA projections. To meet this demand, TVA
estimates that it will need to expand its current generating capacity of
30,365 megawatts2 by 500 megawatts annually-nearly the equivalent of
building an average-size power plant, or contracting for the power from
one, every year. Building new generating capacity can result in additional
emissions, which raises environmental concerns.

In part to lessen the need for new capacity, TVA and other electricity
suppliers promote the efficient use of electricity through "demand-side
management" programs, which are designed to reduce the amount of
energy consumed or to change the time of day when it is consumed. For
example, some utilities offer their customers incentives to purchase
appliances and lighting that use less electricity. When current customers

1Ozone is a colorless gas that occurs both in the earth's upper atmosphere
and at ground level. We use the term ozone to refer to ground-level ozone.

2This total refers to net dependable capacity during the winter and includes
both base load capacity (used throughout the day) and peak load capacity
(used during times of peak demand).

Results in Brief

use less electricity, the utility has to generate less power and thus may
produce fewer emissions of air pollutants.

Concerned about TVA's dual challenge of reducing emissions while managing
increased demand on its power system, you asked us to: (1) determine how TVA
plans to meet future demands for electricity through 2005 while minimizing
its emissions of SO2 and NOx; (2) describe the scope and impact of TVA's
demand-side management efforts; and (3) compare the scope and impact of
TVA's demand-side management efforts to those of selected other utilities'
efforts.

Even though TVA intends to increase its capacity to generate electricity
through 2005, it also expects to reduce its SO2 and NOx emissions during the
same time period, primarily by (1) burning lower-sulfur coal, (2) installing
devices to control emissions at its existing plants, and (3) relying on
fuels other than coal for new capacity. TVA expects to expand its capacity
by more than 10 percent through 2005, with 79 percent of the increase slated
to come from upgrading existing facilities and constructing new
noncoal-burning facilities, such as turbines that run on natural gas or oil.
TVA projects that its SO2 emissions will decline to 525,000 tons (a
28-percent decrease from the 2000 level) and its NOx emissions will decline
to 216,000 tons (a 25-percent decrease from the 2000 level).

Although TVA's demand-side management programs provide opportunities for
thousands of its customers to reduce their consumption of electricity, these
programs make modest contributions to reducing peak-time demand-an average
of 41 megawatts annually between 1996 and 2000 (equivalent to 1/10th of 1
percent of TVA's peak capacity). This reduction is less than it otherwise
could be, in part because TVA has limited the scope of its key program to
reduce peak-time consumption by residential customers; TVA believes the
program is not cost-effective. TVA projects that its demand-side programs
will produce nearly twice as much in savings during the period 2001 through
2005 as was achieved in the previous 5 years. However, about a third of this
projection is based on the expected success of a program that began in June
2001. In October 2001, TVA began an evaluation of short-term opportunities
to improve and expand its demand-side management programs.

Other large utilities have more fully implemented the types of programs that
TVA currently has in place and have also implemented a greater array of
demand-side management tools. For example, like TVA, Florida Power and Light
offers its residential customers a bill credit for allowing their

water heaters and air conditioners to be switched off during periods of peak
demand. However, Florida Power and Light has involved a much higher
proportion of its residential customers in its program (about 19 percent)
than has TVA (about 2 percent). Unlike TVA, Puget Sound Energy piloted a
"time-of-use" program for 300,000 of its 1.4 million residential customers
to encourage less electricity use during periods of peak demand. The utility
established different prices for electricity used during four periods of the
day-ranging from 6.5 cents per kilowatt hour at night to 9 cents per
kilowatt hour during the day-and its customers' bills depend on the amount
of electricity used during each period. As a result of the program,
customers shifted, on average, about 5 percent of their demand from peak to
off-peak hours.

In light of the limited scope and impact of TVA's current demand-side
management programs when compared to similar programs managed by other
utilities and the potential benefits (including reduced emissions) that may
be achieved through the use of additional demand-side management tools, we
are recommending that TVA evaluate the structure and effectiveness of its
current programs, review the longer-term potential applicability of other
programs to its power system, and, as appropriate, expand its demand-side
management programs.

In its February 21, 2002, letter responding to a draft of this report, TVA
described initiatives undertaken that are related to our recommendations
(see app. III).

Background TVA was established in 1933 to provide flood control, navigation,
and electric power in the Tennessee Valley region. As that area has grown,
in both population and economic activity, TVA customers' use of electricity
has grown and is expected to keep growing. TVA estimates that demand for its
electricity will increase about 1.7 percent annually through 2010.

To meet its customers' demand for electricity, TVA generates electricity not
only at its 11 coal-fired plants (consisting of 59 generating units), but
also three nuclear power plants (five units), 29 hydroelectric dams (109
units), one pumped storage site (four units), and five sites with combustion
turbines (64 units). (See fig. 1.) It also generates power from landfill
gas, solar, and wind projects, and it purchases power from others.

Figure 1: Location of TVA's Principal Power Generating Facilities

From the 30,365 megawatts of generating capacity available from these
sources, TVA generated about 156 billion kilowatt-hours of power in fiscal
year 2001.3 It also purchased roughly 9.9 billion kilowatt-hours of power.
Of its power supply, 60 percent came from coal, 27 percent from nuclear, 6
percent each from hydropower and power purchases, and 1 percent from
combustion turbines. (See fig. 2.)

3Kilowatt-hours and megawatt-hours measure energy flows, while kilowatts and
megawatts measure generating capacity. Thus, 1 megawatt of capacity used for
1 hour equals 1 million watt-hours (1,000 kilowatt-hours) of electric
energy.

Figure 2: TVA's Power Supply, by Source, Fiscal Year 2001

Source: TVA.

Note: TVA also generated power in fiscal year 2001 from "green" sources
(solar, landfill gas, and wind), which combined formed less than 1 percent
of power generated.

The share of electricity generated by burning fossil fuels has implications
for the environment. Burning fossil fuels produces SO2 and NOx gases, and
the Environmental Protection Agency estimates that fossil fuel burning from
utilities accounted for 67 percent of the nation's SO2 emissions and 27
percent of its NOx emissions in 1999. Both gases can be transported over
long distances following the patterns of air movements. SO2 emissions
contribute to the production of airborne sulfate particles that contribute
to acid rain, which can harm waters, forests, and materials. In addition,
these particles can block the transmission of light, resulting in haze in
urban areas and the degradation of scenic vistas in many national parks. NOx
is also a source of acid rain and, through chemical reactions in the
atmosphere with other pollutants, leads to the formation of ground-level
ozone, the principal component of smog. Smog can cause chronic human health
effects, particularly respiratory problems, as well as harming plants.

TVA's choices in generating power are constrained by laws, regulations, and
internal policies. For example, the Clean Air Act, as amended, limits
emissions of SO2 and NOx from coal-fired power plants. Moreover, the
Tennessee Valley Authority Act, which established TVA, provides that the
generation of power from hydroelectric units is a lower priority than
navigation and flood control. Finally, an internal TVA policy limits the
time period when TVA can draw down the lakes (reservoirs) that it manages
for flood control and in the process generate hydropower.

To meet its customers' increasing demand for electricity, TVA can upgrade
its existing plants, construct new plants, purchase power from others, or-
as an alternative to finding additional supply sources-provide incentives to
its customers-called "demand-side management"-to reduce or shift their
demand for electricity.

The Department of Energy defines demand-side management as actions taken on
the customer's side of the meter to change the amount or timing of energy
consumption and identifies several types of programs.

* Energy efficiency programs involve the use of technologies that reduce
total energy use, during both peak and off-peak periods, such as
energy-efficient lighting, appliances, and building equipment.

* Peak load reduction programs focus on reducing load during periods of peak
power consumption on a utility's system. These programs can involve the use
of technologies that smooth out the peaks (called "peak shaving") in energy
demand. Such technologies include control systems, such as switches attached
to heating, cooling, and ventilation systems that allow the systems to be
turned off during peak load times. They can also include rate-schedule
programs where utilities structure their rates to encourage customers to
modify their pattern of energy use.

According to the Department, utility funding for demand-side management
programs in the United States declined nationally between 1994 and 1998, due
in large part to increased competition and uncertainties regarding
electricity deregulation. Funding for these programs leveled out in 1999 and
slightly increased in 2000 as concerns over electric supply shortages in
California led many utilities and state regulatory agencies to increase
their emphasis on demand-side management.

TVA can benefit from demand-side management, especially reducing peak loads,
because electricity use varies substantially within a 24-hour period. For
example, on August 17, 2000, an unusually hot day, TVA customers

used about 67 percent more electricity during the hour of highest
consumption (4 p.m.) than the hour of lowest consumption (5 a.m.). TVA used
its various energy sources in a sequenced manner to supply this electricity.
(See fig. 3.) Nuclear facilities provided power steadily throughout the day,
while coal facilities provided power fairly consistently-somewhat lower at
night and higher during the day. As demand increased during the afternoon,
TVA increased the use of hydroelectric power and it purchased power from
other utilities. Finally, during the hottest, mid-day hours, TVA used its
combustion turbines. Even though TVA's customers used more electricity on
that day than on any other in its history, TVA officials told us that the
sequencing of power sources was standard practice.

Figure 3: TVA's Sources of Electricity Supply, by Hour, on a High-Demand Day

Source: TVA.

Note:  The figure  details TVA's  load and  supply for  Aug. 17,  2000. Coal
generation includes  coal burned to  move water to pumped  storage and hydro
generation includes power generated from pumped storage.

TVA Plans to Reduce SO2 and NOx Emissions but Increase Generating Capacity

TVA projects that its SO2 and NOx emissions in 2005 will fall 28 percent and
25 percent, respectively, below its 2000 levels, despite a planned addition
of 3,086 megawatts of generating capacity. TVA projects that its SO2
emissions will decline as it increasingly uses coal with a lower sulfur
content at some of its coal-burning power plants. TVA projects that its NOx
emissions will decline as it installs more control devices at its
coal-burning plants. Moreover, TVA plans to increase its generating capacity
largely from sources-other than coal-burning plants-that generally emit less
of these pollutants. Aside from constructing new generating capacity, TVA
also plans to continue purchasing peak power in a range between 1,500 and
3,000 megawatts annually during the 2001 to 2005 period. (The emissions
associated with purchased power-equivalent to 6 percent of TVA's power
supply-are not included in TVA's emissions data.) Finally, TVA estimates
that its demand-side management programs will offset new peak demand by 396
megawatts between fiscal year 2001 and 2005.

TVA Plans to Continue Reducing SO2 and NOx Emissions

TVA projects that the SO2 emissions from its coal-burning plants will
decline from 727,000 tons in 2000 to 498,000 tons in 2003, before rising to
525,000 tons in 2005. (See fig. 4.) According to a TVA official, the
expected increase after 2003 is directly related to planned increases in
generating capacity at its coal plants. TVA attributes overall projected
declines in SO2 emissions to the continued switching to coal with lower
sulfur content at three plants.4 Specifically, the lower sulfur coal is 0.5
to 0.6 percent sulfur, about half the sulfur content of the coal that is
currently burned at these units. Moreover, according to the same official,
even though SO2 emissions will increase slightly from 2003 to 2005, the
average emissions rate will remain unchanged during this period.5

4TVA  officials told us that  lower sulfur coal is likely  to be used at its
Colbert, Alabama; Gallatin, Tennessee; and Paradise, Kentucky, coal plants.

5Measured in pounds of SO2 emitted per million British thermal units of heat
generated.

Figure 4: TVA Expects Its SO2 and NOx Emissions to Decrease, and Its
Capacity to Increase, Through 2005

Source: TVA.

Beyond 2005, TVA has committed to further reduce SO2 emissions. In October
2001, TVA announced that it would install five additional scrubbers to limit
SO2 emissions at its coal-burning plants between 2006 and 2010.6 According
to a senior TVA official, annual SO2 emissions from TVA coal-burning plants
are likely to fall to around 400,000 tons by 2010.

TVA's projections show a steady decline in its NOx emissions, from 287,000
tons in 2000 to 216,000 tons in 2005. TVA attributes this projected decline
to the planned installation of "selective catalytic reduction" systems-which
remove nitrogen oxides from the exhaust gases-at some of its generating
units at its coal-burning plants. TVA's first such system began operating in
2000. According to TVA, by spring 2005 it will have installed 18 of these
systems, or similar such systems, which will control NOx emissions on 25 of
its 59 generating units.

6TVA committed to installing two scrubbers at its Kingston, Tennessee, coal
plant and single scrubbers at its Bull Run, Tennessee; Colbert, Alabama; and
Paradise, Kentucky, coal plants.

Moreover, TVA expects to make even sharper cuts in its NOx emissions during
the summer "ozone season" that extends from May through October. Ozone
levels are higher during these months because emissions levels of NOx and
natural hydrocarbons are higher, and there is more sunlight, all of which
are needed for the formation of ozone, as well as higher temperatures, which
speed up the chemical reactions. TVA expects its ozone-season NOx emissions
to fall from 118,000 tons in 2000 to 43,000 tons in 2005.

(Additional information on TVA's SO2 and NOx emissions from 1974 through
2010 is included in apps. I and II of this report, respectively.)

Capacity Increases to Of the 3,086 megawatts of additional capacity that TVA
plans to add Come Mainly from Energy between 2001 and 2005, more than half
(1,658 megawatts) will come from Sources Other Than Coal "peaking" units,
which are used only during the parts of the day when

demand spikes. The rest of the new capacity (1,428 megawatts) will be base
load units, which are used throughout the day. Most of this increased
capacity will be generated through hydropower, natural gas, nuclear power,
and other noncoal sources. (See fig. 5.)

Figure 5: TVA Plans to Rely Primarily on Sources Other Than Coal to Meet
Demand, 2001-05

Source: TVA.

To increase its base load capacity, in December 2001 TVA began purchasing
power from a new 440-megawatt coal-burning lignite power plant in
Mississippi. Although TVA does not own the plant, it purchases all of the
facility's output. To further increase its base load capacity, TVA plans
both to upgrade existing units and to build new capacity:

* constructing a 500-megawatt, natural gas-fired, combined cycle plant in
Tennessee, to begin operating in 2003;

* increasing the base load generating output at the Browns Ferry, Alabama,
and Sequoyah, Tennessee, nuclear plants, between 2003 and 2005, by 290
megawatts.

* increasing turbine efficiency at three of its coal-burning plants between
2001 and 2005, adding 153 megawatts of capacity; and

* increasing its acquisition of "green power" (from landfill gas, solar, and
wind sources) to 45 megawatts in 2005.

To increase its own peak load capacity, TVA plans to add

* 1,336  megawatts of  additional combustion turbine  capacity, primarily in
2001 and 2002, at facilities in Mississippi and Tennessee;

* 310 megawatts of capacity between 2001 and 2005 by continuing to modernize
its hydropower and pumped storage facilities; and

* 12 megawatts of peak capacity by constructing a battery storage plant in

TVA's Demand-Side Management Programs Have Realized Few Savings to Date, but
TVA Projects Bigger Savings in the Future

Columbus, Mississippi.

Finally, TVA plans to meet future needs by continuing to purchase power to
meet peak-time demand. These purchases are expected to remain in the range
between 1,500 and 3,000 megawatts through 2005.

Between fiscal years 1996 and 2000, demand-side management programs reduced
TVA's peak load by 204 megawatts (about 41 megawatts a year, or roughly
equivalent to 1/10th of 1 percent of its overall capacity).7 Two programs
accounted for these savings: the Energy Right Program, which promotes the
installation of energy-efficient heat pumps and other electric appliances;
and the Cycle and Save Program, which gives residential customers a bill
credit for allowing TVA to switch off their water heaters and air
conditioners during peak demand periods. TVA reported no savings from its
rate-schedule program for commercial and industrial customers. Due in large
part to a new program introduced in mid-2001, TVA plans to achieve a
cumulative peak load reduction of 396 megawatts for the fiscal year 2001
through 2005 period (about 80 megawatts a year). Finally, TVA is studying
ways to expand its demand-side management programs and increase their
impact.

TVA's Demand-Side Management Programs Achieved Limited Energy Savings

Each year tens of thousands of customers participate in TVA's demand-side
management programs. Such programs involve all major types of
customers-commercial, industrial, and residential. Moreover, they are aimed
at reducing electricity use both year-round and during peak demand periods.

According to TVA, energy-efficiency and load-reduction programs saved 97
megawatts in fiscal year 2000, and a cumulative total of 204 megawatts

7Reductions  in peak-time  demand are measured in  megawatts. They represent
reductions in the need to invest in or purchase incremental capacity to meet
peak load.

The Energy Right Program Actually Increased Consumption

from fiscal years 1996 through 2000. Furthermore, TVA expects these programs
to result in an additional 120 megawatts of savings in fiscal year 2005 and
a cumulative total of 396 megawatts from fiscal year 2001 through 2005.
According to TVA, its peak load reduction impacts are to increase from 0.7
percent of peak load in fiscal year 2000 to 2 percent of peak load in fiscal
year 2005.

TVA attributes 74 percent of the energy savings for the fiscal year period
1996-2000 to its Energy Right Program. This program offers incentives to
encourage contractors, developers, and homeowners to install
energy-efficient electric appliances, such as heat pumps and water heaters.
(TVA attributes the remaining 26 percent to a direct load control program,
discussed below.) The Energy Right Program includes components for new
homes, manufactured homes, heat pumps in existing homes, and self-audits by
residential customers. (See fig. 6.)

Figure 6:  TVA's Peak Load Reductions  from Demand-Side Management Programs,
Fiscal Years 1996-2000

                                Source: TVA.

The Energy Right Program, which has the greatest number of participants
among TVA's demand-side management programs, is designed to reduce
residential customers' consumption both year-round and during peak-demand
times through increases in energy efficiency. In fiscal year 2000, 37,182
residential customers became participants in the program, a substantial
increase from the 15,481 residential customers who became participants in
fiscal year 1996. TVA anticipates that an additional 58,900 new participants
will join the program in fiscal year 2005.

Similarly, TVA expects the program's impacts to increase by fiscal year
2005. The reduction in year-round consumption, which stood at 23,565
megawatt-hours in fiscal year 1996 and 54,129 megawatt-hours in fiscal year
2000, is expected to reach 83,726 megawatt-hours in fiscal year 2005. Also,
the reduction in peak load demand, which was 19 megawatts in fiscal year
1996 and 43 megawatts in fiscal year 2000, is expected to reach 62 megawatts
in fiscal year 2005.

  Table 1: Peak Load Reductions from TVA's Demand-Side Management Programs,
       Fiscal Years 2000 and 2005 Name of program Customers targeted

Number of Estimated savings (in megawatts) participants, fiscal

year 2000 a 2000 2005

     Cycle and Save Program          Residential and small commercial     57,913  54
      Energy Right Program                     Residential                37,182  43
   Interruptible Power Program          Commercial and industrial          396    b   b
     Load Buyback Initiative         Large commercial and industrial        c     c
              Total                                                               97

a

For the Energy Right Program components, this is the number of new
participants enrolled in fiscal year 2000.

b TVA did not estimate the benefits of this program.

c

The program did not exist in 2000.

Source: TVA.

According to TVA's most recent estimate, the program's overall effect on
peak demand varied by season. For example, in 1996, the program resulted in
an annual decrease of 19.4 megawatts in peak summer demand and an annual
increase of 31.3 megawatts in winter demand, by providing incentives to
developers and others to install appliances powered by electricity rather
than natural gas or another energy source. According to TVA, such programs
help improve the overall efficiency of its system and ultimately result in
lower costs to consumers.

TVA Limited the Scope of Its Load-Control Program

TVA Reports No Energy Savings for Its Rate-Schedule Program

TVA's Cycle and Save program allows TVA to turn off certain appliances in
participating households for short periods when demand is high. TVA
estimates that its Cycle and Save Program for residential customers
accounted for about 26 percent of the savings realized from fiscal year 1996
through 2000. On an annual basis, the program's savings outpaced those
attributed to the Energy Right Program. However, because the Cycle and Save
Program's benefits are not cumulative, the Energy Right Program accounted
for 74 percent of the cumulative savings.

TVA reduced the incentives it offered distributors to participate in the
Cycle and Save Program and later restricted the number of distributors that
may participate in the program. According to the program manager, TVA
determined that the Cycle and Save Program was not cost-effective and
allowed it to decline over time. As a result, peak-time consumption was
presumably higher than it would have been if TVA had not taken these
actions. For example,

* TVA shifted to the distributors the cost of purchasing, installing, and
maintaining the switches that allow certain appliances to be cycled-off.
While TVA initially paid for all switches installed on appliances, including
air conditioners, standard water heaters, and storage water heaters, it
currently pays for the switches only on storage water heaters. TVA pays only
for these switches because storage water heaters are cycled-off for a longer
period of time than air conditioners and standard water heaters, thereby
providing enough peak load savings to justify their costs.

* Between 1992 and 1998, TVA reduced the amount of the monthly credit
provided to participating distributors. It reduced the credit for storage
water heaters from $5.70 to $5.50; for standard water heaters from $5.25 to
$4.75; and for air conditioners and heat pumps from $1.40 to $1.15 (dollar
figures not adjusted for inflation).

* TVA estimates that 30 percent of the radio-controlled switches that allow
the water heaters or air conditioners to be cycled off are inoperable. TVA
currently allows only 14 of its 158 distributors to participate in the
program. According to the TVA program manager, as many as 30 distributors
participated in the mid-1980s, but this number declined significantly after
TVA eliminated incentives for distributors to participate in the program.
The manager further noted that despite TVA's changes in the program, several
non-participating TVA distributors continue to express interest in
participating in the program.

TVA offers rate discounts to its commercial and industrial customers who
give TVA permission to interrupt their power during periods of peak demand
(called "interruptible power contracts"). According to TVA, 51 of

the 62 large federal and industrial customers it serves directly have such
contracts, as do 345 of its distributor-served commercial and industrial
customers. TVA estimates that these contracts give it the ability to curtail
up to 1,800 megawatts of power at times of peak demand. However, TVA seldom
uses this tool. Between 1996 and 2000 TVA curtailed power under these
contracts on only three occasions, and did not measure the savings it
accrued. Moreover, according to TVA, the customers enrolled in these
programs may reduce their consumption by 300 or more megawatts in response
to price increases.

TVA Projects Bigger Demand-Side Management Savings in the Future

TVA projects that its demand-side management programs will save nearly twice
as much in the fiscal year 2001 through 2005 period as they did in the
previous 5-fiscal year period. Specifically, it projects cumulative savings
of 396 megawatts through fiscal year 2005, in contrast to the 204 megawatts
saved through fiscal year 2000. The higher level of savings stems from
several factors: increased participation in its long-standing programs, and
the introduction of a new "buyback" program for large commercial and
industrial customers in June 2001. Specifically, this program allows TVA to
buy power back from its large commercial and industrial customers whenever
it is economical for these customers to curtail their power usage or when
they can generate power from on-site sources. TVA expects that the program
will reduce peak demand by an average of about 27 megawatts annually between
fiscal years 2001 and 2005, or 133 megawatts overall for the fiscal year
2001 through 2005 period.

In October 2001, TVA began a study of its demand-side programs, which it
expects to complete in early 2002. According to the TVA project manager, the
study's goal is to identify ways to increase cumulative savings to 500
megawatts by the end of fiscal year 2003-75 more megawatts than the current
estimate of 425 megawatts for fiscal year 2003. The study will consider a
range of options, including real-time pricing, rebates to consumers who
purchase energy-efficient appliances (such as air conditioners and
refrigerators), and incentives for industrial and commercial customers to
install high-efficiency lighting.

Other Utilities More Aggressively Pursue Demand-Side Management Programs *

Some comparable utilities have gone further than TVA in implementing
demand-side management programs that are similar to TVA's programs and in
operating other programs. In an effort to determine how other utilities are
approaching demand-side management, we contacted four utilities with such
programs:

The Bonneville Power Administration, which sells wholesale electricity,
primarily generated by hydropower, in Idaho, Oregon, Washington, and a
portion of Montana;

* Florida Power and Light, a utility serving a large residential population
in Florida;

* Georgia Power, which serves retail customers in Georgia; and

* Puget Sound Energy, which sells electricity to retail consumers in
Washington state.

The utilities we selected serve different sections of the country and face
differing regulatory environments. For example, Florida Power operates in a
regulated environment and recovers expenses from an energy conservation cost
recovery plan run by the Florida Public Service Commission. As compensation
for demand-side management expenditures, Florida Power and Light requested
reimbursement of more than $158 million from the Commission in 2000.

Energy Efficiency Unlike TVA, the Bonneville Power Administration-an agency
of the U.S.

Programs Department of Energy-offers a credit program to wholesale power
customers who take action to further conservation and renewable resource
development in the region. Bonneville offers utilities and directly served
customers a rate reduction of one-twentieth of a cent per kilowatt-hour to
develop their own conservation and renewables programs.

Peak Load Reduction Like TVA, both Florida Power and Light and Georgia Power
have load

Programs management programs for residential customers. Florida Power
residential customers receive a bill credit if they allow the utility to
switch off their air conditioners, hot water heaters, and pool pumps at peak
times.8 The utility estimates that about 657,000 (about 19 percent) of its
residential customers participate in its load control program, as contrasted

8The bill credit is $12.50 for summer months (April through October), if the
customer enrolls for all three options, and $8.50 for winter months.

with about 2 percent of TVA's residential customers. In addition, Florida
Power has 14,285 businesses enrolled in a similar program for air
conditioners. Florida Power and Light estimated that peak load savings from
its program amounted to 941 megawatts in 2000. Similarly, Georgia Power
operates a program that cycles off power to residential air conditioners.
The program, begun in 1997, is projected to reduce peak demand by 44
megawatts in 2004.

Also, like TVA, Georgia Power has 500 megawatts of interruptible power
available. Though interruptions are rare, Georgia Power uses an average of
350 megawatts when necessary. In the summer of 2000, it interrupted power
for a total of 12 hours over 3 days.

                           Rate-Schedule Programs

Georgia Power and Puget Sound Energy have experience with time-of-use
pricing programs-Georgia Power involves commercial and industrial customers,
while Puget Sound Energy involves residential customers. Georgia Power
started a real-time pricing program in 1992, and it has become the largest
such program in the country, according to the Electric Power Research
Institute. About 1,600 large commercial and industrial customers, or about
25 percent of such customers, participate in the program. In response to
peak demands for power, Georgia Power can initiate a pricing "event." The
company uses e-mail to notify participating customers, a day or an hour
ahead of time, that their prices during the event will be based on the
marginal cost of producing power.

During such an event, prices have two components: (1) a baseline charge and
(2) either a marginal charge or credit, depending on how the customer's
energy use varies from its historic energy use. In August 1999, when prices
spiked to more than $1 per kilowatt-hour (15 times the average price),9
customers reduced their demand by 800 megawatts. During typical peak events,
customers reduce demand by an average of 300 megawatts.

During 2001, Puget Sound Energy piloted a time-of-use program for about
300,000 of its 1.4 million residential customers in order to get them to use
less electricity at peak demand times. It established different rates for

9According to the Energy Information Administration, in Georgia in 1999,
commercial customers paid an average of 6.67 cents per kilowatt-hour and
industrial customers paid an average of 4.15 cents per kilowatt-hour.

4 time periods during the day-from a low of 6.5 cents per kilowatt-hour at
night to 9 cents during the mid-morning and evening hours. Moreover, Puget
Sound Energy's state-of-the-art automated meter reading system allowed its
customers to log on to its website and track their energy consumption
throughout the day. The utility found that the customers involved in the
"informational pilot program" (billed on the standard rate but provided with
consumption information via the internet), on average, shifted about 5
percent of their consumption from peak to off-peak hours. Preliminary
results indicate that those actually being billed on the time-of-use rate
reduced their overall consumption by 6 percent. Subject to state regulatory
approval, Puget Sound Energy said it plans to introduce the program to all
of its residential customers in 2002.

Bonneville Power has a demand exchange program for large industrial and
commercial customers who are willing to curtail their consumption depending
on electricity prices. Program participants are notified via the internet of
hourly, 1-day-ahead, and 2-day-ahead prices that are associated with peak
load events. Customers may respond, via computer, noting their willingness
to curtail their use of power at the posted prices.

Conclusions

Recommendations for Executive Action

While TVA plans to substantially reduce its SO2 and NOx emissions by three
means-installing control devices, using lower-sulfur coal, and relying
largely on noncoal sources for additional capacity-it could reduce emissions
even more by more aggressively pursuing an existing fourth
option-demand-side management. However, TVA's demand-side management
programs are generally limited in scope, and they contribute little to
moderating future demand. As a result, to meet its customers' growing demand
for power, TVA will need to generate more power itself, or purchase more
power from others, which will likely produce more air emissions. In
contrast, certain other utilities have realized greater savings from their
demand-side management programs. TVA's recently commissioned study of
opportunities to increase the short-term impact of its demand-side
management programs may serve as a useful first step. However, TVA still
needs to assess the potential contributions of demand-side management over a
longer time horizon.

TVA should reevaluate the design of its current programs and evaluate
opportunities for adopting proven ideas from other utilities. Accordingly,
we are recommending that the TVA Chairman (1) evaluate the structure and
effectiveness of its current programs; (2) review the longer-term

Agency Comments

Scope and Methodology

potential applicability of other programs to its power system; and (3), as
appropriate, implement demand-side management practices.

We provided a draft of this report to TVA for review and comment, and
received a letter from the Interim Vice President for Governmental Relations
(see app. III). He said that TVA was evaluating its own demand-side
management programs, including identifying potential opportunities,
researching programs offered by other utilities, and analyzing the cost
effectiveness of potential programs, all of which are consistent with our
recommendations. In addition, he provided technical comments, which we have
incorporated in the report as appropriate.

To determine TVA's plans for meeting future power demands for electricity
while minimizing emissions of SO2 and NOx and to describe the scope and
impact of TVA's demand-side management efforts, we interviewed officials
from TVA and reviewed studies and other documents prepared by the Department
of Energy's Energy Information Administration and TVA. In addition, we
interviewed three TVA distributors that participate in TVA's demand-side
management programs in order to hear their opinions on the programs'
strengths and weaknesses. In addition, we contacted experts at five
non-governmental organizations-the American Council for an Energy Efficient
Economy, Edison Electric Institute, Electric Power Research Institute,
Regulatory Assistance Project, and Southern Alliance for Clean Energy.

To describe the demand-side activities of other utilities, we contacted
officials from, and reviewed studies and other documents prepared by, the
Edison Electric Institute, the Electric Power Research Institute, and four
utilities: the Bonneville Power Administration, Florida Power and Light,
Georgia Power, and Puget Sound Energy. We selected these utilities for their
geographic dispersion, diverse customers bases, and reputation for
undertaking noteworthy demand-side management efforts. These utilities are
not necessarily representative of other utilities in this country.

We conducted our review between July 2001 and February 2002 in accordance
with generally accepted government auditing standards.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report for 14 days after
the date of this letter. At that time, we will send copies of this report to
the

Ranking Minority Member, Subcommittee on Legislative, House of
Representatives Committee on Appropriations; Senator Fred Thompson;
Representative Zach Wamp; the TVA Chairman; the EPA Administrator; and other
interested parties. We will make copies available to others upon request.

Questions about this report should be directed to me or David Marwick at
(202) 512-3841. Key contributors to this report were Richard A. Frankel,
Timothy Minelli, and Richard Slade.

Sincerely yours,

John B. Stephenson Director, Natural Resources and Environment

                 Appendix I: TVA's SO2 Emissions, 1974-2010

The planned reduction in TVA's SO2 emissions from 2001 to 2010 continues the
trend over the previous quarter-century, as shown in figure 7. TVA's
emissions dropped from 2,212,000 tons in 1974 to 727,000 tons in 2000, and
are expected to drop to 406,000 tons in 2010. This represents an 82-percent
decrease over the entire period.

TVA's two primary means for reducing SO2 emissions from its coal-burning
plants are (1) installing scrubbers that remove sulfur from smokestack gases
and (2) decreasing the sulfur content of the coal it burns to generate
electricity.

Figure 7: TVA's SO2 Emissions at Coal-Fired Plants: Actual Emissions,
1974-2000, and Estimated Emissions, 2001-10

Source: TVA.

Between 1974 and 1995, when TVA reduced its annual emissions from 2,212,000
tons to 876,000 tons, there were notable decreases in 1978, 1982, 1984, and
1995. These decreases reflect the installation of scrubbers at TVA's two
largest plants (Cumberland in Tennessee and Paradise in

Appendix I: TVA's SO2 Emissions, 1974-2010

Kentucky), as well as at Widow's Creek in Alabama, in those years. Between
1995 and 2000, TVA further reduced its annual emissions to 727,000 tons,
without adding any more scrubbers, by switching to lower-sulfur coal. Over
those 5 years, TVA lowered the average sulfur content of its coal purchases
from 2.26 percent to 1.88 percent. This decrease of about 17 percent is
roughly equal to the proportional decline of SO2 emissions during that
period.

Between 2000 and 2010, TVA plans to use both strategies to further reduce
its SO2 emissions. Through 2005, TVA plans to reduce its annual emissions to
525,000 tons, by continuing to switch to lower-sulfur coal. Beyond 2005, TVA
plans to further reduce its emissions, by installing five scrubbers on 12
units at four coal-fired plants. This will increase to 60 percent the share
of TVA's coal-fired capacity operating with scrubbers.

According to TVA, in 2001, TVA emitted SO2 at a rate of 1.18 pounds per
million British thermal units of fuel energy. TVA expects the rate will
decline to below 0.8 pounds per million units in 2010. This remains above
the rate that plants considered new sources are required to meet, which is
about 0.3 pounds per million British thermal units.

                 Appendix II: TVA's NOx Emissions, 1974-2010

TVA's planned reduction in NOx emissions at its coal plants from 2001 to
2010 continues the trend that began after 1995, when emissions reached
530,000 tons. (See fig. 8.) In that year, phase one of the Acid Rain Program
(authorized by title IV of the Clean Air Act Amendments of 1990) started and
TVA began modifying its coal plants to reduce their NOx emissions.

By 2000, when the program's second phase began, TVA's annual NOx emissions
had fallen to 285,000 tons. In that year, TVA's first selective catalytic
reduction system went into operation at its Paradise, Kentucky, coal plant.
According to TVA, by spring 2005, it will have installed 18 selective
catalytic reduction systems, or similar systems, on 25 generating units at 7
of its coal plants. TVA projects that, once these systems are installed, the
NOx emissions from its coal plants will fall to 215,000 tons in 2005. NOx
emissions shown in figure 8 reflect no additional controls beyond the 18
systems.

Figure  8: TVA ' s NOx  Emissions  at Coal-Fired  Plants: Actual  Emissions,
1974-2000, and Estimated Emissions, 2001-10

                                Source: TVA.

Appendix III: Comments from the Tennessee Valley Authority

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