Tennessee Valley Authority (Form: 10-Q, Received: 08/11/2011 15:41:18)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-52313

TENNESSEE VALLEY AUTHORITY

(Exact name of registrant as specified in its charter)


A corporate agency of the United States created by an act of Congress (State or other jurisdiction of incorporation or organization)			62-0474417 (IRS Employer Identification No.)

400 W. Summit Hill Drive Knoxville, Tennessee (Address of principal executive offices)			37902 (Zip Code)

(865) 632-2101

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o

Non-accelerated filer x Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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GLOSSARY OF COMMON ACRONYMS		3
FORWARD-LOOKING INFORMATION		5
GENERAL INFORMATION		6

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		7
Statements of Operations (unaudited)		7
Balance Sheets (unaudited)		8
Statements of Cash Flows (unaudited)		9
Statements of Changes in Proprietary Capital (unaudited)		10
Notes to Financial Statements (unaudited)		12

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		42
Executive Overview		42
Challenges and Key Initiatives		42
Liquidity and Capital Resources		49
Results of Operations		52
Critical Accounting Policies and Estimates		56
Changes in Ratemaking Impacting Accounting		56
New Accounting Standards and Interpretations		57
Corporate Governance		57
Legislative and Regulatory Matters		57
Environmental Matters		57
Legal Proceedings		59

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		60

ITEM 4. CONTROLS AND PROCEDURES		60
Disclosure Controls and Procedures		60
Changes in Internal Control over Financial Reporting		60

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		61

ITEM 1A. RISK FACTORS		61

ITEM 6. EXHIBITS		62

SIGNATURES		63

EXHIBIT INDEX		64

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GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Quarterly Report”):

Term or Acronym		Definition
AFUDC		Allowance for funds used during construction
ARO		Asset retirement obligation
ARP		Acid Rain Program
ART		Asset Retirement Trust
ASLB		Atomic Safety and Licensing Board
BEST		Bellefonte Efficiency and Sustainability Team
BREDL		Blue Ridge Environmental Defense League
CAA		Clean Air Act
CCP		Coal combustion products
CERCLA		Comprehensive Environmental Response, Compensation, and Liability Act
CME		Chicago Mercantile Exchange
CO 2		Carbon dioxide
COLA		Cost of living adjustment
CVA		Credit valuation adjustment
CY		Calendar year
EIS		Environmental Impact Statement
EPA		The Environmental Protection Agency
FASB		Financial Accounting Standards Board
FCA		Fuel cost adjustment
FERC		Federal Energy Regulatory Commission
FTP		Financial trading program
GAAP		Accounting principles generally accepted in the United States of America
GHG		Greenhouse gas
GWh		Gigawatt hour(s)
IRP		Integrated Resource Plan
KDAQ		Kentucky Division for Air Quality
kWh		Kilowatt hour(s)
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
mmBtu		Million British thermal unit(s)
MtM		Mark-to-market
MW		Megawatt
MWh		Megawatt hour(s)
NAAQS		National Ambient Air Quality Standards
NDT		Nuclear Decommissioning Trust
NEPA		National Environmental Policy Act
NERC		North American Electric Reliability Corporation
NOV		Notice of Violation
NO x		Nitrogen oxides
NPDES		National Pollutant Discharge Elimination System
NRC		The Nuclear Regulatory Commission
NRP		Natural Resource Plan
NSR		New Source Review
PSD		Prevention of Significant Deterioration
QSPE		Qualifying Special-Purpose Entity
REIT		Real estate investment trust
SACE		Southern Alliance for Clean Energy
SCRs		Selective catalytic reduction systems
SEC		Securities and Exchange Commission

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SERP		Supplemental Executive Retirement Plan
Seven States		Seven States Power Corporation
SO 2		Sulfur dioxide
SSSL		Seven States Southaven, LLC
TDEC		Tennessee Department of Environment & Conservation
TVARS		Tennessee Valley Authority Retirement System
VIE		Variable Interest Entity

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FORWARD-LOOKING INFORMATION

This Quarterly Report contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” or other similar expressions.

Although the Tennessee Valley Authority (“TVA”) believes that the assumptions underlying the forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements. Numerous factors could cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:

•

New or changed laws, regulations, and administrative orders, including those related to environmental matters, and the costs of complying with these new or changed laws, regulations, and administrative orders, as well as complying with existing laws, regulations, and administrative orders;

•

The requirement or decision to make additional contributions to TVA’s pension or other post-retirement benefit plans or to TVA’s Nuclear Decommissioning Trust (“NDT”);

•

Events at a TVA nuclear facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;

•

Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities and on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, negatively affect the cost and schedule for completing Watts Bar Nuclear Plant (“Watts Bar”) Unit 2, increase the costs of operating TVA’s existing nuclear units, and cause TVA to forego any future construction at Bellefonte Nuclear Plant (“Bellefonte”) or other facilities;

•

Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets;

•

Fines, penalties, natural resource damages, and settlements associated with the Kingston ash spill;

•

Significant changes in demand for electricity;

•

Addition or loss of customers;

•

The continued operation, performance, or failure of TVA’s generation, transmission, and related assets, including coal combustion product (“CCP”) facilities;

•

The economics of modernizing aging coal-fired generating units and installing emission control equipment to meet anticipated emission reduction requirements, which could make continued operation of certain coal-fired units uneconomical and lead to their removal from service, perhaps permanently;

•

Disruption of fuel supplies, which may result from, among other things, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA’s fuel suppliers or transporters;

•

Purchased power price volatility and disruption of purchased power supplies;

•

Events involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA’s transmission system is a part, as well as the supply of water to TVA’s generation facilities;

•

Inability to obtain regulatory approval for the construction or operation of assets;

•

Weather conditions;

•

Catastrophic events such as fires, earthquakes, solar events, floods, hurricanes, tornadoes, pandemics, wars, national emergencies, terrorist activities, and other similar events, especially if these events occur in or near TVA’s service area;

•

Reliability and creditworthiness of counterparties;

•

Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, and emission allowances;

•

Changes in the market price of equity securities, debt securities, and other investments;

•

Changes in interest rates, currency exchange rates, and inflation rates;

•

Rising pension and health care costs;

•

Increases in TVA’s financial liability for decommissioning its nuclear facilities and retiring other assets;

•

Limitations on TVA’s ability to borrow money which may result from, among other things, TVA’s approaching or reaching its debt ceiling and changes in TVA’s borrowing authority;

•

An increase in TVA’s cost of capital which may result from, among other things, changes in the market for TVA’s debt securities, changes in the credit rating of TVA or the U.S. government, and an increased reliance by TVA on alternative financing arrangements as TVA approaches its debt ceiling;

•

Changes in the economy and volatility in financial markets;

•

Inability to eliminate identified deficiencies in TVA’s systems, standards, controls, and corporate culture;

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•

Ineffectiveness of TVA’s disclosure controls and procedures and its internal control over financial reporting;

•

Problems attracting and retaining a qualified workforce;

•

Changes in technology;

•

Failure of TVA’s information technology assets to operate as planned and the failure of TVA’s cyber security program to protect TVA’s information technology assets from successful cyber attacks;

•

Differences between estimates of revenues and expenses and actual revenues and expenses incurred; and

•

Unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (the “Annual Report”) and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors, in this Quarterly Report. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA’s business or cause results to differ materially from those contained in any forward-looking statement. TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

References to years (2011, 2010, etc.) in this Quarterly Report are to TVA’s fiscal years ending September 30. Years that are preceded by “CY” are references to calendar years.

Notes

References to “Notes” are to the Notes to Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available on TVA's web site, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). TVA's web site is www.tva.gov. Information contained on TVA’s web site shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report. TVA's SEC reports are also available to the public without charge from the web site maintained by the SEC at www.sec.gov. In addition, the public may read and copy any reports or other information that TVA files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENNESSEE VALLEY AUTHORITY STATEMENTS OF OPERATIONS (Unaudited) (in millions)
	Three Months Ended June 30						Nine Months Ended June 30
	2011			2010			2011			2010

Operating revenues
Sales of electricity
Municipalities and cooperatives	$	2,287		$	2,204		$	7,190		$	6,367
Industries directly served		310			324			1,077			1,019
Federal agencies and other		31			31			95			83
Other revenue		29			28			91			89
Total operating revenues		2,657			2,587			8,453			7,558

Operating expenses
Fuel		584			509			2,071			1,343
Purchased power		387			277			1,026			656
Operating and maintenance		994			757			2,677			2,267
Depreciation and amortization		436			416			1,296			1,240
Tax equivalents		174			114			464			320
Total operating expenses		2,575			2,073			7,534			5,826

Operating income		82			514			919			1,732

Other income (expense), net		4			6			25			20

Interest expense
Interest expense		358			343			1,072			1,026
Allowance for funds used during construction and nuclear fuel expenditures		(32	)		(22	)		(93	)		(53	)
Net interest expense		326			321			979			973

Net income (loss)	$	(240	)	$	199		$	(35	)	$	779
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY BALANCE SHEETS (in millions)
ASSETS
	June 30, 2011			September 30, 2010
Current assets	(Unaudited)
Cash and cash equivalents	$	542		$	328
Accounts receivable, net		1,548			1,639
Inventories, net		1,060			1,012
Regulatory assets		757			791
Other current assets		219			78
Total current assets		4,126			3,848

Property, plant, and equipment
Completed plant		43,522			42,997
Less accumulated depreciation		(20,277	)		(19,326	)
Net completed plant		23,245			23,671
Construction in progress		4,048			3,008
Nuclear fuel		1,126			1,102
Capital leases		28			49
Total property, plant, and equipment, net		28,447			27,830

Investment funds		1,257			1,128

Regulatory and other long-term assets
Regulatory assets		9,416			9,756
Other long-term assets		374			191
Total regulatory and other long-term assets		9,790			9,947

Total assets	$	43,620		$	42,753

LIABILITIES AND PROPRIETARY CAPITAL
Current liabilities
Accounts payable and accrued liabilities	$	1,659		$	1,698
Environmental cleanup costs - Kingston ash spill		151			220
Accrued interest		333			407
Current portion of leaseback obligations		80			74
Current portion of energy prepayment obligations		105			105
Regulatory liabilities		215			63
Short-term debt, net		—			27
Current maturities of long-term debt		1,523			1,008
Total current liabilities		4,066			3,602

Other liabilities
Post-retirement and post-employment benefit obligations		4,831			4,729
Asset retirement obligations		3,108			2,963
Other long-term liabilities		1,698			1,526
Leaseback obligations		1,208			1,279
Energy prepayment obligations		638			717
Environmental cleanup costs - Kingston ash spill		260			305
Regulatory liabilities		261			106
Total other liabilities		12,004			11,625

Long-term debt, net		22,438			22,389

Total liabilities		38,508			37,616

Proprietary capital
Power program appropriation investment		313			328
Power program retained earnings		4,230			4,264
Total power program proprietary capital		4,543			4,592
Nonpower programs appropriation investment, net		634			640
Accumulated other comprehensive loss		(65	)		(95	)
Total proprietary capital		5,112			5,137

Total liabilities and proprietary capital	$	43,620		$	42,753
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended June 30 (in millions)
	2011			2010
Cash flows from operating activities
Net income (loss)	$	(35	)	$	779
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		1,311			1,255
Nuclear refueling outage amortization cost		38			82
Amortization of nuclear fuel cost		158			177
Non-cash retirement benefit expense		349			268
Prepayment credits applied to revenue		(79	)		(79	)
Fuel cost adjustment deferral		7			(808	)
Environmental cleanup costs – Kingston ash spill – non cash		57			47
Changes in current assets and liabilities
Accounts receivable, net		100			(89	)
Inventories and other, net		(116	)		(137	)
Accounts payable and accrued liabilities		94			80
Accrued interest		(73	)		(78	)
Environmental cleanup costs – Kingston ash spill, net		(74	)		(292	)
Preconstruction costs		(96	)		—
Other, net		62			5
Net cash provided by operating activities		1,703			1,210

Cash flows from investing activities
Construction expenditures		(1,678	)		(1,491	)
Nuclear fuel expenditures		(184	)		(282	)
Purchases of investments, net		—			5
Loans and other receivables
Advances		(26	)		(23	)
Repayments		9			14
Other, net		(1	)		4
Net cash used in investing activities		(1,880	)		(1,773	)

Cash flows from financing activities
Long-term debt
Issues		1,582			679
Redemptions and repurchases		(1,020	)		(35	)
Short-term debt issues (redemptions), net		(27	)		(10	)
Proceeds from sale/leaseback financing		5			9
Payments on leases and leaseback financing		(109	)		(79	)
Bond premium received		—			28
Financing costs, net		(19	)		(4	)
Payments to U.S. Treasury		(20	)		(25	)
Other		(1	)		(3	)
Net cash provided by financing activities		391			560

Net change in cash and cash equivalents		214			(3	)
Cash and cash equivalents at beginning of period		328			201

Cash and cash equivalents at end of period	$	542		$	198
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited) For the three months ended June 30, 2011 and 2010 (in millions)

	Power Program Appropriation Investment				Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss)			Total			Comprehensive Income (Loss)

Balance at March 31, 2010 (unaudited)		$	338		$	3,871		$	649		$	(5	)	$	4,853
Net income (loss)			-			202			(3	)		-			199		$	199
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges			-			-			-			(76	)		(76	)		(76	)
Reclassification to earnings from cash flow hedges			-			-			-			14			14			14
Total other comprehensive income (loss)			-			-			-			(62	)		(62	)		(62	)
Total comprehensive income (loss)																	$	137
Return on power program appropriation investment			-			(2	)		-			-			(2	)
Return of power program appropriation investment			(5	)		-			(3	)		-			(8	)
Balance at June 30, 2010 (unaudited)		$	333		$	4,071		$	643		$	(67	)	$	4,980

Balance at March 31, 2011 (unaudited)		$	318		$	4,470		$	635		$	(52	)	$	5,371
Net income (loss)			-			(239	)		(1	)		-			(240	)	$	(240	)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges			-			-			-			(12	)		(12	)		(12	)
Reclassification to earnings from cash flow hedges			-			-			-			(1	)		(1	)		(1	)
Total other comprehensive income (loss)			-			-			-			(13	)		(13	)		(13	)
Total comprehensive income (loss)																	$	(253	)
Return on power program appropriation investment			-			(1	)		-			-			(1	)
Return of power program appropriation investment			(5	)		-			-			-			(5	)
Balance at June 30, 2011 (unaudited)		$	313		$	4,230		$	634		$	(65	)	$	5,112

The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited) For the nine months ended June 30, 2011 and 2010 (in millions)

	Power Program Appropriation Investment				Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss)			Total			Comprehensive Income (Loss)

Balance at September 30, 2009		$	348		$	3,291		$	654		$	(75	)	$	4,218
Net income (loss)			-			787			(8	)		-			779		$	779
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges			-			-			-			(55	)		(55	)		(55	)
Reclassification to earnings from cash flow hedges			-			-			-			63			63			63
Total other comprehensive income (loss)			-			-			-			8			8			8
Total comprehensive income (loss)																	$	787
Return on power program appropriation investment			-			(7	)		-			-			(7	)
Return of power program appropriation investment			(15	)		-			(3	)		-			(18	)
Balance at June 30, 2010 (unaudited)		$	333		$	4,071		$	643		$	(67	)	$	4,980

Balance at September 30, 2010		$	328		$	4,264		$	640		$	(95	)	$	5,137
Net income (loss)			-			(29	)		(6	)		-			(35	)	$	(35	)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges			-			-			-			51			51			51
Reclassification to earnings from cash flow hedges			-			-			-			(21	)		(21	)		(21	)
Total other comprehensive income (loss)			-			-			-			30			30			30
Total comprehensive income (loss)																	$	(5	)
Return on power program appropriation investment			-			(5	)		-			-			(5	)
Return of power program appropriation investment			(15	)		-			-			-			(15	)
Balance at June 30, 2011 (unaudited)		$	313		$	4,230		$	634		$	(65	)	$	5,112

The accompanying notes are an integral part of these financial statements.

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NOTES TO FINANCIAL STATEMENTS ( U naudited )

(Dollars in millions except where noted)

Note No.			Page No.
1	Summary of Significant Accounting Policies	12
2	Impact of New Accounting Standards and Interpretations	14
3	Accounts Receivable, Net	14
4	Inventories, Net	15
5	Other Long-Term Assets	15
6	Regulatory Assets and Liabilities	16
7	Kingston Fossil Plant Ash Spill	17
8	Other Long-Term Liabilities	18
9	Asset Retirement Obligations	18
10	Debt	18
11	Seven States Power Corporation Obligation	19
12	Risk Management Activities and Derivative Transactions	20
13	Fair Value Measurements	27
14	Other Income (Expense), Net	33
15	Benefit Plans	33
16	Legal Proceedings	34
17	Subsequent Events	40

1. Summary of Significant Accounting Policies

General

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation creating the Tennessee Valley Authority (“TVA”), a government corporation. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA’s service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation’s largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of over nine million people.

TVA also manages the Tennessee River and its tributaries to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.

The power program has historically been separate and distinct from the stewardship programs. Additionally, the power program is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other evidences of indebtedness (“Bonds”). Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Treasury in repayment of, and as a return on, the government’s appropriation investment in TVA power facilities (the “Power Program Appropriation Investment”). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and TVA properties with power funds in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States (“GAAP”). Accordingly, these assets and properties are included as part of the power program, TVA’s only operating segment.

Power rates are established by the TVA Board of Directors (“TVA Board”) as authorized by the Tennessee Valley Authority Act of 1933, as amended , 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”). The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes; debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA’s power business. In setting TVA’s rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or federal regulatory body.

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Fiscal Year

TVA’s fiscal year ends September 30. Years (2011, 2010, etc.) refer to TVA’s fiscal years unless they are proceeded by “CY,” in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is “self regulated.” Additionally, TVA’s regulated rates are designed to recover its costs of providing electricity. In view of demand for electricity and the level of competition, it is reasonable to assume that the rates, set at levels that will recover TVA’s costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs. Most regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its interim financial statements in conformity with GAAP for interim financial information. Accordingly, TVA’s interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2010, and the notes thereto, which are contained in TVA’s Annual Report on Form 10-K for the year ended September 30, 2010 (the “Annual Report”). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included.

Use of 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 GAAP, 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 conditions, results of operations, or cash flows.

Reclassifications

Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation. Assets of $1.2 billion previously reported as Nuclear fuel and capital leases on the September 30, 2010 Balance Sheet have been reclassified as Nuclear fuel of $1.1 billion and Capital leases of $49 million. Liabilities of $4.7 billion previously reported as Other long-term liabilities on the September 30, 2010 Balance Sheet have been reclassified as Post-retirement and post-employment benefit obligations . On the Statements of Cash Flows, $292 million previously reported as changes in Accounts payable and accrued liabilities for the nine months ended June 30, 2010, have been reclassified as Environmental cleanup costs-kingston ash spill, net .

Operating expenses of $786 million and $2.0 billion for the three and nine months ended June 30, 2010, respectively, previously reported as Fuel and purchased power on the Statements of Operations, have been reclassified as follows:

	Three Months Ended June 30, 2010	Nine Months Ended June 30, 2010
Fuel	$ 509	$ 1,343
Purchased power	277	656

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Interest on debt and leaseback obligations and Amortization of debt discount, issue, and reacquisition costs, net have been combined in the three and nine months ended June 30, 2011, and are shown as Interest expense in the Statements of Operations. Interest expense for the three and nine months ended June 30, 2010, was $343 million and $1.0 billion, respectively.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances. TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days. It also reflects TVA's corporate credit department’s assessment of the financial condition of customers and the credit quality of the receivables.

2. Impact of New Accounting Standards and Interpretations

The following accounting standards and interpretations became effective for TVA during 2011 .

Transfers of Financial Assets . In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and subjects those entities to the same consolidation guidance as other variable interest entities (“VIEs”). The guidance changes the eligibility criteria for certain transactions to qualify for sale accounting and the accounting for certain transfers. The guidance also establishes broad disclosure objectives and requires extensive specific disclosure requirements related to the transfers. These changes became effective for TVA for any transfers of financial assets occurring on or after October 1, 2010. The adoption of this guidance did not materially affect TVA’s financial condition, results of operations, or cash flows.

Variable Interest Entities . In June 2009, FASB issued guidance that changes the consolidation guidance for VIEs. The guidance eliminates the consolidation scope exception for QSPEs. The statement amends the triggering events to determine if an entity is a VIE, establishes a primarily qualitative model for determining the primary beneficiary of the VIE, and requires on-going assessment of whether the reporting entity is the primary beneficiary. These changes became effective for TVA on October 1, 2010, and apply to all entities determined to be VIEs as of and subsequent to the date of adoption. The adoption of this guidance did not materially affect TVA’s financial condition, results of operations, or cash flows.

There were no accounting standards issued that were not yet effective and adopted by TVA as of June 30, 2011, that if adopted, would have materially affected its financial condition, results of operation, or cash flows. However, in June 2011, FASB issued guidance that will require adjustments to the presentation of TVA’s financial information. The guidance eliminates the current option to report comprehensive income and its components in the statement of changes in proprietary capital. The guidance allows for presentation of net income and other comprehensive income in one continuous statement or in two separated, but consecutive statements. These changes become effective for TVA on October 1, 2012.

3. Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales. The table below summarizes the types and amounts of TVA’s accounts receivable:

Accounts Receivable, Net
	At June 30, 2011			At September 30, 2010

Power receivables
Billed	$	1,473		$	597
Unbilled		21			1,004
Total power receivables		1,494			1,601

Other receivables		55			40
Allowance for uncollectible accounts		(1	)		(2	)

Accounts receivable, net	$	1,548		$	1,639

The $983 million decrease in unbilled power receivables and the $876 million increase in billed receivables are primarily due to the implementation of a new wholesale base rate structure for the majority of TVA’s customers on April 1, 2011. Under the previous end-use billing structure, billed sales were reported a month in arrears. Under the new wholesale

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base rate structure, customers are billed in the current month.

4. Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories :

Inventories, Net
	At June 30, 2011			At September 30, 2010

Fuel inventory	$	546		$	539
Materials and supplies inventory		530			486
Emission allowance inventory		10			11
Allowance for inventory obsolescence		(26	)		(24	)

Inventories, net	$	1,060		$	1,012

5. Other Long-Term Assets

The table below summarizes the types and amounts of TVA’s other long-term assets :

Other Long-Term Assets
	At June 30, 2011		At September 30, 2010

Coal contract derivative assets	$	252	$	103
Loans and other long-term receivables, net		75		68
Currency swap assets		14		–
Other long-term assets		33		20

Total other long-term assets	$	374	$	191

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6 . Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below.

Regulatory Assets and Liabilities
	At June 30, 2011		At September 30, 2010
Current regulatory assets
Deferred nuclear generating units	$	391	$	391
Unrealized losses on commodity derivatives		218		184
Environmental cleanup costs – Kingston ash spill		74		76
Fuel cost adjustment receivable		69		84
Deferred outage costs		4		42
Deferred capital lease		1		14
Total current regulatory assets		757		791

Non-current regulatory assets
Deferred pension costs		4,254		4,456
Deferred nuclear generating units		1,271		1,565
Environmental cleanup costs – Kingston ash spill		892		987
Nuclear decommissioning costs		857		898
Other non-current regulatory assets		577		499
Unrealized losses on swaps and swaptions		512		797
Non-nuclear decommissioning costs		481		410
EPA agreement		350		—
Unrealized losses related to commodity derivatives		222		144
Total non-current regulatory assets		9,416		9,756

Total regulatory assets	$	10,173	$	10,547
Current regulatory liabilities
Unrealized gains on commodity contracts	$	147	$	57
Fuel cost adjustment tax equivalents		68		—
Capital leases		—		6
Total current regulatory liabilities		215		63
Non-current regulatory liabilities
Unrealized gains on commodity contracts		261		106

Total regulatory liabilities	$	476	$	169

Preconstruction Costs. Certain preliminary work and costs associated with engineering, design, and licensing activities, as well as the procurement of long lead-time components for the partially completed Bellefonte Nuclear Plant (“Bellefonte”) Unit 1, have been deferred as a regulatory asset pending the TVA Board’s decision on the completion of the project. If the TVA Board decides to complete Bellefonte Unit 1, the costs will be moved to construction in progress and amortized over a cost recovery period equivalent to the expected useful life of the future operating nuclear unit. If the TVA Board decides not to complete the unit, the costs will be expensed at the time of the decision. The preconstruction costs were $103 million as of June 30, 2011, and are included in other non-current regulatory assets. At September 30, 2010, no such preconstruction asset had been established.

Environmental Agreement. In conjunction with the agreements with the Environmental Protection Agency (“EPA”) and others ( see Note 16 — EPA Settlement ), TVA recorded certain liabilities totaling $360 million ($290 million investment in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects; $60 million to be provided to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects [with preference for projects in the TVA watershed]; and $10 million in civil penalties) . The TVA Board determined that these costs would be collected in customer rates in the future and, accordingly, the amounts were deferred as a regulatory asset. During the three months ended June 30, 2011, the civil penalties of $10 million were expensed, and they were subsequently paid in July 2011. The remaining amounts will be charged to expense and recovered in rates over future periods as payments are made .

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7. Kingston Fossil Plant Ash Spill

The Event

In December 2008 , one of the dredge cells at the Kingston Fossil Plant (“Kingston”) failed , and approximately five million cubic yards of water and coal fly ash flowed out of the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies. TVA completed the removal of time-critical ash from the river during the third quarter of 2010 , and removal of the remaining ash is considered to be non-time-critical. TVA estimates that the physical cleanup work (final removal) will be completed in the last quarter of 2014. A final assessment, a completion report, and approval by Tennessee and EPA is expected to occur by the second quarter of 2015. Surveillance and monitoring of the site will continue, but this work is beyond the scope of the cleanup project.

Claims and Litigation

See Note 16 — Litigation — Legal Proceedings Related to the Kingston Ash Spill and Civil Penalty and Natural Resource Damages for the Kingston Ash Spill .

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category . Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate. The range of estimated costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA recorded an estimate of $1.1 billion for the cost of cleanup related to this event. In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill. The cost is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009. As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate. TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA’s balance sheets. Amounts spent since the event through June 30, 2011, totaled $714 million. The remaining estimated liability at June 30, 2011, was $411 million.

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the June 2010 Tennessee Department of Environment & Conservation (“TDEC”) order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), outcomes of lawsuits, future claims, long-term environmental impact costs, final long-term disposition of ash processing area, costs associated with new laws and regulations, or cost of remediating any ash which is comingled with radioactive material from non-TVA operations, to the extent it would have to be managed as low-level radioactive waste. There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the financial statements. Associated capital asset purchases are recorded in property, plant, and equipment . Ash handling and disposition costs from current plant operations are recorded in operating expenses. A portion of the pond and dredge cell closure costs is also not included in the estimate as it is included in the non-nuclear asset retirement obligation (“ARO”) liability.

Insurance

TVA had property and excess liability insurance programs in place at the time of the Kingston ash spill. TVA pursued claims under both the property and excess liability programs and has settled all of its property insurance claims and some of its excess liability insurance claims. Through June 3 0 , 2011, TVA received proceeds of $40 million. TVA continues to provide information about the nature and extent of TVA’s claims under the policies to some of the excess liability insurance companies. It is unclear at this time whether the parties will be able to resolve the outstanding claims without resorting to the policies’ dispute resolution procedures. Any amounts received related to insurance settlements are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

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8. Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements. The table below summarizes the types and amounts of liabilities:

Other Long-Term Liabilities
	At June 30, 2011		At September 30, 2010

Swaption liability	$	629	$	804
EPA settlement liabilities		350		—
Interest rate swap liabilities		259		371
Coal contract derivative liabilities		143		2
Commodity swap derivative liabilities		71		118
Currency swap liabilities		44		81
Other long-term liabilities		202		150

Total other long-term liabilities	$	1,698	$	1,526

9. Asset Retirement Obligations

During the nine months ended June 30, 2011, TVA’s total ARO liability increased $145 million. The increase was comprised of $39 million of new revisions in the cost estimates related to TVA’s nuclear AROs and $118 million of ARO accretion. This increase was partially offset by ash area settlement projects that were conducted during the first nine months of 2011. The nuclear and non-nuclear accretion were deferred as regulatory assets. During the nine months ended June 30, 2011, $36 million of the related regulatory assets were amortized into expense since this amount was collected in rates.

Reconciliation of Asset Retirement Obligation Liability Nine Months Ended June 30, 2011
	Nuclear		Non-nuclear			Total


Balance at beginning of period	$	1,940	$	1,023		$	2,963

Settlements (ash storage areas)		—		(12	)		(12	)
Accretion (recorded as regulatory asset)		82		36			118
Change in nuclear estimate		39		—			39

Balance at end of period	$	2,061	$	1,047		$	3,108

10. Debt

Debt Outstanding

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30 billion outstanding at any time. Debt outstanding at June 30, 2011, and September 30, 2010, including the effect of translations related to Bonds denominated in foreign currencies, consisted of the following:

Debt Outstanding
	At June 30, 2011			At September 30, 2010

Current debt
Short-term debt, net	$	—		$	27
Current maturities of long-term debt		1,523			1,008
Total current debt		1,523			1,035

Long-term debt
Long-term debt		22,673			22,605
Unamortized discount		(235	)		(216	)
Total long-term debt, net		22,438			22,389
Total outstanding debt	$	23,961		$	23,424

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Debt Securities Activity

The table below summarizes TVA’s long-term Bond activity for the period from October 1, 2010, to June 30, 2011 .

	Date	Amount	Interest Rate
Issuances:
2011 Series A	February 2011	$ 1,500	3.88%

electronotes ®(1)	Three months ended March 31, 2011	40	4.25%

	Three months ended June 30, 2011	42	4.33%


Total		$ 1,582
Redemptions/Maturities:
2009 Series A	November 2010	$ 2	2.25%
2009 Series B	December 2010	1	3.77%
2001 Series A	January 2011	1,000	5.63%
2009 Series A	May 2011	2	2.25%
2009 Series B	June 2011	1	3.77%

electronotes ®(2)	Three months ended December 31, 2010	2	3.62%

	Three months ended March 31, 2011	10	5.47%

	Three months ended June 30, 2011	2	3.12%

Total		$ 1,020
Note (1) The electronotes ® interest rate is the weighted average of the interest rates of the notes issued during that period. (2) The electronotes ® interest rate is the weighted average of the interest rates of the notes redeemed during that period.

Credit Facility Agreements . TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility matures on September 30, 2011, and is expected to be renewed. This arrangement is pursuant to the TVA Act. TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less. There were no borrowings outstanding under the facility at June 30, 2011 .

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion. Both the $0.5 billion and one of the $1.0 billion credit facilities mature on January 14, 2014, and the other $1.0 billion credit facility matures on May 11, 2014. The credit facilities also accommodate the issuance of letters of credit. The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA’s senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA’s senior unsecured long-term non-credit enhanced debt. At June 30, 2011, and September 30, 2010, there were $224 million and $411 million, respectively, of letters of credit outstanding under the facilities in place at those times, and there were no borrowings outstanding.

11. Seven States Power Corporation Obligation

Seven States Power Corporation (“Seven States”), through its subsidiary, Seven States Southaven, LLC (“SSSL”), exercised Seven States’s option to purchase from TVA an undivided 90-percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi. As part of interim joint-ownership arrangements, Seven States has the right at any time, and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven States’s interest in the facility. TVA will buy back the Seven States interest if long-term operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or

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alternative arrangements, are not in place by April 23, 2013. TVA’s buy-back obligation will terminate if such long-term arrangements are in place by that date. In the event of a buy-back, TVA will re-acquire the Seven States interest in the facility and the related assets. As of June 3 0 , 2011, and September 30, 2010, the carrying amount of the obligation was approximately $401 million and $413 million, respectively.

12. Risk Management Activities and Derivative Transactions

TVA is exposed to various market risks. These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and counterparty performance risk. To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in investment funds, it is TVA’s policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its balance sheets at fair value. The accounting for changes in the fair value of these instruments depends on whether TVA uses regulatory accounting to defer the derivative gains and losses, or whether the derivative instrument has been designated and qualifies for hedge accounting treatment , and if so, the type of hedge relationship (e.g., cash flow hedge).

The following tables summarize the accounting treatment that certain of TVA’s financial derivative transactions receive.

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	Amount of Mark-to-Market Gain (Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”) Three Months Ended June 30		Amount of Mark-to-Market Gain (Loss) Recognized in OCI Nine Months Ended June 30
			2011	2010	2011	2010

Currency swaps	To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction	$ (12)	$ (76)	$ 51	$ (55)

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
Derivatives in Cash Flow Hedging Relationship	Amount of Exchange Gain (Loss) Reclassified from OCI to Interest Expense Three Months Ended June 30 (1)			Amount of Exchange Gain (Loss) Reclassified from OCI to Interest Expense Nine Months Ended June 3 0 (1)
	2011	2010		2011	2010

Currency swaps	$ (1)	$ 14	$ (21)		$ 63
Note (1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Ended June 30 (1)		Amount of Gain (Loss) Recognized in Income on Derivatives Nine Months Ended June 30 (1)
			2011	2010	2011	2010
Swaption	To protect against decreases in value of the embedded call (interest rate risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	$ —	$ —	$ —	$ —

Interest rate swaps	To fix short-term debt variable rate to a fixed rate (interest rate risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts. (2)	—	—	—	—

Commodity contract derivatives	To protect against fluctuations in market prices of purchased coal or natural gas (price risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in fuel expense when the related commodity is used in production .	—	—	—	—

Commodity derivatives under financial trading program	To protect against fluctuations in market prices of purchased commodities (price risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities . Realized gains and losses are recognized in fuel expense when the related commodity is used in production.	(29)	(26)	(106)	(98)
Note (1) All of TVA’s derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three and nine months ended June 30, 2011 and 2010. (2) Generally, TVA maintains a level of outstanding discount notes equal to or greater than the notional amount of the interest rate swaps. However, in February 2011 and September 2010 TVA issued long-term Bonds in anticipation of the maturity of other long-term debt, and used the proceeds to pay down discount notes, which caused the balance of discount notes outstanding at June 30, 2011, to remain below the notional amount of the interest rate swaps. There is no impact on the statements of operations due to the use of regulatory accounting for these items.

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MARK-TO-MARKET VALUES OF TVA DERIVATIVES
	At June 30, 2011			At September 30, 2010

Derivatives that Receive Hedge Accounting Treatment:

	Balance		Balance Sheet Presentation	Balance	Balance Sheet Presentation
Currency swaps:
£200 million Sterling	$ (29)		Other long-term liabilities	$ (42)	Other long-term liabilities
£250 million Sterling	14		Other long-term assets	(5)	Other long-term liabilities
£150 million Sterling	(15)		Other long-term liabilities	(34)	Other long-term liabilities

Derivatives that Do Not Receive Hedge Accounting Treatment:

	Balance		Balance Sheet Presentation	Balance	Balance Sheet Presentation
Swaption:
$1.0 billion notional	$ (629)		Other long-term liabilities	$ (804)	Other long-term liabilities
Interest rate swaps:
$476 million notional	(247)		Other long-term liabilities	(356)	Other long-term liabilities
$42 million notional	(12)		Other long-term liabilities	(15)	Other long-term liabilities
Commodity contract derivatives	124		Other long-term assets $252; Other current assets $131; Other long-term liabilities ($143); Accounts payable and accrued liabilities ($116)	103	Other long-term assets $103; Other current assets $49; Other long-term liabilities ($2); Accounts payable and accrued liabilities ($47)

Derivatives under financial trading program:
Margin cash account (1)	33		Other current assets	12	Other current assets
Derivatives under financial trading program (2)		(142)	Current regulatory liabilities $16; Regulatory liabilities $9; Current regulatory assets ($88); Regulatory assets ($79)	(254)	Current regulatory liabilities $6; Regulatory liabilities $3; Current regulatory assets ($136); Regulatory assets ($127)
Note (1) In accordance with certain credit terms, TVA uses leverage to trade financial instruments under the financial trading program. Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under financial trading program table. (2) The June 30, 2011, and September 30, 2010, balances in Derivatives under financial trading program show all open derivative positions in the financial trading program. TVA previously included both open derivative positions and closed derivative gains and losses in this amount. TVA changed the presentation at June 30, 2011, to be consistent with the other derivatives in this table, which only show open positions, and revised the September 30, 2010 balances accordingly.

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Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred. TVA had the following currency swaps outstanding as of June 30, 2011:

Currency Swaps Outstanding At June 30, 2011
Effective Date of Currency Swap Contract	Associated TVA Bond Issues Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA
2003	£150 million	2043	4.96%
2001	£250 million	2032	6.59%
1999	£200 million	2021	5.81%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by an exchange loss on the swap contract. Conversely, when the dollar weakens against the British pound sterling, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract. All such exchange gains or losses on the Bond liability are included in Long-term debt, net . The offsetting exchange losses or gains on the swap contracts are recognized in Accumulated other comprehensive loss . If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense .

Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate Swaps . Prior to 2006 , TVA entered into four swaption transactions to monetize the value of call provisions on certain of its Bond issues. A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a floating rate of interest and pays the third party a fixed rate of interest equal to the interest rate on the Bond issue whose call provision TVA has monetized . Subsequently, the counterparties to three of the swaptions exercised their rights to enter into interest rate swaps with TVA.

TVA uses regulatory accounting treatment to defer the mark-to-market gains and losses on these swaps and swaption and includes the gain or loss in the ratemaking formula when these transactions settle. The values of the swaps and swaption and related deferred unrealized gains and losses are recorded on TVA’s balance sheets with realized gains or losses, if any, recorded on TVA’s statements of operations. There were no realized gains or losses for the nine months ended June 30, 2011 and 2010.

For the three and nine months ended June 30, 2011, the changes in market value resulted in deferred unrealized gains (losses) on the value of the interest rate swaps and swaption of $(93) million and $287 million, respectively. All net deferred unrealized gains and losses are reclassified as regulatory assets or liabilities on the balance sheet.

Commodity Derivatives. TVA enters into certain derivative contracts for coal, natural gas, and electricity that require physical delivery of the contracted quantity of the commodity. TVA expects to take or make delivery, as appropriate, under the electricity contract derivatives. Accordingly, these contracts qualify for normal purchases and normal sales accounting.

TVA marks to market all of its natural gas derivative contracts that require physical delivery. The total market value of these natural gas derivative contracts at June 30, 2011, and September 30, 2010, was less than $1 million. At June 30, 2011, these natural gas derivative contracts had terms of up to four months.

During the three months ended December 31, 2010, TVA determined that certain quantities under the coal contract derivatives were no longer probable of physical delivery; therefore, these contracts were no longer eligible for normal purchases and normal sales accounting. Accordingly, TVA began marking all of its coal contract derivatives to market as of December 31, 2010 . At June 3 0 , 2011, and September 30, 2010, TVA’s coal contract derivatives had net market values of $123 million and $103 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis. At June 30, 2011, TVA’s coal contract derivatives had terms of up to six years.

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Commodity Contract Derivatives
	At June 30, 2011			At September 30, 2010
	Number of Contracts	Notional Amount	Fair Value (MtM)	Number of Contracts	Notional Amount	Fair Value ( MtM )

Coal Contract Derivatives	41	74 million tons	$ 123	11	27 million tons	$ 103

Natural Gas Contract Derivatives	15	24 million mmBtu	$ 1	3	1 million mmBtu	$ —

Derivatives Under Financial Trading Program. TVA has a financial trading program (“FTP”) under which it purchases and sells futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment (“FCA”) calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies. The combined transaction limit for the FCA and construction material transactions is $130 million (based on one-day value at risk). In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $100 million at the execution of any new transaction. The portfolio value at risk limit for the foreign currency transactions is $5 million and is separate and distinct from the $130 million transaction limit discussed above. TVA is prohibited from trading financial instruments under the FTP for speculative purposes.

At June 30, 2011, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, coal, and power. Futures contracts and option contracts under the FTP had remaining terms of one year or less. Swap contracts under the FTP had remaining terms of six years or less.

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Derivatives Under Financial Trading Program

	At June 30, 2011					At September 30, 2010

	Notional Amount		Fair Value (MtM) (in millions)			Notional Amount		Fair Value (MtM) (in millions)

Natural gas (in mmBtu)
Futures contracts		2,550,000	$	(6	)		7,920,000	$	(21	)
Swap contracts		171,915,000		(159	)		137,110,000		(241	)
Option contracts		1,250,000		(1	)		5,250,000		(2	)
Natural gas financial positions		175,715,000	$	(166	)		150,280,000	$	(264	)

Fuel oil/crude oil (in barrels)
Futures contracts		-	$	-			125,000	$	2
Swap contracts		1,495,000		22			1,711,000		8
Option contracts		180,000		-			495,000		-
Fuel oil/crude oil financial positions		1,675,000	$	22			2,331,000	$	10

Coal (in tons)
Futures contracts		-	$	-			-	$	-
Swap contracts		120,000		2			480,000		-
Option contracts		-		-			-		-
Coal financial positions		120,000	$	2			480,000	$	-

Power (in MWh)
Swap contracts		16,800	$	-			-	$	-
Power financial positions		16,800	$	-			-	$	-

Note Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the broker or other counterparty. Notional amounts disclosed represent the net absolute value of contractual amounts.

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity product. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $(14) million at June 30, 2011, and $(15) million at September 30, 2010. The deferred unrealized losses related to natural gas hedges were $(166) million at June 30, 2011, and $(264) million at September 30, 2010. For the nine months ended June 30, 2011 and 2010, TVA recognized realized losses on natural gas hedges of $(121) million and $(110) million, respectively, which were recorded as increases to Fuel expense . The deferred unrealized gains related to fuel oil/crude oil hedges were $22 million at June 30, 2011, and $10 million at September 30, 2010. For the nine months ended June 30, 2011 and 2010, TVA recognized realized gains on fuel oil/crude oil hedges of $17 million and $12 million, respectively, which were recorded as decreases to Fuel expense . The deferred unrealized gain related to coal hedges was $2 million at June 30, 2011. For the nine months ended June 30, 2011, TVA recognized realized gains on coal hedges of less than $1 million, which was recorded as a decrease to Fuel expense. There were no deferred unrealized gains or losses related to coal hedges at June 30, 2010.

Other Derivative Instruments

Investment Fund Derivatives. Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust (“NDT”), the Asset Retirement Trust (“ART”), and the Supplemental Executive Retirement Plan (“SERP”). All securities in the trusts are classified as trading. See Note 13 for a discussion of the trusts’ objectives and the types of investments included in the various trusts. Derivative instruments in these trusts include swaps, futures, options, forwards, and other instruments. As of June 30, 2011, and September 30, 2010, the fair value of derivative instruments in these trusts was not material to TVA’s financial statements.

Collateral . TVA’s interest rate swaps, its currency swaps, and its swaption contain contract provisions that require a party to post collateral (in a form such as cash or a letter

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of credit) when the party’s liability balance under the agreement exceeds a certain threshold. As of June 30, 2011, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $932 million. TVA’s collateral obligation as of June 30, 2011, under these arrangements was $224 million, for which TVA had posted $224 million under a letter of credit. These letter of credit postings reduce the available balance under the related credit facility. TVA’s assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral.

For all of its derivative instruments with credit-risk related contingent features:

•

If TVA remains a majority-owned U.S. government entity but Standard & Poors (“S&P”) or Moody’s Investor Service (“Moody’s”) downgrades TVA’s credit rating to AA or Aa2, respectively, TVA would be required to post an additional $175 million of collateral in excess of its June 30, 2011, obligation; and

•

If TVA ceases to be majority-owned by the U.S. government, its credit rating would likely change and TVA would be required to post additional collateral.

Counterparty Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of a counterparty’s nonperformance of its contractual obligations. Where exposed to counterparty credit risk, TVA analyzes the counterparty’s financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty on an ongoing basis, and employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

Credit of Customers. The majority of TVA’s counterparty credit risk is associated with trade accounts receivable from delivered power sales to municipal and cooperative distributor customers, all located in the Tennessee Valley region. To a lesser extent, TVA is exposed to credit risk from industries and federal agencies directly served and from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements. Power sales to TVA’s largest industrial customer directly served represented five percent of TVA’s total operating revenues for the nine months ended June 30, 2011. This customer’s senior unsecured credit ratings are currently CCC- by S&P and Caa2 by Moody’s. As a result of its credit ratings, this customer has provided credit assurance to TVA under the terms of its power contract. TVA had concentrations of accounts receivable from four customers that represented 31 percent of total outstanding accounts receivable at June 30, 2011. TVA had concentrations of accounts receivable from five customers that represented 36 percent of total outstanding accounts receivable at September 30, 2010.

Credit of Derivative Counterparties. TVA has entered into derivative contracts for hedging purposes, and TVA’s NDT and defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of TVA’s hedging transactions defaults, TVA might incur substantial costs in connection with entering into a replacement hedging transaction. If a counterparty to the derivative contracts into which the NDT and the pension fund have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. As of June 30, 2011, the swaption and all of TVA’s currency swaps, interest rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody’s credit rating was A2 or higher. As of June 30, 2011, all of TVA’s coal contract derivatives were with counterparties whose Moody’s credit rating, or TVA’s internal analysis when such information was unavailable, was Caa1 or higher.

Credit of Suppliers. If one of TVA’s fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. To help ensure a reliable supply of coal, TVA had coal contracts with 23 different suppliers at June 30, 2011. The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck). TVA purchases all of its natural gas requirements from a variety of suppliers under short-term contracts.

TVA has a power purchase agreement with a supplier of electricity for 440 megawatts (“MW”) of summer net capability from a lignite-fired generating plant that expires on March 31, 2032. The supplier’s senior secured credit ratings are currently B+ by S&P and B2 by Moody’s. As a result of its credit ratings, the supplier has provided credit assurance to TVA under the terms of its agreement. Additionally, the senior unsecured credit ratings of TVA’s largest supplier of uranium enrichment services, which is also TVA's largest industrial customer directly served, are currently CCC - by S&P and Caa2 by Moody's. Any nonperformance by this company could result in TVA incurring additional costs.

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13. Fair Value Measurements

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in TVA’s principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:

Level 1	—	Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
Level 2	—	Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
Level 3	—	Pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only to be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

A financial instrument's level within the fair value hierarchy (where Level 3 is the lowest and Level 1 is the highest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP assets, all changes in fair value of these assets and liabilities have been reflected as changes in Regulatory assets , Regulatory liabilities , or Accumulated other comprehensive loss on TVA’s Balance Sheet as of June 30, 2011, and Statements of Changes in Proprietary Capital for the three and nine months ended June 30, 2011. Except for gains and losses on SERP assets, there has been no impact to the Statements of Operations for the three and nine months ended June 30, 2011, or the Statements of Cash Flows for the nine months ended June 30, 2011, related to these fair value measurements.

Investments

At June 30, 2011, TVA’s investment funds were composed of $1.3 billion of securities classified as trading and measured at fair value and $2 million of equity investments not required to be measured at fair value. Trading securities are held in the NDT, ART, and SERP. The NDT holds funds for the ultimate decommissioning of TVA’s nuclear power plants. The ART holds funds for the costs related to the future closure and retirement of TVA’s long-lived assets. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by Internal Revenue Service (“IRS”) rules applicable to the qualified defined benefit pension plan. The NDT and SERP are invested in securities generally designed to achieve a return in line with overall equity market performance. The ART is presently invested to achieve a return in line with fixed-income market performance.

The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers. Most U.S. and international equities, Treasury inflation-protected securities, real estate investment trust (“REIT”) securities, cash securities, and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.

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Private partnership investments may include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations. Investments in private partnerships generally involve a three - to four - year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, a 10-year or longer investment commitment. The NDT had unfunded commitments related to private partnerships of $82 million at June 30, 2011. These investments have no redemption or limited redemption options and may also restrict the NDT’s ability to liquidate its investment interest. The private partnerships and other similar alternative investments are reported at fair value which is derived by independent appraisals or judgment of the general partners of each such investment. The inputs used in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments of comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows of the limited partnerships. The fair value of these investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from the value ultimately realized from the private partnership investments. TVA classifies its interest in these types of investment as Level 3 within the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT and SERP consist either of a single class of security, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded (Level 1) or measured using observable inputs for similar instruments (Level 2). The fair value of commingled funds is based on net asset values (“NAV”) per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be liquidated at the measurement date NAV price and are classified as Level 2 valuations. Required notification periods range from zero to 30 days. The funds can be redeemed unless doing so would violate regulations to which the fund is subject, would be unreasonable or impracticable, or would be seriously prejudicial to the fund.

Realized and unrealized gains and losses on trading securities are recognized in current earnings and are based on average cost. The SERP had unrealized gains (losses) of less than $(1) million and $4 million for the three and nine months ended June 30, 2011, respectively, compared with unrealized gains (losses) of $(2) million and $1 million for the three and nine months ended June 30, 2010, respectively. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory liability or asset account in accordance with TVA’s regulatory accounting policy. The NDT had unrealized (losses) of $(8) million and $(61) million for the three months ended June 30, 2011 and 2010, respectively, and the ART had an unrealized (loss) of $(1) million for the three months ended June 30, 2011, compared to an unrealized gain of less than $1 million for the three months ended June 30, 2010.

Currency Swaps, Swaption, and Interest Rate Swaps

See Note 12 — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA’s currency swaps, swaption, and interest rate swaps.

The currency swaps and interest rate swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments. The swaption is classified as a Level 3 valuation and is valued based on an income approach. The valuation is computed using a broker-provided pricing model utilizing interest and volatility rates. While most of the fair value measurement is based on observable inputs, volatility for TVA’s swaption is generally unobservable. Therefore, the valuation is derived from an observable volatility measure with adjustments.

Commodity Contract and Commodity Derivatives

Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches. TVA develops an overall coal price forecast using widely-used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from overall coal price forecasts, contract-specific terms, and other market inputs.

Commodity Derivatives Under Financial Trading Program. These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange (“CME”) quoted prices and other observable inputs. Futures and options contracts settled on the CME are classified as Level 1 valuations. Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.

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See Note 12 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and Derivatives Under Financial Trading Program for a discussion of the nature and purpose of coal contracts and derivatives under TVA’s FTP .

Nonperformance Risk. The impact of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, a swaption, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

Nonperformance risk for most of TVA’s derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a Credit Valuation Adjustment (“CVA”). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA’s or counterparty’s credit rating as obtained from Moody’s. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody’s for CY 1983 to CY 2010) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a $77 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at June 30, 2011.

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The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2011, and September 30, 2010. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.

Fair Value Measurements
	At June 30, 2011
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total
Description			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total

Currency swaps	$	—	$	14	$	—	$	—		$	14
Investments
Equity securities		106		—		—		—			106
Debt securities
U.S. government corporations and agencies		110		39		—		—			149
Corporate debt securities		—		240		—		—			240
Residential mortgage-backed securities		—		19		—		—			19
Commercial mortgage-backed securities		—		4		—		—			4
Collateralized debt obligations		—		5		—		—			5
Private partnerships		—		—		18		—			18
Commingled funds (2)
Equity security commingled funds		—		451		—		—			451
Debt security commingled funds		—		224		—		—			224
Other commingled funds		—		38		—		—			38
Total investments		216		1,020		18		—			1,254
Commodity contract derivatives		—		—		383		—			383
Commodity derivatives under FTP
Futures contracts		—		—		—		—			—
Swap contracts		—		34		—		(9	)		25
Option contracts		—		—		—		—			—
Total commodity derivatives under FTP		—		34		—		(9	)		25
Total	$	216	$	1,068	$	401	$	(9	)	$	1,676

	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total
Liabilities Description			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total

Currency swaps	$	—	$	44	$	—	$	—		$	44
Interest rate swaps		—		259		—		—			259
Swaption		—		—		629		—			629
Commodity contract derivatives		—		—		259		—			259
Commodity derivatives under FTP
Futures contracts		6		—		—		—			6
Swap contracts		—		169		—		(9	)		160
Option contracts		1		—		—		—			1
Total commodity derivatives under FTP		7		169		—		(9	)		167
Total	$	7	$	472	$	888	$	(9	)	$	1,358
Notes (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

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Fair Value Measurements

	At September 30, 2010
Assets
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total


Investments
Equity securities	$	96	$	-	$	-	$	-		$	96
Debt securities
U.S. government corporations and agencies		136		57		-		-			193
Corporate debt securities		-		193		-		-			193
Residential mortgage-backed securities		-		22		-		-			22
Commercial mortgage-backed securities		-		2		-		-			2
Collateralized debt obligations		-		3		-		-			3
Private partnerships		-		-		13		-			13
Commingled funds (2)
Equity security commingled funds		-		340		-		-			340
Debt security commingled funds		-		209		-		-			209
Foreign currency commingled funds		-		12		-		-			12
Other commingled funds		-		45		-		-			45
Total investments		232		883		13		-			1,128
Commodity contract derivatives		-		-		152		-			152
Commodity derivatives under FTP
Futures contracts		2		-		-		-			2
Swap contracts		-		9		-		(1	)		8
Total commodity derivatives under FTP		2		9		-		(1	)		10
Total	$	234	$	892	$	165	$	(1	)	$	1,290

Liabilities
Description	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting (1)			Total

Currency swaps	$	-	$	81	$	-	$	-		$	81
Interest rate swaps		-		371		-		-			371
Swaption		-		-		804		-			804
Commodity contract derivatives		-		-		49		-			49
Commodity derivatives under FTP
Futures contracts		21		-		-		-			21
Swap contracts		15		227		-		(1	)		241
Option contracts		2		-		-		-			2
Total commodity derivatives under FTP		38		227		-		(1	)		264
Total	$	38	$	679	$	853	$	(1	)	$	1,569

Note (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as "other commingled funds."

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The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair Value Measurements Using Significant Unobservable Inputs
	Three Months Ended June 30, 2011							Nine Months Ended June 30, 2011
	Private Partnerships		Commodity Contract Derivatives		Swaption			Private Partnerships			Commodity Contract Derivatives		Swaption

Balances at the beginning of the period	$	14	$	73	$	(554	)	$	13		$	103	$	(804	)
Purchases		4		—		—			13			—		—
Issuances		—		—		—			—			—		—
Settlements		—		—		—			(7	)		—		—
Total gains or losses (realized or unrealized):
Net unrealized gains (losses) deferred as regulatory assets and liabilities		—		51		(75	)		(1	)		21		175
Balances at June 30, 2011	$	18	$	124	$	(629	)	$	18		$	124	$	(629	)

	Three Months Ended June 30, 2010							Nine Months Ended June 30, 2010
	Private Partnerships		Commodity Contract Derivatives		Swaption			Private Partnerships		Commodity Contract Derivatives		Swaption

Balances at the beginning of the period	$	—	$	—	$	(448	)	$	—	$	7	$	(592	)
Purchases		2		—		—			2		—		—
Issuances		—		—		—			—		—		—
Settlements		—		—		—			—		—		—
Total gains or losses (realized or unrealized):
Net unrealized gains (losses) deferred as regulatory assets and liabilities		—		13		(226	)		—		6		( 82	)
Balances at June 30, 2010	$	2	$	13	$	(674	)	$	2	$	13	$	(674	)

There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected net income during the three and nine months ended June 30, 2011. All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 6.

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Other Financial Instruments Not Recorded at Fair Value

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument. The fair market value of the financial instruments held at June 30, 2011, and September 30, 2010, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA’s financial instruments not recorded at fair value at June 30, 2011, and September 30, 2010, were as follows:

Estimated Values of Financial Instruments
	At June 30, 2011				At September 30, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Loans and other long-term receivables, net	$	75	$	69	$	68	$	60

Long-term debt (including current portion), net		23,961		26,208		23,397		27,193

Because of the short-term maturity of cash and cash equivalents, restricted cash and investments, and short-term debt, the carrying amounts of these instruments approximate their fair values.

Fair value of long-term debt traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date.

Fair values for loans and other long-term receivables are estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable.

14. Other Income (Expense), Net

Income and expenses not related to TVA’s operating activities are summarized in the following table:

Other Income (Expense), Net
	For the three months ended June 30					For the nine months ended June 30
	2011		2010			2011		2010

External services	$	2	$	3		$	13	$	9
Interest income		2		1			6		4
Gains (losses) on investments		—		(2	)		4		1
Miscellaneous		—		4			2		6

Total other income (expense), net	$	4	$	6		$	25	$	20

15. Benefit Plans

TVA sponsors a qualified defined benefit pension plan and a qualified defined contribution plan that cover eligible employees, two unfunded post-retirement plans that provide for non-vested contributions toward the cost of certain eligible retirees’ medical coverage, other postemployment benefits such as workers’ compensation, and the SERP.

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The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three and nine months ended June 30, 2011 and 2010 were as follows:

Components of TVA’s Benefit Plans
	For the Three Months Ended June 30											For the Nine Months Ended June 30
	Pension Benefits						Other Post-retirement Benefits					Pension Benefits						Other Post-retirement Benefits
	2011			2010			2011			2010		2011			2010			2011			2010

Service cost	$	30		$	24		$	4		$	3	$	90		$	74		$	10		$	9
Interest cost		126			128			8			10		377			384			24			28
Expected return on plan assets		(122	)		(140	)		—			—		(366	)		(404	)		—			—
Amortization of prior service cost		(6	)		(6	)		(2	)		1		(18	)		(18	)		(5	)		4
Recognized net actuarial loss		71			41			5			4		212			143			16			13
Net periodic benefit cost as actuarially determined		99			47			15			18		295			179			45			54
Amount charged (capitalized) due to actions of regulator		3			24			—			—		9			38			—			—
Total net periodic benefit cost recognized	$	102		$	71		$	15		$	18	$	304		$	217		$	45		$	54

During the nine months ended June 30, 2011, TVA did not make contributions to its pension plan. TVA does not separately set aside assets to fund other benefit costs, but rather funds such costs on an as-paid basis. TVA provided approximately $30 million and $27 million for other benefit costs during the nine months ended June 30, 2011 and 2010, respectively. Net amounts capitalized due to regulatory actions include amounts that have been deemed probable of recovery in future rates.

16. Legal Proceedings

General

From time to time, TVA is a 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 TVA’s activities, as a result of a catastrophic event or otherwise. TVA had accrued approximately $385 million of potential losses with respect to Legal Proceedings as of June 30, 2011. Of this amount, $350 million is included in Other long-term liabilities and $35 million is included in Accounts payable and accrued liabilities . 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.

EPA Settlement

On April 14, 2011, TVA entered into two agreements that generally absolve TVA from any liability under the New Source Review (“NSR”) requirements of the Clean Air Act (“CAA”) for maintenance, repair, and component replacement projects at TVA’s coal-fired units. The first agreement is a Federal Facilities Compliance Agreement with EPA. The second agreement is a consent decree with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation (the “Consent Decree”). The two agreements (collectively, “the Environmental Agreements”) are substantially the same and are parts of a collective undertaking and are described below .

Under the agreements:

Most existing and possible claims against TVA based on alleged NSR and associated violations are waived and cannot be brought against TVA. Some possible claims for sulfuric acid mist and greenhouse gases (“GHG”) can still be brought against TVA. Additionally, the agreements do not address compliance with new laws and regulations or the cost associated with such compliance.

EPA generally will not enforce NSR requirements for new plant maintenance, repair, and component replacement projects against TVA until 2019. Possible claims for NSR violations involving increases in GHG and sulfuric acid mist from projects can still be pursued in the future. Claims for increases in particulates also can be pursued except at TVA’s Allen Fossil Plant, Bull Run Fossil Plant (“Bull Run”), Kingston, and Gallatin Fossil Plant and Unit 5 at TVA’s Colbert Fossil Plant.

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TVA commits to retiring on a phased schedule two units at the John Sevier Fossil Plant (“John Sevier”), the six small units at the Widows Creek Fossil Plant (“Widows Creek”), and 10 units at the Johnsonville Fossil Plant (“Johnsonville”). This is a total of approximately 2,700 MW (nameplate capacity) or 2,200 MW (summer net dependable capability). The majority of these retirement costs have been previously included in the ARO liability. Further, the depreciation expense related to these facilities was changed beginning in April 2011 in order to depreciate the assets over their remaining useful lives.

Of the remaining 5,600 MW (nameplate capacity) or 4,500 MW (summer net dependable capability) coal-fired fleet capacity that is not already fully equipped with advanced sulfur dioxide (“SO 2 ”) or nitrogen oxides (“NO x ”) controls, TVA must decide whether to control, convert, or retire 4,300 MW (nameplate capacity) or 3,500 MW (summer net dependable capability) on a unit by unit schedule which can extend until 2019.

·	Annual, declining emission caps are set for SO 2 and NO x .

·	TVA, with EPA approval, will invest $290 million in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects by June 2016. This amount is included on the June 30, 2011 Balance Sheet as a regulatory asset.

TVA will provide Alabama, Kentucky, North Carolina, and Tennessee a total of $60 million in annual installments beginning in 2011 through 2016 to fund environmental projects, giving a preference for projects in the TVA watershed or service area. This amount is included on the June 30, 2011 Balance Sheet as a regulatory asset.

·	The civil penalties of $10 million were expensed during the period ended June 30, 2011, and subsequently paid in July 2011. The civil penalty was divided among EPA, Alabama, Kentucky, and Tennessee.

The $290 million and the $60 million detailed above are included in Other long-term liabilities on the June 30, 2011 Balance Sheet. In conjunction with the approval of the agreements, the TVA Board determined that it was appropriate to record the amounts detailed above as regulatory assets. Therefore, the amounts will be recovered in future periods.

The agreement with EPA was noticed in the Federal Register , and the public comment period expired with no changes made to the agreement. That agreement became effective on June 13, 2011. The United States District Court for the Eastern District of Tennessee (“Eastern District of Tennessee”) entered the Consent Decree on June 30, 2011. In connection with the agreement and the entry of the Consent Decree, the following legal and administrative clean air proceedings discussed below are expected to be terminated or narrowed in scope:

·	The Proceeding Involving the John Sevier CAA Permit, and

·	The Proceeding Involving the Shawnee Fossil Plant (“Shawnee”) CAA Permit.

Additionally, the following legal and administrative clean air proceedings have already been terminated in connection with the agreement and the Consent Decree:

·	The Case Involving Alleged Violations of New Source Review Regulations at Bull Run,

·	The Case Brought by North Carolina Alleging Public Nuisance, and

·	The Proceeding Involving the Paradise Fossil Plant (“Paradise”) CAA Permit.

Demand and sales projections for the TVA system are expected to require that TVA replace the retired capacity over time. The cost of this is uncertain and depends on demand and the energy resources chosen for this replacement capacity. TVA anticipates meeting this need with a mix of generating assets and investments in energy efficiency and demand reduction programs so as to minimize the total costs of replacing the generation lost as a result of retiring these units .

Litigation

Legal Proceedings Related to the Kingston Ash Spill . Sixty-one lawsuits based on the Kingston ash spill have been filed in the Eastern District of Tennessee. Eight of those actions have been voluntarily dismissed. The lawsuits, filed by residents, businesses, and property owners in the Kingston area, allege various causes of action in tort – including nuisance, strict liability, personal injury, and property damage – as well as inverse condemnation, and generally seek unspecified compensatory and punitive damages, court orders to clean up the plaintiffs’ properties and surrounding properties, and other relief. The lawsuits seeking class certification have been voluntarily consolidated so there is now only one

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complaint, Chesney , seeking class certification. The court has denied the request for class certification. TVA is the sole defendant in all actions, since the two non-TVA defendants in Chesney have been dismissed from the lawsuit. On March 26, 2010, the court issued a decision finding (1) the discretionary function doctrine is applicable to TVA’s ash pond design decisions and its spill response activities, (2) plaintiffs cannot recover punitive damages against TVA, and (3) plaintiffs have no right to a jury trial against TVA. The court denied TVA’s motions with regard to plaintiffs’ tort claims concerning TVA's maintenance and upkeep of the ash pond, along with the inverse condemnation claims raised by certain plaintiffs. The court has scheduled the seven earliest-filed cases for trial beginning on September 13, 2011, and the remaining cases for trial beginning November 1, 2011.

On March 22, 2011, the court issued decisions on two motions filed by TVA. With respect to the TVA motions, the court held that (1) a plaintiff could not bring a claim for TVA’s allegedly having caused a nuisance with regard to property if the plaintiff did not have a valid property interest in that property and (2) a plaintiff who filed for bankruptcy after bringing suit against TVA but did not include the suit in the bankruptcy proceeding was barred from pursuing the suit against TVA.

On March 24, 2011, the court issued a decision which granted TVA’s motion for summary judgment on any claim related to activities the court had previously ruled as being protected by the discretionary function doctrine (ash pond design and spill response activities). The court denied TVA’s motion with regard to any alleged failures to adequately inform or train personnel in applicable policies or procedures or negligent maintenance. The court also held that while TVA’s design and construction decisions concerning the ash pond were protected by the discretionary function doctrine, the court would not grant summary judgment on claims related to alleged negligence in carrying out such design and construction decisions.

On April 19, 2011, plaintiffs in one of the lawsuits requested permission from the court to file an amended complaint which asserts only claims based on alleged property damage, including nuisance and trespass. The court allowed the amended complaint and the case with regard to these plaintiffs will proceed on the property damage claims and not on any personal injury or related claims, including requests for medical monitoring.

On August 2, 2011, the court granted summary judgment in favor of TVA on plaintiffs’ personal injury, emotional distress, and inverse condemnation claims. The court denied summary judgment on the trespass, nuisance, and property injury claims, and the litigation now will proceed to the scheduled bench trial on those claims.

TVA has received several notices of intent to sue under various environmental statutes from both individuals and environmental groups. In addition, TVA has received substantial other claims from individuals and companies allegedly affected by the ash spill and may receive additional claims.

Civil Penalty and Natural Resource Damages for the Kingston Ash Spill . On June 14, 2010, TDEC issued a civil penalty order of approximately $12 million to TVA for the Kingston ash spill, citing violations of the Tennessee Solid Waste Disposal Act and the Tennessee Water Quality Control Act. Of the $12 million, TVA has already satisfied $6 million of the obligation and may also be credited up to $2 million for performing environmental projects approved by TDEC. The remaining obligation will be paid in installments through July 2012. On January 24, 2011, TVA entered into a memorandum of agreement with the TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damage claim associated with the Kingston ash spill. As part of this memorandum of agreement, TVA agreed to pay $250 thousand each year for three years as a down payment on the amount of natural resource damages ultimately established. TVA is also required to reimburse TDEC and the Fish and Wildlife Service for their costs.

Case Brought by North Carolina Alleging Public Nuisance . On January 30, 2006, North Carolina filed suit against TVA in the United States District Court for the Western District of North Carolina, alleging that TVA’s operation of its coal-fired power plants in Tennessee, Alabama, and Kentucky constitutes a public nuisance. On January 13, 2009, the court held that emissions from Bull Run, Kingston, and John Sevier, located in Tennessee, and Widows Creek, located in Alabama, constitute a public nuisance.

The court issued an order that required TVA to operate existing flue gas scrubbers and selective catalytic reduction systems (“SCRs”) at the units that have them, add scrubbers and SCRs by certain dates at the units that do not have them, and meet specified emission rates and annual tonnage caps for NO x and SO 2 after the applicable operation dates for the scrubbers.

TVA appealed the decision to the United States Court of Appeals for the Fourth Circuit (“Fourth Circuit”), which on July 26, 2010, reversed the holding of the district court and directed the district court to dismiss the action against TVA. In its decision, the Fourth Circuit held that (1) state laws, including nuisance laws, could not be used to bypass the regulatory structure established by Congress and EPA for controlling emissions; (2) the district court improperly applied North Carolina law to power plants located in Alabama and Tennessee; and (3) the plant operations in Alabama and Tennessee could not be considered nuisances because both states had specifically approved these operations. North Carolina requested an en banc rehearing, but the Fourth Circuit denied this request on September 21, 2010. The district court dismissed the case with prejudice on October 1, 2010. North Carolina filed a petition for review of the Fourth Circuit’s decision with the U.S. Supreme Court on February 2, 2011. On July 22, 2011, the U.S. Supreme Court granted the parties joint motion to withdraw the petition for review, ending this case. See EPA Settlement .

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Case Involving Alleged Violations of the New Source Review Regulations at Bull Run . The National Parks Conservation Association and the Sierra Club filed suit against TVA on February 13, 2001, in the Eastern District of Tennessee, alleging that TVA did not comply with the NSR requirements of the Clean Air Act when TVA repaired Bull Run. On March 31, 2010, the court ruled in TVA’s favor, holding that two maintenance projects at Bull Run fell under the exception for “routine maintenance repair and replacement” and therefore did not require NSR permits. The plaintiffs appealed this decision to the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”). On July 6, 2011, the Sixth Circuit granted the parties’ joint motion to dismiss this case. See EPA Settlement .

Case Involving Tennessee Valley Authority Retirement System . On March 5, 2010, eight current and former participants in and beneficiaries of the Tennessee Valley Authority Retirement System (“TVARS”) filed suit in the United States District Court for the Middle District of Tennessee against the six then-current members of the TVARS Board. The lawsuit challenged the TVARS Board’s decision to suspend the TVA contribution requirements for 2010 through 2013, and to amend the TVARS Rules and Regulations to (1) reduce the calculation for cost of living adjustment (“COLA”) benefits for CY 2010 through CY 2013, (2) reduce the interest crediting rate for the fixed fund accounts, and (3) increase the eligibility age to receive COLAs from age 55 to 60. The plaintiffs allege that these actions violated the TVARS Board members’ fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs’ contractual rights, among other claims. The plaintiffs sought, among other things, unspecified damages, an order directing the TVARS Board to rescind the amendments, and the appointment of a seventh TVARS Board member . Five of the six individual defendants filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint. On July 28, 2010, TVA moved to intervene in the suit in the event it was not dismissed. On September 7, 2010, the district court dismissed the breach of fiduciary duty claim against the directors without prejudice, allowing the plaintiffs to file an amended complaint within 14 days against TVARS and TVA but not the individual directors. The plaintiffs previously had voluntarily withdrawn their constitutional claims, so the court also dismissed those claims without prejudice. The court dismissed with prejudice the plaintiffs’ claims for breach of contract, violation of the Internal Revenue Code, and appointment of a seventh TVARS Board member.

On September 21, 2010, the plaintiffs filed an amended complaint against TVARS and TVA. The plaintiffs allege, among other things, violations of their constitutional rights (due process, equal protection , and property rights), violations of the Administrative Procedure Act, and breach of statutory duties owed to the plaintiffs. They seek a declaratory judgment and appropriate relief for the alleged statutory and constitutional violations and breaches of duty. TVA filed its answer to the amended complaint on December 27, 2010. A briefing schedule has been issued and final dispositive motions are due in 2012.

Case Arising out of Hurricane Katrina . In April 2006, TVA was added as a defendant to a class action lawsuit brought in the United States District Court for the Southern District of Mississippi by 14 Mississippi residents allegedly injured by Hurricane Katrina. The plaintiffs sued seven large oil companies and an oil company trade association, three large chemical companies and a chemical trade association, and 31 large companies involved in the mining and/or burning of coal, alleging that the defendants’ greenhouse gas emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina’s increased destructive force. Action by the United States Supreme Court on January 10, 2011, ended this case in a manner favorable to TVA.

On May 27, 2011, under a Mississippi state statute that permits the re-filing of lawsuits that were dismissed on procedural grounds, the plaintiffs filed another lawsuit against the same and additional defendants, again alleging that the defendants’ greenhouse gas emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina' s increased destructive force.

Global Warming Cases, Southern District of New York . On July 21, 2004, two lawsuits were filed in the United States District Court for the Southern District of New York against TVA and other companies that generate power from fossil-fuel electric generating facilities alleging that global warming is a public nuisance and that carbon dioxide (“CO 2 ”) emissions from fossil-fuel electric generating facilities should be ordered abated because they contribute to causing the nuisance. The first case was filed by various states (California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin) and the City of New York against TVA and other power suppliers. The second case, which also alleges private nuisance, was filed against the same defendants by Open Space Institute, Inc., Open Space Conservancy, Inc., and the Audubon Society of New Hampshire. The plaintiffs seek a court order requiring each defendant to cap its CO 2 emissions and then reduce these emissions by an unspecified percentage each year for at least a decade. In September 2005, the district court dismissed both lawsuits because they raised political questions that should not be decided by the courts. The plaintiffs appealed to the United States Court of Appeals for the Second Circuit (“Second Circuit”). On September 21, 2009, the Second Circuit reversed the district court’s decision and remanded the cases to the district court for further proceedings. On November 5, 2009, TVA and the other defendants filed a petition seeking a rehearing by the entire Second Circuit, which petition was denied on March 5, 2010. On December 6, 2010, the U.S. Supreme Court granted a petition requesting that the Supreme Court review the Second Circuit’s decision. The U.S. Solicitor General filed a brief on behalf of TVA on January 31, 2011. Oral arguments were held on April 19, 2011. On June 16, 2011, the Supreme Court issued a decision reversing the Second Circuit’s ruling, and

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holding that any federal common law cause of action was displaced by the CAA and its implementing regulations. The Supreme Court did not address the plaintiffs’ state law claims, but instead remanded the case to the Second Circuit for consideration of these claims.

Case Regarding Bellefonte Nuclear Plant Units 1 and 2. On March 9, 2009, in response to a request by TVA, the Nuclear Regulatory Commission (“NRC”) issued an order reinstating the construction permits for Bellefonte Units 1 and 2 and returning the Bellefonte construction permits to a terminated status. (They are currently in deferred status.) On March 30, 2009, Blue Ridge Environmental Defense League (“BREDL”) filed a petition in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) challenging NRC’s authority to reinstate the construction permits and alleging that NRC failed to follow the requirements of the National Environmental Policy Act (“NEPA”). TVA was permitted to intervene in this proceeding. On June 11, 2009, the D.C. Circuit issued an order holding the case in abeyance pending further order of the court. On March 8, 2010, BREDL filed a second petition in the D.C. Circuit, again challenging NRC’s compliance with NEPA and NRC’s authority to reinstate the construction permits. TVA was granted intervenor status in this case as well, and requested that the court dismiss this second petition. On July 26, 2010, the D.C. Circuit consolidated the two BREDL petitions and continued the stay of the case pending the conclusion of an administrative proceeding concerning the same issues. The administrative proceeding, in which BREDL challenged the reinstatement of the construction permits before an NRC Atomic Safety and Licensing Board (“ASLB”), was completed on September 29, 2010, with the dismissal of all contentions. Upon completion of the administrative proceeding, the D.C. Circuit on November 5, 2010, issued an order returning the two cases to the court’s active docket. Final briefs have been submitted, and oral arguments have been scheduled to take place on October 20, 2011.

Administrative Proceedings Regarding Bellefonte Units 3 and 4 . TVA submitted its Combined Construction and Operating License Application for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to NRC in October 2007. On June 6, 2008, Bellefonte Efficiency and Sustainability Team (“BEST”), BREDL, and Southern Alliance for Clean Energy (“SACE”) submitted to NRC a joint petition for intervention and a request for a hearing. The petition raised 20 potential contentions with respect to TVA’s Combined Construction and Operating License Application. The ASLB denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE. NRC later reversed the ASLB’s decision to admit two of the four contentions, leaving only two contentions (which involve questions about the estimated costs of the new nuclear plant and the impact of the facility’s operations, in particular the plant intake, on aquatic ecology) to be litigated in a future hearing. No hearing will take place until NRC issues a final Environmental Impact Statement and final Safety Evaluation Report for the units. On September 29, 2010, TVA notified NRC that the recently completed Final Supplemental Environmental Impact Statement had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site. Consequently, with the exception of the ongoing review of hydrology-related portions of the application, TVA requested that NRC defer review of the Bellefonte Units 3 and 4 Combined Construction and Operating License Application pending a final decision of the TVA Board regarding new generation capacity at the Bellefonte site. On April 21, 2011, the ASLB requested that TVA provide the ASLB with a status report that describes in as much detail as practicable TVA’s plans for reaching a decision regarding how TVA expects to proceed with the licensing of Bellefonte. TVA provided a status report to the ASLB on May 6, 2011, indicating that while TVA intends to continue the ongoing licensing efforts for Bellefonte, a decision by the TVA Board had been delayed pending consideration of the impacts of the events at the Fukushima Daiichi facility in Japan. TVA committed to inform the ASLB of any subsequent decision in this regard as soon as practicable.

Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2 . On July 13, 2009, SACE, the Tennessee Environmental Council, the Sierra Club, We the People, and BREDL filed a request for a hearing and petition to intervene in the NRC administrative process reviewing TVA’s application for an operating license for Watts Bar Nuclear Plant (“Watts Bar”) Unit 2. The petitioners raised seven contentions related to TVA’s environmental review of the project and NRC’s basis for confidence in the availability of safe storage options for spent nuclear fuel. On November 19, 2009, the ASLB granted SACE’s request for hearing, admitted two of SACE’s seven contentions for hearing, and denied the request for hearing submitted on behalf of the other four petitioners. On March 26, 2010, NRC affirmed the ASLB’s decision denying the other petitioners the opportunity to participate. After providing additional information to NRC on April 9, 2010, which addressed one of the two admitted contentions, TVA submitted a motion asking the ASLB to dismiss the contention as moot. The motion was unopposed by SACE and on June 2, 2010, the ASLB granted TVA’s motion to dismiss the contention. SACE also asked the ASLB to waive NRC’s longstanding regulations establishing that, for the purposes of the NEPA, the need for power and alternative energy source issues will not be considered in operating license proceedings. On June 29, 2010, the ASLB denied this request and declined to refer the waiver petition to NRC for consideration. SACE subsequently filed a petition for interlocutory review of this decision with NRC, which NRC denied on November 30, 2010 . Regarding the sole remaining contention which raises concerns about the aquatic impacts of two-unit operation, several additional reports have been provided to NRC providing up to date information to address this contention. These reports include a mussel survey and entrainment report, both issued on March 24, 2011, and an impingement report issued on March 29, 2011. A supplement to the impingement report was submitted on April 28, 2011. A hearing on the remaining contention is expected to take place in the latter part of 2012.

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John Sevier Fossil Plant Clean Air Act Permit . On September 20, 2010, the Environmental Integrity Project, the Southern Environmental Law Center, and the Tennessee Environmental Council filed a petition with EPA, requesting that the EPA Administrator object to the CAA permit issued to TVA for operation of John Sevier. Among other things, the petitioners allege that repair, maintenance, or replacement activities undertaken at John Sevier Unit 3 in 1986 triggered the Prevention of Significant Deterioration (“PSD”) requirements for SO 2 and NO x . The CAA permit, issued by the TDEC, remains in effect pending the disposition of EPA’s petition. See EPA Settlement .

Paradise Fossil Plant Clean Air Act Permit . On December 21, 2007, the Sierra Club, the Center for Biological Diversity, Kentucky Heartwood, Preston Forsythe, and Hilary Lambert filed a petition with EPA raising objections to the conditions of TVA’s current CAA permit at Paradise. Among other things, the petitioners allege that activities at Paradise triggered the NSR requirements for NO x and that the monitoring of opacity at Units 1 and 2 of the plant is deficient. In an order issued in July 2009, EPA agreed that the permit failed to include a proper PSD analysis for NO x emission increases as a result of physical changes made to the plant’s three main boilers in the 1984-1986 period, that the permit failed to require adequate monitoring systems for opacity and NO x , and that the monitoring of soot emissions from the coal washing and handling plant was inadequate. TVA’s permit at Paradise is issued by the Kentucky Division for Air Quality (“KDAQ”) . In November 2009, KDAQ determined that the actions at Paradise had not triggered NSR requirements and reissued the operating permit without including NSR compliance milestones. On January 9, 2010, the Sierra Club petitioned EPA to object to the operating permit, alleging that KDAQ had failed to properly take into account the PSD requirements for the physical changes made in 1986. On May 21, 2010, the Sierra Club filed a lawsuit seeking to compel EPA to act on the petition. To resolve this lawsuit, EPA entered into a consent decree with the Sierra Club under which EPA agreed to respond to the petition. On May 2, 2011, EPA denied the petition, citing the Environmental Agreements. See EPA Settlement .

Shawnee Fossil Plant Clean Air Act Permit . On December 16, 2010, the Environmental Integrity Project and the Southern Alliance for Clean Energy filed a petition with EPA requesting that the EPA Administrator object to the proposed CAA renewal permit issued to TVA for operations at Shawnee. Among other things, the petitioners allege that repair, maintenance, or replacement undertaken at Shawnee Units 1 and 4 in the 1989-90 period triggered the PSD requirements for SO 2 and NO x . The current permit remains in effect pending KDAQ’s finalization of the renewal permit. See EPA Settlement .

Notice of Violation at Widows Creek Unit 7 . On July 16, 2007, TVA received a Notice of Violation (“NOV”) from EPA alleging, among other violations, that TVA failed to properly maintain ductwork at Widows Creek Unit 7. TVA repaired the ductwork in 2005. On March 5, 2008, TVA and Alabama entered into an agreed order in which TVA agreed to pay the state $100 thousand. On March 15, 2011, TVA and EPA entered into an agreed order which resolves this matter, and under which TVA paid $450 thousand and retired 1,000 SO 2 and NO x allowances.

Kingston NPDES Permit Appeal . The Sierra Club filed a challenge to the National Pollutant Discharge Elimination System (“NPDES”) permit issued by Tennessee for the scrubber-gypsum pond discharge at Kingston in November 2009 before the Tennessee Water Quality Control Board (“TWQCB”). This is the second such challenge nationally. In addition to its allegation that Tennessee violated the Clean Water Act by failing to set specific limits on certain toxic discharges, the Sierra Club alleges that no discharges from the pond infrastructure should be allowed because zero-discharge scrubbers exist. TDEC is the defendant in the challenge, and TVA has intervened in support of TDEC’s decision to issue the permit. The matter was set for a hearing before the TWQCB in February 2011 but has since been stayed by agreement of the parties . The other similar challenge involves an Allegheny Power NPDES permit for its scrubber discharge at a Pennsylvania plant.

Bull Run NDPES Permit Appeal. The SACE and the Tennessee Clean Water Network (“TCWN”) filed a challenge to the NPDES permit for Bull Run on November 1, 2010. TDEC is the defendant in the challenge and TVA’s petition to intervene to support TDEC’s decision to issue the permit was granted on January 12, 2011. The matter is expected to go to a hearing before the TWQCB in the spring of 2012.

Johnsonville Fossil Plant NDPES Permit Appeal. SACE and TCWN filed a challenge to the NPDES permit for Johnsonville on or about March 10, 2011. TDEC is the defendant in the challenge. TVA has filed a motion to intervene in this administrative challenge.

John Sevier Fossil Plant NDPES Permit Appeal. SACE and TCWN filed a challenge to the NPDES permit for John Sevier on or about May 31, 2011. TDEC is the defendant in the challenge. TVA has filed a motion to intervene in this administrative challenge.

Information Request from EPA . On April 25, 2008, TVA received a request from EPA under Section 114 of the CAA requesting extensive information about maintenance, repair, and replacement projects at and the operations of 14 of TVA’s coal-fired units. These 14 units are located in Alabama, Kentucky, and Tennessee. The Environmental Agreements have resolved most issues related to this information request, excluding claims related to sulfuric acid mist. See EPA Settlement .

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Petitions Resulting from Japanese Nuclear Events

As a result of the events precipitated by the March 11, 2011 earthquake and tsunami at the Japanese nuclear power stations, petitions have been filed with NRC which could impact TVA’s nuclear program. These petitions include:

·	Petition Seeking Enforcement Action Against Licensees of NRC

Saprodani Associates filed a petition on March 12, 2011, under the 10 CFR 2.206 process requesting that NRC take enforcement action, issue a Notice of Violation, and immediately shutdown all U.S. reactors known to be near an earthquake fault line. On June 29 , 2011, NRC rejected the petition but committed to continue analyzing the events at Fukushima Daiichi and to take any actions deemed appropriate following its analysis.

·	Emergency Petition to Suspend All Pending Reactor Licensing Decisions and Related Rulemaking Decisions Pending Investigation of Lessons Learned From Fukushima Daiichi Nuclear Power Station Accident

Separate but essentially identical petitions have been filed by almost 50 petitioners in 24 ongoing NRC licensing proceedings, including Watts Bar Unit 2 (filed April 14, 2011 by SACE) and Bellefonte Units 3 and 4 (filed April 18, 2011 by BREDL). Filed under NRC’s general authority to regulate the U . S . nuclear industry, the petitions seek to suspend all licensing decisions and other major licensing activities pending completion of NRC’s Fukushima Task Force investigation and subsequent issuance of any proposed regulatory decisions and/or environmental analyses.

·	Petition to Suspend AP1000 Design Certification Rulemaking Pending Evaluation of Fukushima Accident Implications on Design and Operational Procedures and Request for Expedited Consideration

A petition was filed by 13 petitioners on April 6, 2011, requesting that NRC suspend the AP1000 ® design certification rulemaking while NRC investigates the Fukushima accident and determines appropriate lessons learned to be incorporated into the design and operational procedures. The AP1000 ® is a pressurized water nuclear reactor designed by the Westinghouse Electric Company, LLC, and is the nuclear reactor technology TVA has referenced in its Bellefonte Units 3 and 4 combined license application. Granting of this petition could potentially impact the licensing proceeding for these units.

·	Petition to Immediately Suspend the Operating Licenses of GE BWR Mark I Units Pending Full NRC Review With Independent Expert and Public Participation From Affected Emergency Planning Zone Communities

Beyond Nuclear filed a petition on April 13, 2011, requesting that NRC take emergency enforcement action against all nuclear reactor licensees that operate units that use the General Electric Mark I BWR design. TVA uses this design at Browns Ferry Units 1, 2, and 3. The petition requests NRC to take an enforcement action and requests NRC to take several actions, including the suspension of the operating licenses at the affected nuclear units, including Browns Ferry Units 1, 2, and 3, until several milestones have been met.

17. Subsequent Events

Issuance of Debt

In July 2011, TVA issued $17.4 million of electronotes® with an interest rate of 4.3 percent which mature in 2041 and are callable beginning in 2016.

Credit Rating

On July 13, 2011, a national rating agency placed the sovereign ratings of the United States on review for possible downgrade due to increasing possibility that the government’s statutory debt limit would not be raised on a timely basis, potentially leading to a default on U.S. Treasury debt obligations. On July 14, 2011, the agency placed TVA’s senior secured and unsecured credit ratings on review for possible downgrade. On July 14, 2011, another rating agency placed the sovereign ratings of the United States on review for possible downgrade, and on July 15, 2011, placed TVA’s ratings on review for downgrade. The agencies informed TVA that the actions on TVA were based on the actions on the United States and do not reflect a change in TVA’s financial condition or any TVA - specific event.

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On August 2, 2011, one of the rating agencies confirmed the Aaa rating of the United States and assigned a Negative rating outlook following the government’s action to raise the debt limit and avoid default on the government’s obligations. On August 3, 2011, this same agency confirmed the Aaa senior secured and unsecured ratings of TVA and assigned a Stable rating outlook.

On August 5, 2011, one of the rating agencies lowered its long-term rating on the United States to AA+ from AAA and affirmed the A-1+ short-term rating. This action was based on concerns regarding the fiscal and economic position of the United States. The outlook on the long-term rating is Negative. The rating agency removed the short- and long-term ratings of the United States from review for possible downgrade. On August 8, 2011, this same rating agency lowered the long-term rating on TVA to AA+ from AAA and removed the rating on review for possible downgrade. The outlook on TVA’s rating is Negative. The action taken on TVA’s rating was based on the application of the rating agency’s government-related entities criteria.

The downgrade of TVA’s rating to AA+ by this one rating agency may increase TVA’s interest expense by increasing the interest rates that TVA pays on debt securities that it issues. The downgrade requires TVA to post $100 million of additional collateral under certain physical and financial contracts that contain rating triggers.

Impacts of Recent Financial Market Conditions on Investment Portfolios

Financial markets have experienced significant uncertainty from late July to early August due to the U.S. debt limit debate, indications of expected slower economic growth by the Federal Reserve, and downgrade of U.S. debt to AA+ by a national rating agency. The volatility has resulted in lower market valuations for many investments. TVA's and the Retirement System’s investment portfolios contain a variety of diversified investments, including securities directly impacted by these events. The impact of these events on the TVA Retirement System, the nuclear decommissioning trust, and asset retirement trust investment portfolios is reflected in changes in these portfolio values from June 30, 2011, to August 9, 2011, which are outlined in the following table:

	June 30, 2011 (1)		August 9, 2011 (2)		Percent Change

Retirement system (3)	$	7,069	$	6,592		(7	%)
Nuclear decommissioning trust		1,071		982		(8	%)
Asset retirement trust		156		144		(8	%)
Note (1) Investment balances at June 30, 2011, are based on final trustee statements and estimates for certain private equity and real estate investments. (2) Investment balances at August 9, 2011, are based on preliminary trustee balances and estimates. (3) The August 9, 2011 Retirement System balance is net of July 2011 benefit payments of approximately $50 million.

During the period of June 30, 2011, through August 9, 2011, the change in the S&P 500 Stock Index was a decrease of 11 percent.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN D RESULTS OF OPERAT IONS

(Dollars in millions except where noted)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) explains the results of operations and general financial condition of Tennessee Valley Authority (“TVA”). The MD&A should be read in conjunction with the accompanying financial statements and TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (the “Annual Report”).

Executive Overview

TVA’s service area experienced unprecedented weather during a series of storms which came through the area during April 27, 2011 , and April 28, 2011, causing significant damage to the TVA power system. The hardest hit areas were central and northern Mississippi, northern Alabama, and the eastern portion of Tennessee. Local power distributors also sustained significant damage. At the end of the storms on April 28, 2011, there were approximately 850,000 distributor-served customers without power, 128 customer delivery points out of service, and more than 90 large transmission lines taken out of service, including 25 of TVA’s 500-kilovolt lines. All transmission lines were repaired by mid-July 2011.

TVA’s Browns Ferry Nuclear Plant (“Browns Ferry”), located in northern Alabama, and the switchyard at Browns Ferry sustained only minimal damage from the storms, but damage to the TVA transmission system at offsite locations resulted in the plant being without sufficient external electricity supply. Emergency backup power systems, including on-site diesel generators, provided power to safely cool down the reactors during the ensuing shutdown. TVA declared a Notification of Unusual Event (“NOUE”), the lowest of the four levels of nuclear plant emergency classifications, and notified the Nuclear Regulatory Commission (“NRC”). The NOUE was terminated on May 2, 2011. All Browns Ferry units returned to full availability status by early June 2011.

Additionally, transmission lines at Widows Creek Fossil Plant (“Widows Creek”), also located in north Alabama, were damaged as a result of this storm system. The interruption in transmission service resulted in one generating unit at Widows Creek being taken off-line. The unit returned to availability status on May 9, 2011.

TVA estimates the cost of the events , described above , to be $39 million for structural repairs including capitalized expenditures of $29 million and operating and maintenance expenditures of $10 million. The cost of power purchased to meet demand while Browns Ferry and other generating units were not connected to the electric grid was $95 million. The increase in TVA’s fuel rate from May 2011 to July 2011 is due in part to help recover the cost of the replacement power purchased as a result of these storms.

During the three-month period ended June 30, 2011, TVA had a five percent decrease in sales of electricity as compared to the same period of the prior year. Sales also decreased three percent during the nine-month period ended June 30, 2011, as compared to the same period of the prior year. The lower demand for electricity by the distributor-served customers was primarily weather driven. Lower sales to directly served customers during the same three-month and nine-month periods from the prior year periods were attributable to lower demand by TVA’s largest industrial customer , which has been curtailing operations and, to a lesser extent, weather conditions.

TVA had a net loss for the three months ended June 30, 2011, of $240 million as compared to net income of $199 million for the three-month period ended June 30, 2010. Expenses related to repair of damage caused by storms, higher operating and maintenance expenses related to outages at generating plants, the agreements with the Environmental Protection Agency (“EPA”) and others (described below), and increases in employee benefit expenses all contributed to lower net income for the quarter ended June 30, 2011, as compared to the same period of 2010. In addition, fuel and purchased power costs increased and because of the timing of the total fuel rate adjustments, were only partially recovered in fuel-related revenue during the three-month period. TVA had a net loss for the nine months ended June 30, 2011, of $35 million as compared to net income of $779 million for the nine months ended June 30, 2010. Primary drivers for the decline in net income between the nine-month periods were essentially the same as for the three - month periods.

Challenges and Key Initiatives

Rate Change

In April 2011, TVA implemented a new wholesale rate structure, which includes seasonal and time of use rates. This change in structure will not materially impact TVA’s annual revenue recovery but will more closely align TVA’s revenues with its costs. There will, however, be some seasonal structural changes that may impact the timing of the revenue between seasons.

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The power contracts between TVA and the distributor customers provide for purchase of power by the distributor customers at the wholesale rates established by the TVA Board of Directors (“TVA Board”). These contracts include a monthly adjustment to reflect the total costs of fuel commodity and other fuel-related costs, variable purchased power, and emission costs.

Major changes by the TVA Board related to the rates are:

·	Conversion of the fuel cost adjustment (“FCA”) formula from quarterly operation to monthly operation in October 2009;

·	Revision of the formula to allow seasonal cost differences to flow through the FCA in October 2009; and

·	Removal of the 1.851 cents per kWh “base fuel rate” from the formula so that all fuel and other fuel-eligible and purchased power and emission costs would flow through to the customer as a monthly “total fuel rate” separate from the base rates in April 2011.

The table below identifies the monthly FCA amounts during the period from October 2010 to March 2011, as well as total fuel rate impact through August 2011. In order to compare the months more meaningfully, the former base fuel rate is shown, in addition to the total monthly fuel cost rate .

Month	Base Fuel Rate (¢/kWh)	FCA Rate (¢/kWh)	Total Fuel Rate (¢/kWh)	Impact on Total Average Wholesale Firm Rate

October 2010	1.851	1.127	2.978	6.4%
November 2010	1.851	0.735	2.586	(5.0%)
December 2010	1.851	0.476	2.327	(3.5%)
January 2011	1.851	0.548	2.399	1.0%
February 2011	1.851	0.436	2.287	(1.5%)
March 2011	1.851	0.613	2.464	2.5%
April 2011	n/a	n/a	2.376	(1.2%)
May 2011	n/a	n/a	2.347	(0.4%)
June 2011	n/a	n/a	2.366	0.3%
July 2011	n/a	n/a	2.689	4.5%
August 2011	n/a	n/a	2.741	0.7%

Regulatory Compliance

Browns Ferry Unit 1 NRC Finding. A problem involving the Browns Ferry Unit 1 low pressure coolant injection valve was discovered by TVA when the reactor was shut down for refueling in October 2010. TVA repaired the valve and reported the problem to NRC. On March 2, 2011, NRC identified an apparent violation of greater-than-very-low safety significance in connection with the valve failure . The valve was repaired and returned to service during the refueling outage , and NRC determined that there was no immediate safety concern. However, NRC determined that the event had the potential for greater-than-low safety significance , because the valve’s failure adversely affected TVA’s ability to achieve safe shutdown in certain conditions. TVA met with NRC on April 4, 2011, and presented its conclusion that the valve failure was due to a manufacturing deficiency, and that the failure did not constitute an event of high safety significance. On May 9, 2011 , TVA was notified that NRC issued a “red finding” related to the valve’s performance, which denotes “high safety significance.” This “red” finding would move Browns Ferry Unit 1 to Reactor Oversight Program Action Matrix Column Four, resulting in increased oversight and inspection of the plant. On June 8, 2011 , TVA submitted a letter to NRC appealing the “red” finding determination. On June 23, 2011 , NRC notified TVA that its appeal of the performance deficiency part of the regulatory finding at Browns Ferry did not meet the acceptance criteria for NRC review of the appeal, but NRC will have an independent review to ensure NRC has taken appropriate regulatory action. The review is expected to be completed in August 2011. TVA is taking actions to address the performance deficiency and contributors to the safety significance.

Transmission System. TVA is subject to federal reliability standards that are set forth by the North American Electric Reliability Corporation (“NERC”) and approved by the Federal Energy Regulatory Commission (“FERC”). These standards are designed to maintain the reliability of the bulk electric system, including TVA’s generation and transmission system. These standards include areas such as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings. TVA believes itself to be compliant with the majority of these standards, but as a result of self-examination and audits by NERC’s regional entity, the SERC Reliability Corporation (“SERC”), some issues have been identified. TVA is working with SERC on acceptable mitigation plans, based on findings during recent audits, and is negotiating financial settlements where issues have arisen.

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TVA recognizes that reliability standards and expectations are becoming more complex and stringent for transmission systems. Compliance with these standards and

expectations may necessitate the need to expand manpower and programs to address the associated exposure to risk of noncompliance. TVA continues to evaluate its options to meet these new measures.

Environmental Agreements. On April 14, 2011, TVA entered into two agreements that generally absolve TVA from any liability under the New Source Review (“NSR”) requirements of the Clean Air Act (“CAA”) for maintenance, repair, and component replacement projects at TVA’s coal-fired units. The first agreement is a Federal Facilities Compliance Agreement with EPA. The second agreement is a consent decree with Alabama, Kentucky, North Carolina, and Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation (the “Consent Decree”). The two agreements (collectively, the “Environmental Agreements”) are substantially the same and are parts of a collective undertaking. As part of the Environmental Agreements, EPA generally will not enforce NSR requirements for new plant maintenance, repair, and component replacement projects against TVA until 2019. Possible claims for NSR violations involving increases in greenhouse gases (“GHG”) and sulfuric acid mist from projects can still be pursued in the future. Claims for increases in particulates also can be pursued except at TVA’s Allen Fossil Plant, Bull Run Fossil Plant, Kingston Fossil Plant (“Kingston”), and Gallatin Fossil Plant and Unit 5 at TVA’s Colbert Fossil Plant.

These agreements also contain provisions with a direct monetary impact on TVA’s operations during the three-month period ended June 30, 2011 , as well as on future operations. During the three months ended June 30, 2011, the civil penalty of $10 million was expensed and it was subsequently paid in July 2011. TVA will also provide $60 million to be divided by Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects, giving a preference for projects in the TVA watershed. In addition, TVA will invest $290 million in energy efficiency projects, demand response projects, renewable energy projects, and other projects.

In connection with the agreements, certain legal and administrative proceedings have been or are expected to be terminated. See Note 16 — EPA Settlement for more information regarding these proceedings.

The Environmental Agreements will also require TVA to take actions with respect to some of its coal-fired units. See Generation Resources for more information regarding these actions.

Environmental Matters

In December 2010, EPA issued a report that evaluated progress under its Acid Rain Program (“ARP”). ARP, established under Title IV of the 1990 CAA Amendments, requires major emission reductions of sulfur dioxide (“SO 2 ”) and nitrogen oxide (“NO x ”) from the electric power industry. The December 2010 report contains information examining emission reductions, reviewing compliance results and market activity, and comparing changes in emissions to changes in pollutant concentrations. Data contained in this report indicates TVA has reduced SO 2 emissions from its coal-fired generating plants at a faster rate than the national average for the industry and that TVA’s SO 2 emissions have been significantly reduced during the past three decades. Furthermore, the report indicates that TVA’s NO x emissions have been significantly reduced since CY 1990 and that the reduction in these emissions has been at a rate faster than the national average during the past two decades.

Generation Resources

At its April 14, 2011 meeting, the TVA Board accepted an Integrated Resource Plan (“IRP”) which was developed utilizing extensive business, technical, and economic analyses, as well as public input. The plan outlines a strategic direction focusing on a diverse mix of electricity generation sources, including nuclear power, renewable energy, natural gas, and energy efficiency, as well as traditional coal and hydroelectric power.

TVA’s intention to transition more toward generation sources with low or no emissions and to retire coal-fired units from service will likely result in a need for new generating capacity. Additionally, installing scrubbers or other emission controls to meet increasingly stringent environmental regulations facing coal-fired power plants could require TVA to make substantial capital investments in the current year as well as future years and lead to increased liquidity needs and financing requirements.

Coal-Fired Generation. With the acceptance of the IRP and the Environmental Agreements, the TVA Board approved the retirement of 18 older coal-fired generation units at three power plants. In June 2011, TVA idled Widows Creek Units 1 and 3 and in August 2011, TVA idled Widows Creek Unit 4, resulting in a reduction of approximately 330 megawatt ("MW") of net summer dependable capability. TVA continues to evaluate the possibility of idling Widows Creek Unit 6. This potential action will result in a further reduction of approximately 110 MW of summer net dependable capability. As part of the Environmental Agreements, TVA announced the retirement of two John Sevier Fossil Plant (“John Sevier”) units with approximately 350 MW of net summer dependable capability by December 31, 2012, and Johnsonville Fossil Plant’s (“Johnsonville”)

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10 units with approximately 1,100 MW of net summer dependable capability by December 31, 2015 (six units) and December 31, 2017 (four units). These actions will permanently remove these units from service under their current operating permits and reduce TVA’s coal-fired fleet by approximately 13 percent by the end of 2017. In addition, TVA is also required to remove from service (idle) the other two John Sevier units by December 31, 2012, and either retire these units, install emission control equipment at the units, or convert them to biomass by December 31, 2015. These two remaining John Sevier units have approximately 350 MW of summer net dependable capability. TVA has determined that it is economically advantageous to idle these remaining two John Sevier units and plans to remove them from service by December 31, 2012. TVA had previously idled Widows Creek Unit 5 in September 2010 and Widows Creek Unit 2 and Shawnee Fossil Plant (“Shawnee”) Unit 10 in October 2010. These earlier actions resulted in a reduction of nearly 350 MW of net summer dependable capability.

Although TVA may decide to idle additional coal units, there may still be some risks related to TVA’s ability to meet customer demand for low-cost power in the future. These risks, however, are being addressed through TVA’s integrated planning process, diversification of fuel sources and fuel type, as well as physical and financial hedging programs for fuel and purchased power.

Additionally, as part of the Environmental Agreements, and consistent with the strategic direction outlined in the IRP, TVA’s long-range plans will continue to attempt to balance the costs and benefits of significant investments at its remaining, coal-fired plants without emissions controls and decide whether to control, convert, or retire the remaining uncontrolled coal-fired capacity on a unit by unit schedule which can extend until 2019. TVA anticipates having to take action to reduce emissions earlier than required by the Environmental Agreements in response to new EPA regulations. TVA estimates that it may invest an additional $3.7 billion in the next 10 years on new emission-control equipment and upgrades of existing equipment at its coal-fired plants. See Environmental Matters .

Nuclear Generation. TVA management has established a response team to analyze events resulting from the Japanese nuclear events of 2011. A comprehensive review is in progress to determine the status of safety-related equipment and other aspects of plant operations that affect nuclear, radiological, and personal safety in order to make changes as needed for safety. The response team is also analyzing the ability of TVA’s plants to safely shut down and safely remain in that state during simultaneous natural disasters such as floods, earthquakes, and/or tornadoes.

The team will also provide short, intermediate, and long-term recommendations for TVA sites related to additional precautionary actions TVA may adopt. Possible short-term actions include adding additional satellite phones for emergency responders when normal communications are damaged and adding small portable electric generators for lights, charging batteries, and other vital equipment. Longer-term actions may include changes to the storage methods for spent nuclear fuel. Finally, TVA will further evaluate its switch-yards for seismic vulnerabilities and may provide additional backup power sources at its nuclear plants.

Browns Ferry Nuclear Plant . The TVA service area experienced a hotter than normal summer in 2010. The hot summer resulted in TVA having to curtail the use of some of its generating facilities including generation at some of its nuclear units, primarily Browns Ferry, because of water temperature. To better address the water temperature issues at Browns Ferry, TVA has initiated a capital project to construct a new cooling tower. Completion of the tower, originally scheduled to be operational before the summer of 2011, has been delayed because of the April 27, 2011 and April 28, 2011 storms. Current plans are for the tower to be operational by the fall of 2011.

Watts Bar Nuclear Plant Unit 2 . The current and past estimates of the construction project cost and schedule for Watts Bar Nuclear Plant (“Watts Bar”) Unit 2 are currently being reviewed by TVA. The project’s schedule has experienced some delays as a result of lower than expected construction productivity, and the construction of Watts Bar Unit 2 will take longer than originally planned.

It is also virtually certain that the project’s schedule could be adversely affected by licensing-related delays, including a delay resulting from a hearing to be scheduled to take place before an Atomic Safety and Licensing Board to resolve a pending aquatic contention.

On July 13, 2011, NRC’s Japan Task Force released its review of insights from the Fukushima Daiichi accident proposing safety improvements in areas ranging from loss of power to earthquakes, flooding, spent fuel pools, containment venting, and preparedness. The report has been sent to the five NRC Commissioners and could result in TVA being required to make changes to its operating nuclear units and Watts Bar Unit 2. Such changes could also possibly impact the cost and schedule of the project.

As a result of one or more of the above developments, TVA believes that the Watts Bar Unit 2 completion date will extend into CY 2013, rather than the last quarter of CY 2012 as currently scheduled. Project costs could also exceed the current estimate of approximately $2.5 billion. The extent of exceedance is not known at this time.

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As planned, TVA received a license from NRC to bring fuel to Watts Bar for its ultimate use in the Unit 2 reactor. The license allows TVA to receive, inspect, and store new nuclear fuel at the site of Unit 2. New fuel is expected to begin arriving at the Watts Bar site during the summer of 2011. Nuclear fuel will be loaded into the Unit 2 reactor following receipt of the operating license.

For legal proceedings related to Watts Bar Unit 2, see Note 16 — Litigation — Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2 .

Bellefonte Nuclear Plant . Engineering work at the Bellefonte Nuclear Plant (“Bellefonte”) site in northern Alabama is proceeding on schedule as feasibility studies related to the completion of Bellefonte Unit 1 continue. TVA management will ask the TVA Board to make a decision on whether to move ahead with construction of Unit 1. Should TVA proceed with construction of Bellefonte Unit 1, TVA is evaluating the design for additional defense-in-depth improvements for the project.

For legal proceedings related to Bellefonte, see Note 16 — Litigation — Case Regarding Bellefonte Nuclear Plant Units 1 and 2 and Administrative Proceedings Regarding Bellefonte Units 3 and 4 .

Future Plans for TVA’s Nuclear Program . TVA believes that the Japanese nuclear events could translate into changes in plant operations, design, or safety and the imposition of additional requirements by NRC or other regulatory bodies. Should potential changes prove to be significant, the schedule for the commercial operation of Watts Bar Unit 2 , as well as future plans for construction at Bellefonte or other facilities , could be affected. To date, six petitions have been filed with NRC that seek to take actions in response to the Japanese nuclear events that could impact TVA nuclear operations or licensing activities if the requested actions are taken by NRC. See Note 16 — Petitions Resulting from Japanese Nuclear Events .

Natural Gas-Fired Generation. Despite the impacts of the recession of 2008-2009, which reduced TVA sales by approximately seven percent at its peak, and a relatively sluggish economic recovery, TVA believes new generation sources will be needed to meet anticipated load growth under most likely scenarios. Additionally, increasingly stringent environmental regulations facing coal-fired power plants, coupled with TVA’s announced intention to transition more toward generation sources with low or no emissions, and the retirement of 18 coal-fired units, are highly likely to result in a need for new generating capacity. Accordingly, TVA intends to make capital investments in the current year as well as future years.

In keeping with its generation strategy to assemble a balanced generation portfolio comprised of efficient resources at favorable life-cycle costs with little or no emissions, TVA continues to evaluate natural gas-fired resource options. Existing combined cycle plants located within or closely adjacent to the TVA service territory generally meet these criteria and provide suitable opportunities for acquisition or long-term purchased power contracts. TVA completed its evaluation of a site in western Tennessee for a natural gas-fired generation facility but does not plan to pursue this option at this time.

On July 7, 2011, TVA entered into an agreement, subject to TVA Board and FERC approvals, to acquire the Magnolia Combined Cycle Power Plant (“Magnolia”) from Magnolia Energy L.P., a subsidiary of Kelson Energy. The Magnolia facility is a three-unit natural gas-fired combined cycle plant with approximately 900 MW of net summer dependable capacity located in Benton County, Mississippi, and has been a source of purchased power for TVA since the plant began operation in 2003. Finalization of the purchase is contingent on several conditions, including the approval of FERC and the TVA Board.

Hydroelectric Generation . Weather was also a driver of hydroelectric generation for the three-month period ended June 30, 2011. March 2011 was wetter than normal (123 percent of normal rainfall), resulting in 126 percent of normal runoff and 114 percent of normal hydroelectric generation. The effects of the increase in rain and runoff in late March 2011 allowed for increased hydroelectric generation in April, May, and June 2011. Hydroelectric generation was 47 percent higher during the three months ended June 30, 2011, than during the same period of the prior year. Totals for the three months ended June 30, 2011, for rainfall, runoff, and hydroelectric generation were 134 percent, 144 percent, and 147 percent of the same period of 2010, respectively.

Coal Combustion Products Facilities

TVA retained an independent third-party engineering firm to perform a multi-phased evaluation of the overall stability and safety of all existing embankments associated with TVA’s wet coal combustion product (“CCP”) facilities. Phases one and two were completed by the end of 2010. The studies indicated that none of TVA’s other coal-fired plants showed the same set of conditions that existed at Kingston at the time of the ash spill, and the ongoing remediation work at the plants is expected to bring all of them to within industry standards in terms of stability. The third phase of the program, which is implementation of recommended actions, is ongoing. This phase includes risk mitigation steps such as performance monitoring, designing and completing repairs, developing planning documents, obtaining permits, and generally implementing the lessons learned from the Kingston ash spill at TVA’s other CCP facilities. As a part of this effort, CCP facilities have been incorporated into TVA’s dam oversight program, with additional training in dam safety and monitoring provided .

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TVA is converting its wet fly ash, bottom ash, and gypsum facilities to dry collection facilities and remediating or eliminating the CCP facilities that were classified as “high” risk during the preliminary reassessment. The classifications, such as “high,” do not measure the structural integrity of the facility or the possibility of whether a failure could occur. Rather, they are designed to identify where loss of life or significant economic or environmental damage could occur in the event of a failure. The expected cost of the CCP work is between $1.5 billion and $2.0 billion, and the work is expected to be completed over the next 10 years. The work is proceeding on schedule and is prioritized based on structural needs, plant storage requirements, and ongoing studies related to idling TVA’s older coal-fired facilities.

On December 15, 2010, a small leak was identified in the clay liner of the gypsum pond at the Kingston facility. TVA identified the leak during a routine inspection and immediately notified the state and EPA and isolated the leak. The Tennessee Department of Environment & Conservation (“TDEC”) sent TVA an order outlining the requirements to return the gypsum pond to an operational status. TVA is complying with TDEC’s order and has submitted the repair plan to install a synthetic liner on the gypsum pond. The gypsum from the plant is scheduled to be dewatered in 2012, and the material will be dry stacked in the facility after 2012. The synthetic liner will be designed and installed to meet the proposed new EPA rules on coal combustion residue storage and thereby extend the life of the facility. Once TDEC has approved TVA’s repair plans, the estimate as to how much the liner installation will cost and how long it will take to install will be developed by TVA.

Natural Resources

TVA completed and released its proposed Natural Resource Plan (“NRP”) in July 2011. The NRP is designed to enhance stewardship of public recreation facilities, water resources, wildlife and plants, and historic and cultural sites on TVA-managed reservoir lands by helping to guide TVA management to better meet public stewardship objectives while responding to the needs of the TVA region’s communities and residents. Implementation of the NRP is expected to be staged over a 20-year period and reviewed and updated every five years. The NRP is scheduled to be presented for TVA Board consideration in August of 2011.

Financial Flexibility

The TVA Act specifies that TVA’s bonds, notes, and other evidences of indebtedness (“Bonds”) may not exceed $30.0 billion outstanding at any one time. As of June 30, 2011, TVA had $24.2 billion of Bonds outstanding. TVA’s challenge to meet the economic, environmental, and energy demands facing the Tennessee Valley region puts further pressure on its $30.0 billion borrowing authority, which has not been changed since 1979. Increased future capital expenditures, along with restrictive borrowing authority, may pose a challenge to TVA’s ability to maintain low and competitive power rates.

On April 18, 2011, a national rating agency affirmed the AAA sovereign credit rating on the United States, but revised the outlook to Negative from Stable. On April 25, 2011, the agency affirmed the AAA long-term rating and AAA issuer credit rating (“ICR”) on TVA, but revised the outlook for TVA to Negative from Stable. The change in the agency’s outlook on TVA was the result of the change in outlook on the United States and does not reflect a change in TVA’s financial condition or any TVA-specific event. TVA is completely self-funded and does not rely on financial support from the government.

On concerns that the United States Congress and the Administration might not act to raise the statutory debt limit on a timely basis, two national rating agencies took action on July 13 and 14, 2011, and placed the triple-A sovereign credit rating on the United States on review for possible downgrade. Subsequently, these same two rating agencies took similar actions on TVA’s credit rating, placing TVA’s triple-A rating on review for possible downgrade. These actions were the result of the change on the credit rating of the United States and do not reflect a change in TVA’s financial condition or any TVA-specific event.

On August 2, 2011, one of the rating agencies confirmed the Aaa rating of the United States and assigned a Negative rating outlook following the government’s action earlier that same day to raise the debt limit and avoid default on the government’s obligations. The next day, this same agency confirmed the Aaa senior secured and unsecured ratings of TVA and assigned a Stable rating outlook.

On August 5, 2011, one of the rating agencies lowered its long-term rating on the United States to AA+ from AAA and affirmed the A-1+ short-term rating. This action was based on concerns regarding the fiscal and economic position of the United States. The outlook on the long-term rating is Negative. The rating agency removed the short- and long-term ratings of the United States from review for possible downgrade. On August 8, 2011, this same rating agency lowered the long-term rating on TVA to AA+ from AAA and removed the rating from review for possible downgrade. The outlook on TVA’s rating is Negative. The action taken on TVA’s rating was based on the application

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of the rating agency’s government-related entities criteria.

The downgrade of TVA’s rating to AA+ by this one rating agency may increase TVA’s interest expense by increasing the interest rates TVA pays on short-term or long-term debt securities it issues. The downgrade requires TVA to post $100 million of additional collateral under certain physical and financial contracts that contain rating triggers.

As of August 10, 2011, the third national rating agency that provides a rating on TVA securities had not taken any action on either the United States government or TVA. See Note 17 — Credit Ratings .

Customer Contracts

TVA continues to monitor the financial stability of its largest directly served customer. The current power supply contract with this customer expires in May 2012. Although the customer is pursuing options to extend operations of its plant , there is currently no contract in place to continue power sales to the customer. Sales to this customer amounted to nearly 43 percent of revenue from industries directly served and five percent of total operating revenues during 2010. See Note 12 — Counterparty Credit Risk — Credit of Customers .

Future Workforce Needs and Development

Effectively addressing workforce needs is a priority for TVA. Although TVA traditionally experiences low employee turnover, potential emerging risks exist because of retirements, competition for talent from other companies, new nuclear construction and installation of new environmental equipment, additional environmental controls construction, new regulations, and evolving employee skill sets required to meet TVA’s vision of being one of the nation’s leading providers of low-cost and cleaner energy by 2020. During 2010, TVA established a new organization to focus on human capital, including recruiting programs and outreach to high school, trade school, and college students. In addition, a workforce planning program is being revised in 2011, and the program is targeted for implementation agency-wide in the first quarter of 2012. The goal of these initiatives is the recruitment, retention and motivation of the talent required to achieve the TVA vision. Achieving this goal may be challenging in light of the salary freeze for federal employees enacted on December 22, 2010. See Legislative and Regulatory Matters for a discussion of the salary freeze.

Safeguarding Assets

Physical Security. TVA is responsible for assets across its service area, and views the protection of its critical infrastructures, employees, and the public as a priority. In seeking to protect these assets, TVA follows numerous regulatory requirements that set minimum standards for physical security and uses a combination of threat analysis, technology, and partnerships with the public to help deter, detect, and respond to specific threats to critical assets. In addition, training programs for TVA’s workforce are being developed in order to help foster a strong culture of security awareness throughout TVA. TVA is likely to invest in future protective measures based on security assessments being performed in 2011 and 2012 that are expected to identify opportunities for improvement.

Nuclear Security . Nuclear security is carried out in accordance with federal regulations as set forth by NRC. These regulations are designed for the protection of TVA’s nuclear power plants and for the health and safety of the public and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has nuclear security forces to guard against such threats. TVA currently plans to spend between $100 million and $140 million between 2011 and 2013 on upgrades to its nuclear security infrastructure.

Cyber Security. Cyber security and the protection of TVA operations and activities are a priority. TVA uses a defense-in-depth security model in an effort to prevent, detect, respond to, and recover from threats against its systems. TVA plans to modify and upgrade its protections as technology advances and threat environments and business requirements change. TVA currently plans to spend approximately $20 million to $40 million in cyber security updates between 2011 and 2013.

Investment Performance

The performance of debt, equity, and other markets during the summer of 2011 negatively impacted the asset values of investments held in TVA’s decommissioning trust funds and pension fund.

During the period from June 30, 2011 to August 9, 2011, the nuclear decommissioning trust portfolio declined in value $89 million, or eight percent. As of August 9, 2011, TVA’s nuclear decommissioning trust funding was 119 percent of the estimated present value of the funding requirements established by NRC.

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TVA’s asset retirement trust portfolio, which is invested entirely in fixed income funds, decreased in value $12 million, or eight percent, during the period from June 30, 2011 to August 9, 2011.

As of September 30, 2010, TVA's pension plan had assets of $6.8 billion compared with liabilities of $10.4 billion. TVA's plan remained underfunded at June 30, 2011. Assets in the plan at June 30, 2011, were approximately $7.1 billion. During the period from June 30, 2011 to August 9, 2011, the investments in the TVA Retirement System declined in value $477 million, or seven percent. The ability of the plan’s funded status to quickly improve is limited because of the significant amount of benefits paid each year to plan beneficiaries. The plan currently has nearly 23,000 participants receiving benefits of approximately $600 million per year.

TVA’s investment policies are based on the objective of meeting long-term obligations, and the allocation of investments is based on the assumption of encountering distressed market conditions from time to time. TVA does not anticipate making significant changes in its basic investment policies as a result of current market conditions.

Liquidity and Capital Resources

Sources of Liquidity

To meet cash needs and contingencies, TVA depends on various sources of liquidity. TVA’s primary sources of liquidity are cash from operations and proceeds from the issuance of short-term and long-term debt. Net working capital may be negative from time to time, and TVA uses short-term debt to fund short-term cash needs as well as scheduled maturities of long-term debt. The daily balance of cash and cash equivalents maintained is based on near-term expectations for cash expenditures and funding needs. Management expects these sources to provide adequate liquidity to TVA for the foreseeable future. However, the limit on the amount of Bonds TVA may have outstanding at any one time is $30.0 billion. Due to the limit on Bonds, TVA may not be able to use Bonds to finance all of the capital investments needed over the next decade. Capital spending needs could be met with a

combination of Bonds, alternative financing, additional power revenues through rate increases, costs reductions, or other ways. Certain sources of liquidity are discussed below. Additionally, energy efficiency and demand response initiatives may reduce generation requirements, thereby resulting in lower capital needs.

Issuance of Debt. TVA Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bonds. As of June 3 0 , 2011, all of TVA’s Bonds were rated by at least one rating agency except for two issues of power bonds and TVA’s discount notes. Ratings are not recommendations to buy, sell, or hold any TVA securities and may be subject to revision or withdrawal at any time by the rating agencies. Ratings are assigned independently, and each should be evaluated as such.

TVA uses the proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of long-term debt. The following table provides additional information regarding TVA’s short-term borrowings.

Short-Term Borrowing Table

	At June 30, 2011		For the three months ended June 30, 2011			For the nine months ended June 30, 2011			At June 30, 2010			For the three months ended June 30, 2010			For the nine months ended June 30, 2010

Amount Outstanding (at End of Period) or Average Amount Outstanding (During Period)

Discount Notes		$ -		$ 138			$ 256			$ 834			$ 1,003			$ 959

Weighted Average Interest Rate

Discount Notes		N/A		0.01	%		0.09	%		0.07	%		0.12	%		0.07	%

Maximum Month-End Amount Outstanding (During Period)

Discount Notes		N/A		$ 150			$ 1,401			N/A			$ 1,176			$ 1,176

The balance of Discount Notes was approximately $834 million lower at June 3 0 , 2011, than June 3 0 , 2010, because a portion of the proceeds from long-term debt issuance in February 2011 was used to reduce short-term debt. Differences in the average balances of short-term debt from year to year are a function of the timing of debt issuances, debt

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redemptions, and other cash flows.

rating of TVA’s senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA’s senior unsecured long-term non-credit enhanced debt. At June 30, 2011, there were $224 million of letters of credit outstanding under the credit facilities, and there were no borrowings outstanding. TVA anticipates renewing each credit facility or replacing it with a different credit facility as it matures. See Note 10 — Debt Securities Activity .

Summary Cash Flows

A major source of TVA’s liquidity is operating cash flows resulting from the sales of electricity. A summary of cash flow components for the nine months ended June 30, 2011 and 2010, follows:

Summary Cash Flows
For the nine months ended June 30
	2011			2010
Cash provided by (used in):
Operating activities	$	1,703		$	1,210
Investing activities		(1,880	)		(1,773	)
Financing activities		391			560

Net increase (decrease) in cash and cash equivalents	$	214		$	(3	)

Operating Activities . Net cash flows from operating activities increased $493 million for the nine months ended June 30, 2011, compared to the same period in the prior year. This increase was primarily due to the timing of revenues related to fuel cost recovery, as well as a decrease in the cash spent on the Kingston ash spill environmental cleanup costs as compared to the same period in the prior year. See Results of Operations .

Investing Activities . Net cash flows used in investing activities increased $107 million for the nine months ended June 3 0 , 2011, compared to the same period in the prior year. The increase resulted primarily from an increase of $187 million in construction expenditures due to ongoing construction of Watts Bar Unit 2 and an increase in base capital spending to improve asset performance and condition . This increase was partially offset by a decrease in nuclear fuels expenditures of $98 million resulting from less purchases of uranium and enrichment services during the current year as compared to the prior year.

Financing Activities . Net cash flows provided by financing activities decreased $169 million during the nine months ended June 30, 2011, as compared to the same period of the prior year. The decrease was primarily due to net issuances of debt of $535 million during the nine months ended June 30, 2011, as compared to net issuances of debt of $662 million during the nine months ended June 30, 2010. This decrease was also due to a $30 million increase in payments on leases and leaseback financing primarily due to the purchase of an office building previously under a capital lease.

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Cash Requirements and Contractual Obligations

The estimated cash requirements and contractual obligations for TVA as of June 30, 2011, are detailed in the following table.

Commitments and Contingencies Payments due in the year ending September 30
	2011 (1)		2012		2013		2014		2015		Thereafter		Total

Debt (2)	$	—	$	1,523	$	2,308	$	32	$	1,032	$	19,266	$	24,161
Interest payments relating to debt		268		1,371		1,227		1,142		1,141		20,296		25,445
Lease obligations
Capital		3		6		—		—		—		3		12
Non-cancelable operating		18		52		48		31		24		169		342
Purchase obligations
Power		73		223		158		158		161		4,376		5,149
Fuel		574		1,683		1,449		1,124		949		2,589		8,368
Other		32		98		78		72		68		1,014		1,362
EPA settlement		2		87		87		87		87		—		350
Other settlements		1		3		3		3		—		—		10
Environmental cleanup costs-Kingston ash spill		58		168		97		88		—		—		411
Payments on other financings		27		136		488		100		104		713		1,568
Payments to U.S. Treasury
Return of Power Program Appropriation Investment		20		20		20		10		—		—		70
Return on Power Program Appropriation Investment		8		22		20		19		18		235		322

Total	$	1,084	$	5,392	$	5,983	$	2,866	$	3,584	$	48,661	$	67,570
Notes (1) Period July 1 – September 30, 2011
(2) Does not include noncash items of foreign currency exchange loss of $35 million and net discount on sale of Bonds of $235 million.

In addition to the cash requirements above, TVA has contractual obligations in the form of revenue discounts related to energy prepayments.

Energy Prepayment Obligations Payments due in the year ending September 30


	2011 (1)		2012		2013		2014		2015		Thereafter		Total

Energy Prepayment Obligations	$	26	$	105	$	102	$	100	$	100	$	310	$	743

Note
(1) Period July 1 - September 30, 2011

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Results of Operations

Sales of Electricity

The following table compares TVA’s energy sales statistics for the three and nine months ended June 30, 2011 and 2010:

Sales of Electricity (millions of kWh)
	For the three months ended June 30							For the nine months ended June 30
	2011		2010		Percent Change			2011		2010		Percent Change

Municipalities and cooperatives		32,129		33,004		(2.7	%)		98,822		101,026		(2.2	%)
Industries directly served		6,240		7,242		(13.8	%)		22,513		24,267		(7.2	%)
Federal agencies and other		486		505		(3.8	%)		1,549		1,479		4.7	%
Total sales of electricity		38,855		40,751		(4.7	%)		122,884		126,772		(3.1	%)


Heating degree days (1) (normal 228 and 3,343, respectively)		199		123		61.8	%		3,405		3,694		(7.8	%)

Cooling degree days (1) (normal 586 and 666, respectively)		761		826		(7.9	%)		831		845		(1.7	%)

Combined degree days (1) (normal 814 and 4,008, respectively)		960		949		1.2	%		4,236		4,539		(6.7	%)

Note (1) The prior year degree day information has been adjusted in order to incorporate a change in TVA’s current calculation of this information. Every five years this calculation is updated in order to incorporate the most recent 30 years of weather history. The most recent update, to incorporate CYs 2006-2010, occurred during the second quarter of 2011.

Significant items contributing to the 1.9 billion kilowatt-hour (“kWh”) decrease in sales of electricity for the three months ended June 30, 2011, compared to the same period in 2010 included:

•

The 875 million kWh decrease in sales to Municipalities and cooperatives was primarily weather driven. There was an increase in both heating and cooling degree days during April 2011, as compared to April 2010. However, cooler weather in May and June 2011 resulted in a net decrease in cooling degree days, as compared to the same period in the prior year. In addition, the power outages caused by the storms of April 27, 2011, and April 28, 2011, contributed to the decrease in sales.

•

The 1.0 billion kWh decrease in sales to Industries directly served was primarily due to a decrease in sales to TVA’s largest directly served industrial customer, which has been curtailing operations.

•

The 19 million kWh decrease in sales to Federal agencies and other was primarily due to a decrease of 37 million kWh in sales to federal agencies directly served and was partially offset by an increase of 18 million kWh sold off-system. The decrease in sales to federal agencies was primarily due to a decline in sales to a large directly served federal agency customer.

Significant items contributing to the 3.9 billion kWh decrease in sales of electricity for the nine months ended June 30, 2011, compared to the same period in 2010 included:

•

The 2.2 billion kWh decrease in sales to Municipalities and cooperatives was primarily due to a decrease in both heating and cooling degree days. This was the result of a cooler than normal summer and a warmer than normal winter.

•

The 1.8 billion kWh decrease in sales to Industries directly served was primarily due to a decrease in sales to TVA’s largest directly served industrial customer, which has been curtailing operations.

•

The 70 million kWh increase in sales to Federal agencies and other was primarily due to an increase of 77 million kWh in off-system sales and was partially offset by a decrease of seven million kWh in sales to federal agencies directly served. The increase in off-system sales was primarily due to an increase in excess generation available for resale.

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Financial Results

The following table compares operating results for the three and nine months ended June 30, 2011 and 2010:

Summary Statements of Operations
	For the three months ended June 30						For the nine months ended June 30
	2011			2010			2011			2010

Operating revenues	$	2,657		$	2,587		$	8,453		$	7,558
Operating expenses		(2,575	)		(2,073	)		(7,534	)		(5,826	)
Operating income		82			514			919			1,732
Other income, net		4			6			25			20
Interest expense, net		(326	)		(321	)		(979	)		(973	)

Net income (loss)	$	(240	)	$	199		$	(35	)	$	779

Operating Revenues. Operating revenues for the three and nine months ended June 30, 2011 and 2010, consisted of the following:

Operating Revenues
	For the three months ended June 30							For the nine months ended June 30
	2011		2010		Percent Change			2011		2010		Percent Change

Sales of electricity
Municipalities and cooperatives	$	2,287	$	2,204		3.8	%	$	7,190	$	6,367		12.9	%
Industries directly served		310		324		(4.3	%)		1,077		1,019		5.7	%
Federal agencies and other		31		31		0.0	%		95		83		14.5	%
Other revenue		29		28		3.6	%		91		89		2.2	%

Total operating revenues	$	2,657	$	2,587		2.7	%	$	8,453	$	7,558		11.8	%

Operating revenues increased $70 million and $895 million in the three and nine months ended June 30, 2011, compared to the three and nine months ended June 30, 2010, due to the following:

	Three Month Change			Nine Month Change

Fuel rate	$	224		$	1,219
Volume		(105	)		(213	)
Base rates		(50	)		(117	)
Off system sales and other		—			4
Other revenue		1			2
Total	$	70		$	895

Note Components of operating revenue related to rates during the first six months of 2011 have been adjusted in order to incorporate the change in TVA’s rate structure implemented in April 2011. See Rate Change for a discussion of the new wholesale rate structure.

The increase of fuel rates for the three and nine months ended June 30, 2011, compared to the three and nine months ended June 30, 2010, was primarily due to overcollection of the FCA in 2009 since the amount overcollected in that year was refunded to customers in 2010 through FCA rate reductions.

Significant items contributing to the $70 million increase in operating revenues for the three months ended June 30, 2011, compared to the same period in 2010 included:

•

An $83 million increase in revenue from Municipalities and cooperatives primarily due to fuel rate increases which increased revenues by $203 million. This increase was partially offset by a decrease in base rates which decreased revenues by $61 million and a decrease in sales volume which decreased revenues by $59 million.

•

A $14 million decrease in revenue from Industries directly served primarily due to sales volume decreases which decreased revenues by $45 million. This decrease was partially offset by fuel rate and base rate increases which increased revenues by $18 million and $13 million, respectively.

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•

Federal agencies and other revenue remained relatively flat for the period. This was primarily due to fuel rate increases which increased revenues by $3 million. The increase was offset by base rate and sales volume decreases of approximately $2 million.

Significant items contributing to the $895 million increase in operating revenues for the nine months ended June 30, 2011, compared to the same period in 2010 included:

•

An $823 million increase in revenue from Municipalities and cooperatives primarily due to fuel rate increases which increased revenues by $1.1 billion. This increase was partially offset by a decrease in base rates which decreased revenues by $109 million and a decrease in sales volume which decreased revenues by $139 million.

•

A $58 million increase in revenue from Industries directly served primarily due to fuel rate increases which increased revenues by $134 million. This increase was partially offset by sales volume and base rate decreases which decreased revenues by $73 million and $3 million, respectively.

•

A $12 million increase in revenue from Federal agencies and other was primarily due to fuel rate increases which increased revenues by $14 million and increases in off-system sales which increased revenue by $4 million. These increases were partially offset by base rate decreases of $6 million.

Operating Expenses. Operating expenses for the three and nine months ended June 30, 2011 and 2010, consisted of the following:

Operating Expenses
	For the three months ended June 30							For the nine months ended June 30
	2011		2010		Percent Change			2011		2010		Percent Change

Fuel	$	584	$	509		14.7	%	$	2,071	$	1,343		54.2	%
Purchased power		387		277		39.7	%		1,026		656		56.4	%
Operating and maintenance		994		757		31.3	%		2,677		2,267		18.1	%
Depreciation and amortization		436		416		4.8	%		1,296		1,240		4.5	%
Tax equivalents		174		114		52.6	%		464		320		45.0	%

Total operating expenses	$	2,575	$	2,073		24.2	%	$	7,534	$	5,826		29.3	%

Operating expenses increased $502 million for the three months ended June 30, 2011, and $1.7 billion for the nine months ended June 30, 2011, compared to the same periods in 2010.

For the three months ended June 30, 2011, significant drivers contributing to the $502 million increase compared to the same period in 2010 are described below:

Fuel expense increased $75 million due to:

•

A $120 million increase in fuel expense resulting primarily from a 30 percent increase in the average fuel cost per kWh of net thermal generation, which increased fuel expense by $91 million and from an increase of $25 million in fuel-related expense that does not qualify for inclusion in the fuel rate. Additionally, net thermal generation decreased 12 percent during the quarter primarily due to a decrease in nuclear generation. The decrease in nuclear generation was due to the April 27, 2011, and April 28, 2011, storms which caused Browns Ferry to go offline for nearly a month. The decrease in nuclear generation was replaced with higher cost gas and coal-fired generation which resulted in a $4 million increase in expense.

•

A $45 million decrease in fuel expense related to the fuel cost mechanism which matches the recognition of fuel expense with the period it is collected in revenue.

Purchased Power expense increased $110 million due to:

•

A $62 million increase in purchased power expense related to the fuel cost mechanism which matches the recognition of purchased power expense with the period it is collected in revenue.

•

A $48 million increase in purchased power expense primarily because of an increase in purchased power volume of 675 million kWh, or 10 percent, which increased purchased power expense by $32 million. The increase in purchased power volume was due to Browns Ferry being offline as a result of the storms on April 27, 2011, and April 28, 2011. Additionally, an increase in the average price of purchased power of four percent increased purchased power expense by $16 million.

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Operating and maintenance expense increased $237 million. The primary driver for the increase was a $134 million increase in operating and maintenance expense at nuclear plants due to the timing and duration of refueling outages, maintenance projects to increase plant reliability, and increased security costs due to regulatory requirements. Additional items contributing to the increase in Operating and maintenance expense included a $25 million increase in pension and postretirement benefit expense, a $21 million increase at coal-fired and combustion turbine plants due to an increase in base maintenance costs to address material condition and regulatory requirements and increased costs associated with the Lagoon Creek Combined Cycle Facility (“Lagoon Creek”), which began commercial operations in September 2010, a $16 million increase due to capital project write-offs, a $13 million increase in other employee benefits, a $10 million increase due to the Environmental Agreements, and a $9 million increase in costs to support energy efficiency and demand response initiatives.

Depreciation and amortization expense increased $20 million primarily because of an increase in net plant additions and the acceleration of depreciation on certain coal-fired units due to the decision to idle those units.

Tax equivalents expense increased $60 million. This increase primarily reflects an increase in the accrued tax equivalent expense related to the FCA. The accrued tax equivalent expense is equal to five percent of the FCA revenues and increased for the three months ended June 30, 2011, since the FCA revenues were higher than in the three months ended June 30, 2010.

For the nine months ended June 30, 2011, significant drivers contributing to the $1.7 billion increase in operating expenses, compared to the same period in 2010, are described below:

Fuel expense increased $728 million due to:

•

A $503 million increase in fuel expense related to the fuel cost mechanism which matches the recognition of fuel expense with the period it is collected in revenue.

•

A $225 million increase in fuel expense resulting primarily from a 14 percent increase in the average fuel cost per kWh of net thermal generation, which increased fuel expense by $141 million and from an increase of $25 million in fuel-related expense that does not qualify for inclusion in the fuel rate. Additionally, net thermal generation decreased three percent primarily due to a decrease in nuclear generation. The decrease in nuclear generation was due to the April 27, 2011, and April 28, 2011, storms which caused Browns Ferry to go offline for nearly a month. The decrease in nuclear generation was replaced with higher cost gas and coal-fired generation which resulted in a $59 million increase in expense.

Purchased power expense increased $370 million due to:

•

A $301 million increase in purchased power expense related to the fuel cost mechanism which matches the recognition of purchased power expense with the period it is collected in revenue.

•

A $69 million increase in purchased power expense primarily because of an increase in purchased power volume of 1.0 billion kWh, or five percent, which increased purchased power expense by $50 million. The increase in purchased power volume was largely due to Browns Ferry being offline for nearly a month as a result of the storms on April 27, 2011, and April 28, 2011. Additionally, the average price of purchased power increased two percent, which increased purchased power expense by $19 million.

Operating and maintenance expense increased $410 million. The primary driver for the increase was a $172 million increase in operating and maintenance expense at nuclear plants due to the timing and duration of refueling outages, maintenance projects to increase plant reliability, and increased security costs due to regulatory requirements. Additional items contributing to the increase in Operating and maintenance expense included a $76 million increase in pension and postretirement benefit expense, a $34 million increase at coal-fired and combustion turbine plants due to an increase in base maintenance costs to address material condition and regulatory requirements and increased costs associated with Lagoon Creek which began commercial operations in September 2010, a $24 million increase related to ash remediation activities as TVA is in the process of converting from wet storage to dry storage facilities, a $22 million increase to support economic development initiatives, a $22 million increase in costs to support energy efficiency and demand response initiatives, a $16 million increase due to capital project write-offs, a $12 million increase in costs for reagents used in coal-fired emission controls, a $10 million increase in other employee benefits, and a $10 million increase due to the Environmental Agreements.

Depreciation and amortization expense increased $56 million primarily because of an increase in net plant additions and acceleration of depreciation on certain coal-fired units due to the decision to idle those units.

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Tax equivalents expense increased $144 million. This increase primarily reflects an increase in the accrued tax equivalent expense related to the FCA. The accrued tax equivalent expense is equal to five percent of the FCA revenues and increased for the nine months ended June 30, 2011, since the FCA revenues were higher than in the nine-month

period ended June 30, 2010.

Interest Expense . Interest expense and interest rates for the three and nine months ended June 30, 2011 and 2010, were as follows:

Interest Expense
	For the three months ended June 30									For the nine months ended June 30
	2011			2010			Percent Change			2011			2010			Percent Change

Interest expense	$	358		$	343			4.4	%	$	1,072		$	1,026			4.5	%
Allowance for funds used during construction and nuclear fuel expenditures		(32	)		(22	)		45.5	%		(93	)		(53	)		75.5	%

Net interest expense	$	326		$	321			1.6	%	$	979		$	973			0.6	%

		2011			2010		Percent Change				2011			2010		Percent Change
Interest rates (average)
Long-term (1)		5.76			5.92			(2.7	%)		5.81			5.90			(1.5	%)
Discount notes		0.01			0.12			(91.7	%)		0.09			0.07			28.6	%
Blended (1)		5.72			5.67			0.9	%		5.75			5.66			1.6	%
Note (1) The average interest rates on long-term debt for the three and nine months ended June 30, 2011, reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the period presented, and interest expense for those periods. Interest expense is interest on long-term debt, including amortization of debt discounts, issue, and reacquisition costs, net. Average long-term interest rates reported for the three and nine months ended June 30, 2010, were calculated using the average balance of debt based at the beginning and end of the period. The calculation was changed so that the average rate reflects fluctuations in the balance of long-term debt throughout the periods and the impact on interest expense.

The $5 million increase in net interest expense for the three months ended June 30, 2011, was primarily attributable to an increase in interest on debt as a result of an increase in the average balance of long-term debt for the three months ended June 30, 2011, compared to the three months ended June 30, 2010. This increase was partially offset by a greater amount of capitalized interest due to an increase in the construction work in progress base used to calculate allowance for funds used during construction (“AFUDC”) as a result of ongoing construction activities at Watts Bar Unit 2.

The $6 million increase in net interest expense for the nine months ended June 30, 2011, was primarily attributable to an increase in interest on debt as a result of an increase in the average balance of long-term debt for the nine months ended June 30, 2011, compared to the nine months ended June 30, 2010. This increase was partially offset by a greater amount of capitalized interest due to an increase in the construction work in progress base used to calculate AFUDC as a result of ongoing construction activities at Watts Bar Unit 2.

Critical Accounting Policies and 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 United States of America (“GAAP”), 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 policies are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates and Note 1 of the Notes to the Financial Statements in the Annual Report.

Changes in Ratemaking Impacting Accounting

On April 1, 2011, TVA implemented new pricing structures for wholesale service to distributor customers and TVA’s retail service to directly served customers. Wholesale service to distributor customers is on a time-of-use rate structure with an option for a seasonal demand and energy rate through no later than October 2012. By October 2012, TVA is proposing to have all distributor customers on a wholesale time-of-use rate structure. However, TVA will continue to have discussions with distributors on other alternative wholesale

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rate structures. TVA is offering a default time-of-use rate structure with the option of a seasonal demand and energy rate structure to directly served customers and distributor-served

customers with contract demands in excess of five MW. The new rate structures are designed to provide pricing signals intended to incentivize wholesale (distributor) and retail customers to shift energy usage from higher cost periods to less expensive periods. These new rates are also intended to provide TVA with the same overall revenue as was generated prior to the rate restructuring; however, individual distributors and retail customers may see some effects on their bills depending on their usage characteristics (demand and energy usage on-peak versus off-peak).

New Accounting Standards and Interpretations

For a discussion of TVA’s new accounting standards and interpretations, see Note 2 , which discussion is incorporated into this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Governance

On April 14, 2011, the TVA Board selected Dennis C. Bottorff to continue to serve as Chairman of the TVA Board after his term in office expired on May 18, 2011. The terms of Robert M. Duncan and Thomas C. Gilliland also expired on May 18, 2011. Even though the terms of Chairman Bottorff and Directors Duncan and Gilliland have expired, they may continue to serve on the TVA Board until the end of the current session of Congress or until a successor takes office. On April 14, 2011, the TVA Board also selected William B. Sansom to serve as Vice Chairman.

On July 13, 2011, Richard Howorth was sworn in as a member of the TVA Board. Mr. Howorth, age 60, is a resident of Oxford, Mississippi. He is the owner of Square Books, an Oxford independent bookstore he founded in 1979. Mr. Howorth served two terms as the mayor of Oxford, from 2001 to 2009, during which time he was chairman of the authority overseeing the Oxford Electric Department. From 2001 to 2009, he also served as a director and officer of the North Mississippi Industrial Development Association, an economic development consortium. Mr. Howorth’s term will expire in 2015.

On August 3, 2011, Ashok Bhatnagar, TVA’s Senior Vice President of Nuclear Generation Development and Construction (“NGDC”), informed senior management that he would retire. His retirement is effective October 1, 2011. Mike Skaggs, currently Site Vice President at TVA’s Sequoyah Nuclear Plant, will replace Mr. Bhatnagar as Senior Vice President of NGDC.

Legislative and Regulatory Matters

On December 22, 2010, Congress approved President Obama’s proposal to freeze base pay for civilian federal employees for a period from January 1, 2011, to December 31, 2012. This freeze applies to TVA’s senior executives , which includes all employees at the level of vice president and above; in addition, the President issued a memorandum on December 30, 2010, to other agencies not directly covered by the legislation requesting that they comply with the terms of the salary freeze. As a result, TVA decided to also freeze salaries for managers, specialists, and those employees not covered by collective bargaining agreements for the duration of the federal freeze. The freeze does not affect salary increases approved prior to January 1, 2011. Employees who receive promotions during this time period will be eligible for salary increases.

For a discussion of recent environmental regulation, see Environmental Matters below .

Environmental Matters

TVA’s power generation activities, like those across the utility industry and in other industrial sectors, are subject to most federal, state, and local environmental laws and regulations. Major areas of regulation affecting TVA’s activities include clean air control, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent and to apply to additional emissions and sources, with a particular emphasis on climate change, renewable generation, and energy efficiency.

Clean Air Regulations

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions. The following CAA programs, along with those discussed in Item 1, Business - Environmental Matters in the Annual Report, can affect TVA’s power generation activities.

National Ambient Air Quality Standards. In January 2010, EPA published a proposed rule that would establish more stringent primary and secondary ozone national ambient air quality standards (“NAAQS”). On December 8, 2010, the EPA Administrator announced a delay in the final issuance of the ozone standard. EPA now expects to publish the final rule with the new ozone standards in mid-August, 2011. As the ozone standards become more stringent, utilities are expected to come under increasing pressure to further reduce NO x

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emissions from their existing fossil plants. The NAAQS for particulate matter (“PM”) 2.5 is also being reviewed to determine if the 24 hour standard should be lowered. The lowering of

the PM 2.5 standards could have impacts on some TVA coal-fired facilities. EPA has also asked the states to inform them of areas that may be non-compliant with the one hour SO 2 NAAQS standard. It is yet to be determined if this issue will impact any TVA coal-fired facilities.

Hazardous Air Pollutants from Industrial, Commercial, and Institutional Boilers. In June 2010, EPA published a proposed rule to establish standards for hazardous air pollutants emitted from industrial, commercial, and institutional boilers and process heaters. The final rule was published on March 21, 2011, and will have minor impacts beginning in CY 2014 for some of TVA’s startup and auxiliary boilers. Most boilers will require scheduled maintenance to ensure optimized combustion, and a few may require the installation of controls. Concurrent with the issuance of the rule, EPA announced reconsideration of several elements in the rule. Until the reconsideration process is completed, final specific requirements are too uncertain to predict. The rule is expected to become effective April 2012.

Hazardous Air Pollutants from Steam Electric Utility Units. On March 16, 2011, EPA released for public comment a proposed rule to establish standards for hazardous air pollutants emitted from steam electric utility units. The comment period was extended until August 4, 2011, and EPA has announced its plan to publish the final rule in November 2011. As proposed, the rule would require additional controls for hazardous air pollutants including mercury, non-mercury metals, and acid gasses for many of TVA’s coal - fired units in the 2015-2016 timeframe. Boiler combustion systems will require scheduled maintenance to ensure optimized combustion to minimize emissions of organic hazardous air pollutants. TVA may choose to idle or retire some units in lieu of investing in additional controls. In conjunction with and consistent with the utility hazardous air pollutant rule, EPA is proposing to revise the New Source Performance Standards (“NSPS”) for new and reconstructed coal and oil-fired units for emissions of PM, SO 2 , and NO X . New PM and NO X standards for modified units are also included in the NSPS. EPA intends to issue the final rules in December 2011. Until the final rules are published, specific requirements are too uncertain to predict.

Cross State Air Pollution Rule. On July 7, 2011, EPA announced the final Cross State Air Pollution Rule ("CSAPR"). This rule, required by court order, will replace the existing Clean Air Interstate Rule ("CAIR") effective January 1, 2012. The CSAPR will regulate SO 2 and NO x emissions from upwind states that are negatively impacting ozone and fine particulate air quality in downwind states. This rule will affect electrical generating utilities within 27 states, including TVA coal and gas-fired plants in Alabama, Kentucky, Mississippi , and Tennessee. Stringent state level emission caps for SO 2 and NO x will begin in 2012 with further reductions required in 2014. TVA is in the process of evaluating the impact of the rule. EPA proposed the rule in 2010 under the name of “Clean Air Transport Rule.”

TVA Integrated Resource Plan and EPA Settlement Agreement

TVA has invested more than $5.3 billion since 1977 to reduce coal-fired power plant emissions. With the Environmental Agreements and its own long-range plans, TVA estimates that it will invest an additional $3 . 7 billion in the next 10 years on new emission-control equipment and upgrades of existing equipment at its coal-fired plants.

The agreement with EPA also calls for TVA to provide $350 million to fund a number of environmental improvement projects over the next five years. Those include efficiency upgrades to the electric grid; support for energy efficiency enhancements in homes and businesses; assistance to the National Park Service and U.S. Forest Service in restoring and improving lands, watersheds , and forests; and aiding reduction of GHG emissions through efforts such as waste-heat recovery, solar , and landfill-gas energy installations.

For a further discussion of the TVA Integrated Resource Plan and EPA settlement agreement, see Note 16 — EPA Settlement and Regulatory Compliance — Environmental Agreements and Generation Resources — Coal-Fired Generation in Challenges and Key Initiatives above.

Climate Change

Regulation. In December 2010, EPA entered into a settlement agreement with various states and environmental groups that establishes a schedule for setting new standards for regulating GHG emissions from oil and coal-fired electric generating units. On June 13, 2011, EPA, states, and environmental groups agreed to a two-month postponement of the agency’s deadline to propose GHG limits on new and modified power plants. The original deadline for EPA to propose NSPS standards for power plants was July 26, 2011. EPA must now propose these standards by September 30, 2011. The extension will not affect the deadline to issue the final rule, which is due May 26, 2012. These rules will affect TVA, but the extent of the impact is not yet known.

On March 21, 2011, EPA released a proposed determination that GHG emissions from biomass combustion will not be counted toward emission thresholds for PSD and Title V permitting under the second phase of EPA’s Tailoring Rule for a period of three years. The rule will take effect July 1, 2011. EPA will examine how to evaluate carbon dioxide (“CO 2 ”)

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emissions from biomass for a three-year interim period. EPA released a companion document that provides guidance for the determination of “best available control technology”
(“BACT”) in PSD proceedings involving biogenic CO 2 emissions from bioenergy facilities.

In March 2011, the White House Council on Environmental Quality (“CEQ”) issued formal guidance to federal agencies on the development of climate change adaptation plans, intended to assist those agencies in fulfilling the requirements of Executive Order 13514. The guidance requires federal agencies to draft adaptation policy statements by June 3, 2011, and complete adaptation plans by June 4, 2012. TVA submitted its adaptation policy statement as required on June 3, 2011.

In March 2011, EPA announced that it would defer the March 31, 2011 deadline for submission of the first GHG emission reports under the agency’s Reporting Rule until an unspecified date in order to complete development of an electronic reporting system, which the Mandatory Reporting Rule requires reporting entities to use. In May 2011 , EPA announced the deadline for submission would be September 30, 2011 .

Litigation. See Note 16 for a discussion of GHG litigation to which TVA is a party.

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, an increase in demand for generation from alternative energy sources, and impacts to the business reputation and public opinion.

Water Quality Control Developments

EPA proposed a new rule on March 28, 2011 , designed to minimize the adverse impacts to fish and shellfish from the design and operation of cooling water intake structures at existing power plants. The new rule identifies proposed changes in the operation of cooling water intakes and modifications to their design. All of the intakes at TVA’s existing coal-fired and nuclear generating facilities are likely to be subject to the new rule. Because of the uncertainty of the final rule development and changes to be made in response to comments by EPA, the impacts of the rulemaking are uncertain at this time. However, these changes could potentially result in significant increases in TVA’s capital costs and operating and maintenance costs .

Estimated Required Environmental Expenditures

The following table contains information about TVA’s current estimates on projects related to environmental

laws and regulations.

Air, Water, and Waste Quality Estimated Potential Environmental Expenditures At June 30, 2011 (in millions)
	Estimated Timetable	Total Estimated Expenditures

Site environmental remediation costs (1)	2011+	$ 23
CCP conversion and remediation (2)	2011-2020	$ 1,396
Proposed clean air projects (3)	2011-2018	$ 3,724
Clean Water Act requirements (4)	2015-2020	TBD*

Notes (1) Estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate. (2) Includes closure of impoundments, construction of lined landfills, and construction of dewatering systems. (3) Includes air quality projects that TVA is currently planning to undertake to comply with existing and proposed air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations. (4) Compliance plans to meet the requirements of a revised or new implementing rule under Section 316(b) of the Clean Water Act and EPA’s revised steam electric effluent guidelines will be determined upon finalization of the rules. * TBD – to be determined as regulations become final.

Legal Proceedings

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results of operations, liquidity, and financial condition could be materially adversely affected.

For a discussion of certain current material Legal Proceedings, see Note 16, which discussion is incorporated by reference into this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes related to market risk disclosed under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management Activities in the Annual Report. See Note 12 for additional information regarding TVA's derivative transactions and risk management activities.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee (including the Chief Financial Officer and the Vice President & Controller), evaluated the effectiveness of TVA’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30, 2011. Based on this evaluation, TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee (including the Chief Financial Officer and the Vice President & Controller), concluded that TVA’s disclosure controls and procedures were effective as of June 30, 2011, to ensure that information required to be disclosed by TVA in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by TVA in such reports is accumulated and communicated to TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee (including the Chief Financial Officer and the Vice President & Controller), as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2011, there were no changes in TVA’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, TVA’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, TVA is party to or otherwise involved in Legal Proceedings that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA’s financial condition, results of operations, and cash flows.

For a discussion of certain current material Legal Proceedings, see Note 16 and Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations — L egal Proceedings , discussions of which are incorporated by reference into this Item 1, Legal Proceedings.

ITEM 1A. RISK FACTORS

The discussion below supplements the disclosure contained in Item 1A, Risk Factors in the Annual Report. The factors described in Item 1A, Risk Factors in the Annual Report, together with the risk factors discussed below and the other information contained in the Quarterly Report, could materially affect TVA’s business, financial condition, and operating results and should be carefully considered. Further, the risks described in this Quarterly Report and in the Annual Report are not the only risks facing TVA. Additional risks and uncertainties not currently known to TVA management or that TVA management currently deems to be immaterial also may materially adversely affect TVA’s business, financial condition, and operating results.

TVA’s nuclear power program may be adversely affected by the Japanese nuclear events.

The Japanese nuclear events could lead to the imposition of additional requirements or restrictions by NRC or other regulatory bodies relating to the construction, operation, and decommissioning of nuclear units, and the storage of spent fuel. These requirements or restrictions could negatively affect the cost and schedule for completing Watts Bar Unit 2, as well as substantially increasing the cost of operating TVA’s existing nuclear units. In addition, if costs to construct nuclear units increase or the public determines that nuclear power is less desirable as a result of the Japanese nuclear events, TVA may be forced to forego any future construction at Bellefonte Nuclear Plant or other facilities. This would make it substantially more difficult for TVA to obtain greater amounts of its power supply from low or zero carbon-emitting or renewable resources and to grow its generation capacity when faced with retiring or idling certain coal-fired units.

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ITEM 6. EXHIBITS

Exhibit No.	Description



10.1	Amendment Dated as of May 9, 2011, to $1,000,000,000 Spring Maturity Credit Agreement Dated as of July 22, 2010, Among TVA, Bank of America, N.A., as Administrative Agent, Letter of Credit Issuer, and a Lender, and Morgan Stanley Bank, N.A., Toronto Dominion (New York) LLC, The Bank of New York Mellon, and First Tennessee Bank, N.A., as Lenders (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form 8-K filed on May 11, 2011, File No. 000-52313)

10.2*	Federal Facilities Compliance Agreement Between the United States Environmental Protection Agency and TVA

10.3*	Consent Decree among Alabama, Kentucky, North Carolina, Tennessee, the Alabama Department of Environmental Management, the National Parks Conservation Association, Inc., the Sierra Club, Our Children’s Earth Foundation, and TVA

31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer

32.1	Section 1350 Certification Executed by the Chief Executive Officer

32.2	Section 1350 Certification Executed by the Chief Financial Officer

101.INS **	TVA XBRL Instance Document

101.SCH **	TVA XBRL Taxonomy Extension Schema

101.CAL **	TVA XBRL Taxonomy Extension Calculation Linkbase

101.DEF **	TVA XBRL Taxonomy Extension Definition Linkbase

101.LAB **	TVA XBRL Taxonomy Extension Label Linkbase

101.PRE **	TVA XBRL Taxonomy Extension Presentation Linkbase

* Certain exhibit(s) have been omitted. TVA hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the Securities and Exchange Commission.

** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liablity under this section.

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SIGNATURES

Pursuant to the requirements of Section 13, 15(d), or 37 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 11, 2011		TENNESSEE VALLEY AUTHORITY
		(Registrant)


	By:	/s/ Tom Kilgore
		Tom Kilgore
		President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ John M. Thomas, III
		John M. Thomas, III
		Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description



10.1	Amendment Dated as of May 9, 2011, to $1,000,000,000 Spring Maturity Credit Agreement Dated as of July 22, 2010, Among TVA, Bank of America, N.A., as Administrative Agent, Letter of Credit Issuer, and a Lender, and Morgan Stanley Bank, N.A., Toronto Dominion (New York) LLC, The Bank of New York Mellon, and First Tennessee Bank, N.A., as Lenders (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form 8-K filed on May 11, 2011, File No. 000-52313)

10.2*	Federal Facilities Compliance Agreement Between the United States Environmental Protection Agency and TVA

10.3*	Consent Decree among Alabama, Kentucky, North Carolina, Tennessee, the Alabama Department of Environmental Management, the National Parks Conservation Association, Inc., the Sierra Club, Our Children’s Earth Foundation, and TVA

31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer

32.1	Section 1350 Certification Executed by the Chief Executive Officer

32.2	Section 1350 Certification Executed by the Chief Financial Officer

101.INS **	TVA XBRL Instance Document

101.SCH **	TVA XBRL Taxonomy Extension Schema

101.CAL **	TVA XBRL Taxonomy Extension Calculation Linkbase

101.DEF **	TVA XBRL Taxonomy Extension Definition Linkbase

101.LAB **	TVA XBRL Taxonomy Extension Label Linkbase

101.PRE **	TVA XBRL Taxonomy Extension Presentation Linkbase

* Certain exhibit(s) have been omitted. TVA hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the Securities and Exchange Commission.

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EXHIBIT 10.2

UNITED STATES

ENVIRONMENTAL PROTECTION AGENCY

________________________________________________

IN THE MATTER OF: )

)

TENNESSEE VALLEY AUTHORITY ) Federal Facilities Compliance Agreement

) Between the United States Environmental

400 West Summit Hill ) Protection Agency and the Tennessee

Knoxville, Tennessee 37902 ) Valley Authority

)

Allen, Bull Run, Colbert, )

Cumberland, Gallatin, Johnsonville, ) Docket No. CAA-04-2010-1760

John Sevier, Kingston, Paradise, )

Shawnee, and Widows Creek )

Fossil Plants )

)

________________________________________________)

FEDERAL FACILITIES COMPLIANCE AGREEMENT

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I. PURPOSE		5

II. JURISDICTION	5

III. PARTIES BOUND	6

IV. EPA’S FINDINGS OF FACT AND CONCLUSIONS OF LAW	6

V. COMPLIANCE PROGRAM	6

A. DEFINITIONS	7

B. NO X EMISSION REDUCTIONS AND CONTROLS	21

C. SO 2 EMISSION REDUCTIONS AND CONTROLS	28

D. PM EMISSION REDUCTIONS AND CONTROLS	37

E. PROHIBITION ON NETTING OR OFFSETS FROM REQUIRED CONTROLS	43

F. ENVIRONMENTAL MITIGATION PROJECTS	50

G. CIVIL PENALTY	52

H. RESOLUTION OF CLAIMS AGAINST TVA	53

I. PERIODIC REPORTING	57

J. REVIEW AND APPROVAL OF SUBMITTALS	59

K. STIPULATED PENALTIES	60

L. PERMITS	65

VI. COORDINATION OF OVERSIGHT AND ENFORCEMENT	69

VII. FORCE MAJEURE	69

VIII. DISPUTE RESOLUTION	73

IX. INFORMATION COLLECTION AND RETENTION	75

X. NOTICES	76

XI. SALES OR TRANSFERS OF OPERATIONAL OR OWNERSHIP INTERESTS	79

XII. MODIFICATION	81

XIII. GENERAL PROVISIONS	81

XIV. SIGNATORIES AND SERVICE	85

XV. PUBLIC COMMENT	85

XVI. CONDITIONAL TERMINATION OF ENFORCEMENT UNDER COMPLIANCE

AGREEMENT	86

APPENDIX A -- REPORTING REQUIREMENTS

APPENDIX B -- EMISSION LIMTATIONS FOR NEW CC/CT UNITS

APPENDIX C -- ENVIRONMENTAL MITIGATION PROJECTS

EXHIBIT 1 -- CONSENT DECREE

WHEREAS, the United States Environmental Protection Agency (“EPA”) issued an administrative compliance order to the Tennessee Valley Authority (“TVA”) pursuant to Sections 113 and 167 of the Clean Air Act (“Act”), 42 U.S.C. §§ 7413, 7477, alleging that TVA violated, inter alia , the Prevention of Significant Deterioration (“PSD”) and Nonattainment New Source Review (“Nonattainment NSR”) programs of the Act, its implementing regulations, and the federally approved and enforceable State Implementation Plans (“SIPs”) for Alabama, Kentucky, and Tennessee at several of the coal-fired electric generating units that TVA owns and operates when it made certain physical changes without obtaining the necessary permits and installing the controls necessary to reduce emissions of oxides of nitrogen (NO x ), sulfur dioxide (SO 2 ), and particulate matter (“PM”);

WHEREAS, in the administrative compliance order, issued on November 3, 1999, and subsequently amended several times, including on April 10, 2000, EPA directed TVA to come into compliance with the Clean Air Act;

WHEREAS, the United States Environmental Appeals Board (“EAB”) issued a Final Order on Reconsideration in In re Tennessee Valley Auth. , 9 E.A.D 357 (EAB 2000), in which it found that TVA had violated the PSD and Nonattainment NSR programs of the Act, its implementing regulations, and the relevant SIPs, and directed TVA to come into compliance with the Act;

Whitman , 336 F.3d 1236, 1244, 1260 (11th Cir. 2003), cert. denied , 541 U.S. 1030 (2004); Brief for Respondent in Opposition to a Writ of Certiorari (“Brief for Respondent”) at 4, National Parks Conservation Ass’n et al. v. Tennessee Valley Auth. , 554 U.S. 917 (2008) (No. 07-867), and which then held that the unconstitutionality of the Act provision meant that EPA’s order was not a “final agency action” and that the court of appeals therefore lacked jurisdiction to review it, see Brief for Respondent at 4 (citing Whitman , 336 F.3d at 1248, 1260);

WHEREAS, through this Federal Facilities Compliance Agreement (“Compliance Agreement”) and the Consent Agreement and Final Order executed by EPA and TVA pursuant to 40 C.F.R §§ 22.13(b) and 22.18(b)(2), forwarded to the Region 4 Regional Judicial Officer for ratification, In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b), EPA and TVA are resolving the violations alleged in the amended administrative compliance order and the Final Order on Reconsideration;

WHEREAS, the States of Alabama, North Carolina, and Tennessee and the Commonwealth of Kentucky (collectively “the States”), are concurrently filing a complaint and lodging a proposed Consent Decree in the Eastern District of Tennessee (Exhibit 1 to this Compliance Agreement), that, when entered, will secure by way of injunction the same relief as this Compliance Agreement and that, therefore, TVA’s operations will be governed by both this Compliance Agreement and the Consent Decree;

WHEREAS, National Parks Conservation Association, Sierra Club, and Our Children’s Earth Foundation (collectively the “Citizen Plaintiffs”) are concurrently filing a complaint

and lodging a Consent Decree in the Eastern District of Tennessee with the States, that secures the same injunctive relief as this Compliance Agreement;

WHEREAS, in their complaints, the States and Citizen Plaintiffs allege, inter alia , that TVA made major modifications to major emitting facilities, and failed to obtain the necessary permits and install the controls necessary under the Act to reduce NO x , SO 2 , and/or PM emissions, and further allege that such emissions damage human health and the environment;

WHEREAS, EPA and TVA agree that this Compliance Agreement has been negotiated and executed by the Parties in good faith to ensure compliance with the law;

WHEREAS, EPA, the States, and the Citizen Plaintiffs anticipate that this Compliance Agreement (and the States’ and Citizen Plaintiffs’ Consent Decree), including the installation and operation of pollution control technology and other measures adopted pursuant to this Compliance Agreement and the Consent Decree, will achieve significant reductions of emissions from the TVA System and thereby significantly improve air quality;

WHEREAS, TVA is now undertaking a process to transform itself into a cleaner power system by reducing emissions from its coal-fired power plants, by retiring some coal-fired units, and by relying more on lower-emitting or non-emitting generation like natural gas and nuclear units and energy-efficiency and demand response programs;

WHEREAS, TVA disagreed with, and continues to disagree with, the allegations of the administrative compliance order and the findings of fact and conclusions of law of the Final Order on Reconsideration by the EAB, and denies that it violated the Act as so alleged and found ( see Whitman , 336 F.3d at 1244-45);

WHEREAS, TVA wishes to resolve, without the uncertainty and expense associated with further litigation, the claims of EPA and other parties that it has violated any provisions of the Act’s PSD, Nonattainment NSR, New Source Performance Standards (“NSPS”), minor new source review (“minor NSR”), or (to the extent related to such PSD, Nonattainment NSR, NSPS, and minor NSR claims) Title V Operating Permit programs by way of the activities identified in the administrative compliance order or other similar activities TVA has conducted at its coal-fired electricity generating plants;

WHEREAS, as specified in 168 of this Compliance Agreement, TVA has agreed to an expedited schedule to obtain the appropriate Clean Water Act National Pollutant Discharge Elimination System permits for the wastewater discharges from its flue gas desulfurization (“FGD”) systems should EPA promulgate a final rule containing revisions to the Effluent Limitations Guidelines; EPA announced on September 15, 2009, its decision to proceed with a rulemaking to revise the existing Effluent Limitations Guidelines for the Steam Electric Power Generating industry; EPA had conducted a multi-year study of the wastewater discharges from the Steam Electric Power Generating industry and technologies available to treat those discharges; EPA determined that steam electric power plants are responsible for a significant amount of the toxic pollutant loadings discharged to surface waters by point sources, and coal ash ponds and FGD systems generate many of these loadings; and EPA concluded that the study demonstrated the need to consider updating the existing Effluent Limitations Guidelines;

WHEREAS, TVA plans to seek public review and comment during the environmental reviews conducted pursuant to the National Environmental Policy Act for the

construction and operation of any combustion turbine and combined cycle electric generating plants it proposes to add to its system;

NOW, THEREFORE, without any admission of fact or law, the Parties hereby agree as follows:

I. PURPOSE

1. The United States Environmental Protection Agency (“EPA”) and the Tennessee Valley Authority (“TVA”) enter into this Federal Facilities Compliance Agreement (“Compliance Agreement”) to address violations of the Clean Air Act (“Act”) alleged by EPA in In re Tennessee Valley Auth. , 9 E.A.D. 357 (EAB 2000). The purpose of this Compliance Agreement is to establish a compliance program for TVA’s fifty-nine (59) coal-fired boilers located at eleven (11) plants in Alabama, Kentucky, and Tennessee.

II. JURISDICTION

2. EPA and TVA enter into this Compliance Agreement pursuant to the Clean Air Act, 42 U.S.C. §§ 7401 et seq ., and Executive Order 12088, 43 Fed. Reg. 47,707 (Oct. 13, 1978).

3. References in this Compliance Agreement to possible civil remedies against TVA shall be without prejudice to the position of the United States in its petition for a writ of certiorari in United States Envtl. Protection Agency v. Tennessee Valley Auth. , No. 02-1162, that TVA, as an agency of the United States, lacks independent litigating authority, and shall not be interpreted as supporting or admitting any contrary position.

4. Subject to Paragraph 87 of the Consent Agreement and Final Order in In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b), TVA retains the right to controvert in

any proceedings, other than a proceeding solely to enforce this Compliance Agreement, the validity of any of EPA’s findings of fact or conclusions of law of this Compliance Agreement. TVA agrees to comply with and be bound by the terms of this Compliance Agreement, and further agrees in any proceeding solely to implement or enforce this Compliance Agreement, that it will not contest the validity of this Compliance Agreement or its terms.

III. PARTIES BOUND

5. The Parties to this Compliance Agreement are EPA and TVA.

6. Upon the Effective Date, the provisions of this Compliance Agreement shall apply to and be binding upon EPA and TVA and their successors and assigns, and TVA’s officers, employees and agents, solely in their capacities as such.

IV. EPA’S FINDINGS OF FACT AND CONCLUSIONS OF LAW

7. EPA incorporates by reference, as if fully set forth herein, the findings of fact and conclusions of law ( i.e. , Section I. Nature of the Action/Jurisdictional Statements, Section II. Legal Background, Section III. Factual Allegations, and Section IV. Alleged Violations) contained in the Consent Agreement and Final Order between EPA and TVA, In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b).

V. COMPLIANCE PROGRAM

8. TVA shall be responsible for providing a copy of this Compliance Agreement to all vendors, suppliers, consultants, contractors, agents, and any other company or other organization retained to perform any of the work required by this Compliance Agreement. Notwithstanding any retention of contractors, subcontractors, or agents to perform any work

required under this Compliance Agreement, TVA shall be responsible for ensuring that all work is performed in accordance with the requirements of this Compliance Agreement. For this reason, in any action to enforce this Compliance Agreement, TVA shall not assert as a defense the failure of its officers, directors, employees, servants, agents, or contractors to take actions necessary to comply with this Compliance Agreement, unless TVA establishes that such failure resulted from a Force Majeure Event, as defined in Paragraph 171 of this Compliance Agreement.

A. DEFINITIONS

9. Every term expressly defined by this Compliance Agreement shall have the meaning given to that term by this Compliance Agreement and, except as otherwise provided in this Compliance Agreement, every other term used in this Compliance Agreement that is also a term under the Act or the regulations implementing the Act shall mean in this Compliance Agreement what such term means under the Act or those implementing regulations.

10. “Alabama” means the State of Alabama, Alabama Department of Environmental Management.

11. “Baghouse” means a full stream (fabric filter) particulate emissions control device.

12. “Boiler Island” means a Unit's (a) fuel combustion system (including bunker, coal pulverizers, crusher, stoker, and fuel burners); (b) combustion air system; (c) steam

generating system (firebox, boiler tubes, and walls); and (d) draft system (excluding the stack), all as further described in “Interpretation of Reconstruction,” by John B. Rasnic U.S. EPA (Nov. 25, 1986) and attachments thereto.

13. “Capital Expenditure” means all capital expenditures, as defined by Generally Accepted Accounting Principles as those principles exist as of the Date of Execution of this Compliance Agreement, excluding the cost of installing or upgrading pollution control devices.

14. “Citizen Plaintiffs” means, collectively, National Parks Conservation Association, Sierra Club, and Our Children’s Earth Foundation.

15. “CEMS” means, for obligations involving NO x and SO 2 under this Compliance Agreement, the devices defined in 40 C.F.R. § 72.2 and installed and maintained as required by 40 C.F.R. Part 75, and for obligations involving PM, the continuous emission monitors installed and maintained as described in 40 C.F.R. § 60.49Da(v).

16. “Clean Air Act” or “Act” means the federal Clean Air Act, 42 U.S.C. §§7401-7671q, and its implementing regulations.

17. “Compliance Agreement” or “Federal Facilities Compliance Agreement” means this Federal Facilities Compliance Agreement and the Appendices hereto, which are incorporated into this Compliance Agreement.

18. “Consent Decree” means the Consent Decree signed by the States, the Citizen Plaintiffs, and TVA and filed for lodging in Alabama et al. v. Tennessee Valley Auth. , No. 11-_____ (E.D. Tenn. filed April 2011), in the United States District Court for the Eastern District of Tennessee. The Consent Decree is Exhibit 1 to this Compliance Agreement.

19. “Continuously Operate” or “Continuous Operation” means that when a pollution control technology or combustion control is used at a Unit (including, but not limited to, SCR, FGD, PM Control Device, SNCR, Low NO x Burner (“LNB”), Overfire Air (“OFA”) or Separated Overfire Air (“SOFA”)), it shall be operated at all times such Unit is in operation (except during a Malfunction that is determined to be a Force Majeure Event), so as to minimize emissions to the greatest extent technically practicable consistent with the technological limitations, manufacturers' specifications, fire prevention codes, and good engineering and maintenance practices for such pollution control technology or combustion control and the Unit.

20. “Date of Execution” means the date that this Compliance Agreement has been signed by both TVA and EPA.

21. “Day” means calendar day unless otherwise specified in this Compliance Agreement.

22. “Effective Date” means sixty (60) days after the Date of Execution of this Compliance Agreement or, if public comments warrant a change to this Compliance Agreement after the Date of Execution, then the Effective Date shall mean sixty (60) days after the date that this Compliance Agreement has been re-signed by both TVA and EPA.

23. “Emission Rate” means the number of pounds of pollutant emitted per million British thermal units of heat input (“lb/mmBTU”), measured in accordance with this Compliance Agreement.

24. “ESP” means electrostatic precipitator, a pollution control device for the reduction of PM.

25. “EPA” means the United States Environmental Protection Agency.

26. “Flue Gas Desulfurization System” or “FGD” means a pollution control device with one or more absorber vessels that employs flue gas desulfurization technology for the control of SO 2 emissions. Unless Paragraph 89 expressly requires the installation and Continuous Operation of a Wet FGD, TVA may install either a Wet FGD or a Dry FGD.

27. “Greenhouse Gases” means the air pollutant defined at 40 C.F.R § 86.1818-12(a) as of the Date of Execution of this Compliance Agreement as the aggregate group of six greenhouse gases: carbon dioxide, nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. This definition continues to apply even if 40 C.F.R § 86.1818-12(a) is subsequently revised, stayed, vacated or otherwise modified.

28. “Improved Unit” for NO x means a TVA System Unit equipped with an SCR or scheduled under this Compliance Agreement to be equipped with an SCR (or equivalent control technology approved pursuant to 198) or Repowered to Renewable Biomass (as defined herein). A Unit may be an Improved Unit for one pollutant without being an Improved Unit for another. Any Other Unit in the TVA System can become an Improved Unit for NO x if it is equipped with an SCR (or equivalent control technology approved pursuant to Paragraph 198) and the requirement to Continuously Operate the SCR or equivalent control technology is incorporated into a federally-enforceable non-Title V permit, or if it is Repowered to Renewable Biomass (as defined herein).

29. “Improved Unit” for SO 2 means a TVA System Unit equipped with an FGD or scheduled under this Compliance Agreement to be equipped with an FGD (or equivalent

control technology approved pursuant to Paragraph 198) or Repowered to Renewable Biomass (as defined herein). A Unit may be an Improved Unit for one pollutant without being an Improved Unit for another. Any Other Unit in the TVA System can become an Improved Unit for SO 2 if it is equipped with an FGD (or equivalent control technology approved pursuant to Paragraph 198) and the requirement to Continuously Operate the FGD or equivalent control technology is incorporated into a federally-enforceable non-Title V permit, or it is Repowered to Renewable Biomass (as defined herein).

30. “Kentucky” means the Commonwealth of Kentucky, Energy and Environment Cabinet.

31. “lb/mmBTU” means one pound per million British thermal units.

32. “Malfunction” means any sudden, infrequent, and not reasonably preventable failure of air pollution control equipment, process equipment, or a process to operate in a normal or usual manner. Failures that are caused in part by poor maintenance or careless operation are not Malfunctions.

33. “MW” means a megawatt or one million Watts.

34. “National Ambient Air Quality Standards” or “NAAQS” means national ambient air quality standards that are promulgated pursuant to Section 109 of the Act, 42 U.S.C. § 7409.

35. “New CC/CT Unit” shall have the meaning indicated in Paragraph 121, below.

36. “NSPS” means New Source Performance Standards within the meaning of Part A of Subchapter I of the Act, 42 U.S.C. § 7411, and 40 C.F.R. Part 60.

37. “Nonattainment NSR” means the nonattainment area new source review program within the meaning of Part D of Subchapter I of the Act, 42 U.S.C. §§ 7501-7515, 40 C.F.R. Part 51, and the federally-approved Nonattainment NSR provisions of the Alabama, Kentucky, and Tennessee State Implementation Plans (“SIPs”), including Ala. Admin. Code r. 335-3-14-.05, 401 Ky. Admin. Regs. 51:052, Tenn. Comp. R. & Regs.1200-3-9-.01(5), and the Memphis/Shelby County local program.

38. “NO x ” means oxides of nitrogen, measured in accordance with the provisions of this Compliance Agreement.

39. “NO x Allowance” means an authorization or credit to emit a specified amount of NO x that is allocated or issued under an emissions trading or marketable permit program of any kind that has been established under the Act and/or the Alabama, Kentucky, or Tennessee SIPs.

40. “North Carolina” means the State of North Carolina.

41. “Other Unit” means any Unit at the Shawnee Plant that is not an Improved Unit for the pollutant in question.

42. “Operational or Ownership Interest” means part or all of TVA’s legal or equitable operational or ownership interest in any Unit in the TVA System or any New CC/CT Unit(s).

43. “Parties” means EPA and TVA.

44. “Parallel Provision” means a requirement or prohibition of this Compliance Agreement that is also a requirement or prohibition of the Consent Decree.

45. “PM” means particulate matter, as measured in accordance with the requirements of this Compliance Agreement.

46. “PM Control Device” means any device, including an ESP or a Baghouse, which reduces emissions of PM. If a Wet FGD is the only device controlling PM on a particular Unit, then the Wet FGD is the PM Control Device.

47. “PM Emission Rate” means the number of pounds of filterable PM emitted per million British thermal units of heat input (“lb/mmBTU”), as measured in accordance with this Compliance Agreement.

48. “Project Dollars” means TVA's expenditures and payments incurred or made in carrying out the Environmental Mitigation Projects identified in Section V.F (Environmental Mitigation Projects) of this Compliance Agreement to the extent that such expenditures or payments both (a) comply with the requirements set forth in Section V.F (Environmental Mitigation Projects) and Appendix C of this Compliance Agreement, and (b) constitute TVA's direct payments for such projects and TVA's external costs for contractors, vendors, and equipment.

49. “PSD” means Prevention of Significant Deterioration within the meaning of Part C of Subchapter I of the Act, 42 U.S.C. §§ 7470 - 7492 and 40 C.F.R. Part 52, and the federally-approved PSD provisions of the Alabama, Kentucky, and Tennessee SIPs, including Ala. Admin. Code r. 335-3-14-.04, 401 Ky. Admin. Reg. 51:017, Tenn. Comp. R. & Regs. 1200-3-9-.01(4), and the Memphis/Shelby County local program.

50. “Region 4 Air Director” means the EPA Region 4 Director of Air, Pesticides and Toxics Management Division.

51. “Remove from Service” means:

a. with regard to the John Sevier plant, that two (2) Units of the four (4) Units shall cease to operate and emit any pollutants whatsoever by the dates specified in Paragraphs 73 and 89 for the 2 Units to be Removed from Service unless and until an SCR and FGD are installed and commence Continuous Operation for each such Unit, or the Unit(s) is Repowered to Renewable Biomass or Retired, which shall occur by no later than the second date specified in Paragraphs 73 and 89 for the 2 Units that are Removed from Service provided that TVA may elect which 2 Units at the John Sevier plant it will Remove from Service and that the remaining 2 Units shall be Retired as set forth in Paragraphs 73 and 89, and

b. with regard to Colbert Units 1-5, that such Units shall cease to operate and emit any pollutants whatsoever by the dates specified in Paragraphs 73 and 89 unless and until, by no later than three (3) years thereafter, an SCR and FGD are installed and commence Continuous Operation for each such Unit(s) or the Unit(s) is Repowered to Renewable Biomass or Retired, as specified therein.

52. “Renewable Biomass” means, solely for purposes of this Compliance Agreement, any organic matter that is available on a renewable basis from non-Federal land or from federal land that TVA manages, including renewable plant material; waste material, including crop residue; other vegetative waste material, including wood waste and wood residues; animal waste and byproducts; construction, food and yard waste; and residues and byproducts from wood pulp or paper products facilities. Biomass is renewable if it originates from forests that remain forests, or from croplands and/or grasslands that remain cropland and/or grassland or revert to forest. Biomass residues and byproducts from wood pulp or paper products facilities includes by-products, residues, and waste streams from agriculture, forestry, and related industries, but does not include used oil or expired pesticides. “Renewable

Biomass” does not include any treated wood, including but not limited to, railroad ties, painted woods, or wood that has been treated with pentachlorophenol, copper-based and borate-based compounds, or creosote.

53. “Repower” or “Repowered” means Repower to Renewable Biomass or Repowered to Renewable Biomass.

54. “Repower to Renewable Biomass” or “Repowered to Renewable Biomass” for purposes of this Compliance Agreement means a TVA System Unit that is repowered to combust a fuel other than coal. Such a Repowered Unit shall only combust Renewable Biomass; provided, however, that such Repowered Unit may co-fire a fuel other than Renewable Biomass (but not used oil, expired pesticides, or any treated wood, including but not limited to, railroad ties, painted wood, or wood that has been treated with pentachlorophenol, copper-based and borate-based compounds, or creosote) up to six percent (6%) of heat input each calendar year for the Unit. Notwithstanding Section V.H (Resolution of Claims Against TVA) and Paragraph 120, for Shawnee Unit 10 and any other TVA System Unit that TVA Repowers to Renewable Biomass pursuant to Paragraphs 73 or 89, TVA shall apply for all required permits. A new source review permit under the PSD and/or Nonattainment NSR programs is a required permit within the meaning of this Paragraph; such a Repowered Unit is a “new emissions unit” as that term is defined in 40 C.F.R. §§ 52.21(b)(7)(i), 51.165(a)(1)(vii)(A), and 51.166(b)(7)(i), and the relevant SIP; and such Unit shall be subject to the test

described in 40 C.F.R. §§ 52.21(a)(2)(iv)(d), 51.165(a)(2)(ii)(D), and 51.166(a)(7)(d), and the relevant SIP. In such permitting action, TVA shall apply to include the limitation on co-firing a fuel other than Renewable Biomass as specified above. Any TVA System Unit that has the option to Repower to Renewable Biomass in Paragraphs 73 and 89 that TVA elects to Repower to Renewable Biomass as the Control Requirement under this Compliance Agreement, shall be subject to the prohibitions in Section V.E (Prohibition on Netting or Offsets From Required Controls). If Shawnee Unit 10 is Repowered to Renewable Biomass, it shall be subject to the prohibitions in Section V.E (Prohibition on Netting or Offsets From Required Controls) regarding netting credits.

55. “Retire” means that TVA shall permanently cease to operate the Unit such that the Unit cannot legally burn any fuel nor produce any steam for electricity production and TVA shall comply with applicable state and/or federal requirements for permanently retiring a coal-fired electric generating unit, including removing the Unit from the relevant state's air emissions inventory, and amending all applicable permits so as to reflect the permanent shutdown status of such Unit. Nothing herein shall prevent TVA from seeking to re-start the Retired Unit provided that TVA applies for, and obtains, all required permits. A new source review permit under the PSD and/or Nonattainment NSR programs is a required permit within the meaning of this Paragraph; such Retired Unit shall be a “new emissions unit” as that term is defined in 40 C.F.R. §§ 52.21(b)(7)(i), 51.165(a)(1)(vii)(A), and 51.166(b)(7)(i), and the relevant SIP; and such Retired Unit shall be subject to the test described in 40 C.F.R. §§ 52.21(a)(2)(iv)(d), 51.165(a)(2)(ii)(D), and 51.166(a)(7)(d), and the relevant SIP.

56. “Selective Catalytic Reduction” or “SCR” means a pollution control device that employs selective catalytic reduction technology for the reduction of NO x emissions.

57. “Selective Non-Catalytic Reduction” or “SNCR” means a pollution control device for the reduction of NO x emissions that utilizes ammonia or urea injection into the boiler.

58. “Startup” and “Shutdown” mean, as to each of those terms, the definition of those respective terms in 40 C.F.R. § 60.2.

59. “States” or “the States” refers collectively to Alabama, Kentucky, North Carolina, and Tennessee.

60. “SO 2 ” means sulfur dioxide, as measured in accordance with the provisions of this Compliance Agreement.

61. “SO 2 Allowance” means an authorization or credit to emit a specified amount of SO 2 that is allocated or issued under an emissions trading or marketable permit program of any kind that has been established under the Act or the Alabama, Kentucky, or Tennessee SIPs.

62. “Surrender” or “surrender of allowances” means, for purposes of SO 2 or NO x allowances, permanently surrendering allowances as required by this Compliance Agreement from the accounts administered by EPA and Alabama, Kentucky, and Tennessee for all Units in the TVA System, so that such allowances can never be used thereafter by any entity to meet any compliance requirement under the Act, a SIP, or this Compliance Agreement.

63. “System-Wide Annual Tonnage Limitation” means the number of tons of the pollutant in question that may be emitted collectively from the TVA System and any New CC/CT Units during the relevant calendar year ( i.e. , January 1 through December 31), and shall include all emissions of the pollutant emitted during all periods of operation, including

Startup, Shutdown, and Malfunction.

64. “Tennessee” means the State of Tennessee, Tennessee Department of Environment and Conservation (“TDEC”).

65. “Tennessee State Implementation Plan” and “Tennessee Title V program” shall include, when applicable, the new source review provisions of the Memphis/Shelby County local program, and its implementing regulations, and its Title V permit program.

66. “TVA” means Tennessee Valley Authority, a federal agency and instrumentality of the United States.

67. “TVA System” means solely for purposes of this Compliance Agreement, the following coal-fired, electric steam generating Units (with nameplate MW capacity of each Unit, for identification purposes only) or such coal-fired Unit that is Repowered to Renewable Biomass, located at the following plants:

Allen Unit 1 (330 MW), Allen Unit 2 (330 MW), and Allen Unit 3 (330 MW) located at the Allen Fossil Plant near Memphis, Tennessee;

Bull Run Unit 1 (950 MW) located at the Bull Run Fossil Plant near Oak Ridge, Tennessee;

Colbert Unit 1 (200 MW), Colbert Unit 2 (200 MW), Colbert Unit 3 (200 MW), Colbert Unit 4 (200 MW), and Colbert Unit 5 (550 MW) located at the Colbert Fossil Plant in Tuscumbia, Alabama;

Cumberland Unit 1 (1300 MW) and Cumberland Unit 2 (1300 MW) located at the Cumberland Fossil Plant in Cumberland City, Tennessee;

Gallatin Unit 1 (300 MW), Gallatin Unit 2 (300 MW), Gallatin Unit 3 (327.6 MW), and Gallatin Unit 4 (327.6 MW) located at the Gallatin Fossil Plant in Gallatin, Tennessee;

John Sevier Unit 1 (200 MW), John Sevier Unit 2 (200 MW), John Sevier Unit 3 (200 MW), and John Sevier Unit 4 (200 MW) located at the John Sevier Fossil Plant near Rogersville, Tennessee;

Johnsonville Unit 1 (125 MW), Johnsonville Unit 2 (125 MW), Johnsonville Unit 3 (125 MW), Johnsonville Unit 4 (125 MW), Johnsonville Unit 5 (147 MW), Johnsonville Unit 6 (147 MW), Johnsonville Unit 7 (172.8 MW), Johnsonville Unit 8 (172.8 MW), Johnsonville Unit 9 (172.8 MW), and Johnsonville Unit 10 (172.8 MW) located at the Johnsonville Fossil Plant near Waverly, Tennessee;

Kingston Unit 1 (175 MW), Kingston Unit 2 (175 MW), Kingston Unit 3 (175 MW), Kingston Unit 4 (175 MW), Kingston Unit 5 (200 MW), Kingston Unit 6 (200 MW), Kingston Unit 7 (200 MW), Kingston Unit 8 (200 MW), and Kingston Unit 9 (200 MW) located at the Kingston Fossil Plant near Kingston, Tennessee;

Paradise Unit 1 (704 MW), Paradise Unit 2 (704 MW), and Paradise Unit 3 (1150.2 MW) located at the Paradise Fossil Plant in Drakesboro, Kentucky;

Shawnee Unit 1 (175 MW), Shawnee Unit 2 (175 MW), Shawnee Unit 3 (175 MW), Shawnee Unit 4 (175 MW), Shawnee Unit 5 (175 MW), Shawnee Unit 6 (175 MW), Shawnee Unit 7 (175 MW), Shawnee Unit 8 (175 MW), Shawnee Unit 9 (175 MW), and Shawnee Unit 10 (175 MW) located at the Shawnee Fossil Plant near Paducah, Kentucky; and

Widows Creek Unit 1 (140.6 MW), Widows Creek Unit 2 (140.6 MW), Widows Creek Unit 3 (140.6 MW), Widows Creek Unit 4 (140.6 MW), Widows Creek Unit 5 (140.6 MW), Widows Creek Unit 6 (140.6 MW), Widows Creek Unit 7 (575 MW), and Widows Creek Unit 8 (550 MW) located at the Widows Creek Fossil Plant near Stevenson, Alabama.

68. “Title V Permit” means the permit required of TVA’s major sources under Subchapter V of the Act, 42 U.S.C. §§ 7661-7661e; Ala. Code §§ 22-22A-1 to -16, §§ 22-28-1 to -23 (2006 Rplc. Vol.), and Ala. Admin. Code r. 335-3-16; Ky. Rev. Stat. Ann. §§ 224.20-100 to -120, and 401 Ky. Admin. Reg. 52:020; and Tenn. Comp. R. & Regs. R. 1200-3-9-.02.

69. “Unit” means collectively, the coal pulverizer, stationary equipment that feeds coal to the boiler, the boiler that produces steam for the steam turbine, the steam turbine, the generator, the equipment necessary to operate the generator, steam turbine and boiler, and all ancillary equipment, including pollution control equipment. An electric steam generating

station may comprise one or more Units. “Unit” shall also include any coal-fired TVA System Unit identified in Paragraph 67 that is Repowered to Renewable Biomass pursuant to this Compliance Agreement.

70. “VOC” means volatile organic compounds as defined in 40 C.F.R. § 51.100.

B. NO x EMISSION REDUCTIONS AND CONTROLS

1. NO x Emission Limitations.

71. System-Wide Annual Tonnage Limitations for NO x . During each calendar year specified in the table below, all Units in the TVA System and any New CC/CT Units constructed pursuant to Paragraph 121, collectively, shall not emit NO x in excess of the following System-Wide Annual Tonnage Limitations:

Calendar Year	System-Wide Tonnage Limitation for NO x
2011	100,600
2012	100,600
2013	90,791
2014	86,842
2015	83,042
2016	70,667
2017	64,951
2018, and each year thereafter	52,000

72. If TVA elects to Remove from Service any or all of Colbert Units 1-5 either pursuant to Paragraph 73 or Paragraph 89, then the System-Wide Annual Tonnage Limitations for NO x in each calendar year for which such Unit(s) is Removed from Service shall be adjusted as follows:

Unit	Tons by Which System-Wide Annual Tonnage Limitation for NO x Shall be Reduced If Unit is Removed From Service in a Calendar Year
Colbert Unit 1	700 tons
Colbert Unit 2	500 tons
Colbert Unit 3	500 tons
Colbert Unit 4	500 tons
Colbert Unit 5	1,200 tons

2. NO x Control Requirements .

73. No later than the dates set forth in the table below, and continuing thereafter, TVA shall install and commence Continuous Operation of the pollution control technology identified therein or, if indicated in the table, Retire or Repower each Unit identified therein, or, solely for Colbert Units 1-4 and two (2) Units at the John Sevier plant, Remove from Service as defined herein:

Plant	Unit	Control Requirement	Date
Allen	Unit 1	SCR	Effective Date
Allen	Unit 2	SCR	Effective Date
Allen	Unit 3	SCR	Effective Date
Bull Run	Unit 1	SCR	Effective Date
Colbert	Unit 1	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 2	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 3	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016

Plant	Unit	Control Requirement	Date
Colbert	Unit 4	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 5	SCR	Effective Date
Cumberland	Unit 1	SCR	Effective Date
Cumberland	Unit 2	SCR	Effective Date
Gallatin	Unit 1	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 2	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 3	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 4	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
John Sevier	2 Units	Retire	December 31, 2012
John Sevier	2 other Units	Remove from Service	December 31, 2012
John Sevier	2 other Units	SCR, Repower to Renewable Biomass, or Retire	December 31, 2015
Johnsonville	Units 1 - 10	Retire	6 Units by December 31, 2015
Johnsonville	Units 1 - 10	Retire	4 additional Units by December 31, 2017
Kingston	Unit 1	SCR	Effective Date
Kingston	Unit 2	SCR	Effective Date
Kingston	Unit 3	SCR	Effective Date
Kingston	Unit 4	SCR	Effective Date
Kingston	Unit 5	SCR	Effective Date
Kingston	Unit 6	SCR	Effective Date
Kingston	Unit 7	SCR	Effective Date
Kingston	Unit 8	SCR	Effective Date
Kingston	Unit 9	SCR	Effective Date

Plant	Unit	Control Requirement	Date
Paradise	Unit 1	SCR	Effective Date
Paradise	Unit 2	SCR	Effective Date
Paradise	Unit 3	SCR	Effective Date
Shawnee	Unit 1	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Shawnee	Unit 4	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Widows Creek	Units 1-6	Retire	2 Units by July 31, 2013
			2 additional Units by July 31, 2014
			2 additional Units by July 31, 2015
Widows Creek	Unit 7	SCR	Effective Date
Widows Creek	Unit 8	SCR	Effective Date

74. Notwithstanding Paragraph 73, TVA’s failure to (a) complete installation and commence Continuous Operation of a pollution control technology by the date specified in the table in Paragraph 73 or (b) Repower to Renewable Biomass by the date specified in the table in Paragraph 73, shall not be a violation of this Compliance Agreement if such Unit:

(i) ceases to operate and emit any pollutants whatsoever at least sixty (60) days before the date specified in the table in Paragraph 73, and

(ii) the installation is completed and the Unit commences Continuous Operation of the pollution control technology specified in the table in Paragraph 73 or as a Repowered Unit no later than ninety (90) days after the date specified in the table in Paragraph 73. If TVA fails to commence Continuous Operation of the pollution control technology

or the Repowered Unit ninety (90) days after such date, then TVA shall be subject to stipulated penalties for the entire period commencing on the date specified in the Table in Paragraph 73.

75. Beginning upon the Effective Date of this Compliance Agreement and continuing thereafter, TVA shall (a) Continuously Operate existing LNB, OFA, and SOFA combustion controls at all Units in the TVA System and (b) Continuously Operate existing SNCR technology at all Units in the TVA System equipped with such technology as of the Date of Execution of this Compliance Agreement ( i.e. , John Sevier Units 1-4 and Johnsonville Units 1-4) unless and until such Unit is equipped with an SCR and TVA Continuously Operates such SCR pursuant to this Compliance Agreement, or such Unit is Retired or Repowered pursuant to this Compliance Agreement.

76. For TVA System Units with two or more methods specified in the Control Requirement column in the table in Paragraph 73, above, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of its election as to which of the Control Requirement methods it will employ at such Unit by no later than three (3) years prior to the date specified in the table for that Unit. For the Units at the John Sevier plant, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement of its election as to which two (2) Units it will Retire and which two (2) Units it will at least initially Remove from Service, by no later than June 30, 2012. For any TVA System Unit that TVA timely elects to control with SCR or Repower to Renewable Biomass, TVA may change its election to Retire at any time prior to the date specified in the table in Paragraph 73. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of its decision to Retire the Unit,

with an explanation for its decision to change the election, by no later than ten (10) business days following its decision to change its election from SCR or Repower to Renewable Biomass to Retire.

77. Solely for the Units at the Colbert plant, if TVA elects the Remove from Service option, it shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) at the time such Units are required to be Removed from Service as to which method specified in the Control Requirement column in the table in Paragraph 73 it will employ at such Unit.

3. Use and Surrender of NO x Allowances.

78. TVA shall not use NO x Allowances to comply with any requirement of this Compliance Agreement, including by claiming compliance with any emission limitation required by this Compliance Agreement by using, tendering, or otherwise applying NO x Allowances to offset any excess emissions.

79. Beginning with calendar year 2011, and continuing each calendar year thereafter, TVA shall surrender all NO x Allowances allocated to the TVA System for that calendar year that TVA does not need in order to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System for that calendar year. However, NO x Allowances allocated to the TVA System may be used by TVA to meet its own federal and/or state Clean Air Act regulatory requirements for the Units included in the TVA System.

80. Nothing in this Compliance Agreement shall prevent TVA from purchasing or otherwise obtaining NO x Allowances from another source for purposes of complying with

federal and/or state Clean Air Act regulatory requirements (i.e., emissions trading or marketable permit programs) to the extent otherwise allowed by law.

81. The requirements of this Compliance Agreement pertaining to TVA's use and surrender of NO x Allowances are permanent injunctions not subject to any termination provision of this Compliance Agreement.

4. Super-Compliance Allowances.

82. Notwithstanding Paragraph 79, in each calendar year beginning in 2011, and continuing thereafter, TVA may sell, bank, use, trade, or transfer any NO x Allowances made available in that calendar year as a result of maintaining actual NO x emissions from the combined total of (a) the TVA System and (b) any New CC/CT Unit(s) constructed pursuant to Paragraph 121 below the System-Wide Annual Tonnage Limitations for NO x for such calendar year (“Super-Compliance Allowances”); provided, however, that reductions in NO x emissions that TVA utilizes as provided in Paragraph 121 to support the permitting of a New CC/CT Unit(s) shall not be available to generate Super-Compliance Allowances within the meaning of this Paragraph in the calendar year in which TVA utilizes such emission reductions and all calendar years thereafter. TVA shall timely report the generation of all Super-Compliance NO x Allowances in accordance with Section V.I (Periodic Reporting) of this Compliance Agreement, and shall specifically identify any Super-Compliance NO x Allowances that TVA generates from Retiring a TVA System Unit and that TVA did not utilize for purposes of Paragraph 121.

5. Method for Surrender of NO x Allowances.

83. TVA shall surrender all NO x Allowances required to be surrendered pursuant to Paragraph 79 by April 30 of the immediately following calendar year.

84. For all NO x Allowances required to be surrendered, TVA shall first submit a NO x Allowance transfer request form to EPA = s Office of Air and Radiation = s Clean Air Markets Division directing the transfer of such NO x Allowances to the EPA Enforcement Surrender Account or to any other EPA account that EPA may direct in writing. As part of submitting these transfer requests, TVA shall irrevocably authorize the transfer of these NO x Allowances and identify -- by name of account and any applicable serial or other identification numbers or station names -- the source and location of the NO x Allowances being surrendered.

6. NO x Monitoring Provisions.

85. TVA shall use CEMS in accordance with 40 C.F.R. Part 75 to monitor its emissions of NO x from the TVA System Units and any New CC/CT Unit(s) for purposes of demonstrating compliance with the applicable System-Wide Annual Tonnage Limitations specified in Paragraph 71 of this Compliance Agreement.

C. SO 2 EMISSION REDUCTIONS AND CONTROLS

1. SO 2 Emission Limitations.

86. System-Wide Annual Tonnage Limitations for SO 2. During each calendar year specified in the table below, all Units in the TVA System and any New CC/CT Unit(s) constructed pursuant to Paragraph 121, collectively, shall not emit SO 2 in excess of the following System-Wide Annual Tonnage Limitations:

Calendar Year	System-Wide Tonnage Limitation for SO 2
2011	285,000
2012	285,000
2013	235,518
2014	228,107
2015	220,631
2016	175,626
2017	164,257
2018	121,699
2019, and each year thereafter	110,000

87. If TVA elects to Remove from Service any or all of Colbert Units 1-5 either pursuant to Paragraph 73 or Paragraph 89, then the System-Wide Annual Tonnage Limitations for SO 2 in each calendar year for which such Unit(s) is Removed from Service shall be adjusted as follows:

Calendar Year	Tons by Which System-Wide Annual Tonnage Limitation for SO 2 Shall be Reduced If Unit is Removed From Service in a Calendar Year
Colbert Unit 1	700 tons
Colbert Unit 2	1,100 tons
Colbert Unit 3	1,000 tons
Colbert Unit 4	1,100 tons
Colbert Unit 5	2,600 tons

88. If TVA must shut down one or more of its nuclear units for more than one hundred and twenty (120) consecutive days within calendar year 2011 or within calendar year 2012 because of a forced outage or in response to a safety concern as required by the Nuclear Regulatory Commission, then the System-Wide Annual Tonnage Limitation for SO 2 for that calendar year shall be 295,000 tons rather than 285,000 tons as specified in the table in Paragraph 86. If TVA must shut down one or more of its nuclear units for more than one

hundred and twenty (120) consecutive days within calendar year 2013 or within calendar year 2014 because of a forced outage or in response to a safety concern as required by the Nuclear Regulatory Commission, then the System-Wide Annual Tonnage Limitation for SO 2 for calendar year 2013 shall be 241,700 tons rather than 235,518 tons as specified in the table in Paragraph 86 and the System-Wide Annual Tonnage Limitation for SO 2 for calendar year 2014 shall be 234,000 tons rather than 228,107 tons as specified in the table in Paragraph 86. In order to put EPA, the States, and the Citizen Plaintiffs on notice of this potential event, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices), and include a summary of the circumstances causing the shut down and TVA’s efforts to bring the unit back on line, commencing no later than thirty (30) days following the shutdown of a nuclear unit, and continuing every thirty (30) days thereafter until either (a) the unit comes back online or (b) the unit remains shut down for one hundred twenty (120) consecutive days, whichever is earlier. In this circumstance, TVA shall, to the extent practicable, increase utilization of any Units in the TVA System that are controlled with FGDs and/or SCRs and/or any New CC/CT Unit(s) constructed pursuant to Paragraph 121 to replace the lost power generation from the nuclear unit before increasing utilization of uncontrolled TVA System Units.

2. SO 2 Control Requirements.

89. No later than the dates set forth in the table below, and continuing thereafter, TVA shall install and commence Continuous Operation of the pollution control technology at each Unit identified therein or, if indicated in the table, Retire or Repower each Unit identified therein, or, solely for Colbert Units 1-5 and two (2) Units at the John Sevier plant, Remove from Service as defined herein:

Plant	Unit	Control Requirement	Date
Allen	Unit 1	FGD or Retire	December 31, 2018
Allen	Unit 2	FGD or Retire	December 31, 2018

Plant	Unit	Control Requirement	Date
Allen	Unit 3	FGD or Retire	December 31, 2018
Bull Run	Unit 1	Wet FGD	Effective Date
Colbert	Unit 1	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 2	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 3	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 4	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 5	Remove from Service, FGD or Retire	December 31, 2015
Cumberland	Unit 1	Wet FGD	Effective Date
Cumberland	Unit 2	Wet FGD	Effective Date
Gallatin	Unit 1	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 2	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 3	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 4	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
John Sevier	2 Units	Retire	December 31, 2012
John Sevier	2 other Units	Remove from Service	December 31, 2012
John Sevier	2 other Units	FGD, Repower to Renewable Biomass, or Retire	December 31, 2015
Johnsonville	Units 1 - 10	Retire	6 Units by December 31, 2015
Johnsonville	Units 1 - 10	Retire	4 additional Units by December 31, 2017
Kingston	Unit 1	Wet FGD	Effective Date
Kingston	Unit 2	Wet FGD	Effective Date
Kingston	Unit 3	Wet FGD	Effective Date

Plant	Unit	Control Requirement	Date
Kingston	Unit 4	Wet FGD	Effective Date
Kingston	Unit 5	Wet FGD	Effective Date
Kingston	Unit 6	Wet FGD	Effective Date
Kingston	Unit 7	Wet FGD	Effective Date
Kingston	Unit 8	Wet FGD	Effective Date
Kingston	Unit 9	Wet FGD	Effective Date
Paradise	Unit 1	FGD Upgrade to 93% Removal Efficiency	December 31, 2012
Paradise	Unit 2	FGD Upgrade to 93% Removal Efficiency	December 31, 2012
Paradise	Unit 3	Wet FGD	Effective Date
Shawnee	Unit 1	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Shawnee	Unit 4	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Widows Creek	Units 1-6	Retire	2 Units by July 31, 2013
			2 additional units by July 31, 2014
			2 additional Units by July 31, 2015
Widows Creek	Unit 7	Wet FGD	Effective Date
Widows Creek	Unit 8	Wet FGD	Effective Date

Notwithstanding any requirement specified in the preceding table to Continuously Operate a Wet FGD at Kingston Units 1-9, TVA shall not be required to Continuously Operate such Wet FGD(s) until either: (a) TDEC authorizes disposal of gypsum in the Class II landfill (IDL 73-0211) which, as of the Date of Execution of this Compliance Agreement, is prohibited pursuant to TDEC’s Order dated December 17, 2010 in Case No. SWM10-0010 or (b) September 20, 2011, whichever occurs sooner. During the period when this exemption is in effect, TVA shall (a) burn coal at Kingston that achieves a 30-day rolling average emission rate for SO 2 of no greater than 1.1 lb/mmBTU and (b) operate Kingston only after Bull Run is

dispatched first. This exemption shall not relieve TVA of its obligation to comply with the 2011 SO2 System-Wide Annual Tonnage Limitation and shall not relieve TVA of any other control requirements relating to Kingston, except as provided in Paragraph 104.

90. Notwithstanding Paragraph 89, TVA’s failure to (a) complete installation and commence Continuous Operation of a pollution control technology by the date specified in the table in Paragraph 89 or (b) Repower to Renewable Biomass by the date specified in the table in Paragraph 89, shall not be a violation of this Compliance Agreement if such Unit:

(i) ceases to operate and emit any pollutants whatsoever at least sixty (60) days before the date specified in the table in Paragraph 89, and

(ii) the installation is completed and the Unit commences Continuous Operation of the pollution control technology specified in the table in Paragraph 89 or as a Repowered Unit no later than ninety (90) days after the date specified in the table in Paragraph 89. If TVA fails to commence Continuous Operation of the pollution control technology or the Repowered Unit ninety (90) days after such date, then TVA shall be subject to stipulated penalties for the entire period commencing on the date specified in the Table in Paragraph 89.

91. Upon the Effective Date of this Compliance Agreement, and continuing thereafter, emissions of SO 2 from Shawnee Units 1-10 shall not exceed 1.2 lb/mmBTU. Compliance with this limitation shall be demonstrated using the procedures specified in the Clean Air Act operating permit for the Shawnee facility.

92. For TVA System Units with two or more methods specified in the Control Requirement column in the table in Paragraph 89, above, TVA shall provide notice to EPA, the

States, and the Citizen Plaintiffs pursuant to Section X (Notices) of its election as to which of the Control Requirement methods it will employ at such Unit by no later than three (3) years prior to the date specified in the Table for that Unit. For the Units at the John Sevier plant, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement of its election as to which two (2) Units it will Retire and which two (2) Units it will at least initially Remove from Service, by no later than June 30, 2012. For any TVA System Unit that TVA timely elects to control with FGD or Repower to Renewable Biomass, TVA may change its election to Retire at any time prior to the date specified in the table in Paragraph 89. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of its decision to Retire the Unit, with an explanation for its decision to change the election, by no later than ten (10) business days following its decision to change its election from FGD or Repower to Renewable Biomass to Retire.

93. Solely for the Units at the Colbert plant, if TVA elects the Remove from Service option, it shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) at the time such Units are required to be Removed from Service as to which method specified in the Control Requirement column in the table in Paragraph 89 it will employ at such Unit.

3. Use and Surrender of SO 2 Allowances.

94. TVA shall not use SO 2 Allowances to comply with any requirement of this Compliance Agreement, including by claiming compliance with any emission limitation required by this Compliance Agreement by using, tendering, or otherwise applying SO 2 Allowances to offset any excess emissions.

95. Beginning with calendar year 2011, and continuing each calendar year thereafter, TVA shall surrender all SO 2 Allowances allocated to the TVA System for that calendar year that TVA does not need in order to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System Units for that calendar year. However, SO 2 Allowances allocated to the TVA System may be used by TVA to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System Units.

96. Nothing in this Compliance Agreement shall prevent TVA from purchasing or otherwise obtaining SO 2 Allowances from another source for purposes of complying with federal and/or state Clean Air Act regulatory requirements (i.e., emissions trading or marketable permit programs) to the extent otherwise allowed by law.

97. The requirements in this Compliance Agreement pertaining to TVA's use and surrender of SO 2 Allowances are permanent injunctions not subject to any termination provision of this Compliance Agreement.

4. Super-Compliance Allowances.

98. Notwithstanding Paragraph 95, in each calendar year beginning in 2011, and continuing thereafter, TVA may sell, bank, use, trade, or transfer any SO 2 Allowances made available in that calendar year as a result of maintaining actual SO 2 emissions from the combined total of (a) the TVA System and (b) any New CC/CT Unit(s) constructed pursuant to Paragraph 121 below the System-Wide Annual Tonnage Limitations for SO 2 for such calendar year (“Super-Compliance Allowances”); provided, however, that reductions in SO 2 emissions that TVA utilizes as provided in Paragraph 121 to support the permitting of a New CC/CT Unit(s) shall not be available to generate Super-Compliance Allowances within the

meaning of this Paragraph in the calendar year in which TVA utilizes such emission reductions and all calendar years thereafter. TVA shall timely report the generation of all Super-Compliance SO 2 Allowances in accordance with Section V.I (Periodic Reporting) of this Compliance Agreement, and shall specifically identify any Super-Compliance SO 2 Allowances that TVA generates from Retiring a TVA System Unit and that TVA did not utilize for purposes of Paragraph 121.

5. Method for Surrender of SO 2 Allowances.

99. TVA shall surrender all SO 2 Allowances required to be surrendered pursuant to Paragraph 95 by April 30 of the immediately following year.

100. For all SO 2 Allowances required to be surrendered, TVA shall first submit an SO 2 Allowance transfer request form to EPA's Office of Air and Radiation's Clean Air Markets Division directing the transfer of such SO 2 Allowances to the EPA Enforcement Surrender Account or to any other EPA account that EPA may direct in writing. As part of submitting these transfer requests, TVA shall irrevocably authorize the transfer of these SO 2 Allowances and identify -- by name of account and any applicable serial or other identification numbers or station names -- the source and location of the SO 2 Allowances being surrendered.

6. SO 2 Monitoring Provisions.

101. TVA shall use CEMS in accordance with 40 C.F.R. Part 75 to monitor its emissions of SO 2 from the TVA System Units and any New CC/CT Unit(s) for purposes of demonstrating compliance with the applicable System-Wide Annual Tonnage Limitations specified in Paragraph 86 of this Compliance Agreement.

D. PM EMISSION REDUCTIONS AND CONTROLS

1. Optimization of Existing PM Control Devices.

102. Beginning sixty (60) days after the Effective Date of this Compliance Agreement, and continuing thereafter, TVA shall Continuously Operate each PM Control Device on each Unit in the TVA System. TVA shall, at a minimum, to the extent reasonably practicable and consistent with manufacturers' specifications, the operational design of the Unit, and good engineering practices (a) fully energize each section of the ESP for each Unit, and where applicable, operate each compartment of the Baghouse (except for a Baghouse compartment that, as part of the original design of the Baghouse when it was first constructed, is a spare compartment); (b) operate automatic control systems on each ESP to maximize PM collection efficiency; and (c) maintain power levels delivered to the ESPs, and where applicable, replace bags as needed on each Baghouse as needed to maximize collection efficiency.

103. TVA shall complete and submit to EPA for review and approval in accordance with Section V.J (Review and Approval of Submittals) of this Compliance Agreement, with copies of such submittal to the States and the Citizen Plaintiffs pursuant to Section VIII (Notices) of the Consent Decree, a PM emission control optimization study for each TVA System Unit except for (a) Colbert Unit 5, Paradise Units 1 and 2, and Widows Creek Unit 8, (b) those Units that TVA is required to Retire pursuant to Paragraphs 73 and 89, (c) those Units that TVA elects to Retire pursuant to Paragraphs 73 and 89, and (d) those Units at which TVA has installed and commenced Continuous Operation of a new PM Control Device. The PM emission control optimization study shall, for the range of fuels used by the Unit, recommend the best available maintenance, repair, and operating practices to optimize

the PM Control Device availability and performance in accordance with manufacturers’ specifications, the operational design of the Unit, and good engineering practices. TVA shall retain a qualified contractor to assist in the performance and completion of each study. TVA shall perform each study and implement the EPA-approved recommendations in accordance with the following schedule:

Date	Studies Completed, New PM Control Devices Identified To Be Installed, Or Units Elected To Be Retired Pursuant To Paragraphs 73 And 89		Recommendations Implemented, New PM Control Devices Installed, Or Units Retired Pursuant To Election As Required By Paragraphs 73 And 89
Date	Individual Year	Cumulative	Individual Year	Cumulative
12/31/2011	6	6	0	0
12/31/2012	8	14	1	1
12/31/2013	6	20	4	5
12/31/2014	6	26	10	15
12/31/2015	3	29	10	25
12/31/2016	4	33	8	33
12/31/2017	4	37	4	37
12/31/2018	0	37	0	37
12/31/2019	0	37	0	37

TVA shall submit each such PM emission control optimization study to EPA for review and approval (in consultation with the States and Citizen Plaintiffs) pursuant to Section V.J (Review and Approval of Submittals) at least nine (9) months before the date specified in the table in this Paragraph for TVA to implement the recommendations. TVA shall maintain each PM Control Device in accordance with the approved PM emission control optimization study or other alternative actions as approved by EPA (in consultation with the States and the Citizen Plaintiffs).

2. PM Emission Rates.

104. No later than the dates set forth in the table below, and continuing thereafter, TVA shall Continuously Operate the PM Control Devices at each Unit identified therein so that each Unit or Units served by a common stack achieve and maintain a PM Emission Rate of no greater than 0.030 lb/mmBTU as determined by stack testing:

Plant	Unit	Date
Allen	Units 1-3	December 31, 2018
Bull Run	Unit 1	Effective Date
Colbert	Unit 5	December 31, 2015
Gallatin	Units 1-4	December 31, 2017
Kingston	Units 1-9	Effective Date, subject to the exemption provided in Paragraph 89 for the Continuous Operation of the Wet FGDs

3. PM Emissions Monitoring.

a. PM Stack Tests.

105. Beginning in calendar year 2011, and continuing in each calendar year thereafter, TVA shall conduct a PM stack test for filterable PM at each TVA System Unit or Units served by a common stack that combust fossil fuels at any time in that calendar year.

106. Beginning in calendar year 2011, and continuing for three (3) consecutive calendar years thereafter, TVA shall conduct a PM stack test for condensable PM at each TVA System Unit or Units served by a common stack that combust fossil fuels at any time in that calendar year.

107. The annual stack test requirement imposed on each TVA System Unit by this Section may be satisfied by stack tests conducted by TVA as required by its permits from

Alabama, Kentucky, and Tennessee for any year that such stack tests are required under the permits, provided that reference methods and procedures for performing such stack tests are consistent with the requirements specified in this Compliance Agreement.

108. Filterable PM. The reference methods and procedures for performing PM stack tests for filterable PM and for determining compliance with the PM Emission Rate shall be the applicable reference methods and procedures specified in the relevant Clean Air Act permit for the plant. TVA shall calculate the PM Emission Rate from the stack test results in accordance with 40 C.F.R. § 60.8(f). The results of each PM stack test shall be submitted to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement within forty-five (45) days of completion of each test.

109. Condensable PM. The reference methods and procedures for performing PM stack tests to monitor condensable PM shall be those specified in 40 C.F.R. Part 51, Appendix M, Method 202. TVA shall calculate the Emission Rate for condensable PM from the stack test results in accordance with 40 C.F.R. § 60.8(f). The results of each PM stack test shall be submitted to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement within forty-five (45) days of completion of each test.

110. Although stack testing shall be used to determine compliance with the PM Emission Rate established by this Compliance Agreement, data from PM CEMS shall be used, at a minimum, to monitor progress in reducing PM emissions.

b. PM CEMS.

111. TVA shall install, correlate, maintain, and operate PM CEMS as specified below. Each PM CEMS shall comprise a continuous particle mass monitor measuring PM

concentration, directly or indirectly, on an hourly average basis and a diluent monitor used to convert the concentration to units of lb/mmBTU. The PM CEMS installed at each stack, or, at Kingston, installed at each flue within the stack, must be appropriate for the anticipated stack conditions. TVA shall maintain, in an electronic database, the hourly average emission values produced by each PM CEMS in lb/mmBTU. Except for periods of monitor malfunction, maintenance, or repair, TVA shall continuously operate the PM CEMS at all times when at least one Unit it serves is operating.

112. No later than twelve (12) months after the Effective Date of this Compliance Agreement, TVA shall submit to EPA for review and approval pursuant to Section V.J (Review and Approval of Submittals) of this Compliance Agreement, with copies of such submittal to the States and the Citizen Plaintiffs pursuant to Section VIII (Notices) of the Consent Decree, a plan for the installation and correlation of each PM CEMS and a proposed Quality Assurance/Quality Control (“QA/QC”) protocol that shall be followed in correlating such PM CEMS. At TVA’s option, and to the extent practicable, TVA may submit one plan and one QA/QC protocol that shall take into account Unit-specific measures, as needed, for the PM CEMS required by Paragraphs 111 and 113. In developing both the plan for installation and correlation of the PM CEMS and the QA/QC protocol, TVA shall use the criteria set forth in 40 C.F.R. Part 60, Appendix B, Performance Specification 11, and Appendix F, Procedure 2. Following approval by EPA (in consultation with the States and the Citizen Plaintiffs) of the plan(s) and protocol(s), TVA shall thereafter operate each PM CEMS in accordance with the approved plan(s) and QA/QC protocol(s).

113. No later than twelve (12) months after the date that EPA approves the plan for installation and correlation of the PM CEMS and the QA/QC protocol, TVA shall install, correlate, maintain and operate six (6) PM CEMS on stacks at the following Units: Paradise Unit 3, Bull Run Unit 1, Colbert Unit 5, Kingston Units 1-9 (one (1) PM CEMS on each flue), and Shawnee Units 1-5.

114. In the event that TVA elects to Retire a Unit scheduled to receive a PM CEMS or, with respect to Colbert Unit 5, elects the Remove from Service option, TVA shall locate a PM CEMS (either the same PM CEMS or a new PM CEMS) at an alternate Unit in the TVA System. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of the alternate Unit by no later than three (3) years prior to the date that the Unit specified in Paragraph 113 is Retired or Removed from Service. TVA shall comply with all the requirements of this Section for such PM CEMS. The deadline identified in Paragraph 112 shall be adjusted to twelve (12) months after TVA’s notice pursuant to this Paragraph.

115. No later than ninety (90) days after TVA begins operation of the PM CEMS, TVA shall conduct tests of each PM CEMS to demonstrate compliance with the PM CEMS installation and correlation plan(s) and QA/QC protocol(s). Within forty-five (45) days of each such test, TVA shall submit the results to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement.

116. When TVA submits the applications for amendments to its Title V Permits pursuant to Paragraph 164, those applications shall include a Compliance Assurance

Monitoring (“CAM”) plan, under 40 C.F.R. Part 64, for the PM Emission Rate specified in Paragraph 104. The PM CEMS required by Paragraphs 111 and 113 may be used in that CAM plan for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9.

c. PM Reporting.

117. Within one hundred eighty (180) days after the date established by this Compliance Agreement for TVA to achieve and maintain a PM Emission Rate at any TVA System Unit, TVA shall conduct a stack performance test for PM that demonstrates compliance with the Emission Rate required by this Compliance Agreement. Within forty-five (45) days of the performance test, TVA shall submit the results of the performance test to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement. TVA may use the annual stack test requirement established in Paragraph 105, above, to satisfy its obligation to conduct a performance test as required by this Paragraph.

118. Following the installation of each PM CEMS, TVA shall begin and continue to report, pursuant to Section V.I (Periodic Reporting), the data recorded by the PM CEMS, expressed in lb/mmBTU on a three-hour (3-hour) rolling average basis and a twenty-four-hour (24-hour) rolling average basis in electronic format to EPA, the States, and the Citizen Plaintiffs including identification of each 3-hour average and 24-hour average above the applicable PM Emission Rate for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9, as required by Paragraph 104.

E. PROHIBITION ON NETTING OR OFFSETS FROM REQUIRED CONTROLS

119. Emission reductions that result from actions to be taken by TVA after the Effective Date of this Compliance Agreement to comply with the requirements of this Compliance

Agreement shall not be considered as creditable contemporaneous emission decreases for the purpose of netting or offset under the Act's PSD and Nonattainment NSR programs (including any applicable SIP provisions).

120. The limitations on the generation and use of netting credits and offsets set forth in the previous Paragraph do not apply to emission reductions achieved at a particular TVA System Unit that are greater than those required under this Compliance Agreement for that particular TVA System Unit. For purposes of this Paragraph, and except as otherwise provided in Paragraph 54, emission reductions achieved at a particular TVA System Unit are greater than those required under this Compliance Agreement only if they result from the actions described in Subparagraphs 120.a and/or 120.b, below:

a. controlling Shawnee Units 2, 3, 5, 6, 7, 8 and/or 9 to reduce emissions of NO x and/or SO 2 beyond the requirements of Paragraphs 75 and 91 of this Compliance Agreement through a federally-enforceable emission limitation, provided that TVA is not otherwise required by the Act or the applicable SIP to control such Units to reduce emissions of NO x and/or SO 2 , or

b. for emission reductions of NO x , except for Shawnee Unit 10, Retiring a TVA System Unit that does not have the Retire option in the Control Requirement column in the Table in Paragraph 73, except to the extent that TVA Retires such Unit as Additional MW pursuant to Paragraph 123.b, and provided that TVA is not otherwise required by the Act or the applicable SIP to Retire such Unit; and for emission reductions of SO 2 , except for Shawnee Unit 10, Retiring a TVA System Unit that does not have the Retire option in the Control Requirement column in the Table in Paragraph 89, except to the extent that TVA Retires such Unit as Additional MW pursuant to Paragraph 123.b, and provided that TVA is not otherwise required by the Act or the applicable SIP to Retire such Unit.

121. Notwithstanding Paragraph 119, TVA may utilize emission reductions of NO x , SO 2 , VOCs, and PM resulting solely from Retiring up to two thousand seven hundred (2,700) MW from the TVA System, as creditable contemporaneous emission decreases for the purpose of obtaining netting credits for these four pollutants to construct and operate no more than a total of four thousand (4,000) MW of new combined cycle (“CC”) combustion turbine electric generating units (“New CC Units”) and simple cycle (“CT”) turbine electric generating units (“New CT Units”) (collectively referred to herein as “New CC/CT Units”) to be located at the stationary source where a TVA System Unit is Retired, subject to the limitations described in this Paragraph and Subparagraphs. Of the total 4,000 MW specified herein, TVA shall not construct more than a total of two thousand (2,000) MW of CT capacity.

a. The emission reductions of NO x , SO 2 , VOC, and PM resulting from Retiring a TVA System Unit that TVA intends to utilize for netting purposes to avoid major NSR for such New CC/CT Unit must be contemporaneous and otherwise creditable within the meaning of the Act and the applicable SIP, and TVA must comply with, and is subject to, all requirements and criteria for creating contemporaneous creditable decreases as set forth in 40 C.F.R. § 52.21(b) and the applicable SIP, subject to the limitations of this Paragraph 121.

b. TVA must apply for, and obtain, minor NSR permits for the construction and operation of such New CC/CT Unit(s) from the relevant permitting authority. Such minor NSR permit must include federally-enforceable emission limitations that reflect either Best Available Control Technology (“BACT”) or Lowest Achievable Emission Rate (“LAER”), as appropriate, depending upon the attainment classification for the relevant regulated pollutants for which TVA is utilizing emission reductions as provided in this Paragraph to net out of

major new source review and that will be emitted from such New CC/CT Unit(s) (including NO x , SO 2, and PM regulated as primary criteria pollutants and NO x , SO 2, and VOCs regulated as precursor pollutants to the formation of the criteria pollutants PM 2.5 and Ozone) in the area where such New CC/CT Units will be located. The relevant permitting authority where the New CC/CT Units will be constructed shall determine emission limitations for NO x , SO 2 , VOCs, PM, PM 10 and PM 2.5 that reflect BACT or LAER, as appropriate, consistent with Sections 165(a)(4), 169(3), 171(3), and 173(a)(2) of the Act, 42 U.S.C. §§ 7475(a)(4), 7479(3), 7501(3), and 7503(a)(3); 40 C.F.R. §§ 52.21(b)(12) and 51.165(a)(1)(xiii); the applicable SIP; and relevant EPA guidance and/or interpretations pertaining to determining BACT and LAER, including EPA’s “New Source Review Workshop Manual – Prevention of Significant Deterioration and Nonattainment Area Permitting” (Draft Oct. 1990). In no event shall the emission limitations determined by the relevant permitting authority for NO x , SO 2 , VOC, and PM 2.5 (filterable) be any less stringent than the emission limitations set forth in Appendix B to this Compliance Agreement. The emission limitations set forth in Appendix B serve solely as the minimum stringency for emission limitations that will be determined by the relevant permitting authority for such New CC/CT Units and shall not be presumed to be BACT or LAER. Although the permitting authority as part of the permitting action described in this Paragraph shall not determine BACT or LAER to be less stringent than the emission limitations set forth in Appendix B, nothing in this Compliance Agreement (including Appendix B) shall prevent the permitting authority from establishing more stringent emission limitations than those set forth in Appendix B. For purposes of the permitting action described in this Paragraph, TVA shall not assert that this Compliance Agreement (including Appendix B) supports imposing a BACT or LAER emission limitation that is no more stringent than the emission limitations set forth in Appendix B.

c. For the minor NSR permitting action specified in Subparagraph 121.a, above, the relevant permitting authority shall comply with the public participation requirements in its SIP for major NSR permitting actions, including: Ala. Admin. Code r. 335-3-14-.01(7) for permitting actions in Alabama, 401 Ky. Admin. Regs. 52:100 for permitting actions in Kentucky, and Tenn. Comp. R. & Regs.1200-3-9-.01(4)(l) for permitting actions in Tennessee. TVA shall provide notice and a copy of its permit application to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) concurrent with its permit application submission to the relevant permitting authority.

d. All emissions of NO x and SO 2 from any New CC/CT Unit(s) where TVA has utilized netting credits in order to construct such New CC/CT Unit as provided in this Paragraph, shall be treated as emissions from a TVA System Unit solely for purposes of the System-Wide Annual Tonnage Limitations for NO x and SO 2 and such emissions of NO x and SO 2 from the New CC/CT Unit(s) are therefore subject to, and shall be included under, the System-Wide Annual Tonnage Limitations for NO x and SO 2 for the relevant calendar year(s) as specified in the tables in Paragraphs 71 and 86.

e. Nothing in this Paragraph affects the Unit-specific schedule specified in the tables in Paragraphs 73 and 89 for each TVA System Unit.

122. For every emission reduction of NO x and SO 2 that TVA utilizes as provided in Paragraph 121 to construct a New CC/CT Unit(s), such reduction shall not be available to generate Super-Compliance Allowances within the meaning of Paragraphs 82 and 98 in the calendar year in which TVA utilizes such emission reductions and all calendar years

thereafter. In the next periodic progress report required pursuant to Section V.I (Periodic Reporting), TVA shall report the amount of emission reductions of NO x and the amount of emission reductions of SO 2 resulting from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 121 to construct a New CC/CT Unit(s).

123. Notwithstanding Paragraph 119, TVA may utilize emission reductions of Greenhouse Gases resulting solely from Retiring a TVA System Unit as creditable contemporaneous emission decreases for the purpose of obtaining netting credits for Greenhouse Gases to construct and operate no more than a total of four thousand (4,000) MW of New CC Units to be located at the stationary source where a TVA System Unit is Retired, subject to the limitations described in this Paragraph and Subparagraphs 123.a through 123.c, below.

a. The emission reductions of Greenhouse Gases resulting from Retiring a TVA System Unit that TVA intends to utilize for netting purposes to avoid major NSR for such New CC Unit must be contemporaneous and otherwise creditable within the meaning of the Clean Air Act and the applicable SIP, and TVA must comply with, and is subject to, all requirements and criteria for creating contemporaneous creditable decreases as set forth in 40 C.F.R. § 52.21(b) and the applicable SIP, subject to the limitations of this Paragraph.

b. For every one (1) MW of New CC Unit capacity that TVA proposes to construct and operate by utilizing Greenhouse Gas emission reductions to avoid major NSR for such New CC Unit, TVA shall Retire at least one (1) MW from the TVA System that is above and beyond the 2,728.8 MW that TVA is required to Retire pursuant to Paragraphs 73 and 89 (referred to herein as “Additional MW”). TVA shall Retire such Additional MW from the TVA System either within one (1) year from the date the New CC Unit commences

operation or by no later than the date set forth in the table in Paragraphs 73 and 89 for the TVA System Unit that TVA is Retiring pursuant to this Paragraph, whichever is sooner. Emission reductions resulting from Retiring such Additional MW are subject to Paragraph 119.

c. Greenhouse Gas emission reductions resulting from Retiring a TVA System Unit may only be available to TVA for netting purposes to avoid major NSR permitting requirements for Greenhouse Gases for the construction and operation of a New CC Unit if TVA satisfies the following requirements: (i) TVA must apply for a minor NSR permit described in Paragraph 121 for the construction and operation of such New CC Unit by no later than June 30, 2012, (ii) TVA must commence construction of the New CC Unit that is the subject of such minor NSR permit application by no later than January 1, 2015, and (iii) by no later than thirty (30) days after the date TVA commences construction of such New CC Unit, TVA must provide notice pursuant to Paragraphs 76 and 92 as to which TVA System Unit(s) TVA will Retire in order for TVA to Retire the requisite Additional MW.

124. Nothing in this Compliance Agreement shall prevent anyone, including EPA, the States, and the Citizen Plaintiffs from submitting comments during the public comment period specified in Subparagraph 121.b regarding the emission limitations developed by the permitting authority as required by Subparagraph 121.a, including comments regarding the stringency of the emission limitations prescribed in Appendix B, or taking any other lawfully permissible action to challenge any permitting authority’s determination pursuant to Subparagraph 121.a or the minor NSR permitting action for such New CC/CT Units.

125. Nothing in this Compliance Agreement is intended to preclude the emission reductions generated under this Compliance Agreement from being considered by EPA or Alabama, Kentucky, or Tennessee for the purpose of attainment demonstrations submitted pursuant to § 110 of the Act, 42 U.S.C. § 7410, or in determining impacts on NAAQS, PSD increment, or air quality related values, including visibility, in a Class I area.

F. ENVIRONMENTAL MITIGATION PROJECTS

126. TVA shall implement the Environmental Mitigation Projects (“Projects”) described in Appendix C to this Compliance Agreement, in compliance with the approved plans and schedules for such Projects and other terms of this Compliance Agreement. These Projects will result in a further reduction of NO x , SO 2 , and PM emissions, and additionally will have the collateral benefit of reducing Greenhouse Gases. In implementing the Projects described in Appendix C, TVA shall spend no less than $290 million in Project Dollars and pay no less than $60 million to the States to fund Projects described in Section III.F of the Consent Decree.

127. TVA shall implement the Projects described in Appendix C by no later than five (5) years from the date of plan approval, as specified in Appendix C.

128. TVA shall maintain, and present to the EPA upon request, all documents to substantiate the Project Dollars expended and shall provide these documents to EPA within thirty (30) days of a request by EPA for the documents.

129. All plans and reports prepared by TVA pursuant to the requirements of this Section of the Compliance Agreement and required to be submitted to EPA shall be publicly available from TVA without charge.

130. TVA shall certify, as part of each plan submitted to EPA for any Project, that TVA is not otherwise required by law to perform the Project described in the plan, that TVA is unaware of any other person who is required by law to perform the Project as of the Effective Date of this Compliance Agreement, and that TVA will not use any Project, or portion thereof, to satisfy any existing obligations as of the Effective Date of this Compliance Agreement that it may have under other applicable requirements of law, including any applicable renewable or energy efficiency portfolio standards.

131. TVA shall use good faith efforts to secure as much benefit as possible for the Project Dollars expended, consistent with the applicable requirements and limits of this Compliance Agreement. TVA shall describe the expected emissions reduced or avoided for all air pollutants, so that EPA can evaluate the benefits of the proposed projects as part of the plan approval process.

132. If TVA elects (where such an election is allowed) to undertake a Project by contributing funds to another person or entity that will carry out the Project in lieu of TVA, but not including TVA’s agents or contractors, that person or instrumentality must, in writing: (a) identify its legal authority for accepting such funding and (b) identify its legal authority to conduct the Project for which TVA contributes the funds. Regardless of whether TVA elected (where such election is allowed) to undertake a Project by itself or to do so by contributing funds to another person or instrumentality that will carry out the Project, TVA acknowledges that it will receive credit for the expenditure of such funds as Project Dollars only if TVA demonstrates that the funds have been actually spent by either TVA or by the person or instrumentality receiving them, and that such expenditures met all requirements of this Compliance Agreement.

133. Beginning on the date of each plan submission required pursuant to Appendix C, and continuing until completion of each Project (including any applicable periods of demonstration or testing), TVA shall provide EPA with semi-annual reports detailing the progress of each Appendix C Project and the disbursement of funds pursuant to Section III.F of the Consent Decree.

134. Within sixty (60) days following the completion of each Project required under this Compliance Agreement (including any applicable periods of demonstration or testing), TVA shall submit to EPA a report that documents the date that the Project was completed, TVA’s results of implementing the Project, including the emission reductions or other environmental benefits achieved, and the Project Dollars expended by TVA in implementing the Project.

G. CIVIL PENALTY

135. TVA shall pay a total of $10,000,000 in civil penalties as further described in this Section.

136. Pursuant to, and as specified in, Paragraph 91 of the Consent Agreement and Final Order in In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b), TVA shall pay the sum of $8,000,000 in civil penalties to EPA.

137. Pursuant to, and as specified in, Paragraph 131 of the Consent Decree, TVA shall pay a total of $2,000,000 in civil penalties to Alabama, Kentucky, and Tennessee as follows: $1,000,000 to Tennessee, $500,000 to Alabama, and $500,000 to Kentucky.

H. RESOLUTION OF CLAIMS AGAINST TVA

1. Resolution of EPA’s Claims.

138. Claims based on modifications occurring before the Date of Execution of this Compliance Agreement. This Compliance Agreement shall resolve all administrative claims of EPA against TVA, and, subject to the reservation in Paragraph 3, EPA covenants not to refer civil claims against TVA to the Department of Justice, arising from any modifications commenced at any TVA System Unit prior to the Date of Execution of this Compliance Agreement, except for claims based upon the regulated pollutant sulfuric acid mist, including but not limited to, those modifications alleged in Section IV of this Compliance Agreement under any or all of:

Sections 165 and 173 of Parts C and D of Subchapter I of the Act, 42 U.S.C. §§ 7475 and 7503, and the implementing PSD and Nonattainment NSR provisions of the relevant SIPs;

Section 111 of the Act, 42 U.S.C. §§ 7411, and 40 C.F.R. §§ 60.14 and 60.15;

Sections 502(a) and 504(a) of the Act, 42 U.S.C. §§ 7661a(a) and 7661c(a), but only to the extent that such claims are based on TVA’s failure to obtain an operating permit that reflects applicable requirements imposed under the PSD and Nonattainment NSR provisions of Subchapter I or Section 111 of the Act; and

The federally approved and enforceable minor NSR programs of Alabama, Kentucky, and Tennessee.

The claims resolved for purposes of this Paragraph under Parts C or D of Subchapter I of the Act shall not include claims based upon Greenhouse Gases.

139. Claims based on modifications occurring after the Date of Execution of this Compliance Agreement . This Compliance Agreement also shall resolve all administrative claims of EPA against TVA, and, subject to the reservation in Paragraph 3, EPA covenants not to refer civil claims against TVA to the Department of Justice, that arise from a modification commenced before June 30, 2019, for pollutants regulated under Parts C or D of Subchapter I of the Act and under regulations promulgated thereunder as of the Date of Execution of this Compliance Agreement, except for sulfuric acid mist and PM as provided below, and:

where such modification is commenced at any TVA System Unit after the Date of Execution of this Compliance Agreement; or

where such modification is one that this Compliance Agreement expressly directs TVA to undertake.

This Compliance Agreement does not resolve any such claims based upon modifications for sulfuric acid mist at any TVA System Unit or for PM at any TVA System Unit that is not subject to a PM Emission Rate pursuant to Paragraph 104. The claims resolved for purposes of this Paragraph under Parts C or D of Subchapter I of the Act shall not include claims based upon Greenhouse Gases.

140. Reopeners. The resolution of EPA's claims against TVA, as provided by this Subsection 1, is subject to the provisions of Subsection 2 of this Section.

2. Pursuit by EPA of Claims Otherwise Resolved by Subsection 1.

141. Bases for Pursuing Resolved Claims for the TVA System. If TVA violates a System-Wide Annual Tonnage Limitation required pursuant to Paragraph 71 (as adjusted, as applicable, by Paragraph 72) or Paragraph 86 (as adjusted, as applicable, by Paragraph 87), or operates a Unit more than ninety (90) days past a date established in this Compliance Agreement without completing the required installation, upgrade, Repowering, Retirement, or commencing Continuous Operation of any pollution control device required pursuant to Paragraphs 73 or 89, or operates 2 Units at the John Sevier plant and/or Colbert Units 1, 2, 3, 4, and/or 5 ninety (90) days past the date established in this Compliance Agreement for such Units to be Removed from Service, then EPA may pursue any claim at any TVA System Unit that is otherwise resolved under Subsection 1 (Resolution of EPA's Claims), subject to a and b, below.

a. For any claims based on modifications undertaken at an Other Unit ( i.e. , any Unit at the Shawnee Plant that is not an Improved Unit for the pollutant in question), claims may be pursued only where the modification(s) on which such claim is based was commenced within the five (5) years preceding the violation or failure specified in this Paragraph.

b. For any claims based on modifications undertaken at an Improved Unit, claims may be pursued only where the modification(s) on which such claim is based was commenced (i) after the Date of Execution this Compliance Agreement and (ii) within the five (5) years preceding the violation or failure specified in this Paragraph.

142. Additional Bases for Pursuing Resolved Claims for Modifications at an Improved Unit. Solely with respect to an Improved Unit, EPA may also pursue claims arising from a modification (or collection of modifications) at an Improved Unit that has otherwise been resolved under Subsection 1 (Resolution of EPA's Claims), if the modification (or collection of

modifications) at the Improved Unit on which such claims are based (a) was commenced after the Date of Execution of this Compliance Agreement, and (b) individually (or collectively) increased the maximum hourly emission rate of that Unit for NO x and/or SO 2 (as measured by 40 C.F.R. §§ 60.14(b) and (h)) by more than ten percent (10%).

143. Additional bases for pursuing resolved claims for modifications at Other Units.

Solely with respect to Other Units, EPA may also pursue claims arising from a modification (or collection of modifications) at an Other Unit that has otherwise been resolved under Subsection 1 (Resolution of EPA's Claims), if the modification (or collection of modifications) at the Other Unit on which the claim is based was commenced within the five (5) years preceding any of the following events:

a. a modification (or collection of modifications) at such Other Unit commenced after the Date of Execution of this Compliance Agreement increases the maximum hourly emission rate for such Other Unit for the relevant pollutant (NO x or SO 2 ), as measured by 40 C.F.R. § 60.14(b) and (h);

b. the aggregate of all Capital Expenditures made at such Other Unit exceed $150/KW on the Unit = s Boiler Island (based on the generating capacities identified in Paragraph 67) during the period from the Date of Execution of this Compliance Agreement through December 31, 2014, and the period from January 1, 2015 through December 31, 2019. (Capital Expenditures shall be measured in calendar year 2009 constant dollars, as adjusted by the McGraw-Hill Engineering News-Record Construction Cost Index); or

c. a modification (or collection of modifications) at such Other Unit commenced after the Date of Execution of this Compliance Agreement results in an emissions increase of NO x and/or SO 2 at such Other Unit, and such increase (i) presents, by itself, or in combination with other emissions or sources, “an imminent and substantial endangerment” within the meaning of Section 303 of the Act, 42 U.S.C. §7603; (ii) causes or contributes to violation of a NAAQS in any Air Quality Control Area that is in attainment with that NAAQS; (iii) causes or contributes to violation of a PSD increment; and/or (iv) causes or contributes to any adverse impact on any formally-recognized air quality related values in any Class I area. The introduction of any new or changed NAAQS shall not, standing alone, provide the showing needed under Subparagraphs (c)(ii) or (c)(iii) to pursue any claim for a modification at an Other Unit resolved under Subsection 1 of this Section.

I. PERIODIC REPORTING

144. Beginning six (6) months after the Effective Date of this Compliance Agreement and continuing annually on April 30 each year thereafter until conditional termination of enforcement through this Compliance Agreement as provided in Paragraph 213, and in addition to any other express reporting requirement in this Compliance Agreement, TVA shall submit to EPA, the States, and the Citizen Plaintiffs a progress report in compliance with Appendix A.

145. In any periodic progress report submitted pursuant to this Section, TVA may incorporate by reference information previously submitted under its Title IV and/or Title V permitting requirements, provided that TVA attaches the Title IV and/or Title V permit report, or the relevant portion thereof, and provides a specific reference to the provisions of the

Title IV and/or Title V permit report that are responsive to the information required in the periodic progress report.

146. Other express reporting requirements. In addition to the annual progress reports required pursuant to Paragraph 144 and Appendix A, TVA shall submit to EPA, the States, and the Citizen Plaintiffs the information otherwise required by this Compliance Agreement in the manner and by the dates set forth herein, including but not limited to, the information required by Paragraphs 76, 77, 88, 92, 93, 108, 109, 114, 115, 117, 147, 156, 167, and 192 and Subparagraph 121.c.

147. In addition to the progress reports required pursuant to this Section, TVA shall provide a written report to EPA, the States, and the Citizen Plaintiffs of any violation of the requirements of this Compliance Agreement within fifteen (15) days of when TVA knew or should have known of any such violation. In this report, TVA shall explain the cause or causes of the violation and all measures taken or to be taken by TVA to prevent such violations in the future and measures taken or to be taken to mitigate the environmental effects of such violation, if any.

148. Each report shall be signed by TVA = s Vice President of Environmental Permitting and Compliance or his or her equivalent or designee of at least the rank of Vice President, and shall contain the following certification:

This information was prepared either by me or under my direction or supervision in accordance with a system designed to assure that qualified personnel properly gather and evaluate the information submitted. Based on my evaluation, or the direction and my inquiry of the person(s) who manage the system, or the person(s) directly responsible for gathering the information, I hereby certify under penalty of law that, to the best of my knowledge and belief, this information is true, accurate,

and complete. I understand that there are significant penalties for submitting false, inaccurate, or incomplete information to EPA.

J. REVIEW AND APPROVAL OF SUBMITTALS

149. Whenever a plan, report, or other submission required by this Compliance Agreement is required to be submitted to EPA for review or approval pursuant to this Compliance Agreement, EPA (in consultation with the States and the Citizen Plaintiffs) may approve the submittal or decline to approve it and provide written comments explaining the basis for declining such approval. Within sixty (60) days of receiving written comments from EPA, TVA shall either (a) revise the submittal consistent with the written comments and provide the revised submittal to EPA with copies to the States and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement; or (b) submit the matter for dispute resolution pursuant to Section VIII (Dispute Resolution) of this Compliance Agreement.

150. Upon receipt of EPA = s final approval of the submittal, or upon completion of dispute resolution pursuant to Section VIII (Dispute Resolution) of this Compliance Agreement, and, if applicable, dispute resolution under Section VI (Dispute Resolution) of the Consent Decree as provided by Section IV (Coordination of Oversight and Enforcement) of the Consent Decree, TVA shall implement the approved submittal in accordance with the schedule specified therein, or if subject to dispute resolution pursuant to Section VI (Dispute Resolution) of this Consent Decree as provided by Section IV (Coordination of Oversight and Enforcement) of the Consent Decree, a schedule established by the Court.

K. STIPULATED PENALTIES

151. For any failure by TVA to comply with the terms of this Compliance Agreement, and subject to the provisions of Sections VII (Force Majeure) and VIII (Dispute Resolution) of this Compliance Agreement, and Section IV (Coordination of Oversight and Enforcement) of the Consent Decree, TVA shall pay, within thirty (30) days after receipt of written demand to TVA by EPA, the following stipulated penalties:

Compliance Agreement Violation	Stipulated Penalty
a. Failure to pay the civil penalty as specified in Section V.G (Civil Penalty) of this Compliance Agreement	$10,000 per day
b. Failure to comply with any applicable PM Emission Rate where the violation is less than five percent (5%) in excess of the limits set forth in this Compliance Agreement	$2,500 per day per violation
c. Failure to comply with any applicable PM Emission Rate where the violation is equal to or greater than five percent (5%) but less than ten percent (10%) in excess of the limits set forth in this Compliance Agreement	$5,000 per day per violation
d. Failure to comply with any applicable PM Emission Rate where the violation is equal to or greater than ten percent (10%) in excess of the limits set forth in this Compliance Agreement	$10,000 per day per violation
e. Failure to comply with an applicable System-Wide Annual Tonnage Limitation for SO 2 set forth in this Compliance Agreement	$5,000 per ton for the first 1,000 tons, and $10,000 per ton for each additional ton above 1,000 tons, plus the surrender of SO 2 Allowances in an amount equal to two (2) times the number of tons by which the limitation was exceeded.

Compliance Agreement Violation	Stipulated Penalty
f. Failure to Remove from Service as required by Paragraphs 73 and 89 of this Compliance Agreement any one or more of the following Units: the two (2) Units at the John Sevier plant that TVA indicated pursuant to Paragraphs 73 and 89 that it will Remove from Service and Colbert Units 1-5	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter
g. Failure to comply with an applicable System-Wide Annual Tonnage Limitation for NO x set forth in this Compliance Agreement	$5,000 per ton for the first 1,000 tons, and $10,000 per ton for each additional ton above 1,000 tons, plus the surrender of annual NO x Allowances in an amount equal to two (2) times the number of tons by which the limitation was exceeded.
h. Failure to comply with the requirements for NO x or SO 2 in Paragraphs 75 or 91 of this Compliance Agreement	$2,500 per day per violation
i. Failure to provide notice as required by Paragraphs 76, 77, 88, 92, and/or 93 of this Compliance Agreement	$1,000 per day for the first fifteen (15) days, $15,000 per day for each day thereafter
j. Failure to install, commence operation of, and/or Continuously Operate a pollution control technology as required by Paragraphs 73, 89, and/or 102 of this Compliance Agreement	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter
k. Failure to Retire or Repower a Unit as required by Paragraphs 73 and 89 of this Compliance Agreement	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter
l. Failure to comply with the PM optimization requirements of Paragraph 103 of this Compliance Agreement	$2,500 per day per violation during the first thirty (30) days, $7,500 per day per violation thereafter
m. Failure to install and/or operate CEMS as required under this Compliance Agreement	$1,000 per day per violation

Compliance Agreement Violation	Stipulated Penalty
n. Failure to conduct stack tests for PM as required under this Compliance Agreement	$1,000 per day per violation
o. Failure to apply for any permit required under this Compliance Agreement	$1,000 per day per violation
p. Failure to timely submit, modify, and/or implement, as approved, the reports, plans, studies, analyses, protocols, and/or other submittals required by this Compliance Agreement	$750 per day per violation during the first ten (10) days, $1,000 per day per violation thereafter
q. Using, selling, banking, trading, or transferring SO 2 Allowances except as permitted under this Compliance Agreement	The surrender of SO 2 Allowances in an amount equal to four (4) times the number of SO 2 Allowances used, sold, banked, traded, or transferred in violation of this Compliance Agreement
r. Failure to surrender SO 2 Allowances as required under this Compliance Agreement	(a) $37,500 per day plus (b) $1,000 per allowance not surrendered
s. Using, selling, banking, trading, or transferring NO x Allowances except as permitted under this Compliance Agreement	The surrender of NO x Allowances in an amount equal to four (4) times the number of NO x Allowances used, sold, banked, traded, or transferred in violation of this Compliance Agreement
t. Failure to surrender NO x Allowances as required under this Compliance Agreement	(a) $37,500 per day plus (b) $1,000 per allowance not surrendered
u. Using emission reductions from Retiring a TVA System Unit except as provided in Paragraphs 119 and 120 of this Compliance Agreement	$2,500 per day per violation during the first 30 days, $10,000 per day per violation thereafter
v. Failing to comply with the requirements of Paragraph 121 of this Compliance Agreement if TVA uses emission reductions from Retiring a TVA System Unit to construct a New CC/CT Unit	$2,500 per day per violation during the first thirty (30) days, $10,000 per day per violation thereafter

Compliance Agreement Violation	Stipulated Penalty
w. Failing to comply with the requirements of Paragraph 123 of this Compliance Agreement if TVA uses emission reductions in Greenhouse Gases to construct a New CC Unit	$2,500 per day per violation during the first thirty (30) days, $10,000 per day per violation thereafter
x. Failure to implement any of the Environmental Mitigation Projects in compliance with Section V.F (Environmental Mitigation Projects) of this Compliance Agreement	$5,000 per day for the first thirty (30) days, $10,000 per day for each day thereafter
y. Any other violation of this Compliance Agreement	$1,000 per day per violation

152. All stipulated penalties shall begin to accrue on the day after the performance is due or on the day a violation occurs, whichever is applicable, and shall continue to accrue until performance is satisfactorily completed or until the violation ceases, whichever is applicable. Nothing in this Compliance Agreement shall prevent the simultaneous accrual of separate stipulated penalties for separate violations of this Compliance Agreement.

153. TVA shall pay all stipulated penalties within thirty (30) days of receipt of written demand to TVA from EPA, and shall continue to make such payments every thirty (30) days thereafter until the violation(s) no longer continues, unless TVA elects within fifteen (15) business days of receipt of written demand to TVA from EPA to dispute the accrual of stipulated penalties in accordance with the provisions in Section VIII (Dispute Resolution) of this Compliance Agreement.

154. Stipulated penalties shall continue to accrue as provided in accordance with Paragraph 152 during any dispute, with interest on accrued stipulated penalties payable and calculated at the rate established by the Secretary of the Treasury, pursuant to 28 U.S.C. § 1961, but need not be paid until the following:

a. If the dispute is resolved by agreement through the Negotiation Period of Paragraph 182 of this Compliance Agreement, accrued stipulated penalties agreed or determined to be owing, together with accrued interest, shall be paid within thirty (30) days of the effective date of the agreement;

b. If the dispute is resolved by the Region 4 Air Director pursuant to Paragraph 182 and the Region 4 Air Director issues a decision in which EPA prevails in whole or in part, TVA shall, within sixty (60) days of receipt of the decision, pay all accrued stipulated penalties determined to be owing, together with interest accrued on such penalties determined to be owing.

155. Notwithstanding any other provision of this Compliance Agreement, the accrued stipulated penalties agreed to by EPA and TVA, or determined through Dispute Resolution, to be owing may be less than the stipulated penalty amounts set forth in Paragraph 151.

156. Monetary stipulated penalties due and owing to EPA shall be paid by Electronic Funds Transfer (“EFT”) in accordance with current EFT procedures, referencing Docket No. CAA-04-2010-1760. The costs of such EFT shall be TVA’s responsibility. Payment shall be made in accordance with instructions provided to TVA by EPA. Any funds received after 2:00 p.m. EST or EDT, as appropriate, shall be credited on the next business day. At the time of payment, TVA shall provide notice of payment to EPA, referencing all relevant case names and case numbers in accordance with Section X (Notices) of this Compliance Agreement. Monetary stipulated penalties due and owing to a State shall be paid in the manner set forth in the Consent Decree for the relevant State. All SO 2 and NO x Allowance surrender stipulated penalties shall comply with the allowance surrender procedures set forth in

Paragraphs 84 (for NO x ) and 100 (for SO 2 ).

157. Should TVA fail to pay a stipulated penalty, EPA shall be entitled to collect interest on such stipulated penalties, as provided for in 31 U.S.C. § 3717.

158. The stipulated penalties provided for in this Compliance Agreement shall be in addition to any other rights, remedies, or sanctions available to EPA by reason of TVA's failure to comply with any requirement of this Compliance Agreement or applicable law, except that for any violation of the Act for which this Compliance Agreement provides for payment of a stipulated penalty, TVA shall be allowed a credit for stipulated penalties paid against any statutory penalties also imposed for such violation.

159. EPA shall share the payment of a stipulated penalty with Alabama, Kentucky, and Tennessee where the violation giving rise to payment of a stipulated penalty is also a violation of a Parallel Provision of the Consent Decree. EPA shall instruct TVA in the written demand issued pursuant to Paragraph 151 as to the amount to be paid to EPA and the amount to be paid to the relevant State(s). Where the violation of a Parallel Provision is facility specific, payment of any stipulated penalty amount shall be made 50% to EPA and 50% to the State where such facility is located. Where a violation of a Parallel Provision is not facility specific, payment of any stipulated penalty amount shall be made as follows: 50% to EPA and 50% allocated equally among Alabama, Kentucky, and Tennessee.

L. PERMITS

160. Unless expressly stated otherwise in this Compliance Agreement, in any instance where otherwise applicable law or this Compliance Agreement requires TVA to secure a

permit to authorize construction or operation of any device, including all construction and operating permits required under state law, TVA shall make such application in a timely manner.

161. Notwithstanding Paragraph 160, nothing in this Compliance Agreement shall be construed to require TVA to apply for or obtain a PSD or Nonattainment NSR permit for physical changes in, or changes in the method of operation of, any TVA System Unit that would give rise to claims resolved by Paragraphs 138 or 139, subject to Paragraphs 140 through 143.

162. When permits or permit applications are required pursuant to Paragraphs 160, 164, 165, and 168, TVA shall complete and submit applications for such permits to Alabama, Kentucky, and Tennessee, whichever is appropriate, to allow sufficient time for all legally required processing and review of the permit request, including requests for additional information by such States. Any failure by TVA to submit a timely permit application for TVA System Units shall bar any use by TVA of Section VII (Force Majeure) of this Compliance Agreement, where a Force Majeure claim is based on permitting delays.

163. Notwithstanding the reference to Title V permits in this Compliance Agreement, the enforcement of such permits shall be in accordance with their own terms and the Act and its implementing regulations, including the federally approved Alabama, Kentucky, and Tennessee Title V programs. The Title V permit shall not be enforceable under this Compliance Agreement, although any term or limit established by or under this Compliance Agreement shall be enforceable under this Compliance Agreement regardless of whether such term has or will become part of a Title V permit, subject to the terms of Section XVI (Conditional Termination of Enforcement Under Compliance Agreement) of this Compliance Agreement.

164. Within three (3) years from the Effective Date of this Compliance Agreement, unless otherwise specified in this Paragraph, and in accordance with federal and/or state requirements for modifying or renewing a Title V permit, TVA shall amend any applicable Title V permit application, or apply for amendments to its Title V permits, to include a schedule for all system-wide, Unit-specific, and plant-specific performance, operational, maintenance, and control technology requirements established by this Compliance Agreement including, but not limited to, emission rates, installation and/or Continuous Operation of SCRs and/or FGDs, tonnage limitations, and the requirements pertaining to the surrender of NO x and SO 2 Allowances. For Units in Paragraphs 73 and 89 with two or more methods specified in the Control Requirement column and that do not have a Remove from Service option, TVA shall apply to modify, renew, or obtain any applicable Title V permit as required by this Paragraph within twelve (12) months of making an election as to the method TVA will employ for the Unit. For Units with the Remove from Service option in the Control Requirement column in Paragraphs 73 and 89, TVA shall apply to modify, renew, or obtain any applicable Title V permit as required by this Paragraph within twelve (12) months of electing to either install and operate FGD(s) and SCR(s), Repower to Renewable Biomass, or Retire.

165. By no later than one (1) year after the date specified in Paragraphs 73 and 89 for the Control Requirement for each Unit, TVA shall (a) apply to include the requirements and limitations enumerated in this Compliance Agreement into federally-enforceable permits such that the requirements and limitations of this Compliance Agreement become and remain “applicable requirements” as that term is defined in 40 C.F.R. § 70.2 and/or (b) request site-specific amendments to the applicable SIPs for Alabama and Tennessee (but not for Kentucky) to reflect all new requirements applicable to each Unit and at each plant in the TVA System. For purposes of this Compliance Agreement, the federally enforceable permit(s)

issued by Kentucky must be issued by Kentucky under its authority under its SIP to issue permits and not solely under Kentucky’s authority to issue permits pursuant to its Title V program.

166. Prior to conditional termination of enforcement through this Compliance Agreement, TVA shall apply for and obtain enforceable provisions in its Title V permits for the TVA System that incorporate (a) any Unit-specific requirements and limitations of this Compliance Agreement, such as performance, operational, maintenance, and control technology requirements, (b) the requirement to Surrender NO x and SO 2 Allowances, and (c) the System-Wide Annual Tonnage Limitations.

167. TVA shall provide EPA, the States, and the Citizen Plaintiffs with a copy of each application for any permit required pursuant to this Section, including any federally enforceable permit or Title V permit or modification, and any site-specific SIP amendment, as well as a copy of any permit or SIP amendment proposed as a result of such application, to allow for timely participation in any public comment opportunity.

168. In the event that EPA promulgates a final rule containing revisions to the Effluent Limitations Guidelines for the Steam Electric Power Generating point source category, by no later than twelve (12) months after the date EPA publishes the final rule in the Federal Register (unless additional time is required for studies or data collection mandated by the final rule), TVA shall submit applications to the relevant permitting authority to obtain National Pollutant Discharge Elimination System (“NPDES”) permit renewals (in the case of expiring

permits); permit renewal modifications (in the case of already submitted permit renewal applications); or permit modification requests (in the case of existing, non-expired permits) to include legally-applicable requirements of the revised Effluent Limitations Guidelines relating to wastewaters from Flue Gas Desulfurization Systems in each of its NPDES permits for the TVA System Units that are subject to the revised Effluent Limitation Guidelines and are equipped with a Flue Gas Desulfurization System. TVA shall include all the relevant information necessary for the permitting authority to expeditiously incorporate the Effluent Limitation Guideline requirements into each of TVA’s NPDES permits, and shall promptly respond to any additional requests for information from the permitting authority.

169. If TVA proposes to sell or transfer to an entity unrelated to TVA (“Third Party”) part or all of TVA's operational or ownership interest in a TVA System Unit, TVA shall comply with the requirements of Section XI (Sales or Transfers of Operational or Ownership Interests) with regard to that Unit prior to any such sale or transfer.

VI. COORDINATION OF OVERSIGHT AND ENFORCEMENT

170. EPA shall be the lead agency, in consultation with the States and the Citizen Plaintiffs, regarding TVA’s implementation of, and compliance with, the Parallel Provisions of this Compliance Agreement and the Consent Decree as described in Section IV (Coordination of Oversight and Enforcement) of the Consent Decree.

VII. FORCE MAJEURE

171. For purposes of this Compliance Agreement, a “Force Majeure Event” shall mean an event that has been or will be caused by circumstances beyond the control of TVA, its contractors, or any entity controlled by TVA that delays compliance with any provision of this Compliance Agreement or otherwise causes a violation of any provision of this

Compliance Agreement despite TVA's best efforts to fulfill the obligation. “Best efforts to fulfill the obligation” include using the best efforts to anticipate any potential Force Majeure Event and to address the effects of any such event (a) as it is occurring and (b) after it has occurred, such that the delay and any adverse environmental effect of the violation is minimized to the greatest extent possible.

172. Notice of Force Majeure Events . If any event occurs or has occurred that may delay compliance with or otherwise cause a violation of any obligation under this Compliance Agreement, as to which TVA intends to assert a claim of Force Majeure, TVA shall notify EPA, the States, and the Citizen Plaintiffs in writing as soon as practicable, but in no event later than twenty-one (21) business days following the date TVA first knew, or by the exercise of due diligence should have known, that the event caused or may cause such delay or violation. In this notice, TVA shall reference this Paragraph of this Compliance Agreement and describe the anticipated length of time that the delay or violation may persist, the cause or causes of the delay or violation, all measures taken or to be taken by TVA to prevent or minimize the delay and any adverse environmental effect of the violation, the schedule by which TVA proposes to implement those measures, and TVA's rationale for attributing a delay or violation to a Force Majeure Event. TVA shall adopt all reasonable measures to avoid or minimize such delays or violations. TVA shall be deemed to know of any circumstance which TVA, its contractors, or any entity controlled by TVA knew or should have known.

173. Failure to Give Notice . If TVA fails to comply with the notice requirements of this Section, EPA (in consultation with the States and the Citizen Plaintiffs) may void TVA's claim for Force Majeure as to the specific event for which TVA has failed to comply with such notice requirement.

174. EPA' s Response . EPA shall notify TVA in writing regarding TVA's claim of Force Majeure as soon as reasonably practicable. If EPA, after consultation with the States and the Citizen Plaintiffs, agrees that a delay in performance has been or will be caused by a Force Majeure Event, EPA and TVA shall stipulate to an extension of deadline(s) for performance of the affected compliance requirement(s) by a period equal to the delay actually caused by the event. In such circumstances, an appropriate modification shall be made pursuant to Section XII (Modification) of this Compliance Agreement.

175. Disagreement . If EPA, after consultation with the States and the Citizen Plaintiffs, does not accept TVA's claim of Force Majeure, or if EPA and TVA cannot agree on the length of the delay actually caused by the Force Majeure Event, the matter shall be resolved in accordance with Section VIII (Dispute Resolution) of this Compliance Agreement.

176. Burden of Proof . In any dispute regarding Force Majeure, TVA shall bear the burden of proving that any delay in performance or any other violation of any requirement of this Compliance Agreement was caused by or will be caused by a Force Majeure Event. TVA shall also bear the burden of proving that TVA gave the notice required by this Section and the burden of proving the anticipated duration and extent of any delay(s) attributable to a Force Majeure Event. An extension of one compliance date based on a particular event may, but will not necessarily, result in an extension of a subsequent compliance date.

177. Events Excluded . Unanticipated or increased costs or expenses associated with the performance of TVA’s obligations under this Compliance Agreement shall not constitute a Force Majeure Event.

178. Potential Force Majeure Events . Depending upon the circumstances related to an event and TVA's response to such circumstances, the kinds of events listed below are among those that could qualify as Force Majeure Events within the meaning of this Section: construction, labor, or equipment delays; Malfunction of a Unit or emission control device; unanticipated coal supply or pollution control reagent delivery interruptions; acts of God; acts of war or terrorism; and, other than by TVA, orders by a government official, government agency, other regulatory authority, or a regional transmission organization, acting under and authorized by applicable law, that directs TVA to supply electricity in response to a system-wide (state-wide or regional) emergency. Depending upon the circumstances and TVA's response to such circumstances, failure of a permitting authority to issue a necessary permit in a timely fashion may constitute a Force Majeure Event where the failure of the permitting authority to act is beyond the control of TVA and TVA has taken all steps available to it to obtain the necessary permit, including, but not limited to submitting a complete permit application; responding to requests for additional information by the permitting authority in a timely fashion; and accepting lawful permit terms and conditions after expeditiously exhausting any legal rights to appeal terms and conditions imposed by the permitting authority.

179. As part of the resolution of any matter by the Region 4 Air Director under Section VIII (Dispute Resolution) regarding a claim of Force Majeure, EPA (in consultation with the States and the Citizen Plaintiffs) and TVA by agreement, or the Region 4 Air Director as part of Dispute Resolution, may in appropriate circumstances extend or modify the schedule

for completion of work under this Compliance Agreement to account for the delay in the work that occurred as a result of any delay agreed to by EPA or as decided by the Region 4 Air Director. TVA shall be liable for stipulated penalties if applicable for its failure thereafter to complete the work in accordance with the extended or modified schedule (provided that TVA shall not be precluded from making a further claim of Force Majeure with regard to meeting any such extended or modified schedule).

VIII. DISPUTE RESOLUTION

180. If a dispute arises under this Compliance Agreement, the procedures of this Section VIII (Dispute Resolution) shall apply. The Parties shall make reasonable efforts to resolve disputes informally, at the level of TVA's Vice President, Environmental Permits and Compliance and the EPA Region 4 Chief of Air & EPCRA Enforcement Branch.

181. If TVA objects to any EPA action or determination taken pursuant to this Compliance Agreement, including any EPA disapproval, modification, or other decision, TVA shall notify EPA in writing of its objections (with copies to the States and the Citizen Plaintiffs), and the basis thereof, within fifteen (15) business days of such action. Such notice shall set forth the specific points of the dispute, the position which TVA asserts should be adopted as consistent with the requirements of this Compliance Agreement, the basis for TVA's position, and any matters that it considers necessary for EPA's determination. For purposes of this Compliance Agreement, EPA actions, orders or determinations will include those actions taken by or on behalf of EPA or any of its employees, agents, or designees.

182. EPA (in consultation with the States and the Citizen Plaintiffs) and TVA shall have an additional fifteen (15) days after receipt by EPA of the notification of objection (Negotiation Period), during which time representatives of EPA and TVA may confer in person or by telephone to resolve any disagreement. If an agreement is reached during the Negotiation Period, the resolution shall be in writing, signed by an authorized representative of both Parties. Such agreement shall be incorporated into and become an enforceable part of this Compliance Agreement. The Negotiation Period may be extended at the sole discretion of EPA, although such extensions shall not be unreasonably withheld. EPA's decision regarding an extension of the Negotiation Period shall not constitute an EPA action subject to Dispute Resolution.

183. If the Parties are unable to reach an agreement within the Negotiation Period, the dispute shall be elevated to the Region 4 Air Director and TVA's Environmental Executive. The Region 4 Air Director and TVA's Environmental Executive shall have an additional fourteen (14) days to resolve the dispute and issue a written decision signed by both Parties. If the Region 4 Air Director and TVA's Environmental Executive cannot reach a mutual agreement within the 14-day period, the Region 4 Air Director will issue a written decision on the dispute to TVA that provides the basis for his or her decision. This decision shall be incorporated into and become an enforceable part of this Compliance Agreement. TVA's obligations under this Compliance Agreement shall not be tolled by submission of any objections for dispute resolution or by any other procedure under this Section.

184. Following resolution of the dispute, as provided by this Section, TVA shall fulfill the requirement that was the subject of the dispute in accordance with the agreement reached or in accordance with EPA's decision.

IX. INFORMATION COLLECTION AND RETENTION

185. Any authorized representative of EPA, including its attorneys, contractors, and consultants, upon presentation of credentials, shall have a right of entry upon the premises of any facility in the TVA System at any reasonable time for the purpose of:

monitoring the progress of activities required under this Compliance Agreement;

verifying any data or information submitted to EPA in accordance with the terms of this Compliance Agreement;

obtaining samples and, upon request, splits of any samples taken by TVA or its representatives, contractors, or consultants; and

assessing TVA's compliance with this Compliance Agreement.

186. TVA shall retain, and instruct its contractors and agents to preserve, all non-identical copies of all records and documents (including records and documents in electronic form) in its or its contractors’ or agents’ possession and/or control, and that directly relate to TVA’s performance of its obligations under this Compliance Agreement until six (6) years following completion of performance of such obligations. This record retention requirement shall apply regardless of any TVA document retention policy to the contrary.

187. All information and documents submitted by TVA pursuant to this Compliance Agreement shall be subject to any requests under applicable law providing public disclosure of documents unless (a) the information and documents are subject to legal privileges or protection or (b) TVA claims and substantiates in accordance with 40 C.F.R. Part 2 that the information and documents contain confidential business information.

188. Nothing in this Compliance Agreement shall limit the authority of EPA or Alabama, Kentucky, and Tennessee to conduct tests and inspections at TVA’s facilities under Section 114 of the Act, 42 U.S.C. § 7414, or any other applicable federal or state laws, regulations or permits.

X. NOTICES

189. Unless otherwise provided herein, whenever notifications, submissions, and/or communications are required by this Compliance Agreement, they shall be made in writing and addressed as follows:

As to EPA:

(If by first class mail)

Director, Air Enforcement Division

Office of Enforcement and Compliance Assurance

U.S. Environmental Protection Agency

1200 Pennsylvania Avenue, NW

Mail Code 2242A

Washington, DC 20460

(If by commercial delivery service)

Director, Air Enforcement Division

Office of Enforcement and Compliance Assurance

U.S. Environmental Protection Agency

Ariel Rios South Building, Room 1119

1200 Pennsylvania Avenue, NW

Washington, DC 20004

and

Director

Air, Pesticides and Toxics Management Division

U.S. EPA- Region 4

Sam Nunn Atlanta Federal Center

61 Forsyth Street, SW

Atlanta, GA 30303-8960

As to Alabama :

Chief, Air Division

Alabama Department of Environmental Management

1400 Coliseum Boulevard

Montgomery, AL 36110-2059

As to Kentucky :

Director

Division for Air Quality

Energy and Environment Cabinet

200 Fair Oaks Lane

Frankfort, KY 40601

As to North Carolina :

Director

NCDENR, Division of Air Quality

1641 Mail Service Center

Raleigh, NC 27699-1641

Senior Deputy Attorney General

Environmental Division

North Carolina Department of Justice

P.O. Box 629 (114 W. Edenton Street, Room 306A)

Raleigh, NC 27602-0629

As to Tennessee :

Division Director/Technical Secretary

Tennessee Department of Environment & Conservation

Air Pollution Control Division

401 Church Street

L&C Annex, 9th Floor

Nashville, TN 37243-1548

As to the Citizen Plaintiffs :

George E. Hays

Attorney at Law

236 West Portal Avenue #110

San Francisco, CA 94127

Office: 415/566-5414 Fax: 415/731-1609

e-mail: georgehays@mindspring.com

William J. Moore, III

1648 Osceola Street

Jacksonville, FL 32204

(904) 685-2172 (phone)

(904) 685-2175 (fax)

wmoore@wjmlaw.net

As to TVA :

Vice President, Environmental Permitting and Compliance

Tennessee Valley Authority

1101 Market Street

Chattanooga, TN 37402

and

Assistant General Counsel, Environment

Tennessee Valley Authority

400 West Summit Hill Drive

Knoxville, TN 37902

190. All notifications, communications or submissions made pursuant to this Section shall be sent either by (a) overnight mail or overnight delivery service, or (b) certified or registered mail, return receipt requested. In addition to the foregoing, notification may also be made through electronic mail. All notifications, communications, and transmissions that are properly addressed and prepaid and are (a) sent by overnight, certified or registered mail shall be deemed submitted on the date they are postmarked, or (b) sent by overnight delivery service shall be deemed submitted on the date they are delivered to the delivery service.

191 . EPA, TVA, the States, and the Citizen Plaintiffs may change either the notice recipient or the address for providing notices to it by serving all others with a notice setting forth such new notice recipient or address.

XI. SALES OR TRANSFERS OF OPERATIONAL OR OWNERSHIP INTERESTS

192. If TVA proposes to sell or transfer an Operational or Ownership Interest to an entity unrelated to TVA (“Third Party”), TVA shall advise the Third Party in writing of the existence of this Compliance Agreement prior to such sale or transfer, and shall send a copy of such written notification to EPA, the States, and the Citizen Plaintiffs pursuant to Section X (Notices) of this Compliance Agreement at least sixty (60) days before such proposed sale or transfer.

193. No sale or transfer of an Operational or Ownership Interest shall take place before the Third Party and EPA (in consultation with the States and the Citizen Plaintiffs) have executed a modification pursuant to Section XII (Modification) of this Compliance Agreement making the Third Party a party to this Compliance Agreement and jointly and severally liable with TVA for all the requirements of this Compliance Agreement that may be applicable to the transferred or purchased Operational or Ownership Interests.

194. This Compliance Agreement shall not be construed to impede the transfer of any Operational or Ownership Interests between TVA and any Third Party so long as the requirements of this Compliance Agreement are met. This Compliance Agreement shall not be construed to prohibit a contractual allocation between TVA and any Third Party of the burdens of compliance with this Compliance Agreement, provided that TVA shall remain liable to EPA for the obligations of the Compliance Agreement applicable to the transferred or

purchased Operational or Ownership Interests.

195. If EPA (in consultation with the States and the Citizen Plaintiffs) agrees, EPA, TVA, and the Third Party that has become a party to this Compliance Agreement pursuant to Paragraph 193, may execute a modification that relieves TVA of its liability under this Compliance Agreement for, and makes the Third Party liable for, all obligations and liabilities applicable to the purchased or transferred Operational or Ownership Interests. Notwithstanding the foregoing, however, no obligation under this Compliance Agreement may be assigned, transferred or released in connection with any sale or transfer of any Ownership Interest that is not specific to the purchased or transferred Operational or Ownership Interests, including the obligations set forth in Sections V.F (Environmental Mitigation Projects) and V.G (Civil Penalty), and Paragraphs 71 and 86. TVA may propose and EPA may agree to restrict the scope of the joint and several liability of any purchaser or transferee for any obligations of this Compliance Agreement that are not specific to the transferred or purchased Operational or Ownership Interests, to the extent such obligations may be adequately separated in an enforceable manner using the methods provided by or approved under Section V.L (Permits).

196. Paragraphs 192-195 of this Compliance Agreement do not apply if an Operational or Ownership Interest is sold or transferred solely as collateral security in order to consummate a financing arrangement (not including a sale-leaseback), so long as TVA (a) remains the operator (as that term is used and interpreted under the Act) of the subject TVA System Unit(s); (b) remains subject to and liable for all obligations and liabilities of this Compliance Agreement; and (c) supplies EPA with the following certification within thirty (30) days of the sale or transfer:

Certification of Change in Ownership Interest Solely for Purpose of Consummating Financing . We, the Chief Executive Officer(s) and General Counsel(s) of the Tennessee Valley Authority (“TVA”), hereby jointly certify under Title 18 U.S.C. Section 1001, on our own behalf and on behalf of TVA, that any change in TVA's Ownership Interest in any Unit that is caused by the sale or transfer as collateral security of such Ownership Interest in such Unit(s) pursuant to the financing agreement consummated on [insert applicable date] between TVA and [insert applicable entity] (a) is made solely for the purpose of providing collateral security in order to consummate a financing arrangement; (b) does not impair TVA's ability, legally or otherwise, to comply timely with all terms and provisions of the Compliance Agreement entered in In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1760; (c) does not affect TVA's operational control of any Unit covered by that Compliance Agreement in a manner that is inconsistent with TVA's performance of its obligations under the Compliance Agreement; and (d) in no way affects the status of TVA's obligations or liabilities under that Compliance Agreement.

XII. MODIFICATION

197. The terms of this Compliance Agreement may be modified only by a subsequent written agreement signed by EPA (in consultation with the States and the Citizen Plaintiffs) and TVA. Where the modification constitutes a material change to this Compliance Agreement, it shall be subject to public notice and comment. The proposed modification shall be effective sixty (60) days after the date the modification is executed by EPA and TVA or, if public comments warrant a change to the proposed modification, then the modification shall be effective sixty (60) days after the date that TVA and EPA have memorialized the change to the modification.

XIII. GENERAL PROVISIONS

198. At any time prior to conditional and/or partial termination of enforcement through this Compliance Agreement, TVA may request approval from EPA to implement a pollution control technology or pollution reduction activity for SO 2 or NO x other than what is required by this Compliance Agreement. In seeking such approval, TVA must

demonstrate that such alternative control technology or activity is capable of achieving and maintaining pollution reductions equivalent to an FGD (for SO 2 ) or SCR (for NO x ) at the Units in the TVA System at which TVA seeks approval to implement such other control technology or activity for SO 2 or NO x . Approval of such a request is solely at the discretion of EPA (in consultation with the States and the Citizen Plaintiffs) provided that EPA shall not approve and TVA shall not implement an alternative control technology or activity if TVA fails to demonstrate that such alternative control technology or activity is capable of achieving and maintaining pollution reductions equivalent to an FGD (for SO 2 ) or SCR (for NO x ) at the Units in the TVA System. If EPA approves TVA's request, nothing in this Paragraph shall relieve TVA from complying with any other requirement of this Compliance Agreement applicable to such Unit ( e.g. , the requirement to obtain a federally enforceable non-Title V permit that includes the Unit-specific performance, operational, maintenance, and control technology requirements for such Unit in addition to the system-wide requirements and any plant-wide requirements also applicable to such Unit).

199. This Compliance Agreement is not a permit. Compliance with the terms of this Compliance Agreement does not guarantee compliance with any applicable federal, state, and/or local laws and/or regulations. The emission limitations set forth herein do not relieve TVA from any obligation to comply with other state and federal requirements under the Act, including TVA's obligation to satisfy any modeling requirements set forth in the Act.

200. This Compliance Agreement does not apply to any claim(s) of alleged criminal liability.

201. In any subsequent action initiated by EPA, the States, or the Citizen Plaintiffs relating to the facilities covered by this Compliance Agreement, TVA shall not assert any defense or claim based upon principles of waiver, res judicata , collateral estoppel, issue preclusion, claim preclusion, or claim splitting, or any other defense based upon the contention that the claims raised by EPA and/or any of the States or the Citizen Plaintiffs in the subsequent proceeding were brought, or should have been brought, in the instant case; provided, however, that nothing in this Paragraph is intended to affect the validity of Section V.H (Resolution of Claims Against TVA).

202. Except as specifically provided by this Compliance Agreement, nothing in this Compliance Agreement shall relieve TVA of its obligation to comply with all applicable federal, state, and/or local laws and/or regulations, including, but not limited to, TVA’s obligation to apply for a Clean Water Act NPDES permit(s) or permit renewal for the discharge of wastewater from the operation of the FGDs at any TVA System Unit, and in connection with any such application or application for permit renewal, to provide the NPDES permitting authority with all information necessary to appropriately characterize effluent from its operations and develop, if applicable, appropriate effluent limitations; provided, however, that no claimed violation of this provision regarding NPDES permitting shall be enforceable as a violation of this Compliance Agreement, by way of stipulated penalty or otherwise. Subject to the provisions in Section V.H (Resolution of Claims Against TVA), nothing contained in this Compliance Agreement shall be construed to prevent or limit the rights of EPA, the States, or the Citizen Plaintiffs to obtain penalties or injunctive relief under the Act or other federal, state, or local statutes, regulations, or permits.

203. Nothing in this Compliance Agreement is intended to, or shall, alter or waive any applicable law (including but not limited to any defenses, entitlements, challenges, or clarifications related to the Credible Evidence Rule, 62 Fed. Reg. 8314 (Feb. 24, 1997)) concerning the use of data for any purpose under the Act.

204. Each limit and/or other requirement established by or under this Compliance Agreement is a separate, independent requirement.

205. Performance standards, emissions limits, and other quantitative standards set by or under this Compliance Agreement must be met to the number of significant digits in which the standard or limit is expressed. For example, an Emission Rate of 0.100 is not met if the actual Emission Rate is 0.101. TVA shall round the fourth significant digit to the nearest third significant digit, or the third significant digit to the nearest second significant digit, depending upon whether the limit is expressed to three or two significant digits. For example, if an actual Emission Rate is 0.1004, that shall be reported as 0.100, and shall be in compliance with an Emission Rate of 0.100, and if an actual Emission Rate is 0.1005, that shall be reported as 0.101, and shall not be in compliance with an Emission Rate of 0.100. TVA shall report data to the number of significant digits in which the standard or limit is expressed.

206. Except as otherwise provided by law, this Compliance Agreement does not limit, enlarge or affect the rights of any Party to this Compliance Agreement as against any third parties.

207. This Compliance Agreement constitutes the final, complete and exclusive agreement and understanding among the Parties with respect to the settlement embodied in this Compliance Agreement, and supersedes all prior agreements and understandings among the Parties related to the subject matter herein. No document, representation, inducement,

agreement, understanding, or promise constitutes any part of this Compliance Agreement or the settlement it represents, nor shall they be used in construing the terms of this Compliance Agreement.

XIV. SIGNATORIES AND SERVICE

208. Each undersigned representative of the Parties certifies that he or she is fully authorized to enter into the terms and conditions of this Compliance Agreement and to execute and legally bind to this document the Party he or she represents.

209. This Compliance Agreement may be signed in counterparts, and such counterpart signature pages shall be given full force and effect.

210. Each Party hereby agrees to accept service of process by mail with respect to all matters arising under or relating to this Compliance Agreement.

XV. PUBLIC COMMENT

211. The Parties agree and acknowledge that this Compliance Agreement shall be subject to public notice in the Federal Register with an opportunity for public comment. EPA reserves the right to withdraw its consent to this Compliance Agreement, and/or to seek modifications to this Compliance Agreement, if public comments received during the comment period disclose facts or considerations that indicate that this Compliance Agreement is inappropriate, improper, or inadequate.

XVI. CONDITIONAL TERMINATION OF ENFORCEMENT

UNDER COMPLIANCE AGREEMENT

212. Termination as to Completed Tasks at a Unit. As soon as TVA completes a requirement of this Compliance Agreement pertaining to a particular Unit that is not ongoing or recurring, TVA may, by written letter to EPA, seek termination of the provision or provisions of this Compliance Agreement that imposed the requirement.

213. Conditional Termination of Enforcement Through the Compliance Agreement. After TVA:

a. has successfully completed construction of all pollution control technology or such other Control Requirement described in Paragraphs 73 and 89, and has maintained Continuous Operation of all pollution control technology or such other Control Requirement at the TVA System Units as required by this Compliance Agreement for at least two (2) years; and

b. has obtained final permits and/or site-specific SIP amendments (i) as required by Section V.L (Permits) of this Compliance Agreement, (ii) that cover all Units in this Compliance Agreement, and (iii) that include as enforceable permit terms all of the Unit-specific and TVA System performance, operational, maintenance, and control technology requirements specified in this Compliance Agreement;

then TVA may so certify these facts to EPA. If EPA (in consultation with the States and the Citizen Plaintiffs) does not object in writing with specific reasons within forty-five (45) days of receipt of TVA's certification, then, for any Compliance Agreement violations that occur after the certification is submitted, EPA shall pursue enforcement through the applicable

permit(s) required pursuant to Paragraphs 54, 160, 164, 165, 166, and 168 and/or other enforcement authority, and not through this Compliance Agreement.

214. Resort to Enforcement under this Compliance Agreement. Notwithstanding Paragraph 213, if enforcement of a provision in this Compliance Agreement cannot be pursued by EPA under the applicable permits required by this Compliance Agreement or other enforcement authority, or if a Compliance Agreement requirement was intended to be part of a permit and did not become or remain part of such permit, then such requirement may be enforced under the terms of this Compliance Agreement at any time.

Signature Page for Federal Facilities Compliance Agreement in:

In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1760

FOR THE UNITED STATES ENVIRONMENTAL PROTECTION AGENCY:

Date: April 8, 2011		/s/ Cynthia Giles
		CYNTHIA GILES Assistant Administrator Office of Enforcement and Compliance Assurance


		/s/ Adam M. Kushner
		ADAM M. KUSHNER
		Director, Office of Civil Enforcement

		/s/ Phillip A. Brooks
		PHILLIP A. BROOKS
		Director, Air Enforcement Division

		/s/ Ilana Saltzbart
		ILANA SALTZBART
		Director, Air Enforcement Division

Signature Page for Federal Facilities Compliance Agreement in:

In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1760

FOR THE UNITED STATES ENVIRONMENTAL PROTECTION AGENCY:

Date: April 8, 2011		/s/ Gwendolyn Keyes Fleming
		GWENDOLYN KEYES FLEMING Assistant Administrator Region 4


		/s/ A. Stanley Meiburg
		A. STANLEY MEIBURG
		Deputy Regional Administrator Region 4

Signature Page for Federal Facilities Compliance Agreement in:

In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1760

FOR THE TENNESSEE VALLEY AUTHORITY:

Date: April 14, 2011		/s/ Tom Kilgore
		TOM KILGORE President and Chief Executive Officer Tennessee Valley Authority

APPENDIX A

REPORTING REQUIREMENTS

I. Annual Reporting Requirements

Beginning six (6) months after the Effective Date of this Compliance Agreement, and continuing annually on April 30 each year thereafter, TVA shall submit annual reports to EPA, the States, and the Citizen Plaintiffs electronically as required by Section V.I (Periodic Reporting). EPA, the States, and the Citizen Plaintiffs reserve the right to request such information in hard copy. In such annual reports, TVA shall include the following information:

A. System-Wide Annual Tonnage Limitations for NO x and SO 2

TVA shall report the following information: (1) the total actual annual tons of the pollutant emitted from each Unit or, for Units sharing a common stack, the total actual annual tons of the pollutant emitted from each combined stack, within the TVA System and any New CC/CT Units during the prior calendar year; (2) the total actual annual tons of the pollutant emitted from the TVA System and any New CC/CT Units during the prior calendar year; (3) the difference, if any, between the System-Wide Annual Tonnage Limitation for the pollutant in that calendar year and the amount reported in subparagraph (2); and (4) for each pollutant, (a) the annual average emission rate, expressed as lb/mmBTU, for each Unit within the TVA System and any New CC/CT Units in the prior calendar year and (b) the annual average emission rate, expressed as lb/mmBTU, for the entire TVA System and any New CC/CT Units during the prior calendar year. Data submitted pursuant to this subsection shall be based upon CEMS pursuant to Paragraphs 85 and 101.

If TVA was subject to an adjusted System-Wide Annual Tonnage Limitation specified in Paragraphs 72 and 87 in the calendar year covered by the annual report, it shall report the following: (1) the Units at which the adjusted System-Wide Annual Tonnage Limitations in Paragraphs 72 and 87 apply and (2) the adjusted aggregate System-Wide Annual Tonnage Limitation.

Continuous Operation of Pollution Control Technology or Combustion Controls

TVA shall report the date that it commenced Continuous Operation of each SCR, FGD, PM Control Device, SNCR, LNB, OFA, and SOFA that TVA is required to Continuously Operate pursuant to this Compliance Agreement in the calendar year covered by the annual report.

TVA shall report, for any SCR, FGD, PM Control Device, SNCR, LNB, OFA, and SOFA that TVA is required to Continuously Operate during the calendar year covered by the annual report, the duration of any period during which that pollution control technology or combustion control did not Continuously Operate, including the specific dates and times

that such pollution control technology or combustion control did not operate, the reason why TVA did not Continuously Operate such pollution control technology or combustion control, and the measures taken to reduce emissions of the pollutant controlled by such pollution control technology or combustion control.

TVA shall include a statement in each annual report describing the actions it took to optimize the PM Control Devices as required by Paragraph 102 in the relevant calendar year.

C. Installation of NO x , SO 2 , and PM Control Devices

TVA shall report on the progress of construction (including upgrades) of SCRs and FGDs (and new PM Control Devices, if any) required by this Compliance Agreement including: (1) if construction is not underway, any available information concerning the construction schedule, including the dates of any major contracts executed during the prior calendar year, and any major components delivered during the prior calendar year; (2) if construction is underway, the estimated percent of installation as of the end of the prior calendar year, the current estimated construction completion date, and a brief description of completion of significant milestones during the prior calendar year, including a narrative description of the current construction status ( e.g . foundations completed, absorber installation proceeding, all material on-site, new stack erection completed, etc.); (3) a list of all permits needed to construct and operate the device, the date TVA applied for such permits, and the status of the permit applications; and (4) once construction is complete, the dates the equipment was placed in service and any performance/emissions testing that was performed during the prior calendar year. For purposes of the FGD upgrade at Paradise Units 1 and 2, TVA shall demonstrate, with supporting documentation, that the construction activities performed to upgrade the FGDs at Paradise Units 1 and 2 were designed to upgrade the FGDs to a 93% removal efficiency.

D. Unit Retirements

Beginning on April 30 of the year following TVA’s obligation pursuant to this Compliance Agreement to Retire a TVA System Unit, and continuing annually thereafter until all TVA System Units required to be Retired have been Retired, TVA shall report the date it Retired such Unit and a description of the actions TVA took to Retire such Unit within the meaning of Paragraph 55.

E. Repower to Renewable Biomass

If TVA elects the Repower to Renewable Biomass option for a TVA System Unit, in the next annual report following such election, and continuing annually thereafter, TVA shall report on the progress of its efforts to Repower such TVA System Unit including: (1) if construction is not underway, any available information concerning the construction

schedule, including the dates of any major contracts executed during the prior calendar year, and any major components delivered during the prior calendar year; (2) if construction is underway, the estimated percent of installation as of the end of the prior calendar year, the current estimated construction completion date, and a brief description of completion of significant milestones during the prior calendar year, including a narrative description of the current construction status; (3) a list of all permits needed to construct and operate the Repowered Unit, the date TVA applies for such permits, and the status of the permit applications; and (4) once construction is complete, the dates the Repowered Unit was placed in service and any performance/emissions testing that was performed during the prior calendar year.

F. PM Emission Control Optimization Study

Beginning on April 30 of the year following TVA’s obligation to implement the EPA-approved recommendations required by Paragraph 103, TVA shall include a statement describing how it maintained each PM Control Device in accordance with the EPA-approved PM emission control optimization study.

G. Reporting Requirements for NO x and SO 2 Allowances

1. Reporting Requirements for NO x and SO 2 Surrendered Allowances

TVA shall report the number of NO x and SO 2 Allowances that were allocated to it under any programs and the number of NO x and SO 2 Allowances surrendered pursuant to Paragraphs 79 and 95 for the prior calendar year. TVA shall include the mathematical basis supporting its calculation of NO x and SO 2 Allowances surrendered.

2. Reporting Requirements for NO x and SO 2 Super-Compliance Allowances

TVA shall report any Super-Compliance NO x or SO 2 Allowances that it generated as provided in Paragraphs 82 and 98 for the prior calendar year. TVA shall include the mathematical basis supporting its calculation of Super-Compliance NO x or SO 2 Allowances. TVA shall also specifically identify the amount, if any, of Super-Compliance NO x and SO 2 Allowances that TVA generated from Retiring a TVA System Unit that TVA did not utilize for purposes of Paragraph 121 (New CC/CT Units).

H. New CC/CT Units

TVA shall report all information necessary to determine compliance with Paragraphs 121-123. In particular, TVA shall report whether it has applied for a minor NSR permit as described in Subparagraph 121.b and 123.c to construct a New CC/CT Unit, and shall confirm that it timely provided a copy of the permit application to EPA, the States, and the Citizen Plaintiffs as required by Subparagraph 121.c and Paragraph 155. TVA shall report the amount of emission reductions of NO x and the amount of emission reductions of SO 2 resulting from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 121. TVA shall report the amount of emission reductions of Greenhouse Gases resulting

from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 123. TVA shall describe how the emissions decreases on which it is relying in order to construct a New CC/CT Unit as provided in Paragraph 121 and 123 are both contemporaneous and otherwise creditable within the meaning of the Clean Air Act and the applicable SIP. In making these demonstrations, TVA shall provide unit-by-unit explanations and calculations. TVA shall include a description of the emission limitations determined by the relevant permitting authority as described in Subparagraph 121.b, and how such emission limitations are consistent with this Compliance Agreement and Appendix B. TVA shall provide all relevant information, including an appropriate mathematical calculation, to demonstrate that any emission decrease upon which it relied for purposes of Paragraph 121 was not used to generate a Super-Compliance NO x or SO 2 Allowance in the calendar year in which TVA relies upon such emission reduction and all calendar years thereafter. TVA shall provide all information necessary to determine compliance with the conditions established in Paragraphs 123.b-123.c.

I. NO x , SO 2 , and PM CEMS Malfunction, Repair, or Maintenance

TVA shall report all periods when a CEMS required by this Compliance Agreement was not operating, including periods of monitor malfunction, repair, or maintenance in the prior calendar year.

J. PM CEMS Data

In an electronic, spreadsheet format, TVA shall submit the data recorded by the PM CEMS, expressed in lb/mmBTU, on a three-hour (3-hour) rolling average basis and a twenty-four-hour (24-hour) rolling average basis, and shall include identification of each 3-hour average and 24-hour average above the 0.030 lb/mmBTU PM Emission Rate for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9, for the prior calendar year. If TVA locates a PM CEMS at another Unit in the TVA System pursuant to Paragraph 114, and such Unit is also subject to a PM Emission Rate pursuant to Paragraph 104, TVA shall also include identification of each 3-hour average exceededance for such Unit.

K. SO 2 Emission Rate at Shawnee

TVA shall submit all data necessary to determine whether emissions of SO 2 from Shawnee Units 1-10 exceeded 1.2 lb/mmBTU in the prior calendar year.

L. PM Stack Tests & PM Emission Rates

TVA shall submit the complete report for the stack tests performed pursuant to Paragraphs 105 and 106 in the prior calendar year. TVA shall separately identify the stack test reports for the TVA System Units subject to a PM Emission Rate under this Compliance Agreement.

M. Environmental Mitigation Projects

1. State Mitigation Projects

TVA shall report funds disbursed to the States pursuant to Paragraphs 122-124 and 126 of the Consent Decree in the prior calendar year.

2. Appendix C Projects

TVA shall report on the progress of the Mitigation Projects as provided in Appendix C.

N. Other Unit at Shawnee Becomes Improved Unit

If TVA decides to make an Other Unit at the Shawnee Plant an Improved Unit, TVA shall so state in the next annual report it submits after making such decision, and shall comply with the reporting requirements specified in Section I.C of this Appendix and any other reporting or notice requirements in accordance with the Compliance Agreement.

O. Projects Performed at Improved Units

TVA shall submit a list of all projects performed at an Improved Unit and an Other Unit that increase the maximum hourly emission rate of that Unit for NO x or SO 2 as described in Paragraphs 142 and 143.a, as measured by 40 C.F.R. §§ 60.14(b) and (h).

P. Capital Projects at Shawnee

TVA shall submit a list of all Capital Expenditures performed on the Boiler Islands at each Unit at the Shawnee Plant in order to determine whether TVA has exceeded the thresholds established in Paragraph 143.b.

Emission Reductions Greater than those Required Under this Compliance Agreement

TVA shall report whether, in the relevant calendar year, it claimed to have achieved emission reductions at a particular TVA System Unit that are greater than those emission reductions required under this Compliance Agreement for the particular TVA System Unit as provided in Paragraph 120. If TVA did not claim to have achieved emission reductions at a particular TVA System Unit that are greater than those emission reductions required under this Compliance Agreement, it shall so state. If TVA did, for any purpose, claim to achieve emission reductions at a particular TVA System Unit that are greater than those required under this Compliance Agreement for that particular TVA System Unit, TVA shall include a description of how it achieved such emission reductions, including a mathematical calculation in support of the claimed emission reductions, an explanation of how such emission reductions are greater than those required under this Compliance Agreement, and the manner in which such emission reductions were either relied upon or used for purposes of

permitting actions, non-permitting actions, or otherwise.

II. Deviation Reports

TVA shall report all deviations from the requirements of the Compliance Agreement that occur during the calendar year covered by the annual report, identifying the date and time that the deviation occurred, the date and time the deviation was corrected, the cause of any corrective actions taken for each deviation, if necessary, and the date that the deviation was initially reported under Paragraph 156.

III. Submission Pending Review

In each annual report, TVA shall include a list of all plans or submissions made pursuant to this Compliance Agreement during the calendar year covered by the annual report and all prior calendar years since the Effective Date of the Compliance Agreement, the date(s) such plans or submissions were submitted to EPA for review or approval, and shall identify which, if any, are still pending review and approval by EPA upon the date of the submission of the annual report.

IV. Other Information Necessary to Determine Compliance

To the extent that information not expressly identified herein is necessary to determine TVA’s compliance with the requirements of this Compliance Agreement for the calendar year covered by the annual report, and such information has not otherwise been submitted, TVA shall provide such information as part of the annual report required pursuant to Section V.I (Periodic Reporting) of the Compliance Agreement and TVA shall provide such other information that is deemed necessary by EPA in consultation with the States.

V. Information Previously Submitted under Title V Permitting Requirements

In any periodic progress report submitted pursuant to Section V.I (Periodic Reporting) of the Compliance Agreement and this Appendix, TVA may incorporate by reference information previously submitted under its Title IV or Title V permitting requirements, provided that TVA attaches the Title IV and/or Title V permit report, or the relevant portion thereof, and provides a specific reference to the provisions of the Title IV and/or Title V permit report that are responsive to the information required in the periodic progress report.

APPENDIX B

EMISSION LIMITATIONS FOR NEW CC/CT UNITS

This Appendix B sets forth emission limitations for certain regulated NSR pollutants for the purpose of constructing New CC/CT Units pursuant to Paragraph 121 of the Compliance Agreement. The emission limitations set forth in this Appendix serve solely as the minimum stringency for emission limitations to be determined by the relevant permitting authority for such New CC/CT Units as described in Paragraph 121, and shall not be presumed to be BACT or LAER. Although the permitting authority as part of the permitting action described in Paragraph 121 of the Compliance Agreement shall not determine BACT or LAER to be less stringent than the emission limitations set forth herein, nothing in the Compliance Agreement or this Appendix shall prevent the permitting authority from establishing more stringent emission limitations than those set forth in this Appendix. For purposes of the permitting action described in Paragraph 121 of the Compliance Agreement, TVA shall not assert that the Compliance Agreement (including this Appendix) supports imposing a BACT or LAER emission limitation that is no more stringent than the emission limitations set forth herein.

The permitting authority will determine BACT and LAER, as appropriate, for NO x , SO 2 , VOC, PM, PM 10 , and PM 2.5 for all periods of operation, including startup, shutdown, combustion tuning, and fuel switching as part of the minor NSR permitting action described in Paragraph 121. The emission limitations only for NO x and VOC described in this Appendix do not apply during startup, shutdown, combustion tuning, and fuel switching. For purposes of startup and shutdown, the permitting authority will consider appropriate technologies, methodologies, and other practices to reduce or minimize emissions during such events (such as the use of an auxiliary boiler to preheat the catalyst, the use of Rapid Start Process, and by limiting the number and duration of startups and shutdowns, among other things) as part of the BACT/LAER analysis. In addition to any other limitations determined by the permitting authority, combustion tuning shall be limited to no more than four (4) hours per event and the total event hours in a calendar year shall not exceed twenty (20) hours. The permitting authority shall require TVA to include advance notice of the details of such combustion tuning event and the proposed tuning schedule. An event, for purposes of the 4-hour event limit, shall begin to run when TVA first commences the combustion tuning process at a unit and shall conclude once TVA has completed all tuning-related activities and returns the unit to normal operation. For purposes of this Appendix, and in addition to any other limitations determined by the permitting authority, the type of fuel switching for which the NO x and VOC emission limitations described in this Appendix do not apply shall be for oil-to-gas switching not to exceed thirty (30) minutes per each oil-to-gas fuel switch and gas-to-oil switching not to exceed fifteen (15) minutes per each gas-to-oil fuel switch.

The New CC/CT Units constructed pursuant to Paragraph 121 of the Compliance Agreement shall combust Natural Gas as the primary fuel, which shall contain no more than one (1) grain sulfur per one hundred (100) standard cubic feet (“Gr S/100 SCF”). Ultra-Low Sulfur Diesel (“ULSD”) Fuel Oil containing no more than 0.0015% sulfur by weight may be used as an alternate fuel, provided that the use of such fuel is limited to no more than five hundred (500) hours during any calendar year or one hundred (100) hours during any calendar year, as

specified in the Tables below. Units subject to an ULSD Fuel Oil operational limitation of 100 hours during any calendar year shall only combust ULSD Fuel Oil for either Testing or during periods of Natural Gas Curtailment. For purposes of this Appendix, the term “Testing” shall mean the infrequent start-up of a unit not for purposes of generating electricity but to ensure that the unit is physically capable of operating. For purposes of this Appendix, the term “Natural Gas Curtailment” shall mean a restriction or limitation imposed by a third-party beyond TVA’s control on TVA’s ability to obtain or use Natural Gas. If TVA Retires one or more of the Units at the Allen Fossil Plant identified in Paragraph 67 of the Compliance Agreement and seeks to construct a New CC/CT Unit co-located at the Allen Fossil Plant pursuant to Paragraph 121 of the Compliance Agreement, then, in addition to Natural Gas and ULSD Fuel Oil, TVA may also request that the permitting authority authorize it to co-fire biogas from the Memphis Public Works waste treatment plant at such New CC/CT Units, which is the same biogas that TVA co-fires at the Allen Fossil Plant as of the Effective Date of this Compliance Agreement.

The Tables in this Appendix do not contain emission limitations for filterable or condensable PM 10 or condensable PM 2.5 . The permitting authority will determine BACT and LAER, as appropriate, for all fractions of PM that are regulated NSR pollutants as of the time of the permitting action, including filterable and condensable PM 10 and filterable and condensable PM 2.5, as part of the permitting process required pursuant to Paragraph 121 of the Compliance Agreement.

The NO x emission limitations in Sections B, C, and D do not require the installation of selective catalytic reduction (SCR) technology. However, the Parties recognize that SCR is technically feasible for CT units.

Tables A.1 and A.2 set forth the minimum stringency emission limitations for New CC Units. Tables B.1, B.2, C.1, C.2, D.1, and D.2 set forth the minimum stringency emission limitations for New CT Units. As set forth in Tables B.1 and C.1, New CT Units located in an attainment area shall either be subject to an overall hours of operation limitation of no more than thirteen hundred (1,300) hours in a rolling twelve-month (12-month) period or have no overall hours of operation limitation. As set forth in Tables A.2, B.2, C.2, and D.2, all New CC/CT Units (whether in attainment or nonattainment areas) will have a limitation on the use of ULSD.

A. Emission Limitations for New CC Units

As part of the minor NSR permitting action described in Paragraph 121 of the Compliance Agreement, the permitting authority shall establish emission limitations that are no less stringent than those set forth in Table A.1 for New CC Units firing Natural Gas and Table A.2 for New CC Units firing ULSD Fuel Oil. Additionally, as part of the minor NSR permitting action described in Paragraph 121 of the Compliance Agreement, the permitting authority shall impose a condition that limits the New CC Units to firing no more than 500 hours of ULSD Fuel Oil in a calendar year.

Table A.1 – Emission Limitations for Natural Gas-fired operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	2.0 parts per million (ppm) at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	All periods of operation are subject to the emission limitation set forth in this Table (hereinafter referred to as “NA”)
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2 without duct firing 2.0 ppm at 15% O 2 with duct firing	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table A.2 – Emission Limitations for ULSD Fuel Oil-fired operation (not to exceed 500 hours during any calendar year)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	8.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

B. Emission Limitations for New CT Units Located in Attainment Areas Subject to an Operational Limitation of 1,300 Hours in a 12-Month Period

Table B.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	9.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	3.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table B.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 500 hours during any calendar year)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	5.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

C. Emission Limitations for New CT Units Located in Attainment Areas with No Hours of Operation Limit

As part of the minor NSR permitting action described in Paragraph 121 of the Compliance Agreement, the permitting authority shall establish emission limitations that are no less stringent than those set forth in: (i) Table C.1 for New CT Units firing Natural Gas if they are located in an attainment area and are not subject to an overall hours of operation limitation of no more than 1,300 hours in a rolling 12-month period and (ii) Table C.2 for New CT Units firing ULSD Fuel Oil if they are located in an attainment area and are not subject to an overall hours of operation limitation of no more than 1,300 hours in a rolling 12-month period, and which must be subject to an operational limitation for ULSD Fuel Oil that limits the New CT Units to firing no more than 100 hours of ULSD Fuel Oil in a calendar year, and further limiting the use of ULSD Fuel Oil at such New CT Units for purposes of Testing or during periods of Natural Gas Curtailment only. If the permitting authority, as part of the minor NSR permitting action for a New CT Unit firing ULSD Fuel Oil to be located in an attainment area with no overall hours of operation limitation, requires TVA to install and operate an SCR and achieve a NO x emission rate of no greater than 6.0 ppm at 15% O 2 over an eight-hour (8-hour) rolling average rather than 42 ppm at 15% O 2 over an 8-hour rolling average as specified in Table C.2 below, then the 500 hour calendar year operational limitation described in Section B shall apply instead of the 100 hour calendar year operational limitation specified in this Section C.

Table C.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	5.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table C.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 100 hours during any calendar year, and only for either Testing or Natural Gas Curtailment)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

D. Emission Limitations for New CT Units Located In Nonattainment Areas With or Without an Hours of Operation Limit

permitting authority, as part of the minor NSR permitting action for a New CT Unit firing ULSD Fuel Oil to be located in a nonattainment area, requires TVA to install and operate an SCR and achieve a NO x emission rate of no greater than 6.0 ppm at 15% O 2 over an 8-hour rolling average rather than 42 ppm at 15% O 2 over an 8-hour rolling average as specified in Table D.2 below, then the 500 hour calendar year operational limitation described in Section B shall apply instead of the 100 hour calendar year operational limitation specified in this Section D.

Table D.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	5.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table D.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 100 hours during any calendar year, and only for either Testing or Natural Gas Curtailment)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

APPENDIX C

ENVIRONMENTAL MITIGATION PROJECTS

In compliance with and in addition to the requirements in Section V.F (Environmental Mitigation Projects) of the Compliance Agreement, TVA shall comply with the requirements of this Appendix to ensure that the benefits of the $290 million in total Project Dollars are achieved.

I. Overall Environmental Mitigation Projects Schedule and Budget

TVA shall submit plans for review and approval pursuant to Section V.J (Review and Approval of Submittals) of the Compliance Agreement for the Environmental Mitigation Projects (“Projects’) described in this Appendix (except for actions required by Section V of this Appendix), within 120 days of the Effective Date of the Compliance Agreement.

Beginning 120 days after the date EPA approves the plan and continuing semi-annually thereafter until completion of each Project (including any applicable periods of demonstration or testing), TVA shall provide EPA with written reports detailing the activities undertaken and the progress of each Project, including an accounting of Project Dollars spent to date, and, if applicable, any GHG (expressed as carbon dioxide equivalent (CO 2e )), sulfur dioxide (SO 2 ), nitrogen oxides (NO x ) and mercury (Hg) emission reductions and the methodologies used for those calculations. TVA may consolidate the plans required by this Appendix into a single plan. For purposes of this Appendix, CO 2 e means the number of metric tons of CO 2 emissions with the same global warming potential as one metric ton of another Greenhouse Gas, and is calculated using Equation A–1 of 40 CFR Part 98, Subpart A.

Within 60 days following the final expenditure of Project Dollars for each Project required under the Compliance Agreement and this Appendix (including any applicable periods of demonstration or testing), TVA shall submit to EPA a report that documents the date that the Project was completed, the emission reductions or other environmental benefits resulting from the Project including TVA’s methodology or analysis supporting these reductions and benefits, and the Project Dollars expended by TVA in implementing the Project.

Upon EPA’s approval of the plans required by this Appendix, TVA shall complete the Environmental Mitigation Projects according to the approved plans. Nothing in the Compliance Agreement or this Appendix shall be interpreted to prohibit TVA from completing the Environmental Mitigation Projects before the deadlines specified in the schedule of an approved plan.

Plan Revisions . Notwithstanding the submission and approval of a plan for these Projects as required by this Appendix, TVA reserves the right to submit to EPA for review and approval pursuant to Section V.J (Review and Approval of Submittals) a proposed amended plan if it identifies alternative Projects that have the potential for greater environmental benefits, are otherwise consistent with the requirements of this Section, and may be more cost-effective than projects listed herein or previously approved by EPA as part of the initial plan.

II. Energy Efficiency Projects

No later than 120 days after the Effective Date of the Compliance Agreement TVA shall submit a plan to EPA for review and approval pursuant to Section V.J of the Compliance Agreement (Review and Approval of Submittals) for the reduction or avoidance of criteria pollutants, Greenhouse Gases (GHGs), and other air pollutants through the Energy Efficiency Projects. The plan shall describe how TVA will spend $240 million Project Dollars on Energy Efficiency Projects (Projects) within five years of the date of plan approval. The plan shall include a phased schedule for the reduction of emissions and TVA’s expenditures on these Projects. TVA may spread the payments for the Energy Efficiency Projects evenly over five years from the date of plan approval.

Nothing in this Appendix is intended to preclude TVA from utilizing any GHG reductions or avoided emissions achieved through implementation of the Energy Efficiency Projects to satisfy any future federal or state legislative or regulatory requirements requiring the avoidance, reduction or offset of GHG emissions from any TVA System Unit or plant.

TVA shall describe in the plans submitted to EPA for review and approval how TVA shall maintain the emission reductions associated with the Projects it implements as part of the Energy Efficiency Projects.

The plan required to be submitted pursuant to this Section of this Appendix shall also satisfy the following criteria:

1.	Describe how the proposed Projects in the plan are consistent with the requirements of this Section and the Compliance Agreement, and how the Projects will result in the emission reductions projected to be reduced for GHGs (expressed in CO 2 e), SO 2 , NO x and Hg pursuant to this Section.

2.	Include a budget and schedule for completing the Energy Efficiency Projects on a phased schedule by five (5) years from the date of plan approval and the supporting methodologies and calculations for the budget.

3.	Describe the methodology and include any calculations that TVA proposes to use in order to document the emission reductions associated with any proposed Project to be implemented as part of this Section.

Upon EPA’s approval of the plan, TVA shall complete the Energy Efficiency Projects according to the approved plan and schedule.

F. Energy Efficiency Projects Include :

Voltage Optimization (Transmission Loss Reduction) . TVA will invest in one or more Projects to improve the end-to-end efficiency of the power delivery system through optimization of system voltages or other similar approaches. An example project would deploy advanced metering and control technology to provide real-time measurement and optimization of system voltages to reduce transmission line losses, and reduce consumer energy consumption. By optimizing distribution feeder voltages to the lower portion of the American National Standards Institute service range, energy savings are estimated to be 2-3% of the total energy delivered. TVA will spend $30 to 60 million in Project Dollars to implement this Project within five years from the date of plan approval.

2. Tennessee Valley Smart Energy Communities:

TVA will establish one or more “Smart Energy Communities” in the Tennessee Valley Region to model the most efficient energy use processes and upgrades available. An example project would provide a range of energy efficiency technologies and the primary enabling elements of a smart grid (intelligent devices, two-way communications, and information management) on a typical power distributor system to demonstrate the range of benefits that can be achieved from a smart grid deployment. Technology or efficiency applications could include: high efficiency air conditioning or water heating, lighting upgrades, smart meters, consumer interface/display devices, grid integrated renewable energy, energy storage, electric vehicle and vehicle charging, voltage optimization, and full characterization of the carbon impact of such a deployment. A component of “Smart Energy Communities” could be the development of tools and resources for educating consumers and communities on the benefits of such upgrades.

TVA will provide “Extreme Energy Makeovers” for at least two communities of homes or residences located in at least two different climate regions in the Tennessee Valley. This Project would retrofit a community of residences, such as low-income housing, with the most cost-effective energy-reduction packages on actual homes and monitor the results, with a goal to achieve 25% energy use reduction. The estimated energy savings is 1,000 MWh/yr at approximately $10/sq.ft.

Within five years from the date of plan approval, TVA will expend $20 to $50 million in Project Dollars to implement these two Projects.

Whole Home Efficiency Upgrades: TVA will reimburse 50 percent of the installation cost per item (with a targeted upper limit of $500 per household) to homeowners who invest in one or more of the following items for their home: insulation; new ENERGY STAR heat pumps, air conditioning, and windows; duct repair/replacement and sealing; or caulking, and weather-stripping, and maintenance of existing Heating Ventilation Air Conditioning (HVAC) systems. TVA and participating distributors of TVA power will also provide expert advice, financing, and lists of qualified weatherization and HVAC contractors to allow homeowners to make the most cost-effective improvements to lower their monthly energy bills. TVA will expend at least $45 to $50 million in Project Dollars within five years of the date of plan approval to implement these Projects.

Commercial Custom and Prescriptive Efficiency Assistance: TVA will provide incentives for commercial end-users to invest in energy efficiency improvements to such systems as lighting, heating and cooling, and other technologies (e.g. refrigeration, food service, office equipment, etc.). TVA will fund energy audits and expert consulting services to collaborate with businesses to develop energy efficiency improvement plans aimed at making commercial facilities (e.g. schools, hospitals, office and government buildings, etc.) more energy efficient. TVA will offer custom incentives for site specific improvements resulting in calculated or directly measured energy and demand reductions and will offer a menu of prescriptive incentives for specified, pre-approved types of efficiency upgrades to commercial building electric systems and equipment. Incentives will be structured to help commercial businesses shorten payback periods and move proposed projects to implementation. TVA will expend $55 to $60 million in Project Dollars within five years of the date of plan approval to implement this Project.

Industrial Custom and Prescriptive Efficiency Assistance: TVA will provide incentives for manufacturers to invest in energy-efficient industrial process improvements (e.g., high-efficiency motors, drives, compressed air, refrigeration, and lighting). TVA will fund expert consulting services to collaborate with manufacturers to develop a portfolio of energy-efficiency Projects aimed at making processes more energy efficient. TVA will offer custom and prescriptive incentives for high-efficiency equipment retrofits and process improvements. The incentives will be structured to help manufacturers shorten payback periods and move proposed Projects to implementation. TVA will expend $45 to $50 million in Project Dollars to implement these Projects within five years of the date of plan approval.

III.

Clean Diesel Retrofit and Electric Vehicle Projects

Within one hundred twenty (120) days from the Effective Date of this Compliance Agreement, TVA shall submit to EPA for review and approval pursuant to Section V.J (Review and Approval of Submittals) of this Compliance Agreement:

A plan to retrofit in-service non-TVA publicly-owned diesel engines (e.g, municipal vehicles, public school vehicles, etc) with emission control equipment further described in this Section, designed to reduce emissions of particulates and/or ozone precursors (the “Clean Diesel Retrofit Project”) and fund the operation and maintenance of the retrofit equipment for the time-period described below.

TVA may also include a plan to replace in-service non-TVA publicly-owned motor vehicles powered by diesel or gasoline engines with newly manufactured hybrid-electric or electric vehicles (the “Electric Vehicle Project”). For purposes of this Appendix, “hybrid-electric vehicle means a vehicle that can generate and utilize electric power to reduce the vehicle’s consumption of fossil fuel. Any hybrid-electric or electric vehicle shall meet all applicable engine standards, certifications, and/or verifications required by law.

The Clean Diesel Retrofit Project and the Electric Vehicle Project shall include, where necessary, techniques and infrastructure needed to support such retrofits and/or replacements. TVA shall ensure that the recipients operate and maintain the retrofit and/or replaced equipment for five years from the date of installation/replacement, by providing funding for operation and maintenance as described in Section III.B.7., below.

TVA shall spend no less than $8 million in performing these Projects, and shall complete the Projects within five years of the date of plan approval . TVA shall limit the use of Project Dollars for administrative and project support costs (excluding educational materials) associated with implementation of these projects to no greater than 10% of the Project Dollars TVA spends. A portion of the funds allocated for administrative and project support may be used for training and travel to support the Project.

In addition to the requirements of Section I, the plan for the Clean Diesel Retrofit Project shall also satisfy the following criteria:

Involve vehicles based in the TVA service area.

Provide for the retrofit of public diesel engines with EPA or California Air Resources Board (“CARB”) verified emissions control technologies to achieve the greatest measurable mass reductions of particulates and/or ozone precursors for the fleet of vehicles that participate(s) in the Clean Diesel Retrofit Project. Depending upon the particular EPA or CARB verified emissions control technology selected, the retrofit diesel engines must achieve emission reductions of particulates and/or ozone precursors by 30%-90%, as measured from the pre-retrofit emissions for the particular diesel engine.

Describe the process TVA will use to determine the most appropriate emissions control technology for each particular diesel engine that will achieve the greatest mass reduction of particulates and/or ozone precursors. In making this determination, TVA must take into account the particular operating criteria required for the EPA or CARB verified emissions control technology to achieve the verified emissions reductions.

Provide for the retrofit of diesel engines with either: (a) diesel particulate filters (DPF); (b) diesel oxidation catalysts (DOC); or (c) closed crankcase ventilation systems with either DPF or DOC.

Describe the process TVA will use to notify fleet operators and owners in TVA’s service territory that their fleet of vehicles may be eligible to participate in the Clean Diesel Retrofit Project and to solicit their interest in participating in the Project.

Describe the process and criteria TVA will use to select the particular fleet operator and owner to participate in this Project, consistent with the requirements of this Section.

For each of the recipient fleet owners and operators, describe the amount of Project Dollars that will cover the costs associated with: (a) purchasing the verified emissions control technology, (b) installation of the verified emissions control technology (including datalogging), (c) training costs associated with repair and maintenance of the verified emissions control technology (including technology cleaning and proper disposal of waste generated from cleaning), and (d) the incremental costs for repair and maintenance of the retrofit equipment (i.e., DPF, DOC, closed crankcase ventilation system) for five years from the date of installation, including the costs associated with the proper disposal of the waste generated from cleaning the verified emissions control technology. This Project shall not include costs for normal repair or operation of the retrofit diesel fleet.

Include a mechanism to ensure that recipients of the retrofit equipment will bind themselves to follow the operating criteria required for the verified emissions control technology to achieve the verified emissions reductions and properly maintain the retrofit equipment installed in connection with the Project for the period beginning on the date the installation is complete through December 31, 2016.

Describe the process TVA will use for determining which diesel engines in a particular fleet will be retrofitted with the verified emissions control technology, consistent with the criteria specified in Section III.B.2.

10.

Ensure that recipient fleet owners and/or operators, or their funders, do not otherwise have a legal obligation to reduce emissions through the retrofit of diesel engines.

11.

For any third party with whom TVA might contract to carry out this Project, establish minimum standards that include prior experience in arranging retrofits, and a record of prior ability to interest and organize fleets, school districts, and community groups to join a clean diesel program.

12.

Ensure that the recipient fleet(s) comply with local, state, and federal requirements for the disposal of the waste generated from the verified emissions control technology and follow CARB’s guidance for the proper disposal of such waste.

13.

Include a schedule and budget for completing each portion of the Project, including funding for operation and maintenance of the retrofit equipment through December 31, 2016.

In addition to the information required to be included in the report pursuant to Section I.C., above, TVA shall also describe the fleet owner/operator; where it implemented this Project; the particular types of verified emissions control technology (and the number of each type) that it installed pursuant to this Project; the type, year, and horsepower of each vehicle; an estimate of the number of citizens affected (if applicable) by this Project, and the basis for this estimate; and an estimate of the emission reductions for Project or engine, as appropriate (using the manufacturer’s estimated reductions for the particular verified emissions control technology), including particulates, hydrocarbons, carbon monoxide, and nitrogen oxides.

In addition to the requirements of Section I, the plan for the Electric Vehicle Project shall also satisfy the following criteria:

Propose the replacement of conventional gasoline or diesel powered motor vehicles described in Section III.A. above with hybrid-electric and/or electric vehicles operated in TVA’s service territory.

Prioritize the public fleets in TVA’s service territory that will be selected for participation in this Project, including consideration of such issues as environmental justice and air quality.

Describe the rationale and basis (including a discussion of cost) for selecting the make and model of the hybrid-electric and/or electric vehicles chosen for this Project, including information about other available hybrid-electric or electric vehicles and why such vehicles were not selected.

Require the recipients of such hybrid-electric or electric vehicles to certify that the hybrid-electric or electric vehicles will be used for their useful life.

5. Describe the final disposition of the vehicles that are being replaced.

Include a schedule for completing the Electric Vehicle Project.

Describe generally the expected environmental benefits of the Project, including any fuel efficiency improvements, and quantify emission reductions expected.

Upon EPA’s approval of the plan, TVA shall complete the Projects described in this Section according to the approved plan and schedule.

IV. Clean/Renewable Energy Projects

Within 120 days from the Effective Date of this Compliance Agreement TVA shall submit to EPA for review and approval pursuant to Section V.J (Review and Approval of Submittals) of this Compliance Agreement a plan for the reduction of GHG and other pollutants through the Clean/Renewable Energy Projects listed below. TVA shall spend no less than $40 million in Project Dollars performing the Clean/Renewable Energy Projects listed below within five years of the date of plan approval. For purposes of this Appendix, “renewable energy” means energy from solar, wind, biogas, landfill gas, digester gas from wastewater treatment facilities, geothermal, hydrokinetic sources, renewable biomass, and biofuels derived from renewable sources, or incremental increases in hydro generation after 1994.

Nothing in this Appendix is intended to preclude TVA from utilizing any GHG reductions or avoided emissions achieved through implementation of the Clean/Renewable Energy Projects to satisfy any future federal or state legislative or regulatory requirements requiring the avoidance, reduction or offset of GHG emissions from any TVA System Unit or plant.

C.	TVA shall describe in the plans submitted to EPA for review and approval, how TVA shall maintain the emissions avoided or reduced for the Projects it implements as part of the Clean/Renewable Energy Projects.

D.	The plan required to be submitted pursuant to this Section of this Appendix, shall also satisfy the following criteria:

1.	Describe how the proposed Projects in the plan are consistent with the requirements of this Section and the Compliance Agreement, and how the Projects will result in the emission reductions projected to be reduced for GHGs (expressed in CO 2 e), SO 2 , NO x and Hg pursuant to this Section.

2.	Include a budget and schedule for completing the Clean/Renewable Energy Projects on a phased schedule, and the supporting methodologies and calculations for the budget.

3.	Describe the methodology and include any calculations that TVA proposes to use in order to document the emission reductions associated with any proposed Project to be implemented as part of this Section.

E.	Upon EPA’s approval of the plan, TVA shall complete the Clean/Renewable Energy Projects according to the approved plan and schedule.

F.	Clean/Renewable Energy Projects Include :

Waste Heat Recovery: TVA will use its Advanced Lower Temperature Power Cycle (ALTPC) or other waste heat conversion technologies, to recover waste heat from an industrial process to generate approximately 5 MW of clean energy. TVA will expend $7-$10 million in Project Dollars within five years of the date of plan approval to implement this Project.

Electric Vehicle and Plug-in Hybrid Electric Vehicle Solar Charging Stations : TVA will develop and provide solar energy for vehicle battery re-charging stations across the Tennessee Valley. TVA will expend $1-3 million in Project Dollars within five years of the date of plan approval to implement this Project.

Solar Photovoltaic (PV) Installations: TVA will install at least 500 kWs of solar PV at TVA facilities, TVA direct serve customer locations, or another government-owned facility, and shall maintain them for a minimum of ten (10) years following approval of the plan. TVA will expend $2-4 million in Project Dollars within five years of the date of plan approval to implement this Project and secure these commitments.

Landfill (or Wastewater Treatment) Methane Gas Capture and Generation: TVA will enter long-term power purchase agreements to develop and secure the generation of approximately 10 MW of renewable power from landfill gas or digester gas from wastewater treatment facilities. TVA will expend $16 to $30 million in Project Dollars within five years of the date of plan approval to implement these Projects.

V. Land and Ecological Restoration & Biological Carbon Sequestration

Within two hundred forty (240) days from the Effective Date of this Compliance Agreement, TVA shall pay $1 million to the National Park Service in accordance with the Park System Resource Protection Act, 16 U.S.C. § 19jj, to be used for the restoration of land, watersheds, vegetation, and forests using adaptive management techniques designed to improve ecosystem health and mitigate harmful effects from air pollution. This may include reforestation or restoration of native species and acquisition of equivalent resources and support for collaborative initiatives with state and local agencies and other stakeholders to develop plans to assure resource protection over the long-term. Projects will focus on one or more of the following Class I areas: Mammoth Cave National Park and Great Smoky Mountains National Park.

Instructions for transferring funds will be provided to TVA by the National Park Service. Notwithstanding Section V. A of this Appendix, payment of funds is not due until ten (10) days after receipt of payment instructions. Upon payment of the required funds into the Natural Resource Damage and Assessment Fund, TVA shall have no further responsibilities regarding the implementation of any project selected by the National Park Service in connection with this provision.

Within two hundred forty (240) days from the Effective Date of this Compliance Agreement, TVA shall pay $1 million to the United States Forest Service in accordance with 16 U.S.C. § 579c, for the improvement, protection, or rehabilitation of lands under the administration of the United States Forest Service. Projects will focus on one or more of the following Class I areas: Cohutta Wilderness Area, Linville Gorge Wilderness Area, Shining Rock Wilderness Area, Sipsey Wilderness Area, and Joyce Kilmer-Slickrock Wilderness Area.

Payment of the amount specified in the preceding paragraph shall be made to the Forest Service pursuant to payment instructions provided to TVA. Notwithstanding Section V. A of this Appendix, payment of funds by TVA is not due until ten (10) days after receipt of payment instructions. Upon payment of the required funds, TVA shall have no further responsibilities regarding the implementation of any project selected by the Forest Service in connection with this provision.

EXHIBIT 10.3

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TENNESSEE

AT KNOXVILLE

________________________________________________________________

STATE OF ALABAMA AND THE )

ALABAMA DEPARTMENT OF )

ENVIRONMENTAL MANAGEMENT, )

COMMONWEALTH OF KENTUCKY, )

STATE OF NORTH CAROLINA ex rel. )

ATTORNEY GENERAL ROY COOPER, )

and STATE OF TENNESSEE, )

)

Plaintiffs, )

)

v. )

)

) JUDGE__________________

TENNESSEE VALLEY AUTHORITY )

) Civil Action No.___________

)

Defendant )

)

_______________________________________________________________)

________________________________________________________________

NATIONAL PARKS CONSERVATION )

ASSOCIATION,INC., SIERRA CLUB, and )

OUR CHILDREN'S EARTH FOUNDATION, )

)

Plaintiffs, )

)

v. )

)

) JUDGE__________________

TENNESSEE VALLEY AUTHORITY )

) Civil Action No.___________

)

Defendant )

)

________________________________________________________________)

CONSENT DECREE

Table of Contents


I. JURISDICTION AND VENUE		6

II. PARTIES BOUND	7

III. COMPLIANCE PROGRAM	7

A. DEFINITIONS	7

B. NO x EMISSION REDUCTIONS AND CONTROLS	21

C. SO 2 EMISSION REDUCTIONS AND CONTROLS	29

D. PM EMISSION REDUCTIONS AND CONTROLS	37

E. PROHIBITION ON NETTING OR OFFSETS FROM REQUIRED CONTROLS	44

F. ENVIRONMENTAL MITIGATION PROJECTS	51

G. CIVIL PENALTY	55

H. RESOLUTION OF CLAIMS AGAINST TVA	56

I. PERIODIC REPORTING	58

J. REVIEW AND APPROVAL OF SUBMITTALS	59

K. STIPULATED PENALTIES	60

L. PERMITS	65

IV. COORDINATION OF OVERSHIGHT AND ENFORCEMENT	69

V. FORCE MAJEURE	76

VI. DISPUTE RESOLUTION	81

VII. INFORMATION COLLECTION AND RETENTION	83

VIII. NOTICES	85

IX. SALES OR TRANSFERS OF OPERATIONAL OR OWNERSHIP INTERESTS	87

X. EFFECTIVE DATE	90

XI. RETENTION OF JURISDICTION	90

XII. MODIFICATION	90

XIII. GENERAL PROVISIONS	90

XIV. SIGNATORIES AND SERVICE	94

XV. PUBLIC COMMENT	94

XVI. CONDITIONAL TERMINATION OF ENFORCEMENT UNDER DECREE	95

XVII. FINAL JUDGMENT	96

APPENDIX A -- REPORTING REQUIREMENTS

APPENDIX B -- EMISSION LIMTATIONS FOR NEW CC/CT UNITS

EXHIBIT 1 -- FEDERAL FACILITIES COMPLIANCE AGREEMENT

EXHIBIT 2 -- PROPOSED CONSENT AGREEMENT AND FINAL ORDER

WHEREAS, the States of Alabama, North Carolina, and Tennessee and the Commonwealth of Kentucky (collectively the “States”), have jointly filed a complaint for injunctive relief and civil penalties pursuant to Ala. Code § 22-22A-5(18), (19), Ky. Rev. Stat. §§ 224.99-010 to -020, Tenn. Code Ann. §§ 68-201-111, -115(b)(5), -117, and Section 304 of the Clean Air Act (the “Act”), 42 U.S.C. § 7604, alleging that Defendant Tennessee Valley Authority (“TVA”) made major modifications to major emitting facilities, and failed to obtain the necessary permits and install the controls necessary under the Prevention of Significant Deterioration (“PSD”) and Nonattainment New Source Review (“Nonattainment NSR”) provisions of the Act and the federally approved and enforceable State Implementation Plans (“SIPs”) for Alabama, Kentucky, and Tennessee, to reduce emissions of oxides of nitrogen (NO x ), sulfur dioxide (SO 2 ), and/or particulate matter (“PM”); further alleging related claims under the New Source Performance Standards, minor new source review (“minor NSR”), and Title V programs; and further alleging that such emissions damage human health and the environment;

WHEREAS, National Parks Conservation Association, Sierra Club, and Our Children’s Earth Foundation (collectively the “Citizen Plaintiffs”) have jointly filed a complaint for injunctive and declaratory relief and civil penalties pursuant to the federal Clean Air Act, 42 U.S.C. §§ 7401 through 7671q, alleging that TVA made major modifications to major emitting facilities and failed to obtain the necessary permits and install the controls necessary under the PSD and Nonattainment NSR provisions of the Act and the EPA-approved SIPs for the States of Alabama and Tennessee, and the Commonwealth of Kentucky to reduce emissions of NO x , SO 2 , and/or PM and further alleging related claims under the New Source Performance Standards and minor NSR;

WHEREAS, on November 10, 2004, the State of North Carolina gave notice to TVA and other required parties, pursuant to Section 304 of the Act, 42 U.S.C. § 7604, of its intent to sue TVA regarding the same alleged violations that EPA had alleged in an administrative compliance order that EPA had issued to TVA first on November 3, 1999, and which was subsequently amended several times, including on April 10, 2000,

WHEREAS, on October 30, 2000, December 13, 2000, July 21, 2003, and September 30, 2008, to the extent it was necessary, the Citizen Plaintiffs gave notice to TVA and other required parties pursuant to Section 304 of the Act, 42 U.S.C. § 7604, of their intent to sue TVA regarding the claims alleged in their complaint;

WHEREAS, the States’ complaint alleges, inter alia , claims upon which relief can be granted against TVA pursuant to Ala. Code § 22-22A-5(18), (19), Ky. Rev. Stat. §§ 224.99-010 to -020, Tenn. Code Ann. §§ 68-201-111, -115(b)(5), -117, Section 304 of the Act, 42 U.S.C. § 304, and 28 U.S.C. § 1355;

WHEREAS, the Citizen Plaintiffs’ complaint alleges claims upon which relief can be granted against TVA pursuant to the Clean Air Act’s PSD program, 42 U.S.C. §§ 7470-7492, Nonattainment NSR program, 42 U.S.C. §§ 7501-7515, New Source Performance Standards, 42 U.S.C. § 7411, NSPS Subparts A and Da, 40 C.F.R. § 60.1 et seq. , 40 C.F.R. § 60.40a et seq. , minor NSR, the EPA-approved SIPs for the States of Tennessee and Alabama, and the Commonwealth of Kentucky, and 28 U.S.C. § 1355;

WHEREAS, EPA issued an administrative compliance order to TVA pursuant to Sections 113 and 167 of the Act, 42 U.S.C. §§ 7413, 7477, alleging that TVA violated, inter alia , the PSD and Nonattainment NSR programs of the Act, its implementing regulations, and the relevant SIPs at several of the coal-fired electric generating units that TVA owns and operates when it made certain physical changes without obtaining the necessary permits and installing the controls necessary to reduce emissions of NO x , SO 2 , and PM;

WHEREAS, in the administrative compliance order, EPA directed TVA to come into compliance with the Act;

WHEREAS, TVA petitioned for review of the administrative compliance order and the EAB’s Final Order on Reconsideration in the United States Court of Appeals for the Eleventh Circuit, which concluded that EPA’s administrative proceedings, and the Act provisions under which the order was issued, violated due process, Tennessee Valley Auth. v. Whitman , 336 F.3d 1236, 1244, 1260 (11th Cir. 2003), cert. denied , 541 U.S. 1030 (2004); Brief for Respondent in Opposition to a Writ of Certiorari (“Brief for Respondent”) at 4, National Parks Conservation Ass’n et al. v. Tennessee Valley Auth. , 554 U.S. 917 (2008) (No. 07-867), and which then held that the unconstitutionality of the Clean Air Act provision meant that EPA’s order was not a “final agency action” and that the court of appeals therefore lacked jurisdiction to review it, see Brief for Respondent at 4 (citing Whitman , 336 F.3d at 1248, 1260);

WHEREAS, through a Clean Air Act Federal Facilities Compliance Agreement (“Compliance Agreement”), In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1760 (Exhibit 1 to this Consent Decree), and a Consent Agreement and Final Order, In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b) (Exhibit 2 to this Consent Decree), EPA and TVA are resolving the violations alleged in the amended administrative compliance order and the Final Order on Reconsideration;

WHEREAS, when entered, this Consent Decree will secure by way of injunction the same relief as the Compliance Agreement and that, therefore, TVA’s operations will be governed by both the Compliance Agreement and this Consent Decree;

WHEREAS, the States, Citizen Plaintiffs, and TVA (the “Parties”) anticipate that this Consent Decree (and EPA and TVA anticipate that the Compliance Agreement), including the installation and operation of pollution control technology and other measures adopted pursuant to this Consent Decree and the Compliance Agreement, will achieve significant reductions of emissions from the TVA System and thereby significantly improve air quality;

WHEREAS, TVA wishes to resolve, without the uncertainty and expense associated with further litigation, the claims of EPA and other parties that it has violated any provisions of the Act’s PSD, Nonattainment NSR, New Source Performance Standards (“NSPS”), minor NSR, or (to the extent related to such PSD, Nonattainment NSR, NSPS, and minor NSR claims) Title V Operating Permit programs by way of the activities identified in the administrative compliance order and/or the complaints or other similar activities TVA has conducted at its coal-fired electricity generating plants;

WHEREAS, as specified in Paragraph 158 of this Consent Decree, TVA has agreed to an expedited schedule to obtain the appropriate Clean Water Act National Pollutant Discharge Elimination System permits for the wastewater discharges from its flue gas desulfurization (“FGD”) systems should EPA promulgate a final rule containing revisions to the Effluent Limitations Guidelines;

WHEREAS, TVA plans to seek public review and comment during the environmental reviews conducted pursuant to the National Environmental Policy Act for the construction and operation of any combustion turbine and combined cycle electric generating plants it proposes to add to its system; and

WHEREAS, the Parties have agreed, and the Court, by entering this Consent Decree finds, that this Consent Decree has been negotiated in good faith and at arm’s length; that this settlement is fair, reasonable, and in the public interest, and consistent with the goals of the Act, and that entry of this Consent Decree without further litigation is the most appropriate means of resolving this matter;

NOW, THEREFORE, without any admission by TVA, and without adjudication of the violations alleged in the complaints, it is hereby ORDERED, ADJUDGED, AND DECREED as follows:

I. JURISDICTION AND VENUE

1. This Court has jurisdiction over this action, the subject matter herein, and the Parties consenting hereto, pursuant to 28 U.S.C. §§ 1331, 1355, and 1367, and Section 304 of the Clean Air Act (the “Act”), 42 U.S.C. § 7604. Solely for purposes of this Consent Decree, venue is proper under 28 U.S.C. §§ 1391(b) and (c) and 1395. Solely for purposes of this Consent Decree and the underlying complaints, and for no other purpose, TVA waives all objections and defenses that it may have to the Court’s jurisdiction over this action, to the Court’s jurisdiction over TVA, and to venue in this District. TVA shall not challenge the terms of this Consent Decree or this Court’s jurisdiction to enter and enforce this Consent Decree. Solely for purposes of the complaints filed by the Plaintiffs in this matter and resolved by this Consent Decree, for the purposes of entry and enforcement of this Consent Decree, and for no other purpose, TVA waives any defense or objection based on standing. Except as expressly provided herein, this Consent Decree shall not create any rights in or

obligations of any party other than the Plaintiffs and TVA.

II. PARTIES BOUND

2. Upon entry, the provisions of this Consent Decree shall apply to and be binding upon the Parties and their successors and assigns, and TVA’s officers, employees and agents, solely in their capacities as such.

III. COMPLIANCE PROGRAM

3. TVA shall be responsible for providing a copy of this Consent Decree to all vendors, suppliers, consultants, contractors, agents, and any other company or other organization retained to perform any of the work required by this Consent Decree. Notwithstanding any retention of contractors, subcontractors, or agents to perform any work required under this Consent Decree, TVA shall be responsible for ensuring that all work is performed in accordance with the requirements of this Consent Decree. For this reason, in any action to enforce this Consent Decree, TVA shall not assert as a defense the failure of its officers, directors, employees, servants, agents, or contractors to take actions necessary to comply with this Consent Decree, unless TVA establishes that such failure resulted from a Force Majeure Event, as defined in Paragraph 166 of this Consent Decree.

A. DEFINITIONS

4. Every term expressly defined by this Consent Decree shall have the meaning given to that term by this Consent Decree and, except as otherwise provided in this Consent Decree, every other term used in this Consent Decree that is also a term under the Act or the regulations implementing the Act shall mean in this Consent Decree what such term means

under the Act or those implementing regulations.

5. “Alabama” means the State of Alabama, Alabama Department of Environmental Management.

6. “Baghouse” means a full stream (fabric filter) particulate emissions control device.

7. “Boiler Island” means a Unit's (a) fuel combustion system (including bunker, coal pulverizers, crusher, stoker, and fuel burners); (b) combustion air system; (c) steam generating system (firebox, boiler tubes, and walls); and (d) draft system (excluding the stack), all as further described in “Interpretation of Reconstruction,” by John B. Rasnic U.S. EPA (Nov. 25, 1986) and attachments thereto.

8. “Capital Expenditure” means all capital expenditures, as defined by Generally Accepted Accounting Principles as those principles exist as of the Date of Lodging of this Consent Decree, excluding the cost of installing or upgrading pollution control devices.

9. “Citizen Plaintiffs” means, collectively, National Parks Conservation Association, Sierra Club, and Our Children’s Earth Foundation.

10. “CEMS” means, for obligations involving NO x and SO 2 under this Consent Decree, the devices defined in 40 C.F.R. § 72.2 and installed and maintained as required by 40 C.F.R. Part 75, and for obligations involving PM, the continuous emission monitors installed and maintained as described in 40 C.F.R. § 60.49Da(v).

11. “Clean Air Act” or “Act” means the federal Clean Air Act, 42 U.S.C. §§ 7401-7671q, and its implementing regulations.

12. “Compliance Agreement” or “Federal Facilities Compliance Agreement” means the Clean Air Act agreement entered into between EPA and TVA, Docket No. CAA-04-2010-1760, and which is Exhibit 1 to this Consent Decree.

13. “Consent Decree” or “Decree” means this Consent Decree and the appendices attached hereto, which are incorporated into this Consent Decree.

14. “Consent Decree Obligation Date” means the Effective Date of the Compliance Agreement, as the term “Effective Date” is defined in the Compliance Agreement, which date is June 13, 2011.

15. “Continuously Operate” or “Continuous Operation” means that when a pollution control technology or combustion control is used at a Unit (including, but not limited to, SCR, FGD, PM Control Device, SNCR, Low NO x Burner (“LNB”), Overfire Air (“OFA”) or Separated Overfire Air (“SOFA”)), it shall be operated at all times such Unit is in operation (except during a Malfunction that is determined to be a Force Majeure Event), so as to minimize emissions to the greatest extent technically practicable consistent with the technological limitations, manufacturers' specifications, fire prevention codes, and good engineering and maintenance practices for such pollution control technology or combustion control and the Unit.

16. “Date of Entry” means the date this Consent Decree is approved or signed by the United States District Court Judge.

17. “Date of Lodging” means the date that this Consent Decree was filed for lodging with the Clerk of the Court for the United States District Court for the Eastern District of Tennessee, Knoxville Division.

18. “Day” means calendar day unless otherwise specified in this Consent Decree.

19. “Emission Rate” means the number of pounds of pollutant emitted per million British thermal units of heat input (“lb/mmBTU”), measured in accordance with this Consent Decree.

20. “ESP” means electrostatic precipitator, a pollution control device for the reduction of PM.

21. “EPA” means the United States Environmental Protection Agency.

22. “Flue Gas Desulfurization System” or “FGD” means a pollution control device with one or more absorber vessels that employs flue gas desulfurization technology for the control of SO 2 emissions. Unless Paragraph 85 expressly requires the installation and Continuous Operation of a Wet FGD, TVA may install either a Wet FGD or a Dry FGD.

23. “Greenhouse Gases” means the air pollutant defined at 40 C.F.R § 86.1818-12(a) as of the Date of Lodging of this Consent Decree as the aggregate group of six greenhouse gases: carbon dioxide, nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. This definition continues to apply even if 40 C.F.R § 86.1818-12(a) is subsequently revised, stayed, vacated or otherwise modified.

24. “Improved Unit” for NO x means a TVA System Unit equipped with an SCR or scheduled under this Consent Decree to be equipped with an SCR (or equivalent control

technology approved pursuant to Paragraph 199) or Repowered to Renewable Biomass (as defined herein). A Unit may be an Improved Unit for one pollutant without being an Improved Unit for another. Any Other Unit in the TVA System can become an Improved Unit for NO x if it is equipped with an SCR (or equivalent control technology approved pursuant to Paragraph 199) and the requirement to Continuously Operate the SCR or equivalent control technology is incorporated into a federally-enforceable non-Title V permit, or if it is Repowered to Renewable Biomass (as defined herein).

25. “Improved Unit” for SO 2 means a TVA System Unit equipped with an FGD or scheduled under this Consent Decree to be equipped with an FGD (or equivalent control technology approved pursuant to Paragraph 199) or Repowered to Renewable Biomass (as defined herein). A Unit may be an Improved Unit for one pollutant without being an Improved Unit for another. Any Other Unit in the TVA System can become an Improved Unit for SO 2 if it is equipped with an FGD (or equivalent control technology approved pursuant to Paragraph 199) and the requirement to Continuously Operate the FGD or equivalent control technology is incorporated into a federally-enforceable non-Title V permit, or it is Repowered to Renewable Biomass (as defined herein).

26. “Kentucky” means the Commonwealth of Kentucky, Energy and Environment Cabinet.

27. “lb/mmBTU” means one pound per million British thermal units.

28. “Malfunction” means any sudden, infrequent, and not reasonably preventable failure of air pollution control equipment, process equipment, or a process to operate in a

normal or usual manner. Failures that are caused in part by poor maintenance or careless operation are not Malfunctions.

29. “MW” means a megawatt or one million Watts.

30. “National Ambient Air Quality Standards” or “NAAQS” means national ambient air quality standards that are promulgated pursuant to Section 109 of the Act, 42 U.S.C. § 7409.

31. “New CC/CT Unit” shall have the meaning indicated in Paragraph 117, below.

32. “NSPS” means New Source Performance Standards within the meaning of Part A of Subchapter I of the Act, 42 U.S.C. § 7411, and 40 C.F.R. Part 60.

33. “Nonattainment NSR” means the nonattainment area new source review program within the meaning of Part D of Subchapter I of the Act, 42 U.S.C. §§ 7501-7515, 40 C.F.R. Part 51, and the federally-approved Nonattainment NSR provisions of the Alabama, Kentucky, and Tennessee State Implementation Plans (“SIPs”), including Ala. Admin. Code r. 335-3-14-.05, 401 Ky. Admin. Regs. 51:052, Tenn. Comp. R. & Regs.1200-3-9-.01(5), and the Memphis/Shelby County local program.

34. “NO x ” means oxides of nitrogen, measured in accordance with the provisions of this Consent Decree.

35. “NO x Allowance” means an authorization or credit to emit a specified amount of NO x that is allocated or issued under an emissions trading or marketable permit program of any kind that has been established under the Act and/or the Alabama, Kentucky, or Tennessee SIPs.

36. “North Carolina” means the State of North Carolina.

37. “Other Unit” means any Unit at the Shawnee Plant that is not an Improved Unit for the pollutant in question.

38. “Operational or Ownership Interest” means part or all of TVA’s legal or equitable operational or ownership interest in any Unit in the TVA System or any New CC/CT Unit(s).

39. “Parallel Provision” means a requirement or prohibition of this Consent Decree that is also a requirement or prohibition of the Compliance Agreement.

40. “Parties” means the Plaintiffs and TVA. “Party” means one of the Parties.

41. “PM” means particulate matter, as measured in accordance with the requirements of this Consent Decree.

42. “PM Control Device” means any device, including an ESP or a Baghouse, which reduces emissions of PM. If a Wet FGD is the only device controlling PM on a particular Unit, then the Wet FGD is the PM Control Device.

43. “PM Emission Rate” means the number of pounds of filterable PM emitted per million British thermal units of heat input (“lb/mmBTU”), as measured in accordance with this Consent Decree.

44. “Plaintiffs” means collectively the States and the Citizen Plaintiffs.

45. “PSD” means Prevention of Significant Deterioration within the meaning of Part C of Subchapter I of the Act, 42 U.S.C. §§ 7470 - 7492 and 40 C.F.R. Part 52, and the federally-approved PSD provisions of the Alabama, Kentucky, and Tennessee SIPs, including Ala. Admin. Code r. 335-3-14-.04, 401 Ky. Admin. Reg. 51:017, Tenn. Comp. R. & Regs. 1200-3-9-.01(4), and the Memphis/Shelby County local program.

46. “Region 4 Air Director” means the EPA Region 4 Director of Air, Pesticides and Toxics Management Division.

47. “Remove from Service” means:

a. with regard to the John Sevier plant, that two (2) of the four (4) Units shall cease to operate and emit any pollutants whatsoever by the dates specified in Paragraphs 69 and 85 for the 2 Units to be Removed from Service unless and until an SCR and FGD are installed and commence Continuous Operation for each such Unit, or the Unit(s) is Repowered to Renewable Biomass or Retired, which shall occur by no later than the second date specified in Paragraphs 69 and 85 for the 2 Units that are Removed from Service provided that TVA may select which 2 Units at the John Sevier plant it will Remove from Service and that the remaining 2 Units shall be Retired as set forth in Paragraphs 69 and 85, and

b. with regard to Colbert Units 1-5, that such Units shall cease to operate and emit any pollutants whatsoever by the dates specified in Paragraphs 69 and 85 unless and until, by no later than three (3) years thereafter, an SCR and FGD are installed and commence Continuous Operation for each such Unit(s) or the Unit(s) is Repowered to Renewable Biomass or Retired, as specified therein.

48. “Renewable Biomass” means, solely for purposes of this Consent Decree, any organic matter that is available on a renewable basis from non-Federal land or from federal land that TVA manages, including renewable plant material; waste material, including crop residue; other vegetative waste material, including wood waste and wood residues; animal waste and byproducts; construction, food and yard waste; and residues and byproducts from wood pulp or paper products facilities. Biomass is renewable if it originates from forests

that remain forests, or from croplands and/or grasslands that remain cropland and/or grassland or revert to forest. Biomass residues and byproducts from wood pulp or paper products facilities includes by-products, residues, and waste streams from agriculture, forestry, and related industries, but does not include used oil or expired pesticides. “Renewable Biomass” does not include any treated wood, including but not limited to, railroad ties, painted woods, or wood that has been treated with pentachlorophenol, copper-based and borate-based compounds, or creosote.

49. “Repower” or “Repowered” means Repower to Renewable Biomass or Repowered to Renewable Biomass.

50. “Repower to Renewable Biomass” or “Repowered to Renewable Biomass” for purposes of this Consent Decree means a TVA System Unit that is repowered to combust a fuel other than coal. Such a Repowered Unit shall only combust Renewable Biomass; provided, however, that such Repowered Unit may co-fire a fuel other than Renewable Biomass (but not used oil, expired pesticides, or any treated wood, including but not limited to, railroad ties, painted wood, or wood that has been treated with pentachlorophenol, copper-based and borate-based compounds, or creosote) up to six percent (6%) of heat input each calendar year for the Unit. Notwithstanding Section III.H (Resolution of Claims Against TVA) and Paragraph 116, for Shawnee Unit 10 and any other TVA System Unit that TVA Repowers to Renewable Biomass pursuant to Paragraphs 69 or 85, TVA shall apply for all required permits. A new source review permit under the PSD and/or Nonattainment NSR programs is a required permit within the meaning of this Paragraph; such a Repowered Unit is a “new

emissions unit” as that term is defined in 40 C.F.R. §§ 52.21(b)(7)(i), 51.165(a)(1)(vii)(A), and 51.166(b)(7)(i), and the relevant SIP; and such Unit shall be subject to the test described in 40 C.F.R. §§ 52.21(a)(2)(iv)(d), 51.165(a)(2)(ii)(D), and 51.166(a)(7)(d), and the relevant SIP. In such permitting action, TVA shall apply to include the limitation on co-firing a fuel other than Renewable Biomass as specified above. Any TVA System Unit that has the option to Repower to Renewable Biomass in Paragraphs 69 and 85 that TVA elects to Repower to Renewable Biomass as the Control Requirement under this Consent Decree, shall be subject to the prohibitions in Section III.E (Prohibition on Netting or Offsets From Required Controls). If Shawnee Unit 10 is Repowered to Renewable Biomass, it shall be subject to the prohibitions in Section III.E (Prohibition on Netting or Offsets From Required Controls) regarding netting credits.

51. “Retire” means that TVA shall permanently cease to operate the Unit such that the Unit cannot legally burn any fuel nor produce any steam for electricity production and TVA shall comply with applicable state and/or federal requirements for permanently retiring a coal-fired electric generating unit, including removing the Unit from the relevant state's air emissions inventory, and amending all applicable permits so as to reflect the permanent shutdown status of such Unit. Nothing herein shall prevent TVA from seeking to re-start the Retired Unit provided that TVA applies for, and obtains, all required permits. A new source review permit under the PSD and/or Nonattainment NSR programs is a required permit within the meaning of this Paragraph; such Retired Unit shall be a “new emissions unit” as that term is defined in 40 C.F.R. §§ 52.21(b)(7)(i), 51.165(a)(1)(vii)(A), and 51.166(b)(7)(i), and the relevant SIP; and such Retired Unit shall be subject to the test described in 40 C.F.R. §§ 52.21(a)(2)(iv)(d), 51.165(a)(2)(ii)(D), and 51.166(a)(7)(d), and the relevant SIP.

52. “Selective Catalytic Reduction” or “SCR” means a pollution control device that employs selective catalytic reduction technology for the reduction of NO x emissions.

53. “Selective Non-Catalytic Reduction” or “SNCR” means a pollution control device for the reduction of NO x emissions that utilizes ammonia or urea injection into the boiler.

54. “Startup” and “Shutdown” mean, as to each of those terms, the definition of those respective terms in 40 C.F.R. § 60.2.

55. “States” or “the States” refers collectively to Alabama, Kentucky, North Carolina, and Tennessee.

56. “SO 2 ” means sulfur dioxide, as measured in accordance with the provisions of this Consent Decree.

57. “SO 2 Allowance” means an authorization or credit to emit a specified amount of SO 2 that is allocated or issued under an emissions trading or marketable permit program of any kind that has been established under the Act or the Alabama, Kentucky, or Tennessee SIPs.

58. “Surrender” or “surrender of allowances” means, for purposes of SO 2 or NO x allowances, permanently surrendering allowances as required by this Consent Decree from the accounts administered by EPA and Alabama, Kentucky, and Tennessee for all Units in the TVA System, so that such allowances can never be used thereafter by any entity to meet any compliance requirement under the Act, a SIP, or this Consent Decree.

59. “System-Wide Annual Tonnage Limitation” means the number of tons of the pollutant in question that may be emitted collectively from the TVA System and any New CC/CT Units during the relevant calendar year ( i.e. , January 1 through December 31), and shall include all emissions of the pollutant emitted during all periods of operation, including Startup, Shutdown, and Malfunction.

60. “Tennessee” means the State of Tennessee, Tennessee Department of Environment and Conservation (“TDEC”).

61. “Tennessee State Implementation Plan” and “Tennessee Title V program” shall include, when applicable, the new source review provisions of the Memphis/Shelby County local program, and its implementing regulations, and its Title V permit program.

62. “TVA” means Tennessee Valley Authority, a federal agency and instrumentality of the United States.

63. “TVA System” means solely for purposes of this Consent Decree, the following coal-fired, electric steam generating Units (with nameplate MW capacity of each Unit, for identification purposes only) or such coal-fired Unit that is Repowered to Renewable Biomass, located at the following plants:

Allen Unit 1 (330 MW), Allen Unit 2 (330 MW), and Allen Unit 3 (330 MW) located at the Allen Fossil Plant near Memphis, Tennessee;

Bull Run Unit 1 (950 MW) located at the Bull Run Fossil Plant near Oak Ridge, Tennessee;

Colbert Unit 1 (200 MW), Colbert Unit 2 (200 MW), Colbert Unit 3 (200 MW), Colbert Unit 4 (200 MW), and Colbert Unit 5 (550 MW) located at the Colbert Fossil Plant in Tuscumbia, Alabama;

Cumberland Unit 1 (1300 MW) and Cumberland Unit 2 (1300 MW) located at the Cumberland Fossil Plant in Cumberland City, Tennessee;

Gallatin Unit 1 (300 MW), Gallatin Unit 2 (300 MW), Gallatin Unit 3 (327.6 MW), and Gallatin Unit 4 (327.6 MW) located at the Gallatin Fossil Plant in Gallatin, Tennessee;

John Sevier Unit 1 (200 MW), John Sevier Unit 2 (200 MW), John Sevier Unit 3 (200 MW), and John Sevier Unit 4 (200 MW) located at the John Sevier Fossil Plant near Rogersville, Tennessee;

Kingston Unit 1 (175 MW), Kingston Unit 2 (175 MW), Kingston Unit 3 (175 MW), Kingston Unit 4 (175 MW), Kingston Unit 5 (200 MW), Kingston Unit 6 (200 MW), Kingston Unit 7 (200 MW), Kingston Unit 8

(200 MW), and Kingston Unit 9 (200 MW) located at the Kingston Fossil Plant near Kingston, Tennessee;

Paradise Unit 1 (704 MW), Paradise Unit 2 (704 MW), and Paradise Unit 3 (1150.2 MW) located at the Paradise Fossil Plant in Drakesboro, Kentucky;

64. “Title V Permit” means the permit required of TVA’s major sources under Subchapter V of the Act, 42 U.S.C. §§ 7661-7661e; Ala. Code §§ 22-22A-1 to -16, §§ 22-28-1 to -23 (2006 Rplc. Vol.), and Ala. Admin. Code r. 335-3-16; Ky. Rev. Stat. Ann. §§ 224.20-100 to -120, and 401 Ky. Admin. Reg. 52:020; and Tenn. Comp. R. & Regs. R. 1200-3-9-.02.

65. “Unit” means collectively, the coal pulverizer, stationary equipment that feeds coal to the boiler, the boiler that produces steam for the steam turbine, the steam turbine, the

generator, the equipment necessary to operate the generator, steam turbine and boiler, and all ancillary equipment, including pollution control equipment. An electric steam generating station may comprise one or more Units. “Unit” shall also include any coal-fired TVA System Unit identified in Paragraph 63 that is Repowered to Renewable Biomass pursuant to this Consent Decree.

66. “VOC” means volatile organic compounds as defined in 40 C.F.R. § 51.100.

B. NO x EMISSION REDUCTIONS AND CONTROLS

1. NO x Emission Limitations.

67. System-Wide Annual Tonnage Limitations for NO x . During each calendar year specified in the table below, all Units in the TVA System and any New CC/CT Units constructed pursuant to Paragraph 117, collectively, shall not emit NO x in excess of the following System-Wide Annual Tonnage Limitations:

Calendar Year	System-Wide Tonnage Limitation for NO x
2011	100,600
2012	100,600
2013	90,791
2014	86,842
2015	83,042
2016	70,667
2017	64,951
2018, and each year thereafter	52,000

68. If TVA elects to Remove from Service any or all of Colbert Units 1-5 either pursuant to Paragraph 69 or Paragraph 85, then the System-Wide Annual Tonnage Limitations for

NO x in each calendar year for which such Unit(s) is Removed from Service shall be adjusted as follows:

Unit	Tons by Which System-Wide Annual Tonnage Limitation for NO x Shall be Reduced If Unit is Removed From Service in a Calendar Year
Colbert Unit 1	700 tons
Colbert Unit 2	500 tons
Colbert Unit 3	500 tons
Colbert Unit 4	500 tons
Colbert Unit 5	1,200 tons

2. NO x Control Requirements .

69. No later than the dates set forth in the table below, and continuing thereafter, TVA shall install and commence Continuous Operation of the pollution control technology identified therein or, if indicated in the table, Retire or Repower each Unit identified therein, or, solely for Colbert Units 1-4 and two (2) Units at the John Sevier plant, Remove from Service as defined herein:

Plant	Unit	Control Requirement	Date
Allen	Unit 1	SCR	Consent Decree Obligation Date
Allen	Unit 2	SCR	Consent Decree Obligation Date
Allen	Unit 3	SCR	Consent Decree Obligation Date
Bull Run	Unit 1	SCR	Consent Decree Obligation Date
Colbert	Unit 1	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016

Plant	Unit	Control Requirement	Date
Colbert	Unit 2	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 3	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 4	Remove from Service, SCR, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 5	SCR	Consent Decree Obligation Date
Cumberland	Unit 1	SCR	Consent Decree Obligation Date
Cumberland	Unit 2	SCR	Consent Decree Obligation Date
Gallatin	Unit 1	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 2	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 3	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 4	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
John Sevier	2 Units	Retire	December 31, 2012
John Sevier	2 other Units	Remove from Service	December 31, 2012
John Sevier	2 other Units	SCR, Repower to Renewable Biomass, or Retire	December 31, 2015
Johnsonville	Units 1 - 10	Retire	6 Units by December 31, 2015
Johnsonville	Units 1 - 10	Retire	4 additional Units by December 31, 2017
Kingston	Unit 1	SCR	Consent Decree Obligation Date

Plant	Unit	Control Requirement	Date
Kingston	Unit 2	SCR	Consent Decree Obligation Date
Kingston	Unit 3	SCR	Consent Decree Obligation Date
Kingston	Unit 4	SCR	Consent Decree Obligation Date
Kingston	Unit 5	SCR	Consent Decree Obligation Date
Kingston	Unit 6	SCR	Consent Decree Obligation Date
Kingston	Unit 7	SCR	Consent Decree Obligation Date
Kingston	Unit 8	SCR	Consent Decree Obligation Date
Kingston	Unit 9	SCR	Consent Decree Obligation Date
Paradise	Unit 1	SCR	Consent Decree Obligation Date
Paradise	Unit 2	SCR	Consent Decree Obligation Date
Paradise	Unit 3	SCR	Consent Decree Obligation Date
Shawnee	Unit 1	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Shawnee	Unit 4	SCR, Repower to Renewable Biomass, or Retire	December 31, 2017
Widows Creek	Units 1-6	Retire	2 Units by July 31, 2013
			2 additional Units by July 31, 2014
			2 additional Units by July 31, 2015
Widows Creek	Unit 7	SCR	Consent Decree Obligation Date
Widows Creek	Unit 8	SCR	Consent Decree Obligation Date

70. Notwithstanding Paragraph 69, TVA’s failure to (a) complete installation and commence Continuous Operation of a pollution control technology by the date specified in the table in Paragraph 69 or (b) Repower to Renewable Biomass by the date specified in the table in Paragraph 69, shall not be a violation of this Consent Decree if such Unit:

(i) ceases to operate and emit any pollutants whatsoever at least sixty (60) days before the date specified in the table in Paragraph 69, and

(ii) the installation is completed and the Unit commences Continuous Operation of the pollution control technology specified in the table in Paragraph 69 or as a Repowered Unit no later than ninety (90) days after the date specified in the table in Paragraph 69. If TVA fails to commence Continuous Operation of the pollution control technology or the Repowered Unit ninety (90) days after such date, then TVA shall be subject to stipulated penalties for the entire period commencing on the date specified in the Table in Paragraph 69.

71. Beginning upon the Consent Decree Obligation Date and continuing thereafter, TVA shall (a) Continuously Operate existing LNB, OFA, and SOFA combustion controls at all Units in the TVA System and (b) Continuously Operate existing SNCR technology at all Units in the TVA System equipped with such technology as of the Date of Lodging of this Consent Decree ( i.e. , John Sevier Units 1-4 and Johnsonville Units 1-4) unless and until such Unit is equipped with an SCR and TVA Continuously Operates such SCR pursuant to this Consent Decree, or such Unit is Retired or Repowered pursuant to this Consent Decree.

72. For TVA System Units with two or more methods specified in the Control Requirement column in the table in Paragraph 69, above, TVA shall provide notice to EPA, the

States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree of its election as to which of the Control Requirement methods it will employ at such Unit by no later than three (3) years prior to the date specified in the table for that Unit. For the Units at the John Sevier plant, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree of its election as to which two (2) Units it will Retire and which two (2) Units it will at least initially Remove from Service, by no later than June 30, 2012. For any TVA System Unit that TVA timely elects to control with SCR or Repower to Renewable Biomass, TVA may change its election to Retire at any time prior to the date specified in the table in Paragraph 69. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of its decision to Retire the Unit, with an explanation for its decision to change the election, by no later than ten (10) business days following its decision to change its election from SCR or Repower to Renewable Biomass to Retire.

73. Solely for the Units at the Colbert plant, if TVA elects the Remove from Service option, it shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) at the time such Units are required to be Removed from Service as to which method specified in the Control Requirement column in the table in Paragraph 69 it will employ at such Unit.

3. Use and Surrender of NO x Allowances.

74. TVA shall not use NO x Allowances to comply with any requirement of this Consent Decree, including by claiming compliance with any emission limitation required by this

Consent Decree by using, tendering, or otherwise applying NO x Allowances to offset any excess emissions.

75. Beginning with calendar year 2011, and continuing each calendar year thereafter, TVA shall surrender all NO x Allowances allocated to the TVA System for that calendar year that TVA does not need in order to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System for that calendar year. However, NO x Allowances allocated to the TVA System may be used by TVA to meet its own federal and/or state Clean Air Act regulatory requirements for the Units included in the TVA System.

76. Nothing in this Consent Decree shall prevent TVA from purchasing or otherwise obtaining NO x Allowances from another source for purposes of complying with federal and/or state Clean Air Act regulatory requirements ( i.e. , emissions trading or marketable permit programs) to the extent otherwise allowed by law.

77. The requirements of this Consent Decree pertaining to TVA's use and surrender of NO x Allowances are permanent injunctions not subject to any termination provision of this Consent Decree.

4. Super-Compliance Allowances.

78. Notwithstanding Paragraph 75, in each calendar year beginning in 2011, and continuing thereafter, TVA may sell, bank, use, trade, or transfer any NO x Allowances made available in that calendar year as a result of maintaining actual NO x emissions from the combined total of (a) the TVA System and (b) any New CC/CT Unit(s) constructed pursuant to Paragraph 117 below the System-Wide Annual Tonnage Limitations for NO x for such calendar year (“Super-Compliance Allowances”); provided, however, that reductions in NO x

emissions that TVA utilizes as provided in Paragraph 117 to support the permitting of a New CC/CT Unit(s) shall not be available to generate Super-Compliance Allowances within the meaning of this Paragraph in the calendar year in which TVA utilizes such emission reductions and all calendar years thereafter. TVA shall timely report the generation of all Super-Compliance NO x Allowances in accordance with Section III.I (Periodic Reporting) of this Consent Decree, and shall specifically identify any Super-Compliance NO x Allowances that TVA generates from Retiring a TVA System Unit and that TVA did not utilize for purposes of Paragraph 117.

5. Method for Surrender of NO x Allowances.

79. TVA shall surrender all NO x Allowances required to be surrendered pursuant to Paragraph 75 by April 30 of the immediately following calendar year.

80. For all NO x Allowances required to be surrendered, TVA shall first submit a NO x Allowance transfer request form to EPA's Office of Air and Radiation's Clean Air Markets Division directing the transfer of such NO x Allowances to the EPA Enforcement Surrender Account or to any other EPA account that EPA may direct in writing. As part of submitting these transfer requests, TVA shall irrevocably authorize the transfer of these NO x Allowances and identify -- by name of account and any applicable serial or other identification numbers or station names -- the source and location of the NO x Allowances being surrendered.

6. NO x Monitoring Provisions.

81. TVA shall use CEMS in accordance with 40 C.F.R. Part 75 to monitor its emissions of NO x from the TVA System Units and any New CC/CT Unit(s) for purposes of demonstrating compliance with the applicable System-Wide Annual Tonnage Limitations specified in Paragraph 67 of this Consent Decree.

C. SO 2 EMISSION REDUCTIONS AND CONTROLS

1. SO 2 Emission Limitations.

82. System-Wide Annual Tonnage Limitations for SO 2. During each calendar year specified in the table below, all Units in the TVA System and any New CC/CT Unit(s) constructed pursuant to Paragraph 117, collectively, shall not emit SO 2 in excess of the following System-Wide Annual Tonnage Limitations:

Calendar Year	System-Wide Tonnage Limitation for SO 2
2011	285,000
2012	285,000
2013	235,518
2014	228,107
2015	220,631
2016	175,626
2017	164,257
2018	121,699
2019, and each year thereafter	110,000

83. If TVA elects to Remove from Service any or all of Colbert Units 1-5 either pursuant to Paragraph 69 or Paragraph 85, then the System-Wide Annual Tonnage Limitations for SO 2 in each calendar year for which such Unit(s) is Removed from Service shall be adjusted as follows:

Calendar Year	Tons by Which System-Wide Annual Tonnage Limitation for SO 2 Shall be Reduced If Unit is Removed From Service in a Calendar Year
Colbert Unit 1	700 tons
Colbert Unit 2	1,100 tons
Colbert Unit 3	1,000 tons
Colbert Unit 4	1,100 tons
Colbert Unit 5	2,600 tons

84. If TVA must shut down one or more of its nuclear units for more than one hundred and twenty (120) consecutive days within calendar year 2011 or within calendar year 2012 because of a forced outage or in response to a safety concern as required by the Nuclear Regulatory Commission, then the System-Wide Annual Tonnage Limitation for SO 2 for that calendar year shall be 295,000 tons rather than 285,000 tons as specified in the table in Paragraph 82. If TVA must shut down one or more of its nuclear units for more than one hundred and twenty (120) consecutive days within calendar year 2013 or within calendar year 2014 because of a forced outage or in response to a safety concern as required by the Nuclear Regulatory Commission, then the System-Wide Annual Tonnage Limitation for SO 2 for calendar year 2013 shall be 241,700 tons rather than 235,518 tons as specified in the table in Paragraph 82 and the System-Wide Annual Tonnage Limitation for SO 2 for calendar year 2014 shall be 234,000 tons rather than 228,107 tons as specified in the table in Paragraph 82. In order to put EPA, the States, and the Citizen Plaintiffs on notice of this potential event, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices), and include a summary of the circumstances causing the shut down and TVA’s efforts to bring the unit back on line, commencing no later than thirty (30) days following the shutdown of a nuclear unit, and continuing every thirty (30) days thereafter until either (a) the unit comes back online or (b) the unit remains shut down for one hundred twenty (120) consecutive days, whichever is earlier. In this circumstance, TVA shall, to the extent practicable, increase utilization of any Units in the TVA System that are controlled with FGDs and/or SCRs and/or any New CC/CT Unit(s) constructed pursuant to Paragraph 117 to replace the lost power generation from the nuclear unit before increasing utilization of

uncontrolled TVA System Units.

2. SO 2 Control Requirements.

85. No later than the dates set forth in the table below, and continuing thereafter, TVA shall install and commence Continuous Operation of the pollution control technology at each Unit identified therein or, if indicated in the table, Retire or Repower each Unit identified therein, or, solely for Colbert Units 1-5 and two (2) Units at the John Sevier plant, Remove from Service as defined herein:

Plant	Unit	Control Requirement	Date
Allen	Unit 1	FGD or Retire	December 31, 2018
Allen	Unit 2	FGD or Retire	December 31, 2018
Allen	Unit 3	FGD or Retire	December 31, 2018
Bull Run	Unit 1	Wet FGD	Consent Decree Obligation Date
Colbert	Unit 1	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 2	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 3	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 4	Remove from Service, FGD, Repower to Renewable Biomass, or Retire	June 30, 2016
Colbert	Unit 5	Remove from Service, FGD or Retire	December 31, 2015
Cumberland	Unit 1	Wet FGD	Consent Decree Obligation Date

Plant	Unit	Control Requirement	Date
Cumberland	Unit 2	Wet FGD	Consent Decree Obligation Date
Gallatin	Unit 1	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 2	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 3	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Gallatin	Unit 4	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
John Sevier	2 Units	Retire	December 31, 2012
John Sevier	2 other Units	Remove from Service	December 31, 2012
John Sevier	2 other Units	FGD, Repower to Renewable Biomass, or Retire	December 31, 2015
Johnsonville	Units 1 - 10	Retire	6 Units by December 31, 2015
Johnsonville	Units 1 - 10	Retire	4 additional Units by December 31, 2017
Kingston	Unit 1	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 2	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 3	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 4	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 5	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 6	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 7	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 8	Wet FGD	Consent Decree Obligation Date
Kingston	Unit 9	Wet FGD	Consent Decree Obligation Date
Paradise	Unit 1	FGD Upgrade to 93% Removal Efficiency	December 31, 2012

Plant	Unit	Control Requirement	Date
Paradise	Unit 2	FGD Upgrade to 93% Removal Efficiency	December 31, 2012
Paradise	Unit 3	Wet FGD	Consent Decree Obligation Date
Shawnee	Unit 1	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Shawnee	Unit 4	FGD, Repower to Renewable Biomass, or Retire	December 31, 2017
Widows Creek	Units 1-6	Retire	2 Units by July 31, 2013
			2 additional Units by July 31, 2014
			2 additional Units by July 31, 2015
Widows Creek	Unit 7	Wet FGD	Consent Decree Obligation Date
Widows Creek	Unit 8	Wet FGD	Consent Decree Obligation Date

Notwithstanding any requirement specified in the preceding table to Continuously Operate a Wet FGD at Kingston Units 1-9, TVA shall not be required to Continuously Operate such Wet FGD(s) until either: (a) TDEC authorizes disposal of gypsum in the Class II landfill (IDL 73-0211) which, as of the Date of Lodging of this Consent Decree, is prohibited pursuant to TDEC’s Order dated December 17, 2010 in Case No. SWM10-0010 or (b) September 20, 2011, whichever occurs sooner. During the period when this exemption is in effect, TVA shall (a) burn coal at Kingston that achieves a 30-day rolling average emission rate for SO 2 of no greater than 1.1 lb/mmBTU and (b) operate Kingston only after Bull Run is dispatched first. This exemption shall not relieve TVA of its obligation to comply with the 2011 SO 2 System-Wide Annual Tonnage Limitation and shall not relieve TVA of any other control requirements relating to Kingston, except as provided in Paragraph 100.

86. Notwithstanding Paragraph 85, TVA’s failure to (a) complete installation and commence Continuous Operation of a pollution control technology by the date specified in the table in Paragraph 85 or (b) Repower to Renewable Biomass by the date specified in the table in Paragraph 85, shall not be a violation of this Consent Decree if such Unit:

(i) ceases to operate and emit any pollutants whatsoever at least sixty (60) days before the date specified in the table in Paragraph 85, and

(ii) the installation is completed and the Unit commences Continuous Operation of the pollution control technology specified in the table in Paragraph 85 or as a Repowered Unit no later than ninety (90) days after the date specified in the table in Paragraph 85. If TVA fails to commence Continuous Operation of the pollution control technology or the Repowered Unit ninety (90) days after such date, then TVA shall be subject to stipulated penalties for the entire period commencing on the date specified in the Table in Paragraph 85.

87. Upon the Consent Decree Obligation Date, and continuing thereafter, emissions of SO 2 from Shawnee Units 1-10 shall not exceed 1.2 lb/mmBTU. Compliance with this limitation shall be demonstrated using the procedures specified in the Clean Air Act operating permit for the Shawnee facility.

88. For TVA System Units with two or more methods specified in the Control Requirement column in the table in Paragraph 85, above, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of its election as to which of the Control Requirement methods it will employ at such Unit by no later than three (3) years prior to the date specified in the Table for that Unit. For the Units at the John Sevier plant, TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to

Section VIII (Notices) of this Consent Decree of its election as to which two (2) Units it will Retire and which two (2) Units it will at least initially Remove from Service, by no later than June 30, 2012. For any TVA System Unit that TVA timely elects to control with FGD or Repower to Renewable Biomass, TVA may change its election to Retire at any time prior to the date specified in the table in Paragraph 85. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of its decision to Retire the Unit, with an explanation for its decision to change the election, by no later than ten (10) business days following its decision to change its election from FGD or Repower to Renewable Biomass to Retire.

89. Solely for the Units at the Colbert plant, if TVA elects the Remove from Service option, it shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) at the time such Units are required to be Removed from Service as to which method specified in the Control Requirement column in the table in Paragraph 85 it will employ at such Unit.

3. Use and Surrender of SO 2 Allowances.

90. TVA shall not use SO 2 Allowances to comply with any requirement of this Consent Decree, including by claiming compliance with any emission limitation required by this Consent Decree by using, tendering, or otherwise applying SO 2 Allowances to offset any excess emissions.

91. Beginning with calendar year 2011, and continuing each calendar year thereafter, TVA shall surrender all SO 2 Allowances allocated to the TVA System for that calendar year that TVA does not need in order to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System Units for that calendar year. However, SO 2

Allowances allocated to the TVA System may be used by TVA to meet its own federal and/or state Clean Air Act regulatory requirements for the TVA System Units.

92. Nothing in this Consent Decree shall prevent TVA from purchasing or otherwise obtaining SO 2 Allowances from another source for purposes of complying with federal and/or state Clean Air Act regulatory requirements ( i.e. , emissions trading or marketable permit programs) to the extent otherwise allowed by law.

93. The requirements in this Consent Decree pertaining to TVA's use and surrender of SO 2 Allowances are permanent injunctions not subject to any termination provision of this Consent Decree.

4. Super-Compliance Allowances.

94. Notwithstanding Paragraph 91, in each calendar year beginning in 2011, and continuing thereafter, TVA may sell, bank, use, trade, or transfer any SO 2 Allowances made available in that calendar year as a result of maintaining actual SO 2 emissions from the combined total of (a) the TVA System and (b) any New CC/CT Unit(s) constructed pursuant to Paragraph 117 below the System-Wide Annual Tonnage Limitations for SO 2 for such calendar year (“Super-Compliance Allowances”); provided, however, that reductions in SO 2 emissions that TVA utilizes as provided in Paragraph 117 to support the permitting of a New CC/CT Unit(s) shall not be available to generate Super-Compliance Allowances within the meaning of this Paragraph in the calendar year in which TVA utilizes such emission reductions and all calendar years thereafter. TVA shall timely report the generation of all Super-Compliance SO 2 Allowances in accordance with Section III.I (Periodic Reporting) of this Consent Decree, and shall specifically identify any Super-Compliance SO 2 Allowances that

TVA generates from Retiring a TVA System Unit and that TVA did not utilize for purposes of Paragraph 117.

5. Method for Surrender of SO 2 Allowances.

95. TVA shall surrender all SO 2 Allowances required to be surrendered pursuant to Paragraph 91 by April 30 of the immediately following year.

96. For all SO 2 Allowances required to be surrendered, TVA shall first submit an SO 2 Allowance transfer request form to EPA's Office of Air and Radiation's Clean Air Markets Division directing the transfer of such SO 2 Allowances to the EPA Enforcement Surrender Account or to any other EPA account that EPA may direct in writing. As part of submitting these transfer requests, TVA shall irrevocably authorize the transfer of these SO 2 Allowances and identify -- by name of account and any applicable serial or other identification numbers or station names -- the source and location of the SO 2 Allowances being surrendered.

6. SO 2 Monitoring Provisions.

97. TVA shall use CEMS in accordance with 40 C.F.R. Part 75 to monitor its emissions of SO 2 from the TVA System Units and any New CC/CT Unit(s) for purposes of demonstrating compliance with the applicable System-Wide Annual Tonnage Limitations specified in Paragraph 82 of this Consent Decree.

D. PM EMISSION REDUCTIONS AND CONTROLS

1. Optimization of Existing PM Control Devices.

98. Beginning sixty (60) days after the Consent Decree Obligation Date, and continuing thereafter, TVA shall Continuously Operate each PM Control Device on each Unit in the TVA System. TVA shall, at a minimum, to the extent reasonably practicable and consistent with manufacturers' specifications, the operational design of the Unit, and good

engineering practices (a) fully energize each section of the ESP for each Unit, and where applicable, operate each compartment of the Baghouse (except for a Baghouse compartment that, as part of the original design of the Baghouse when it was first constructed, is a spare compartment); (b) operate automatic control systems on each ESP to maximize PM collection efficiency; and (c) maintain power levels delivered to the ESPs, and where applicable, replace bags as needed on each Baghouse as needed to maximize collection efficiency.

99. TVA shall complete and submit to EPA for review and approval in accordance with Section III.J (Review and Approval of Submittals) of the Compliance Agreement, with copies of such submittal to the States and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree, a PM emission control optimization study for each TVA System Unit except for (a) Colbert Unit 5, Paradise Units 1 and 2, and Widows Creek Unit 8, (b) those Units that TVA is required to Retire pursuant to Paragraphs 69 and 85, (c) those Units that TVA elects to Retire pursuant to Paragraphs 69 and 85, and (d) those Units at which TVA has installed and commenced Continuous Operation of a new PM Control Device. The PM emission control optimization study shall, for the range of fuels used by the Unit, recommend the best available maintenance, repair, and operating practices to optimize the PM Control Device availability and performance in accordance with manufacturers’ specifications, the operational design of the Unit, and good engineering practices. TVA shall retain a qualified contractor to assist in the performance and completion of each study. TVA shall perform each study and implement the EPA-approved recommendations in accordance with the following schedule:

Date	Studies Completed, New PM Control Devices Identified To Be Installed, Or Units Elected To Be Retired Pursuant To Paragraphs 69 And 85		Recommendations Implemented, New PM Control Devices Installed, Or Units Retired Pursuant To Election As Required By Paragraphs 69 And 85
Date	Individual Year	Cumulative	Individual Year	Cumulative
12/31/2011	6	6	0	0
12/31/2012	8	14	1	1
12/31/2013	6	20	4	5
12/31/2014	6	26	10	15
12/31/2015	3	29	10	25
12/31/2016	4	33	8	33
12/31/2017	4	37	4	37
12/31/2018	0	37	0	37
12/31/2019	0	37	0	37

TVA shall submit each such PM emission control optimization study to EPA for review and approval (in consultation with the States and Citizen Plaintiffs) pursuant to Section III.J (Review and Approval of Submittals) at least nine (9) months before the date specified in the table in this Paragraph for TVA to implement the recommendations. TVA shall maintain each PM Control Device in accordance with the approved PM emission control optimization study or other alternative actions as approved by EPA (in consultation with the States and the Citizen Plaintiffs).

2. PM Emission Rates.

100. No later than the dates set forth in the table below, and continuing thereafter, TVA shall Continuously Operate the PM Control Devices at each Unit identified therein so that each Unit or Units served by a common stack achieve and maintain a PM Emission Rate of no greater than 0.030 lb/mmBTU as determined by stack testing:

Plant	Unit	Date
Allen	Units 1-3	December 31, 2018
Bull Run	Unit 1	Consent Decree Obligation Date
Colbert	Unit 5	December 31, 2015
Gallatin	Units 1-4	December 31, 2017
Kingston	Units 1-9	Consent Decree Obligation Date, subject to the exemption provided in Paragraph 85 for the Continuous Operation of the Wet FGDs

3. PM Emissions Monitoring.

a. PM Stack Tests.

101. Beginning in calendar year 2011, and continuing in each calendar year thereafter, TVA shall conduct a PM stack test for filterable PM at each TVA System Unit or Units served by a common stack that combust fossil fuels at any time in that calendar year.

102. Beginning in calendar year 2011, and continuing for three (3) consecutive calendar years thereafter, TVA shall conduct a PM stack test for condensable PM at each TVA System Unit or Units served by a common stack that combust fossil fuels at any time in that calendar year.

103. The annual stack test requirement imposed on each TVA System Unit by this Section may be satisfied by stack tests conducted by TVA as required by its permits from Alabama, Kentucky, and Tennessee for any year that such stack tests are required under the permits, provided that reference methods and procedures for performing such stack tests are consistent with the requirements specified in this Consent Decree.

104. Filterable PM. The reference methods and procedures for performing PM stack tests for filterable PM and for determining compliance with the PM Emission Rate shall be the applicable reference methods and procedures specified in the relevant Clean Air Act permit for the plant. TVA shall calculate the PM Emission Rate from the stack test results in accordance with 40 C.F.R. § 60.8(f). The results of each PM stack test shall be submitted to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree within forty-five (45) days of completion of each test.

105. Condensable PM. The reference methods and procedures for performing PM stack tests to monitor condensable PM shall be those specified in 40 C.F.R. Part 51, Appendix M, Method 202. TVA shall calculate the Emission Rate for condensable PM from the stack test results in accordance with 40 C.F.R. § 60.8(f). The results of each PM stack test shall be submitted to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree within forty-five (45) days of completion of each test.

106. Although stack testing shall be used to determine compliance with the PM Emission Rate established by this Consent Decree, data from PM CEMS shall be used, at a minimum, to monitor progress in reducing PM emissions.

b. PM CEMS.

107. TVA shall install, correlate, maintain, and operate PM CEMS as specified below. Each PM CEMS shall comprise a continuous particle mass monitor measuring PM concentration, directly or indirectly, on an hourly average basis and a diluent monitor used to convert the concentration to units of lb/mmBTU. The PM CEMS installed at each stack, or, at Kingston, installed at each flue within the stack, must be appropriate for the anticipated stack conditions. TVA shall maintain, in an electronic database, the hourly average

emission values produced by each PM CEMS in lb/mmBTU. Except for periods of monitor malfunction, maintenance, or repair, TVA shall continuously operate the PM CEMS at all times when at least one Unit it serves is operating.

108. No later than twelve (12) months after the Consent Decree Obligation Date, TVA shall submit to EPA for review and approval pursuant to Section III.J (Review and Approval of Submittals) of the Compliance Agreement, with copies of such submittal to the States and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree, a plan for the installation and correlation of each PM CEMS and a proposed Quality Assurance/Quality Control (“QA/QC”) protocol that shall be followed in correlating such PM CEMS. At TVA’s option, and to the extent practicable, TVA may submit one plan and one QA/QC protocol that shall take into account Unit-specific measures, as needed, for the PM CEMS required by Paragraphs 107 and 109. In developing both the plan for installation and correlation of the PM CEMS and the QA/QC protocol, TVA shall use the criteria set forth in 40 C.F.R. Part 60, Appendix B, Performance Specification 11, and Appendix F, Procedure 2. Following approval by EPA (in consultation with the States and the Citizen Plaintiffs) of the plan(s) and protocol(s), TVA shall thereafter operate each PM CEMS in accordance with the approved plan(s) and QA/QC protocol(s).

109. No later than twelve (12) months after the date that EPA approves the plan for installation and correlation of the PM CEMS and the QA/QC protocol, TVA shall install, correlate, maintain and operate six (6) PM CEMS on stacks at the following Units: Paradise Unit 3, Bull Run Unit 1, Colbert Unit 5, Kingston Units 1-9 (one (1) PM CEMS on each flue),

and Shawnee Units 1-5.

110. In the event that TVA elects to Retire a Unit scheduled to receive a PM CEMS or, with respect to Colbert Unit 5, elects the Remove from Service option, TVA shall locate a PM CEMS (either the same PM CEMS or a new PM CEMS) at an alternate Unit in the TVA System. TVA shall provide notice to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of the alternate Unit by no later than three (3) years prior to the date that the Unit specified in Paragraph 109 is Retired or Removed from Service. TVA shall comply with all the requirements of this Section for such PM CEMS. The deadline identified in Paragraph 108 shall be adjusted to twelve (12) months after TVA’s notice pursuant to this Paragraph.

111. No later than ninety (90) days after TVA begins operation of the PM CEMS, TVA shall conduct tests of each PM CEMS to demonstrate compliance with the PM CEMS installation and correlation plan(s) and QA/QC protocol(s). Within forty-five (45) days of each such test, TVA shall submit the results to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree.

112. When TVA submits the applications for amendments to its Title V Permits pursuant to Paragraph 154, those applications shall include a Compliance Assurance Monitoring (“CAM”) plan, under 40 C.F.R. Part 64, for the PM Emission Rate specified in Paragraph 100. The PM CEMS required by Paragraphs 107 and 109 may be used in that CAM plan for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9.

c. PM Reporting.

113. Within one hundred eighty (180) days after the date established by this Consent Decree for TVA to achieve and maintain a PM Emission Rate at any TVA System Unit, TVA shall conduct a stack performance test for PM that demonstrates compliance with the Emission Rate required by this Consent Decree. Within forty-five (45) days of the performance test, TVA shall submit the results of the performance test to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree. TVA may use the annual stack test requirement established in Paragraph 101, above, to satisfy its obligation to conduct a performance test as required by this Paragraph.

114. Following the installation of each PM CEMS, TVA shall begin and continue to report, pursuant to Section III.I (Periodic Reporting), the data recorded by the PM CEMS, expressed in lb/mmBTU on a three-hour (3-hour) rolling average basis and a twenty-four-hour (24-hour) rolling average basis in electronic format to EPA, the States, and the Citizen Plaintiffs including identification of each 3-hour average and 24-hour average above the applicable PM Emission Rate for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9, as required by Paragraph 100.

E. PROHIBITION ON NETTING OR OFFSETS FROM REQUIRED CONTROLS

115. Emission reductions that result from actions to be taken by TVA after the Consent Decree Obligation Date to comply with the requirements of this Consent Decree shall not be considered as creditable contemporaneous emission decreases for the purpose of netting or offset under the Act's PSD and Nonattainment NSR programs (including any applicable SIP provisions).

116. The limitations on the generation and use of netting credits and offsets set forth in the previous Paragraph do not apply to emission reductions achieved at a particular TVA System Unit that are greater than those required under this Consent Decree for that particular TVA System Unit. For purposes of this Paragraph, and except as otherwise provided in Paragraph 50, emission reductions achieved at a particular TVA System Unit are greater than those required under this Consent Decree only if they result from the actions described in Subparagraphs 116.a and/or 116.b, below:

a. controlling Shawnee Units 2, 3, 5, 6, 7, 8 and/or 9 to reduce emissions of NO x and/or SO 2 beyond the requirements of Paragraphs 71 and 87 of this Consent Decree through a federally-enforceable emission limitation, provided that TVA is not otherwise required by the Act or the applicable SIP to control such Units to reduce emissions of NO x and/or SO 2 , or

b. for emission reductions of NO x , except for Shawnee Unit 10, Retiring a TVA System Unit that does not have the Retire option in the Control Requirement column in the Table in Paragraph 69 except to the extent that TVA Retires such Unit as Additional MW pursuant to Paragraph 119.b, and provided that TVA is not otherwise required by the Act or the applicable SIP to Retire such Unit; and for emission reductions of SO 2 , except for Shawnee Unit 10, Retiring a TVA System Unit that does not have the Retire option in the Control Requirement column in the Table in Paragraph 85 except to the extent that TVA Retires such Unit as Additional MW pursuant to Paragraph 119.b, and provided that TVA is not otherwise required by the Act or the applicable SIP to Retire such Unit.

117. Notwithstanding Paragraph 115, TVA may utilize emission reductions of NO x , SO 2 , VOCs, and PM resulting solely from Retiring up to two thousand seven hundred (2,700)

MW from the TVA System, as creditable contemporaneous emission decreases for the purpose of obtaining netting credits for these four pollutants to construct and operate no more than a total of four thousand (4,000) MW of new combined cycle (“CC”) combustion turbine electric generating units (“New CC Units”) and simple cycle (“CT”) turbine electric generating units (“New CT Units”) (collectively referred to herein as “New CC/CT Units”) to be located at the stationary source where a TVA System Unit is Retired, subject to the limitations described in this Paragraph and Subparagraphs. Of the total 4,000 MW specified herein, TVA shall not construct more than a total of two thousand (2,000) MW of CT capacity.

as precursor pollutants to the formation of the criteria pollutants PM 2.5 and Ozone) in the area where such New CC/CT Units will be located. The relevant permitting authority where the New CC/CT Units will be constructed shall determine emission limitations for NO x , SO 2 , VOCs, PM, PM 10 and PM 2.5 that reflect BACT or LAER, as appropriate, consistent with Sections 165(a)(4), 169(3), 171(3), and 173(a)(2) of the Act, 42 U.S.C. §§ 7475(a)(4), 7479(3), 7501(3), and 7503(a)(3); 40 C.F.R. §§ 52.21(b)(12) and 51.165(a)(1)(xiii); the applicable SIP; and relevant EPA guidance and/or interpretations pertaining to determining BACT and LAER, including EPA’s “New Source Review Workshop Manual – Prevention of Significant Deterioration and Nonattainment Area Permitting” (Draft Oct. 1990). In no event shall the emission limitations determined by the relevant permitting authority for NO x , SO 2 , VOC, and PM 2.5 (filterable) be any less stringent than the emission limitations set forth in Appendix B to this Consent Decree. The emission limitations set forth in Appendix B serve solely as the minimum stringency for emission limitations that will be determined by the relevant permitting authority for such New CC/CT Units and shall not be presumed to be BACT or LAER. Although the permitting authority as part of the permitting action described in this Paragraph shall not determine BACT or LAER to be less stringent than the emission limitations set forth in Appendix B, nothing in this Consent Decree (including Appendix B) shall prevent the permitting authority from establishing more stringent emission limitations than those set forth in Appendix B. For purposes of the permitting action described in this Paragraph, TVA shall not assert that this Consent Decree (including Appendix B) supports imposing a BACT or LAER emission limitation that is no more stringent than the emission limitations set forth in Appendix B.

c. For the minor NSR permitting action specified in Subparagraph 117.b, above, the relevant permitting authority shall comply with the public participation requirements in its SIP for major NSR permitting actions, including: Ala. Admin. Code r. 335-3-14-.01(7) for permitting actions in Alabama, 401 Ky. Admin. Regs. 52:100 for permitting actions in Kentucky, and Tenn. Comp. R. & Regs.1200-3-9-.01(4)(l) for permitting actions in Tennessee. TVA shall provide notice and a copy of its permit application to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) concurrent with its permit application submission to the relevant permitting authority.

e. Nothing in this Paragraph affects the Unit-specific schedule specified in the tables in Paragraphs 69 and 85 for each TVA System Unit.

118. For every emission reduction of NO x and SO 2 that TVA utilizes as provided in Paragraph 117 to construct a New CC/CT Unit(s), such reduction shall not be available to generate Super-Compliance Allowances within the meaning of Paragraphs 78 and 94 in the calendar year in which TVA utilizes such emission reductions and all calendar years thereafter. In the next periodic progress report required pursuant to Section III.I (Periodic Reporting), TVA shall report the amount of emission reductions of NO x and the amount of

emission reductions of SO 2 resulting from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 117 to construct a New CC/CT Unit(s).

119. Notwithstanding Paragraphs 115, TVA may utilize emission reductions of Greenhouse Gases resulting solely from Retiring a TVA System Unit as creditable contemporaneous emission decreases for the purpose of obtaining netting credits for Greenhouse Gases to construct and operate no more than a total of four thousand (4,000) MW of New CC Units to be located at the stationary source where a TVA System Unit is Retired, subject to the limitations described in this Paragraph and Subparagraphs 119.a through 119.c, below.

b. For every one (1) MW of New CC Unit capacity that TVA proposes to construct and operate by utilizing Greenhouse Gas emission reductions to avoid major NSR for such New CC Unit, TVA shall Retire at least one (1) MW from the TVA System that is above and beyond the 2,728.8 MW that TVA is required to Retire pursuant to Paragraphs 69 and 85 (referred to herein as “Additional MW”). TVA shall Retire such Additional MW from the TVA System either within one (1) year from the date the New CC Unit commences operation or by no later than the date set forth in the table in Paragraphs 69 and 85 for the TVA System Unit that TVA is Retiring pursuant to this Paragraph, whichever is

sooner. Emission reductions resulting from Retiring such Additional MW are subject to Paragraph 115.

c. Greenhouse Gas emission reductions resulting from Retiring a TVA System Unit may only be available to TVA for netting purposes to avoid major NSR permitting requirements for Greenhouse Gases for the construction and operation of a New CC Unit if TVA satisfies the following requirements: (i) TVA must apply for a minor NSR permit described in Paragraph 117 for the construction and operation of such New CC Unit by no later than June 30, 2012, (ii) TVA must commence construction of the New CC Unit that is the subject of such minor NSR permit application by no later than January 1, 2015, and (iii) by no later than thirty (30) days after the date TVA commences construction of such New CC Unit, TVA must provide notice pursuant to Paragraphs 72 and 88 as to which TVA System Unit(s) TVA will Retire in order for TVA to Retire the requisite Additional MW.

120. Nothing in this Consent Decree shall prevent anyone, including EPA, the States, and the Citizen Plaintiffs from submitting comments during the public comment period specified in Subparagraph 117.c regarding the emission limitations developed by the permitting authority as required by Subparagraph 117.b, including comments regarding the stringency of the emission limitations prescribed in Appendix B, or taking any other lawfully permissible action to challenge any permitting authority’s determination pursuant to Subparagraph 117.b or the minor NSR permitting action for such New CC/CT Units.

121. Nothing in this Consent Decree is intended to preclude the emission reductions generated under this Consent Decree from being considered by EPA or Alabama, Kentucky, or Tennessee for the purpose of attainment demonstrations submitted pursuant to § 110 of the Act, 42 U.S.C. § 7410, or in determining impacts on NAAQS, PSD increment, or

air quality related values, including visibility, in a Class I area.

F. ENVIRONMENTAL MITIGATION PROJECTS

122. TVA shall fund the Environmental Mitigation Projects (“Projects”) described in this Section. These Projects will result in a further reduction of NO x , SO 2 , and PM emissions, and additionally will have the collateral benefit of reducing Greenhouse Gases. TVA shall make payments to the States as further described below in an amount that is no less than $60 million to fund Projects described below. As specified in Section V.F of the Compliance Agreement (Environmental Mitigation Projects), TVA shall spend no less than $290 million to implement the projects described in Appendix C to the Compliance Agreement.

123. As set forth below, the States, by and through their respective Attorneys General or General Counsel, may each submit to TVA Projects within the categories identified for funding. The funds for these Projects will be allocated amongst the States as follows: Tennessee $26.4 million, Kentucky $11.2 million, North Carolina $11.2 million and Alabama $11.2 million. These amounts are referred to below as each State’s “allocation.”

124. Beginning in 2011, TVA shall disburse to each State the amounts requested by each State, provided that, in any year, TVA shall disburse no more than one-fifth (1/5) of the State’s allocation plus any amount by which the State received less than one-fifth (1/5) of its allocation in any prior years until all timely requests have been paid in full by TVA. If by January 31, 2017 any funds remain for which a State has not made a request, TVA shall promptly, but no later than February 29, 2017, notify the States of the remaining amount and the States shall have until March 31, 2017 to jointly provide TVA an agreed-upon method for equitably reallocating the remaining funds to be spent on Projects identified in this Section

by no later than December 31, 2017. In the event the States are unable to agree on a reallocation method, the remaining funds shall by reallocated using the same allocation percentages identified in the preceding Paragraph. TVA shall be obligated to disburse only those funds that are requested by December 31, 2017 in accordance with this Subsection. For funding requests by States commensurate with this Subsection, TVA shall pay funds as requested within thirty (30) days after being notified in writing by the State of its request.

125. The States shall use their best efforts to identify Projects that are located in TVA’s power service area or the Tennessee River watershed and shall give a preference to such Projects over Projects outside these areas. However, any Project funding requested by a State that is within the categories identified in Paragraph 128, shall be funded by TVA in accordance with this Paragraph regardless of where in the State the funds will be utilized. TVA shall not have approval rights over the Projects.

126. As an alternative to the method set forth in Paragraph 124, in any year any two or more States may agree together that any State may request any amount individually up to the remainder of its allocation, provided that the total funding requested by the agreeing States for that year does not exceed the maximum TVA would otherwise be required to disburse under Paragraph 124 to the agreeing States for that year.

127. If TVA wishes to use signage, written materials, publications or events to recognize its funding of these Projects, TVA shall clearly state and identify that the funding is being provided pursuant to this Consent Decree.

128. Categories of Projects . The States agree to use money funded by TVA to implement Projects either from the following categories or for the Projects identified in Appendix C to the Compliance Agreement:

a. Purchase and installation of photo-voltaic cells and/or solar thermal systems on buildings;

b. Implementation of projects that reduce idling time from motor vehicles;

c. Projects to conserve energy in new and existing buildings, mobile homes, and modular buildings, including efficient lighting, appliance efficiency improvement projects, weatherization projects, and projects that meet the ENERGY STAR and Home Performance with ENERGY STAR Building qualifications, the Leadership in Energy and Environmental Design (“LEED”) Green Building Rating System or an equivalent energy efficiency program approved by the State, or other innovative building efficiency projects approved by the State and/or appropriate review committee;

Construction of wind or solar renewable energy production facilities;

e. Installation of cogeneration units (wherein a single fuel source simultaneously produces electricity and useful heat) at industrial manufacturing plants or institutions such as universities, hospitals, prisons, and military bases;

f. Projects that assist smart regional planning to reduce vehicle miles traveled and improve regional air quality;

Installation of geothermal equipment;

h. Funding of agricultural and forestry sector use and production of renewable energy and carbon sequestration including but not limited to:

§	anaerobic digestion of poultry, swine, and dairy manure to produce methane as a fuel source to displace conventional fuel use,

§	installation of wind and solar power projects at farms to power irrigation and provide heat and/or hot water for farm operations,

§	production of biodiesel from high oil producing crops grown and converted on-farm for on-farm use,

§	funding the procurement of land and necessary equipment to establish urban farms and support the education and institution of urban farming practices in these communities,

§	purchasing land buffering national or state forests, parks, and refuges that link important ecological systems in the region to support carbon sequestration efforts,

§	use of agricultural or forestry waste products in support of biofuel production,

§	development of co-products and by-products of biofuel production from agricultural or forestry resources, and

§	other innovative agricultural or forestry projects, including education and training, that meet environmental improvement standards and are approved by the State and/or review committee;

i. Creation of a sustainable revolving loan program or other financing mechanism for homeowners to purchase and install energy efficiency and/or conservation measures with a two (2) to ten (10) year payback period where the repayment occurs over the defined payback period;

j. Promotion of the use of landfill gas to convert methane to electricity and/or useful heat;

k. Establishment and/or promotion of a tourist shuttle service for key tourist routes in and around the Great Smoky Mountain National Park where the shuttles are powered by electricity, fuel cell, or natural gas and/or funding of the purchase of vehicles and/or operation and maintenance of the equipment;

l. Sponsoring a wood and/or coal burning appliance changeout and retrofit campaign that replaces, retrofits, and/or upgrades inefficient, higher polluting wood/coal burning appliances (e.g., non-EPA certified wood stoves, old technology outdoor wood-fired hydronic heaters) with Energy Star qualified heat pumps, EPA Phase II qualified hydronic-heaters, EPA certified wood stoves and/or cleaner, more energy-efficient wood pellet burning appliances;

m. Implementation of projects to improve energy efficiency or renewable energy projects at water treatment and waste water treatment plants; and

n. Development, manufacture, and commercialization of innovative energy efficiency and renewable energy equipment and biofuel production.

G. CIVIL PENALTY

129. TVA shall pay a total of $10,000,000 in civil penalties as further described in this Section.

130. Pursuant to, and as specified in, Paragraph 91 of the Consent Agreement and Final Order in In re Tennessee Valley Auth. , Docket No. CAA-04-2010-1528(b), TVA shall pay the sum of $8,000,000 in civil penalties to EPA.

131. Within thirty (30) days after the Date of Entry of this Consent Decree, TVA shall pay a total of $2,000,000 in civil penalties to Alabama, Kentucky, and Tennessee. TVA shall pay a civil penalty to Alabama in the amount of $500,000. Payment shall be made by check made out to the Alabama Department of Environmental Management and shall be mailed to: Office of General Counsel, Alabama Department of Environmental Management, PO Box 301463, Montgomery, Alabama, 36130-1463. TVA shall pay a civil penalty to Kentucky in the amount of $500,000. Payment shall be made by check made out to the Kentucky State Treasurer and shall be mailed to: Jeff Cummins, Acting Director, Division of Enforcement, 300 Fair Oaks Lane, Frankfort, Kentucky, 40601. TVA shall pay a civil penalty to Tennessee in the amount of $1,000,000. Payment shall be made by check made out to Treasurer, State of Tennessee and shall be mailed to: Tennessee Department of Environment & Conservation, Division of Fiscal Services – Consolidated Fees Section, 14 th Floor L&C Tower, 401 Church Street, Nashville, Tennessee 37243 and shall reference this Consent Decree. At the time of payment, TVA shall also provide notice of its payment to EPA, the States, and Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree, referencing the civil action case name and case number.

H. RESOLUTION OF CLAIMS AGAINST TVA

132. Except as expressly provided in Paragraphs 134-135 below, the States and the Citizen Plaintiffs agree that this Consent Decree resolves all civil claims arising from any modifications commenced at any TVA System Unit that could have been alleged against TVA prior to the Date of Lodging of this Consent Decree for violations of (a) Sections 165 and 173 of Parts C and D of Subchapter I of the Act, 42 U.S.C. §§ 7475 and 7503, and the implementing PSD and Nonattainment NSR provisions of the relevant SIPs, (b) Section 111 of the

Act, 42 U.S.C. §§ 7411, and 40 C.F.R. §§ 60.14 and 60.15, (c) Sections 502(a) and 504(a) of the Act, 42 U.S.C. §§ 7661a(a) and 7661c(a), but only to the extent that such claims are based on TVA’s failure to obtain an operating permit that reflects applicable requirements imposed under the PSD and Nonattainment NSR provisions of Subchapter I or Section 111 of the Act, and (d) the federally approved and enforceable minor NSR programs of Alabama, Kentucky, and Tennessee.

133. The States and Citizen Plaintiffs expressly do not join in giving TVA the covenant provided by EPA through Paragraph 139 of the Compliance Agreement, and reserve their rights to bring any actions against TVA for any claims arising after the Date of Lodging of this Consent Decree.

134. Notwithstanding Paragraph 133, the States and the Citizen Plaintiffs release TVA from any civil claim that may arise under the PSD and/or Nonattainment NSR provisions of the Act as described in Paragraph 132 ( i.e. , 42 U.S.C. §§ 7475 and 7503) and the implementing provisions of the relevant SIP, for TVA’s performance of activities that this Consent Decree expressly directs TVA to undertake pursuant to Paragraphs 69 and 85 (within Alabama, which meet the criteria of Ala. Admin. Code r. 335-3-14-.04(8)(m)), except to the extent that (a) such activities would cause a significant increase in the emission of a regulated NSR pollutant other than NO x , SO 2 , and PM, in which event this release will not extend to any claim relating to such regulated NSR pollutant for which there is a significant increase or (b) a Unit is Repowered to Renewable Biomass.

135. Solely with regard to claims of the Citizen Plaintiffs, the claims of the Citizen Plaintiffs resolved by Paragraph 132 above do not include any claims based upon the regulated pollutant sulfuric acid mist (“SAM” or “H 2 SO 4 ”).

I. PERIODIC REPORTING

136. Beginning six (6) months after the Consent Decree Obligation Date, and continuing annually on April 30 each year thereafter until conditional termination of enforcement through this Consent Decree as provided in Paragraph 214, and in addition to any other express reporting requirement in this Consent Decree, TVA shall submit to EPA, the States, and the Citizen Plaintiffs a progress report in compliance with Appendix A.

137. In any periodic progress report submitted pursuant to this Section, TVA may incorporate by reference information previously submitted under its Title IV and/or Title V permitting requirements, provided that TVA attaches the Title IV and/or Title V permit report, or the relevant portion thereof, and provides a specific reference to the provisions of the Title IV and/or Title V permit report that are responsive to the information required in the periodic progress report.

138. Other express reporting requirements. In addition to the annual progress reports required pursuant to Paragraph 136 and Appendix A, TVA shall submit to EPA, the States, and the Citizen Plaintiffs the information otherwise required by this Consent Decree in the manner and by the dates set forth herein, including but not limited to, the information required by Paragraphs 72, 73, 84, 88, 89, 104, 105, 110, 111, 113, 131, 139, 148, 157, and 191 and Subparagraph 117.c.

139. In addition to the progress reports required pursuant to this Section, TVA shall provide a written report to EPA, the States, and the Citizen Plaintiffs of any violation of the requirements of this Consent Decree within fifteen (15) days of when TVA knew or should have known of any such violation. In this report, TVA shall explain the cause or causes of

the violation and all measures taken or to be taken by TVA to prevent such violations in the future and measures taken or to be taken to mitigate the environmental effects of such violation, if any.

140. Each report shall be signed by TVA's Vice President of Environmental Permitting and Compliance or his or her equivalent or designee of at least the rank of Vice President, and shall contain the following certification:

J. REVIEW AND APPROVAL OF SUBMITTALS

141. Whenever a plan, report, or other submission required by this Consent Decree is required to be submitted to EPA for review or approval, EPA (in consultation with the States and the Citizen Plaintiffs) may approve the submittal or decline to approve it and provide written comments explaining the basis for declining such approval. Within sixty (60) days of receiving written comments from EPA, TVA shall either (a) revise the submittal consistent with the written comments and provide the revised submittal to EPA with copies to the States and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree; or (b) submit the matter for dispute resolution pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement.

142. Upon receipt of EPA's final approval of the submittal, or upon completion of dispute resolution under the Compliance Agreement and, if applicable, dispute resolution under Section VI (Dispute Resolution) of this Consent Decree as provided by Section IV (Coordination of Oversight and Enforcement) of this Consent Decree, TVA shall implement the

approved submittal in accordance with the schedule specified therein or, if subject to dispute resolution pursuant to Section VI (Dispute Resolution) of this Consent Decree as provided by Section IV (Coordination of Oversight and Enforcement) of this Consent Decree, a schedule established by the Court.

K. STIPULATED PENALTIES

143. For any failure by TVA to comply with the terms of this Consent Decree, and subject to the provisions of Sections IV (Coordination of Oversight and Enforcement), V (Force Majeure), and VI (Dispute Resolution), TVA shall pay, within thirty (30) days after receipt of written demand to TVA by a State or the Citizen Plaintiffs, the following stipulated penalties :

Consent Decree Violation	Stipulated Penalty
a. Failure to pay the civil penalty as specified in Section III.G (Civil Penalty) of this Consent Decree	$10,000 per day
b. Failure to comply with any applicable PM Emission Rate where the violation is less than five percent (5%) in excess of the limits set forth in this Consent Decree	$2,500 per day per violation
c. Failure to comply with any applicable PM Emission Rate where the violation is equal to or greater than five percent (5%) but less than ten percent (10%) in excess of the limits set forth in this Consent Decree	$5,000 per day per violation
d. Failure to comply with any applicable PM Emission Rate where the violation is equal to or greater than ten percent (10%) in excess of the limits set forth in this Consent Decree	$10,000 per day per violation

Consent Decree Violation	Stipulated Penalty
e. Failure to comply with an applicable System-Wide Annual Tonnage Limitation for SO 2 set forth in this Consent Decree	$5,000 per ton for the first 1,000 tons, and $10,000 per ton for each additional ton above 1,000 tons, plus the surrender of SO 2 Allowances in an amount equal to two (2) times the number of tons by which the limitation was exceeded.
f. Failure to Remove from Service as required by Paragraphs 69 and 85 of this Consent Decree any one or more of the following Units: the two (2) Units at the John Sevier plant that TVA indicated pursuant to Paragraphs 72 and 88 that it will Remove from Service and Colbert Units 1-5	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter
g. Failure to comply with an applicable System-Wide Annual Tonnage Limitation for NO x set forth in this Consent Decree	$5,000 per ton for the first 1,000 tons, and $10,000 per ton for each additional ton above 1,000 tons, plus the surrender of annual NO x Allowances in an amount equal to two (2) times the number of tons by which the limitation was exceeded.
h. Failure to comply with the requirements for NO x or SO 2 in Paragraphs 71 or 87 of this Consent Decree	$2,500 per day per violation
i. Failure to provide notice as required by Paragraphs 72, 73, 84, 88, and/or 89 of this Consent Decree	$1,000 per day for the first fifteen (15) days, $15,000 per day for each day thereafter
j. Failure to install, commence operation of, and/or Continuously Operate a pollution control technology as required by Paragraphs 69, 85, and/or 98 of this Consent Decree	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter
k. Failure to Retire or Repower a Unit as required by Paragraphs 69 and 85 of this Consent Decree	$10,000 per day per violation during the first thirty (30) days, $37,500 per day per violation thereafter

Consent Decree Violation	Stipulated Penalty
l. Failure to comply with the PM optimization requirements of Paragraph 99 of this Consent Decree	$2,500 per day per violation during the first thirty (30) days, $7,500 per day per violation thereafter
m. Failure to install and/or operate CEMS as required under this Consent Decree	$1,000 per day per violation
n. Failure to conduct stack tests for PM as required under this Consent Decree	$1,000 per day per violation
o. Failure to apply for any permit required under this Consent Decree	$1,000 per day per violation
p. Failure to timely submit, modify, and/or implement, as approved, the reports, plans, studies, analyses, protocols, and/or other submittals required by this Consent Decree	$750 per day per violation during the first ten (10) days, $1,000 per day per violation thereafter
q. Using, selling, banking, trading, or transferring SO 2 Allowances except as permitted under this Consent Decree	The surrender of SO 2 Allowances in an amount equal to four (4) times the number of SO 2 Allowances used, sold, banked, traded, or transferred in violation of this Consent Decree
r. Failure to surrender SO 2 Allowances as required under this Consent Decree	(a) $37,500 per day plus (b) $1,000 per allowance not surrendered
s. Using, selling, banking, trading, or transferring NO x Allowances except as permitted under this Consent Decree	The surrender of NO x Allowances in an amount equal to four (4) times the number of NO x Allowances used, sold, banked, traded, or transferred in violation of this Consent Decree
t. Failure to surrender NO x Allowances as required under this Consent Decree	(a) $37,500 per day plus (b) $1,000 per allowance not surrendered
u. Using emission reductions from Retiring a TVA System	$2,500 per day per violation during the first 30 days, $10,000

Consent Decree Violation	Stipulated Penalty
Unit except as provided in Paragraphs 116 and 117 of this Consent Decree	per day per violation thereafter
v. Failing to comply with the requirements of Paragraph 117 of this Consent Decree if TVA uses emission reductions from Retiring a TVA System Unit to construct a New CC/CT Unit	$2,500 per day per violation during the first thirty (30) days, $10,000 per day per violation thereafter
w. Failing to comply with the requirements of Paragraph 119 of this Consent Decree if TVA uses emission reductions in Greenhouse Gases to construct a New CC Unit	$2,500 per day per violation during the first thirty (30) days, $10,000 per day per violation thereafter
x. Failure to fund the Environmental Mitigation Projects in compliance with Section III.F (Environmental Mitigation Projects) of this Consent Decree	$5,000 per day for the first thirty (30) days, $10,000 per day for each day thereafter
y. Any other violation of this Consent Decree	$1,000 per day per violation

144. All stipulated penalties shall begin to accrue on the day after the performance is due or on the day a violation occurs, whichever is applicable, and shall continue to accrue until performance is satisfactorily completed or until the violation ceases, whichever is applicable. Nothing in this Consent Decree shall prevent the simultaneous accrual of separate stipulated penalties for separate violations of this Consent Decree.

145. TVA shall pay all stipulated penalties within thirty (30) days of receipt of written demand to TVA from any or all Plaintiffs (referred to herein as the “demanding Party”), and shall continue to make such payments every thirty (30) days thereafter until the violation(s) no longer continues, unless TVA elects within fifteen (15) business days of receipt of written demand to TVA from the demanding Party to dispute the accrual of stipulated penalties in accordance with the provisions in Section VI (Dispute Resolution) of this Consent Decree, subject to Section IV (Coordination of Oversight and Enforcement) of this Consent Decree.

146. Stipulated penalties shall continue to accrue as provided in accordance with Paragraph 144 during any dispute, with interest on accrued stipulated penalties payable and calculated at the rate established by the Secretary of the Treasury, pursuant to 28 U.S.C. § 1961, but need not be paid until the following:

a. If the dispute is resolved by agreement, or by a written summary of the demanding Party that is not challenged within the time permitted pursuant to Section VI (Dispute Resolution) of this Consent Decree and that is not submitted to the Court for resolution, accrued stipulated penalties agreed or determined to be owing, together with accrued interest, shall be paid within thirty (30) days of the effective date of the agreement;

b. If the dispute is submitted to the Court and the demanding Party prevails in whole or in part, TVA shall pay, within sixty (60) days of receipt of the Court’s decision or order, all accrued stipulated penalties determined to be owing, together with interest accrued on such penalties determined by the Court to be owing, except as provided in Subparagraph c, below;

c. If the Court’s decision is appealed by either TVA or the demanding Party, TVA shall, within fifteen (15) days of receipt of the final appellate court decision, pay all accrued stipulated penalties determined to be owing, together with interest accrued on such stipulated penalties determined to be owing by the appellate court.

147. Notwithstanding any other provision of this Consent Decree, the accrued stipulated penalties agreed to by the demanding Party and TVA, or determined through dispute resolution, to be owing may be less than the stipulated penalty amounts set forth in Paragraph 143.

148. Monetary stipulated penalties due and owing to Alabama, Kentucky, or Tennessee shall be paid in the manner specified in Paragraph 131. Monetary stipulated penalties due and owing as a result of a demand from North Carolina or the Citizen Plaintiffs shall be paid as specified in Section 304(g)(1) of the Act, 42 U.S.C. § 7604(g)(1). At the time of payment, TVA shall provide notice of payment to EPA, the States, and the Citizen Plaintiffs, referencing the relevant case names and case numbers in accordance with Section VIII (Notices) of this Consent Decree. All SO 2 and NO x Allowance surrender stipulated penalties shall comply with the allowance surrender procedures set forth in Paragraphs 80 (for NO x ) and 96 (for SO 2 ).

149. The stipulated penalties provided for in this Consent Decree shall be in addition to any other rights, remedies, or sanctions available to the demanding Party by reason of TVA's failure to comply with any requirement of this Consent Decree or applicable law, except that for any violation of the Act for which this Consent Decree provides for payment of a stipulated penalty, TVA shall be allowed a credit for stipulated penalties paid against any statutory penalties also imposed for such violation.

L. PERMITS

150. Unless expressly stated otherwise in this Consent Decree, in any instance where otherwise applicable law or this Consent Decree requires TVA to secure a permit to authorize construction or operation of any device, including all construction and operating permits required under state law, TVA shall make such application in a timely manner.

151. Notwithstanding Paragraph 150, nothing in this Consent Decree shall be construed to require TVA to apply for or obtain a PSD or Nonattainment NSR permit for physical

changes in, or changes in the method of operation of, any TVA System Unit that would give rise to claims resolved by Paragraphs 132 or 134 of this Consent Decree.

152. When permits or permit applications are required pursuant to Paragraphs 50, 150, 154, 155, 156, and 158, TVA shall complete and submit applications for such permits to Alabama, Kentucky, and Tennessee, whichever is appropriate, to allow sufficient time for all legally required processing and review of the permit request, including requests for additional information by such States. Any failure by TVA to submit a timely permit application for TVA System Units shall bar any use by TVA of Section V (Force Majeure) of this Consent Decree, where a Force Majeure claim is based on permitting delays.

153. Notwithstanding the reference to Title V permits in this Consent Decree, the enforcement of such permits shall be in accordance with their own terms and the Act and its implementing regulations, including the federally approved Alabama, Kentucky, and Tennessee Title V programs. The Title V permit shall not be enforceable under this Consent Decree, although any term or limit established by or under this Consent Decree shall be enforceable under this Consent Decree regardless of whether such term has or will become part of a Title V permit, subject to the terms of Section XVI (Conditional Termination of Enforcement Under Decree) of this Consent Decree.

154. Within three (3) years from the Consent Decree Obligation Date, unless otherwise specified in this Paragraph, and in accordance with federal and/or state requirements for modifying or renewing a Title V permit, TVA shall amend any applicable Title V permit application, or apply for amendments to its Title V permits, to include a schedule for all system-wide, Unit-specific, and plant-specific performance, operational, maintenance, and control technology requirements established by this Consent Decree including, but not limited to,

emission rates, installation and/or Continuous Operation of SCRs and/or FGDs, tonnage limitations, and the requirements pertaining to the surrender of NO x and SO 2 Allowances. For Units in Paragraphs 69 and 85 with two or more methods specified in the Control Requirement column and that do not have a Remove from Service option, TVA shall apply to modify, renew, or obtain any applicable Title V permit as required by this Paragraph within twelve (12) months of making an election as to the method TVA will employ for the Unit. For Units with the Remove from Service option in the Control Requirement column in Paragraphs 69 or 85, TVA shall apply to modify, renew, or obtain any applicable Title V permit as required by this Paragraph within twelve (12) months of electing to either install and operate FGD(s) and SCR(s), Repower to Renewable Biomass, or Retire.

155. By no later than one (1) year after the date specified in Paragraphs 69 and 85 for the Control Requirement for each Unit, TVA shall (a) apply to include the requirements and limitations enumerated in this Consent Decree into federally-enforceable permits such that the requirements and limitations of this Consent Decree become and remain “applicable requirements” as that term is defined in 40 C.F.R. § 70.2 and/or (b) request site-specific amendments to the applicable SIPs for Alabama and Tennessee (but not for Kentucky) to reflect all new requirements applicable to each Unit and at each plant in the TVA System. For purposes of this Consent Decree, the federally enforceable permit(s) issued by Kentucky must be issued by Kentucky under its authority under its SIP to issue permits and not solely under Kentucky’s authority to issue permits pursuant to its Title V program.

156. Prior to conditional termination of enforcement through this Consent Decree, TVA shall apply for and obtain enforceable provisions in its Title V permits for the TVA System that incorporate (a) any Unit-specific requirements and limitations of this Consent Decree, such as performance, operational, maintenance, and control technology requirements, (b) the requirement to Surrender NO x and SO 2 Allowances, and (c) the System-Wide Annual Tonnage Limitations.

157. TVA shall provide EPA, the States, and the Citizen Plaintiffs with a copy of each application for any permit required pursuant to this Section, including any federally enforceable permit or Title V permit or modification, and any site-specific SIP amendment, as well as a copy of any permit or SIP amendment proposed as a result of such application, to allow for timely participation in any public comment opportunity.

158. In the event that EPA promulgates a final rule containing revisions to the Effluent Limitations Guidelines for the Steam Electric Power Generating point source category, by no later than twelve (12) months after the date EPA publishes the final rule in the Federal Register (unless additional time is required for studies or data collection mandated by the final rule), TVA shall submit applications to the relevant permitting authority to obtain National Pollutant Discharge Elimination System (“NPDES”) permit renewals (in the case of expiring permits); permit renewal modifications (in the case of already submitted permit renewal applications); or permit modification requests (in the case of existing, non-expired permits) to include legally-applicable requirements of the revised Effluent Limitations Guidelines relating to wastewaters from Flue Gas Desulfurization Systems in each of its NPDES permits for the TVA System Units that are subject to the revised Effluent Limitation Guidelines and are equipped with a Flue Gas Desulfurization System. TVA shall include all the relevant information

necessary for the permitting authority to expeditiously incorporate the Effluent Limitation Guideline requirements into each of TVA’s NPDES permits, and shall promptly respond to any additional requests for information from the permitting authority.

159. If TVA proposes to sell or transfer to an entity unrelated to TVA (“Third Party”) part or all of TVA's operational or ownership interest in a TVA System Unit, TVA shall comply with the requirements of Section IX (Sales or Transfers of Operational or Ownership Interests) with regard to that Unit prior to any such sale or transfer.

IV. COORDINATION OF OVERSIGHT AND ENFORCEMENT

160. Oversight and Enforcement of Parallel Provisions of the Compliance Agreement and this Consent Decree.

a. EPA and TVA in the Compliance Agreement, and TVA, the States, and the Citizen Plaintiffs in this Consent Decree, are entering into separate agreements with Parallel Provisions to resolve TVA’s alleged violations of the Act. This Section of the Consent Decree establishes the manner in which enforcement and oversight (including resolution of disputes) pertaining to Parallel Provisions will occur.

b. Except where there is an unreasonable delay in resolving a dispute pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, a State or the Citizen Plaintiffs shall not invoke Section VI (Dispute Resolution) of this Consent Decree pertaining to a Parallel Provision until TVA has resolved any disputes between it and EPA pertaining to such Parallel Provision pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement either through an agreement reached with EPA pursuant to Section VIII of the

Compliance Agreement or a decision issued by the Region 4 Air Director pursuant to Paragraph 183 of the Compliance Agreement. TVA shall not seek judicial review in any court of any agreement reached with EPA pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement or any decision issued by the Region 4 Air Director pursuant to Paragraph 183 of the Compliance Agreement. Although neither the Compliance Agreement nor any determinations that EPA makes under it are before this Court for judicial review, and are not subject to this Court’s judicial review now or in the future, this Court should accord appropriate weight to EPA’s determinations made either pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement or as provided in Paragraphs 162, 163, and 164, below. For example, where EPA’s determination made either pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement or as provided in Paragraphs 162, 163, or 164, below, relies on EPA’s technical expertise, determinations, or interpretation of statutes EPA administers and/or of regulations EPA promulgated (among other circumstances), such determination should be entitled to judicial deference consistent with prevailing law regarding judicial deference to such agency technical expertise, determinations, or interpretation of statutes or regulations.

c. Nothing in this Consent Decree shall be construed to affect the authority of EPA or a State under applicable federal statutes or regulations and applicable state statutes and regulations or any other applicable provisions to seek appropriate relief to address an imminent and substantial endangerment to public health or welfare, or the environment.

161. Availability of Dispute Resolution under Section VI of this Consent Decree.

a. If there has been a resolution of a dispute pertaining to a Parallel Provision pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, a State or the

Citizen Plaintiffs may only invoke the dispute resolution procedures of Section VI (Dispute Resolution) of this Consent Decree pertaining to that resolution solely to seek a resolution that is more stringent than the resolution reached through Section VIII (Dispute Resolution) of the Compliance Agreement.

b. TVA may invoke Section VI (Dispute Resolution) of this Consent Decree regarding a Parallel Provision only (i) if a State or the Citizen Plaintiffs are acting in contravention to Section IV (Coordination of Oversight and Enforcement) of this Consent Decree or (ii) as necessary to address any conflict between this Consent Decree and the Compliance Agreement due to a change to the Compliance Agreement that is made subsequent to the Effective Date of the Compliance Agreement as that term is defined therein.

162. Disputes Involving Parallel Provisions Resolved Through Section VIII of the Compliance Agreement .

a. If a State or the Citizen Plaintiffs invoke Section VI (Dispute Resolution) of this Consent Decree to seek a resolution of a dispute under this Consent Decree pertaining to a Parallel Provision that is more stringent than the resolution reached through Section VIII (Dispute Resolution) of the Compliance Agreement, the Court should accord appropriate weight to the resolution of the dispute by EPA under Section VIII of the Compliance Agreement as described in Subparagraph 160.b, above.

b. TVA shall be bound by and hereby stipulates to be bound by any agreement reached with EPA pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, any decision issued by the Region 4 Air Director pursuant to Paragraph 183 of the Compliance Agreement, and/or any written determination pursuant to Subparagraph 163

and/or 164, below, and it shall not seek relief from this Court that is less stringent than, or is otherwise in any way inconsistent with, any agreement reached with EPA pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, any decision issued by the Region 4 Air Director pursuant to Paragraph 183 of the Compliance Agreement, and/or any written determination pursuant to Paragraphs 163 and/or 164 below. TVA may inform the Court of the position that it presented to EPA during the Dispute Resolution process; provided that TVA shall not argue to this Court that any agreement reached with EPA pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement or any decision issued by the Region 4 Air Director, or the basis for such decision, was wrong (either technically, legally, or factually) or otherwise in error.

163. Process for Requesting that the Court Exercise Jurisdiction . A Party shall provide notice as further described in this Paragraph before it can request that the Court exercise jurisdiction (including under Sections V (Force Majeure), VI (Dispute Resolution), or XI (Retention of Jurisdiction)), regarding implementation of this Consent Decree. The Party seeking to request that the Court exercise jurisdiction shall notify the other Parties to this Consent Decree and EPA of such intent pursuant to Section VIII (Notices) of this Consent Decree and shall include a description of the issue in such notice.

a. If the issue involves a Parallel Provision that has not already been the subject of dispute and resolution pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, EPA may provide the Parties with a written determination of EPA’s view regarding the issue within forty-five (45) days following the notice. No action before this Court may be taken by any Party (i) for at least fifteen (15) business days following EPA’s written determination or, (ii) if EPA does not make such written determination, then for at

least forty-five (45) days following the notice described previously in this Paragraph. If TVA does not invoke Section VIII (Dispute Resolution) of the Compliance Agreement within fifteen (15) business days following receipt of EPA’s written determination, then TVA shall be bound by EPA’s written determination in any action before this Court regarding such issue, as described in Subparagraph 162.b, above. TVA shall furnish to the Court EPA’s written determination under this Paragraph no later than the filing of its next brief, motion, or other communication with the Court regarding the issue. The Court should accord appropriate weight to EPA’s written determination as described in Subparagraph 160.b, above. If TVA does invoke Section VIII (Dispute Resolution) of the Compliance Agreement within fifteen (15) business days of receipt of EPA’s written determination, the Parties may not proceed in this Court until EPA and TVA have resolved such dispute pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement.

b. If the issue involves a Parallel Provision that has already been the subject of dispute and resolution pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, then the Party requesting that the Court exercise jurisdiction shall provide such notice at least fifteen (15) business days before requesting that the Court exercise jurisdiction and must furnish a copy of TVA’s written objection as provided in Paragraph 181 of the Compliance Agreement and the final resolution rendered pursuant to either Paragraph 182 or Paragraph 183 of Section VIII (Dispute Resolution) of the Compliance Agreement to the Court no later than the filing of its next brief, motion, or other communication with the Court regarding that issue. If EPA provides the Party with a written determination of its view regarding the issue to be presented to the Court, such Party shall furnish a copy

of EPA’s written determination to the Court with its next filing. The Court should accord appropriate weight to EPA’s written determination as described in Subparagraph 160.b, above.

c. If the issue involves a Parallel Provision that is the subject of a dispute pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement but there is an unreasonable delay in resolving the dispute under Section VIII (Dispute Resolution) of the Compliance Agreement, then the Parties may proceed in this Court prior to a resolution by EPA and TVA of such dispute. The Party requesting that the Court exercise jurisdiction shall provide such notice at least fifteen (15) business days before requesting that the Court exercise jurisdiction. No action before this Court may be taken by any Party during this 15 business day period. If the Region 4 Air Director issues a decision pursuant to Paragraph 183 of the Compliance Agreement during this 15 business day period, then TVA shall be bound by such decision in any action before this Court regarding such issue, as described in Subparagraph 162.b, above, and the Party requesting that the Court exercise jurisdiction may only seek a more stringent resolution, as described in Paragraph 161.a. Such Party must furnish a copy of the Region 4 Air Director’s decision, if any, to the Court no later than the filing of its next brief, motion, or other communication with the Court regarding the issue. The Court should accord appropriate weight to the Region 4 Air Director’s decision as described in Subparagraph 160.b, above.

164. Assessment and Collection of Stipulated Penalties.

a. TVA shall not be required to pay additional stipulated penalties under the Consent Decree for a violation of the same Parallel Provision of the Compliance Agreement if TVA has paid stipulated penalties pursuant to a demand made by EPA (in consultation with the States and the Citizen Plaintiffs). Notwithstanding the preceding sentence, TVA may be

required to pay additional stipulated penalties under this Consent Decree for a violation of the same Parallel Provision of the Compliance Agreement if the stipulated penalty that EPA demanded (and that TVA paid) is inappropriate in light of the circumstances, taking into account the appropriate weight to be accorded to EPA’s written determination as described in Subparagraph 160.b, above. Nothing in this Paragraph shall prevent EPA and the States of Alabama, Kentucky, and Tennessee from sharing the payment of a stipulated penalty provided that the violation giving rise to payment of a stipulated penalty is a violation of a Parallel Provision of this Consent Decree. Where a violation of a Parallel Provision is facility specific, EPA has agreed to split the collected stipulated penalty evenly with the State where such facility is located. Where a violation of a Parallel Provision is not facility specific, EPA has agreed to split the collected stipulated penalty with the States of Alabama, Kentucky, and Tennessee as follows: 50% to EPA and 50% allocated equally among the States of Alabama, Kentucky, and Tennessee.

b. If a State or the Citizen Plaintiffs believes there has been a violation of a Parallel Provision under this Consent Decree but EPA has not taken action under the Compliance Agreement to assess stipulated penalties for such a violation through the Compliance Agreement, a State or the Citizen Plaintiffs may demand the payment of stipulated penalties pursuant to Section III.K (Stipulated Penalties) of this Consent Decree only after it has first consulted with EPA regarding the alleged violation as further described in this subparagraph. The State or the Citizen Plaintiffs shall provide EPA with a sixty (60) day period to evaluate the alleged violation and to provide a written determination as to whether it believes there is a violation of the Parallel Provision of the Compliance Agreement. The Court should accord appropriate weight to EPA’s written determination as described in Subparagraph 160.b, above.

165. Enforcement of Parallel Provisions under this Consent Decree. Any or all Plaintiffs may demand the payment of stipulated penalties or seek other appropriate relief as allowed by Section XI (Retention of Jurisdiction) or any other provision of this Consent Decree for TVA’s failure to comply with the terms of a Parallel Provision of this Consent Decree if (i) after consulting with EPA as required in Paragraph 164.b, EPA does not take action under the Compliance Agreement to assess stipulated penalties for such alleged violation, or, as described in Paragraph 164.a., EPA assesses a stipulated penalty that is inappropriate in light of the circumstances, (ii) TVA has failed to comply with any agreement reached with EPA pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement or any decision issued by the Region 4 Air Director pursuant to Paragraph 183 of the Compliance Agreement, or (iii) TVA remains in non-compliance despite assessment of stipulated penalties.

V. FORCE MAJEURE

166. For purposes of this Consent Decree, a “Force Majeure Event” shall mean an event that has been or will be caused by circumstances beyond the control of TVA, its contractors, or any entity controlled by TVA that delays compliance with any provision of this Consent Decree or otherwise causes a violation of any provision of this Consent Decree despite TVA's best efforts to fulfill the obligation. “Best efforts to fulfill the obligation” include using the best efforts to anticipate any potential Force Majeure Event and to address the effects of any such event (a) as it is occurring and (b) after it has occurred, such that the delay and any adverse environmental effect of the violation is minimized to the greatest extent possible.

167. Notice of Force Majeure Events . If any event occurs or has occurred that may delay compliance with or otherwise cause a violation of any obligation under this Consent

Decree, as to which TVA intends to assert a claim of Force Majeure, TVA shall notify EPA, the States, and the Citizen Plaintiffs in writing as soon as practicable, but in no event later than twenty-one (21) business days following the date TVA first knew, or by the exercise of due diligence should have known, that the event caused or may cause such delay or violation. In this notice, TVA shall reference this Paragraph of this Consent Decree and describe the anticipated length of time that the delay or violation may persist, the cause or causes of the delay or violation, all measures taken or to be taken by TVA to prevent or minimize the delay and any adverse environmental effect of the violation, the schedule by which TVA proposes to implement those measures, and TVA's rationale for attributing a delay or violation to a Force Majeure Event. TVA shall adopt all reasonable measures to avoid or minimize such delays or violations. TVA shall be deemed to know of any circumstance which TVA, its contractors, or any entity controlled by TVA knew or should have known.

168. Failure to Give Notice . If TVA fails to comply with the notice requirements of this Section for any Parallel Provision, EPA (in consultation with the States and the Citizen Plaintiffs) may void TVA's claim for Force Majeure as to the specific event for which TVA has failed to comply with such notice requirement. If TVA fails to comply with the notice requirements of this Section for any provision that is not a Parallel Provision of this Consent Decree (“Non-Parallel Provision”) the States and the Citizen Plaintiffs may void TVA's claim for Force Majeure as to the specific event for which TVA has failed to comply with such notice requirement.

169. Response . EPA (for any Parallel Provision, and as required by the Compliance Agreement) and the States and the Citizen Plaintiffs (for any Non-Parallel Provision) shall

notify TVA in writing regarding TVA's claim of Force Majeure as soon as reasonably practicable. For any Parallel Provisions, if EPA, after consultation with the States and the Citizen Plaintiffs, agrees that a delay in performance has been or will be caused by a Force Majeure Event, the Plaintiffs and TVA under this Consent Decree (and EPA and TVA under the Compliance Agreement), shall stipulate to an extension of deadline(s) for performance of the affected compliance requirement(s) by a period equal to the delay actually caused by the event. In such circumstances, an appropriate modification shall be made pursuant to Section XII (Modification) of this Consent Decree. For any Non-Parallel Provision, if the States and the Citizen Plaintiffs agree that a delay in performance has been or will be caused by a Force Majeure Event, the Plaintiffs and TVA shall stipulate to an extension of deadline(s) for performance of the affected compliance requirement(s) by a period equal to the delay actually caused by the event. In such circumstances, an appropriate modification shall be made pursuant to Section XII (Modification) of this Consent Decree.

170. Disagreement . For any Parallel Provision, if EPA, after consultation with the States and the Citizen Plaintiffs, does not accept TVA's claim of Force Majeure, or if EPA and TVA cannot agree on the length of the delay actually caused by the Force Majeure Event, the matter shall be resolved in accordance with Section VIII (Dispute Resolution) of the Compliance Agreement and as provided in Section IV (Coordination of Oversight and Enforcement) of this Consent Decree. For any Parallel Provision, a Plaintiff may seek a resolution that is more stringent than the resolution reached through Section VIII (Dispute Resolution) of the Compliance Agreement as provided in Paragraph 161.a or if there is an unreasonable delay in resolving a dispute pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement, the Plaintiffs may pursue dispute resolution or other available remedies,

subject to the limitations in Section IV (Coordination of Oversight and Enforcement) of this Consent Decree. For any Non-Parallel Provision, if the States and the Citizen Plaintiffs do not accept TVA’s claim of Force Majeure, or if the Parties cannot agree on the length of the delay actually caused by the Force Majeure Event, the matter shall be resolved in accordance with Section VI (Dispute Resolution) of this Consent Decree.

171. Burden of Proof . In any dispute regarding Force Majeure, TVA shall bear the burden of proving that any delay in performance or any other violation of any requirement of this Consent Decree was caused by or will be caused by a Force Majeure Event. TVA shall also bear the burden of proving that TVA gave the notice required by this Section and the burden of proving the anticipated duration and extent of any delay(s) attributable to a Force Majeure Event. An extension of one compliance date based on a particular event may, but will not necessarily, result in an extension of a subsequent compliance date.

172. Events Excluded . Unanticipated or increased costs or expenses associated with the performance of TVA’s obligations under this Consent Decree shall not constitute a Force Majeure Event.

173. Potential Force Majeure Events . Depending upon the circumstances related to an event and TVA's response to such circumstances, the kinds of events listed below are among those that could qualify as Force Majeure Events within the meaning of this Section: construction, labor, or equipment delays; Malfunction of a Unit or emission control device; unanticipated coal supply or pollution control reagent delivery interruptions; acts of God; acts of war or terrorism; and, other than by TVA, orders by a government official, government

agency, other regulatory authority, or a regional transmission organization, acting under and authorized by applicable law, that directs TVA to supply electricity in response to a system-wide (state-wide or regional) emergency. Depending upon the circumstances and TVA's response to such circumstances, failure of a permitting authority to issue a necessary permit in a timely fashion may constitute a Force Majeure Event where the failure of the permitting authority to act is beyond the control of TVA and TVA has taken all steps available to it to obtain the necessary permit, including, but not limited to submitting a complete permit application; responding to requests for additional information by the permitting authority in a timely fashion; and accepting lawful permit terms and conditions after expeditiously exhausting any legal rights to appeal terms and conditions imposed by the permitting authority.

174. As part of the resolution of any matter submitted to this Court under Section VI (Dispute Resolution) of this Consent Decree, subject to Section IV (Coordination of Oversight and Enforcement) of this Consent Decree, regarding a claim of Force Majeure, the Plaintiffs and TVA by agreement, or this Court by order, may in appropriate circumstances extend or modify the schedule for completion of work under this Consent Decree to account for the delay in the work that occurred as a result of any delay agreed to by the Plaintiffs or as approved by the Court. TVA shall be liable for stipulated penalties if applicable for its failure thereafter to complete the work in accordance with the extended or modified schedule (provided that TVA shall not be precluded from making a further claim of Force Majeure with regard to meeting any such extended or modified schedule).

VI. DISPUTE RESOLUTION

175. Subject to, and only as allowed by, Section IV (Coordination of Oversight and Enforcement), the dispute resolution procedures provided by this Section shall be available to resolve all disputes arising under this Consent Decree. The procedures provided in Paragraphs 176-183 are limited by the provisions set forth in Section IV (Coordination of Oversight and Enforcement) of this Consent Decree.

176. The dispute resolution procedure provided herein may be invoked only by one Party giving written notice to the other Parties (and EPA) advising of a dispute pursuant to this Section. The notice shall describe the nature of the dispute and shall state the noticing Party’s position with regard to such dispute. The Parties receiving such a notice shall acknowledge receipt of the notice, and the Parties in dispute (and EPA) shall expeditiously schedule a meeting to discuss the dispute informally not later than fourteen (14) days following receipt of such notice.

177. Disputes submitted to dispute resolution under this Section shall, in the first instance, be the subject of informal negotiations among the disputing Parties (and EPA). Such period of informal negotiations shall not extend beyond thirty (30) days from the date of the first meeting among the disputing Parties’ representatives unless they agree in writing to shorten or extend this period. During the informal negotiations period, the disputing Parties may also submit their dispute to a mutually agreed upon alternative dispute

resolution (“ADR”) forum if the Parties agree that the ADR activities can be completed within the 30-day informal negotiations period (or such longer period as the Parties may agree to in writing).

178. If the disputing Parties are unable to reach agreement during the informal negotiation period, the relevant disputing Plaintiff ( e.g. , the Plaintiff that initiated dispute resolution pursuant to this Section through the notice described in Paragraph 176) shall provide TVA (and EPA) with a written summary of its position regarding the dispute. The written position provided by the disputing Plaintiff shall be considered binding unless, within forty-five (45) days thereafter, TVA seeks judicial resolution of the dispute by filing a petition with this Court. The disputing Plaintiff, or any other Party, may respond to the petition within forty-five (45) days of filing. The Parties shall provide to EPA copies of all filings with the Court.

179. In addition to any other methods set forth in this Section for altering time periods, the time periods set out in this Section may be shortened or extended upon motion to the Court of one of the Parties to the dispute, explaining the Party’s basis for seeking such a scheduling modification.

180. As part of the resolution of any dispute under this Section, in appropriate circumstances the disputing Parties may agree, or this Court may order, an extension or modification of the schedule for the completion of the activities required under this Consent Decree to account for the delay that occurred as a result of dispute resolution. TVA shall be liable for stipulated penalties for its failure thereafter to complete the work in accordance with the extended or modified schedule, provided that TVA shall not be precluded from asserting that a Force Majeure Event has caused or may cause a delay in complying with the extended or modified schedule.

181. Subject only to the exceptions set forth in Paragraph 182, the dispute resolution process set forth in this Section is mandatory once a notice is served under Paragraph 176. If notice is served under Paragraph 176, no Party may seek resolution of a dispute by the Court without first completing dispute resolution pursuant to Paragraphs 176-178. The dispute resolution process pursuant to Paragraphs 176-178 may be conducted concurrently with the process specified in Paragraph 163.

182. Notwithstanding Paragraph 181, if the matter has already been subject to dispute and resolution pursuant to Section VIII (Dispute Resolution) of the Compliance Agreement then no Party shall be required to engage in dispute resolution pursuant to Paragraphs 176-178 and a Party may seek resolution of a dispute by the Court without first engaging in dispute resolution pursuant to Paragraphs 176-178.

183. The Court shall decide all disputes pursuant to applicable principles of law for resolving such dispute. In their initial filings with the Court under Paragraph 178, the disputing Parties shall state their respective positions as to the applicable standard of law for resolving the particular dispute.

VII. INFORMATION COLLECTION AND RETENTION

184. Any authorized representative of Alabama, Kentucky, or Tennessee, including their attorneys, contractors, and consultants, upon presentation of credentials, shall have a right of entry upon the premises of any facility in the TVA System at any reasonable time for the purpose of:

monitoring the progress of activities required under this Consent Decree;

verifying any data or information submitted in accordance with the terms of this Consent Decree;

obtaining samples and, upon request, splits of any samples taken by TVA or its representatives, contractors, or consultants; and

assessing TVA's compliance with this Consent Decree.

185. TVA shall retain, and instruct its contractors and agents to preserve, all non-identical copies of all records and documents (including records and documents in electronic form) in its or its contractors’ or agents’ possession and/or control, and that directly relate to TVA’s performance of its obligations under this Consent Decree until six (6) years following completion of performance of such obligations. This record retention requirement shall apply regardless of any TVA document retention policy to the contrary.

186. All information and documents submitted by TVA pursuant to this Consent Decree shall be subject to any requests under applicable law providing public disclosure of documents unless (a) the information and documents are subject to legal privileges or protection or (b) TVA claims and substantiates in accordance with relevant federal or state law that the information and documents contain confidential business information. The Citizen Plaintiffs shall appropriately protect all information that is either subject to legal privileges or protection or that TVA substantiates as confidential business information.

187. Nothing in this Consent Decree shall limit the authority of EPA or Alabama, Kentucky, and Tennessee to conduct tests and inspections at TVA’s facilities under Section 114 of the Act, 42 U.S.C. § 7414, or any other applicable federal or state laws, regulations or permits.

VIII. NOTICES

188. Unless otherwise provided herein, whenever notifications, submissions, and/or communications are required by this Consent Decree, they shall be made in writing and addressed as follows:

As to EPA:

(If by first class mail)

Director, Air Enforcement Division

Office of Enforcement and Compliance Assurance

U.S. Environmental Protection Agency

1200 Pennsylvania Avenue, NW

Mail Code 2242A

Washington, DC 20460

(If by commercial delivery service)

Director, Air Enforcement Division

Office of Enforcement and Compliance Assurance

U.S. Environmental Protection Agency

Ariel Rios South Building, Room 1119

1200 Pennsylvania Avenue, NW

Washington, DC 20004

and

Director

Air, Pesticides and Toxics Management Division

U.S. EPA- Region 4

Sam Nunn Atlanta Federal Center

61 Forsyth Street, SW

Atlanta, GA 30303-8960

As to Alabama :

Chief, Air Division

Alabama Department of Environmental Management

1400 Coliseum Boulevard

Montgomery, AL 36110-2059

As to Kentucky :

Director

Division for Air Quality

Energy and Environment Cabinet

200 Fair Oaks Lane

Frankfort, KY 40601

As to North Carolina :

Director

NCDENR, Division of Air Quality

1641 Mail Service Center

Raleigh, NC 27699-1641

Senior Deputy Attorney General

Environmental Division

North Carolina Department of Justice

P.O. Box 629 (114 W. Edenton Street, Room 306A)

Raleigh, NC 27602-0629

As to Tennessee :

Division Director/Technical Secretary

Tennessee Department of Environment & Conservation

Air Pollution Control Division

401 Church Street

L&C Annex, 9th Floor

Nashville, TN 37243-1548

As to the Citizen Plaintiffs :

George E. Hays

Attorney at Law

236 West Portal Avenue #110

San Francisco, CA 94127

Office: 415/566-5414 Fax: 415/731-1609

e-mail: georgehays@mindspring.com

William J. Moore, III

1648 Osceola Street

Jacksonville, FL 32204

(904) 685-2172 (phone)

(904) 685-2175 (fax)

wmoore@wjmlaw.net

As to TVA :

Vice President, Environmental Permitting and Compliance

Tennessee Valley Authority

1101 Market Street

Chattanooga, TN 37402

and

Assistant General Counsel, Environment

Tennessee Valley Authority

400 West Summit Hill Drive

Knoxville, TN 37902

189. All notifications, communications or submissions made pursuant to this Section shall be sent either by (a) overnight mail or overnight delivery service, or (b) certified or registered mail, return receipt requested. In addition to the foregoing, notification may also be made through electronic mail. All notifications, communications, and transmissions that are properly addressed and prepaid and are (a) sent by overnight, certified or registered mail shall be deemed submitted on the date they are postmarked, or (b) sent by overnight delivery service shall be deemed submitted on the date they are delivered to the delivery service.

190. Any Party (and EPA) may change either the notice recipient or the address for providing notices to it by serving all other Parties (and EPA) with a notice setting forth such new notice recipient or address.

IX. SALES OR TRANSFERS OF OPERATIONAL OR OWNERSHIP INTERESTS

191. If TVA proposes to sell or transfer an Operational or Ownership Interest to an entity unrelated to TVA (“Third Party”), TVA shall advise the Third Party in writing of the

existence of this Consent Decree prior to such sale or transfer, and shall send a copy of such written notification to EPA, the States, and the Citizen Plaintiffs pursuant to Section VIII (Notices) of this Consent Decree at least sixty (60) days before such proposed sale or transfer.

192. No sale or transfer of an Operational or Ownership Interest shall take place before the Third Party and the Plaintiffs (in consultation with EPA) have executed a modification pursuant to Section XII (Modification) of this Consent Decree making the Third Party a party to this Consent Decree and jointly and severally liable with TVA for all the requirements of this Consent Decree that may be applicable to the transferred or purchased Operational or Ownership Interests.

193. This Consent Decree shall not be construed to impede the transfer of any Operational or Ownership Interests between TVA and any Third Party so long as the requirements of this Consent Decree are met. This Consent Decree shall not be construed to prohibit a contractual allocation between TVA and any Third Party of the burdens of compliance with this Consent Decree, provided that TVA shall remain liable to the Plaintiffs for the obligations of the Consent Decree applicable to the transferred or purchased Operational or Ownership Interests.

194. If the Plaintiffs (in consultation with EPA) agree, the Plaintiffs, TVA, and the Third Party that has become a party to this Consent Decree pursuant to Paragraph 192, may execute a modification that relieves TVA of its liability under this Consent Decree for, and makes the Third Party liable for, all obligations and liabilities applicable to the purchased or transferred Operational or Ownership Interests. Notwithstanding the foregoing, however, no obligation under this Consent Decree may be assigned, transferred or released in

connection with any sale or transfer of any Ownership Interest that is not specific to the purchased or transferred Operational or Ownership Interests, including the obligations set forth in Sections III.F (Environmental Mitigation Projects) and III.G (Civil Penalty), and Paragraphs 67 and 82. TVA may propose and the Plaintiffs may agree to restrict the scope of the joint and several liability of any purchaser or transferee for any obligations of this Consent Decree that are not specific to the transferred or purchased Operational or Ownership Interests, to the extent such obligations may be adequately separated in an enforceable manner using the methods provided by or approved under Section III.L (Permits).

195. Paragraphs 191-194 of this Consent Decree do not apply if an Operational or Ownership Interest is sold or transferred solely as collateral security in order to consummate a financing arrangement (not including a sale-leaseback), so long as TVA (a) remains the operator (as that term is used and interpreted under the Act) of the subject TVA System Unit(s); (b) remains subject to and liable for all obligations and liabilities of this Consent Decree; and (c) supplies EPA with the following certification within thirty (30) days of the sale or transfer:

Certification of Change in Ownership Interest Solely for Purpose of Consummating Financing . We, the Chief Executive Officer(s) and General Counsel(s) of the Tennessee Valley Authority (“TVA”), hereby jointly certify under Title 18 U.S.C. Section 1001, on our own behalf and on behalf of TVA, that any change in TVA's Ownership Interest in any Unit that is caused by the sale or transfer as collateral security of such Ownership Interest in such Unit(s) pursuant to the financing agreement consummated on [insert applicable date] between TVA and [insert applicable entity] (a) is made solely for the purpose of providing collateral security in order to consummate a financing arrangement; (b) does not impair TVA's ability, legally or otherwise, to comply timely with all terms and provisions of the Consent Decree entered in Alabama et al. v. Tennessee Valley Auth. , [insert case number] (E.D. Tenn. filed April 2011); (c) does not affect TVA's operational control of any Unit covered by that Consent Decree in a manner that is inconsistent with TVA's performance of its obligations under the Consent Decree; and (d) in no way affects the status of TVA's obligations or liabilities under that Consent Decree.

X. EFFECTIVE DATE

196. The effective date of this Consent Decree shall be the Date of Entry.

XI. RETENTION OF JURISDICTION

197. The Court shall retain jurisdiction of this case after the Date of Entry of this Consent Decree to enforce compliance with the terms and conditions of this Consent Decree and to take any action necessary or appropriate for the interpretation, construction, execution, or modification of the Consent Decree, or for adjudication of disputes. During the term of this Consent Decree, any Party to this Consent Decree may apply to the Court for any relief necessary to construe or effectuate this Consent Decree.

XII. MODIFICATION

198. Except for a Party’s request to modify this Consent Decree to conform to any modification to the Compliance Agreement, the terms of this Consent Decree may be modified only by a subsequent written agreement signed by the Parties. A Party shall provide notice to all other Parties (and to EPA) at least ten (10) business days before moving this Court to modify this Consent Decree to conform it to any modification of the Compliance Agreement. Except as otherwise specified herein, where the modification constitutes a material change to any term of this Consent Decree, it shall be effective only upon approval by the Court.

XIII. GENERAL PROVISIONS

199. At any time prior to conditional and/or partial termination of enforcement through this Consent Decree, TVA may request approval from EPA to implement a pollution control technology or pollution reduction activity for SO 2 or NO x other than what is required by this Consent Decree. In seeking such approval, TVA must demonstrate that such

alternative control technology or activity is capable of achieving and maintaining pollution reductions equivalent to an FGD (for SO 2 ) or SCR (for NO x ) at the Units in the TVA System at which TVA seeks approval to implement such other control technology or activity for SO 2 or NO x . Approval of such a request is solely at the discretion of EPA (in consultation with the States and the Citizen Plaintiffs) provided that TVA shall not implement (and the Compliance Agreement prohibits EPA from approving) an alternative control technology or activity if TVA fails to demonstrate that such alternative control technology or activity is capable of achieving and maintaining pollution reductions equivalent to an FGD (for SO 2 ) or SCR (for NO x ) at the Units in the TVA System. If EPA approves TVA's request, nothing in this Paragraph shall relieve TVA from complying with any other requirement of this Consent Decree applicable to such Unit ( e.g. , the requirement to obtain a federally enforceable non-Title V permit that includes the Unit-specific performance, operational, maintenance, and control technology requirements for such Unit in addition to the system-wide requirements and any plant-wide requirements also applicable to such Unit).

200. This Consent Decree is not a permit. Compliance with the terms of this Consent Decree does not guarantee compliance with any applicable federal, state, and/or local laws and/or regulations. The emission limitations set forth herein do not relieve TVA from any obligation to comply with other state and federal requirements under the Act, including TVA's obligation to satisfy any modeling requirements set forth in the Act.

201. This Consent Decree does not apply to any claim(s) of alleged criminal liability.

202. In any subsequent action initiated by EPA, the States, or the Citizen Plaintiffs relating to the facilities covered by this Consent Decree, TVA shall not assert any defense or

claim based upon principles of waiver, res judicata , collateral estoppel, issue preclusion, claim preclusion, or claim splitting, or any other defense based upon the contention that the claims raised by EPA and/or any of the States or the Citizen Plaintiffs in the subsequent proceeding were brought, or should have been brought, in the instant case; provided, however, that nothing in this Paragraph is intended to affect the validity of Section III.H (Resolution of Claims Against TVA).

203. Except as specifically provided by this Consent Decree, nothing in this Consent Decree shall relieve TVA of its obligation to comply with all applicable federal, state, and/or local laws and/or regulations, including, but not limited to, TVA’s obligation to apply for a Clean Water Act NPDES permit(s) or permit renewal for the discharge of wastewater from the operation of the FGDs at any TVA System Unit, and in connection with any such application or application for permit renewal, to provide the NPDES permitting authority with all information necessary to appropriately characterize effluent from its operations and develop, if applicable, appropriate effluent limitations; provided, however, that no claimed violation of this provision regarding NPDES permitting shall be enforceable as a violation of this Consent Decree, by way of stipulated penalty or otherwise. Subject to the provisions in Section III.H (Resolution of Claims Against TVA), nothing contained in this Consent Decree shall be construed to prevent or limit the rights of EPA, the States, or the Citizen Plaintiffs to obtain penalties or injunctive relief under the Act or other federal, state, or local statutes, regulations, or permits.

204. Nothing in this Consent Decree is intended to, or shall, alter or waive any applicable law (including but not limited to any defenses, entitlements, challenges, or

clarifications related to the Credible Evidence Rule, 62 Fed. Reg. 8314 (Feb. 24, 1997)) concerning the use of data for any purpose under the Act.

205. Each limit and/or other requirement established by or under this Consent Decree is a separate, independent requirement.

206. Performance standards, emissions limits, and other quantitative standards set by or under this Consent Decree must be met to the number of significant digits in which the standard or limit is expressed. For example, an Emission Rate of 0.100 is not met if the actual Emission Rate is 0.101. TVA shall round the fourth significant digit to the nearest third significant digit, or the third significant digit to the nearest second significant digit, depending upon whether the limit is expressed to three or two significant digits. For example, if an actual Emission Rate is 0.1004, that shall be reported as 0.100, and shall be in compliance with an Emission Rate of 0.100, and if an actual Emission Rate is 0.1005, that shall be reported as 0.101, and shall not be in compliance with an Emission Rate of 0.100. TVA shall report data to the number of significant digits in which the standard or limit is expressed.

207. Except as otherwise provided by law, this Consent Decree does not limit, enlarge or affect the rights of any Party to this Consent Decree as against any third parties.

208. This Consent Decree constitutes the final, complete and exclusive agreement and understanding among the Parties with respect to the settlement embodied in this Consent Decree, and supersedes all prior agreements and understandings among the Parties related to the subject matter herein. No document, representation, inducement, agreement, understanding, or promise constitutes any part of this Consent Decree or the settlement it represents, nor shall they be used in construing the terms of this Consent Decree.

XIV. SIGNATORIES AND SERVICE

209. Each undersigned representative of the Parties certifies that he or she is fully authorized to enter into the terms and conditions of this Consent Decree and to execute and legally bind to this document the Party he or she represents.

210. This Consent Decree may be signed in counterparts, and such counterpart signature pages shall be given full force and effect.

211. Each Party hereby agrees to accept service of process by mail with respect to all matters arising under or relating to this Consent Decree and to waive the formal service requirements set forth in Rule 4 of the Federal Rules of Civil Procedure and any applicable Local Rules of this Court, including but not limited to, service of a summons.

XV. PUBLIC COMMENT

212. The Parties agree and acknowledge that entry of this Consent Decree shall occur only after EPA has completed the public notice and comment process that is specified in Paragraph 211 of the Compliance Agreement. The Parties shall not oppose entry of this Consent Decree by this Court or challenge any provision of this Consent Decree unless EPA has notified TVA, the States, and the Citizen Plaintiffs in writing that due to the substance of comments received during the notice and comment period specified in Paragraph 211 of the Compliance Agreement, EPA no longer consents to the Compliance Agreement as originally executed by EPA and TVA. The Parties reserve the right to seek, prior to entry, modifications to this Consent Decree consistent with any modifications that EPA and TVA make to the Compliance Agreement pursuant to Paragraph 211 of the Compliance Agreement.

XVI. CONDITIONAL TERMINATION OF ENFORCEMENT UNDER DECREE

213. Termination as to Completed Tasks at a Unit. As soon as TVA completes a requirement of this Consent Decree pertaining to a particular Unit that is not ongoing or recurring, TVA may, by written letter to the States and the Citizen Plaintiffs, seek termination of the provision or provisions of this Consent Decree that imposed the requirement.

214. Conditional Termination of Enforcement Through the Consent Decree. After TVA:

a. has successfully completed construction of all pollution control technology or such other Control Requirement described in Paragraphs 69 and 85, and has maintained Continuous Operation of all pollution control technology or such other Control Requirement at the TVA System Units as required by this Consent Decree for at least two (2) years; and

b. has obtained final permits and/or site-specific SIP amendments (i) as required by Section III.L (Permits) of this Consent Decree, (ii) that cover all Units in this Consent Decree, and (iii) that include as enforceable permit terms all of the Unit-specific and TVA System performance, operational, maintenance, and control technology requirements specified in this Consent Decree;

then TVA may so certify these facts to the States and the Citizen Plaintiffs. If the States and the Citizen Plaintiffs (in consultation with EPA) do not object in writing with specific reasons within forty-five (45) days of receipt of TVA's certification, then, for any Consent Decree violations that occur after the certification is submitted, the States and the Citizen Plaintiffs shall pursue enforcement through the applicable permit(s) required pursuant to Paragraphs 50, 150, 154, 155, 156, and 158 and/or other enforcement authority, and not through this Consent Decree.

215. Resort to Enforcement under this Consent Decree. Notwithstanding Paragraph 214, if enforcement of a provision in this Consent Decree cannot be pursued by the States and the Citizen Plaintiffs under the applicable permits required by this Consent Decree or other enforcement authority, or if a Consent Decree requirement was intended to be part of a permit and did not become or remain part of such permit, then such requirement may be enforced under the terms of this Consent Decree at any time.

XVI. FINAL JUDGMENT

216. Upon approval and entry of this Consent Decree by the Court, this Consent Decree shall constitute a final judgment among the Parties.

It is so ordered.

/s/ Thomas A. Varlan

Thomas A. Varlan

United States District Judge

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR THE STATE OF ALABAMA AND THE ALABAMA DEPARTMENT OF ENVIRONMENTAL MANAGEMENT:





		/s/ Lance R. LeFleur
			LANCE R. LEFLEUR, Director Alabama Department of Environmental Management 1400 Coliseum Boulevard Montgomery, AL 36130-1463

LUTHER STRANGE, Attorney General



			BY: /s/ S. Shawn Sibley
		S. SHAWN SIBLEY (ASB-2802-Y49S)
		Assistant Attorney General and Associate General Counsel Alabama Department of Environmental Management 1400 Coliseum Boulevard Montgomery, AL 36130-1463

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR THE COMMONWEALTH OF KENTUCKY:

/s/ Leonard K. Peters

DR. LEONARD K. PETERS, Secretary

Energy and Environment Cabinet

500 Mero Street

12th Floor, Capital Plaza Tower

Frankfort, Kentucky 40601

/s/ C. Michael Haines

C. MICHAEL HAINES, General Counsel

Office of General Counsel

2 Hudson Hollow Road

Frankfort, Kentucky 40601

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR THE STATE OF NORTH CAROLINA:

/s/ Roy Cooper

ROY COOPER

Attorney General

North Carolina Department of Justice

P.O. Box 629

114 West Edenton Street

Raleigh, NC 27602

(919) 716-6400

Fax: (919) 716-0803

100

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR THE STATE OF TENNESSEE:

ROBERT E. COOPER, JR.

Attorney General & Reporter

Tenn. BPR No. 10934

BY:	/s/ Phillip R. Hilliard PHILLIP R. HILLIARD Senior Counsel Office of the Tennessee Attorney General & Reporter Environmental Division P.O. Box 20207 425 Fifth Avenue North Nashville, TN 37202 (615) 741-4612 Fax: (615) 741-8724 Phillip.Hilliard@ag.tn.gov Tenn. BPR No. 21524

101

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR NATIONAL PARKS CONSEVATION ASSOCIATION:


	/s/ Elizabeth Fayad ELIZABETH FAYAD General Counsel

102

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR SIERRA CLUB:


	/s/ Bruce E. Nilles BRUCE E. NILLES Deputy Conservation Director

103

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR OUR CHILDREN’S EARTH FOUNDATION:


	/s/ Tiffany Schauer TIFFANY SCHAUER Executive Director

104

Signature Page for Consent Decree in:

Alabama et al.

Tennessee Valley Auth.

FOR THE TENNESSEE VALLEY AUTHORITY:


	/s/ Tom Kilgore TOM KILGORE President and Chief Executive Officer Tennessee Valley Authority

105

APPENDIX A

REPORTING REQUIREMENTS

I. Annual Reporting Requirements

Beginning six (6) months after the Consent Decree Obligation Date, and continuing annually on April 30 each year thereafter, TVA shall submit annual reports to EPA, the States, and the Citizen Plaintiffs electronically as required by Section III.I (Periodic Reporting). EPA, the States, and the Citizen Plaintiffs reserve the right to request such information in hard copy. In such annual reports, TVA shall include the following information:

A. System-Wide Annual Tonnage Limitations for NO x and SO 2

If TVA was subject to an adjusted System-Wide Annual Tonnage Limitation specified in Paragraphs 68 and 83 in the calendar year covered by the annual report, it shall report the following: (1) the Units at which the adjusted System-Wide Annual Tonnage Limitations in Paragraphs 68 and 83 apply and (2) the adjusted aggregate System-Wide Annual Tonnage Limitation.

Continuous Operation of Pollution Control Technology or Combustion Controls

TVA shall report the date that it commenced Continuous Operation of each SCR, FGD, PM Control Device, SNCR, LNB, OFA, and SOFA that TVA is required to Continuously Operate pursuant to this Consent Decree in the calendar year covered by the annual report.

TVA shall include a statement in each annual report describing the actions it took to optimize the PM Control Devices as required by Paragraph 98 in the relevant calendar year.

C. Installation of NO x , SO 2 , and PM Control Devices

TVA shall report on the progress of construction (including upgrades) of SCRs and FGDs (and new PM Control Devices, if any) required by this Consent Decree including: (1) if construction is not underway, any available information concerning the construction schedule, including the dates of any major contracts executed during the prior calendar year, and any major components delivered during the prior calendar year; (2) if construction is underway, the estimated percent of installation as of the end of the prior calendar year, the current estimated construction completion date, and a brief description of completion of significant milestones during the prior calendar year, including a narrative description of the current construction status ( e.g . foundations completed, absorber installation proceeding, all material on-site, new stack erection completed, etc.); (3) a list of all permits needed to construct and operate the device, the date TVA applied for such permits, and the status of the permit applications; and (4) once construction is complete, the dates the equipment was placed in service and any performance/emissions testing that was performed during the prior calendar year. For purposes of the FGD upgrade at Paradise Units 1 and 2, TVA shall demonstrate, with supporting documentation, that the construction activities performed to upgrade the FGDs at Paradise Units 1 and 2 were designed to upgrade the FGDs to a 93% removal efficiency.

D. Unit Retirements

Beginning on April 30 of the year following TVA’s obligation pursuant to this Consent Decree to Retire a TVA System Unit, and continuing annually thereafter until all TVA System Units required to be Retired have been Retired, TVA shall report the date it Retired such Unit and a description of the actions TVA took to Retire such Unit within the meaning of Paragraph 51.

E. Repower to Renewable Biomass

F. PM Emission Control Optimization Study

Beginning on April 30 of the year following TVA’s obligation to implement the EPA-approved recommendations required by Paragraph 99, TVA shall include a statement describing how it maintained each PM Control Device in accordance with the EPA-approved PM emission control optimization study.

G. Reporting Requirements for NO x and SO 2 Allowances

1. Reporting Requirements for NO x and SO 2 Surrendered Allowances

TVA shall report the number of NO x and SO 2 Allowances that were allocated to it under any programs and the number of NO x and SO 2 Allowances surrendered pursuant to Paragraphs 75 and 91 for the prior calendar year. TVA shall include the mathematical basis supporting its calculation of NO x and SO 2 Allowances surrendered.

2. Reporting Requirements for NO x and SO 2 Super-Compliance Allowances

TVA shall report any Super-Compliance NO x or SO 2 Allowances that it generated as provided in Paragraphs 78 and 94 for the prior calendar year. TVA shall include the mathematical basis supporting its calculation of Super-Compliance NO x or SO 2 Allowances. TVA shall also specifically identify the amount, if any, of Super-Compliance NO x and SO 2 Allowances that TVA generated from Retiring a TVA System Unit that TVA did not utilize for purposes of Paragraph 117 (New CC/CT Units).

H. New CC/CT Units

TVA shall report all information necessary to determine compliance with Paragraphs 117-119. In particular, TVA shall report whether it has applied for a minor NSR permit as described in Subparagraph 117.b and 119.c to construct a New CC/CT Unit, and shall confirm that it timely provided a copy of the permit application to EPA, the States, and the Citizen Plaintiffs as required by Subparagraph 117.c and Paragraph 155. TVA shall report the amount of emission reductions of NO x and the amount of emission reductions of SO 2 resulting from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 117. TVA shall report the amount of emission reductions of Greenhouse Gases resulting

from Retiring a TVA System Unit that TVA utilized as netting credits as provided in Paragraph 119. TVA shall describe how the emissions decreases on which it is relying in order to construct a New CC/CT Unit as provided in Paragraph 117 and 119 are both contemporaneous and otherwise creditable within the meaning of the Clean Air Act and the applicable SIP. In making these demonstrations, TVA shall provide unit-by-unit explanations and calculations. TVA shall include a description of the emission limitations determined by the relevant permitting authority as described in Subparagraph 117.b, and how such emission limitations are consistent with this Consent Decree and Appendix B. TVA shall provide all relevant information, including an appropriate mathematical calculation, to demonstrate that any emission decrease upon which it relied for purposes of Paragraph 117 was not used to generate a Super-Compliance NO x or SO 2 Allowance in the calendar year in which TVA relies upon such emission reduction and all calendar years thereafter. TVA shall provide all information necessary to determine compliance with the conditions established in Paragraphs 119.b-119.c.

I. NO x , SO 2 , and PM CEMS Malfunction, Repair, or Maintenance

TVA shall report all periods when a CEMS required by this Consent Decree was not operating, including periods of monitor malfunction, repair, or maintenance in the prior calendar year.

J. PM CEMS Data

In an electronic, spreadsheet format, TVA shall submit the data recorded by the PM CEMS, expressed in lb/mmBTU, on a three-hour (3-hour) rolling average basis and a twenty-four-hour (24-hour) rolling average basis, and shall include identification of each 3-hour average and 24-hour average above the 0.030 lb/mmBTU PM Emission Rate for Bull Run Unit 1, Colbert Unit 5, and Kingston Units 1-9, for the prior calendar year. If TVA locates a PM CEMS at another Unit in the TVA System pursuant to Paragraph 110, and such Unit is also subject to a PM Emission Rate pursuant to Paragraph 100, TVA shall also include identification of each 3-hour average exceededance for such Unit.

K. SO 2 Emission Rate at Shawnee

TVA shall submit all data necessary to determine whether emissions of SO 2 from Shawnee Units 1-10 exceeded 1.2 lb/mmBTU in the prior calendar year.

L. PM Stack Tests & PM Emission Rates

TVA shall submit the complete report for the stack tests performed pursuant to Paragraphs 101 and 102 in the prior calendar year. TVA shall describe at which TVA System Units, if any, TVA did not perform a stack test in the relevant calendar year. TVA shall separately identify the stack test reports for the TVA System Units subject to a PM Emission Rate under this Consent Decree.

M. Environmental Mitigation Projects

TVA shall report funds disbursed to the States pursuant to Paragraphs 122-124 and 126 of the Consent Decree in the prior calendar year.

N. Other Unit at Shawnee Becomes Improved Unit

Emission Reductions Greater than those Required Under this Consent Decree

TVA shall report whether, in the relevant calendar year, it claimed to have achieved emission reductions at a particular TVA System Unit that are greater than those emission reductions required under this Consent Decree for the particular TVA System Unit as provided in Paragraph 116. If TVA did not claim to have achieved emission reductions at a particular TVA System Unit that are greater than those emission reductions required under this Consent Decree, it shall so state. If TVA did, for any purpose, claim to achieve emission reductions at a particular TVA System Unit that are greater than those required under this Consent Decree for that particular TVA System Unit, TVA shall include a description of how it achieved such emission reductions, including a mathematical calculation in support of the claimed emission reductions, an explanation of how such emission reductions are greater than those required under this Consent Decree, and the manner in which such emission reductions were either relied upon or used for purposes of permitting actions, non-permitting actions, or otherwise.

II. Deviation Reports

TVA shall report all deviations from the requirements of the Consent Decree that occur during the calendar year covered by the annual report, identifying the date and time that the deviation occurred, the date and time the deviation was corrected, the cause of any corrective actions taken for each deviation, if necessary, and the date that the deviation was initially reported under Paragraph 156.

III. Submission Pending Review

In each annual report, TVA shall include a list of all plans or submissions made pursuant to this Consent Decree during the calendar year covered by the annual report and all prior calendar years since the Consent Decree Obligation Date, the date(s) such plans or submissions were submitted to EPA for review or approval, and shall identify which, if any, are still pending review and approval by EPA upon the date of the submission of the annual report.

IV. Other Information Necessary to Determine Compliance

To the extent that information not expressly identified herein is necessary to determine TVA’s compliance with the requirements of this Consent Decree for the calendar year covered by the annual report, and such information has not otherwise been submitted, TVA shall provide such information as part of the annual report required pursuant to Section III.I (Periodic Reporting) of the Consent Decree and TVA shall provide such other information that is deemed necessary by EPA in consultation with the States.

V. Information Previously Submitted under Title V Permitting Requirements

In any periodic progress report submitted pursuant to Section III.I (Periodic Reporting) of the Consent Decree and this Appendix, TVA may incorporate by reference information previously submitted under its Title IV or Title V permitting requirements, provided that TVA attaches the Title IV and/or Title V permit report, or the relevant portion thereof, and provides a specific reference to the provisions of the Title IV and/or Title V permit report that are responsive to the information required in the periodic progress report.

APPENDIX B

EMISSION LIMITATIONS FOR NEW CC/CT UNITS

This Appendix B sets forth emission limitations for certain regulated NSR pollutants for the purpose of constructing New CC/CT Units pursuant to Paragraph 117 of the Consent Decree. The emission limitations set forth in this Appendix serve solely as the minimum stringency for emission limitations to be determined by the relevant permitting authority for such New CC/CT Units as described in Paragraph 117, and shall not be presumed to be BACT or LAER. Although the permitting authority as part of the permitting action described in Paragraph 117 of the Consent Decree shall not determine BACT or LAER to be less stringent than the emission limitations set forth herein, nothing in the Consent Decree or this Appendix shall prevent the permitting authority from establishing more stringent emission limitations than those set forth in this Appendix. For purposes of the permitting action described in Paragraph 117 of the Consent Decree, TVA shall not assert that the Consent Decree (including this Appendix) supports imposing a BACT or LAER emission limitation that is no more stringent than the emission limitations set forth herein.

The permitting authority will determine BACT and LAER, as appropriate, for NO x , SO 2 , VOC, PM, PM 10 , and PM 2.5 for all periods of operation, including startup, shutdown, combustion tuning, and fuel switching as part of the minor NSR permitting action described in Paragraph 117. The emission limitations only for NO x and VOC described in this Appendix do not apply during startup, shutdown, combustion tuning, and fuel switching. For purposes of startup and shutdown, the permitting authority will consider appropriate technologies, methodologies, and other practices to reduce or minimize emissions during such events (such as the use of an auxiliary boiler to preheat the catalyst, the use of Rapid Start Process, and by limiting the number and duration of startups and shutdowns, among other things) as part of the BACT/LAER analysis. In addition to any other limitations determined by the permitting authority, combustion tuning shall be limited to no more than four (4) hours per event and the total event hours in a calendar year shall not exceed twenty (20) hours. The permitting authority shall require TVA to include advance notice of the details of such combustion tuning event and the proposed tuning schedule. An event, for purposes of the 4-hour event limit, shall begin to run when TVA first commences the combustion tuning process at a unit and shall conclude once TVA has completed all tuning-related activities and returns the unit to normal operation. For purposes of this Appendix, and in addition to any other limitations determined by the permitting authority, the type of fuel switching for which the NO x and VOC emission limitations described in this Appendix do not apply shall be for oil-to-gas switching not to exceed thirty (30) minutes per each oil-to-gas fuel switch and gas-to-oil switching not to exceed fifteen (15) minutes per each gas-to-oil fuel switch.

The New CC/CT Units constructed pursuant to Paragraph 117 of the Consent Decree shall combust Natural Gas as the primary fuel, which shall contain no more than one (1) grain sulfur per one hundred (100) standard cubic feet (“Gr S/100 SCF”). Ultra-Low Sulfur Diesel (“ULSD”) Fuel Oil containing no more than 0.0015% sulfur by weight may be used as an alternate fuel, provided that the use of such fuel is limited to no more than five hundred (500) hours during any calendar year or one hundred (100) hours during any calendar year, as specified in

the Tables below. Units subject to an ULSD Fuel Oil operational limitation of 100 hours during any calendar year shall only combust ULSD Fuel Oil for either Testing or during periods of Natural Gas Curtailment. For purposes of this Appendix, the term “Testing” shall mean the infrequent start-up of a unit not for purposes of generating electricity but to ensure that the unit is physically capable of operating. For purposes of this Appendix, the term “Natural Gas Curtailment” shall mean a restriction or limitation imposed by a third-party beyond TVA’s control on TVA’s ability to obtain or use Natural Gas. If TVA Retires one or more of the Units at the Allen Fossil Plant identified in Paragraph 63 of the Consent Decree and seeks to construct a New CC/CT Unit co-located at the Allen Fossil Plant pursuant to Paragraph 117 of the Consent Decree, then, in addition to Natural Gas and ULSD Fuel Oil, TVA may also request that the permitting authority authorize it to co-fire biogas from the Memphis Public Works waste treatment plant at such New CC/CT Units, which is the same biogas that TVA co-fires at the Allen Fossil Plant as of the Consent Decree Obligation Date of this Consent Decree.

A. Emission Limitations for New CC Units

As part of the minor NSR permitting action described in Paragraph 117 of the Consent Decree, the permitting authority shall establish emission limitations that are no less stringent than those set forth in Table A.1 for New CC Units firing Natural Gas and Table A.2 for New CC Units firing ULSD Fuel Oil. Additionally, as part of the minor NSR permitting action described in Paragraph 117 of the Consent Decree, the permitting authority shall impose a condition that limits the New CC Units to firing no more than 500 hours of ULSD Fuel Oil in a calendar year.

Table A.1 – Emission Limitations for Natural Gas-fired operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	2.0 parts per million (ppm) at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	All periods of operation are subject to the emission limitation set forth in this Table (hereinafter referred to as “NA”)
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2 without duct firing 2.0 ppm at 15% O 2 with duct firing	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table A.2 – Emission Limitations for ULSD Fuel Oil-fired operation (not to exceed 500 hours during any calendar year)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	8.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

B. Emission Limitations for New CT Units Located in Attainment Areas Subject to an Operational Limitation of 1,300 Hours in a 12-Month Period

Table B.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	9.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	3.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table B.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 500 hours during any calendar year)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	5.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

C. Emission Limitations for New CT Units Located in Attainment Areas with No Hours of Operation Limit

As part of the minor NSR permitting action described in Paragraph 117 of the Consent Decree, the permitting authority shall establish emission limitations that are no less stringent than those set forth in: (i) Table C.1 for New CT Units firing Natural Gas if they are located in an attainment area and are not subject to an overall hours of operation limitation of no more than 1,300 hours in a rolling 12-month period and (ii) Table C.2 for New CT Units firing ULSD Fuel Oil if they are located in an attainment area and are not subject to an overall hours of operation limitation of no more than 1,300 hours in a rolling 12-month period, and which must be subject to an operational limitation for ULSD Fuel Oil that limits the New CT Units to firing no more than 100 hours of ULSD Fuel Oil in a calendar year, and further limiting the use of ULSD Fuel Oil at such New CT Units for purposes of Testing or during periods of Natural Gas Curtailment only. If the permitting authority, as part of the minor NSR permitting action for a New CT Unit firing ULSD Fuel Oil to be located in an attainment area with no overall hours of operation limitation, requires TVA to install and operate an SCR and achieve a NO x emission rate of no greater than 6.0 ppm at 15% O 2 over an eight-hour (8-hour) rolling average rather than 42 ppm at 15% O 2 over an 8-hour rolling average as specified in Table C.2 below, then the 500 hour calendar year operational limitation described in Section B shall apply instead of the 100 hour calendar year operational limitation specified in this Section C.

Table C.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	5.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table C.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 100 hours during any calendar year, and only for either Testing or Natural Gas Curtailment)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

D. Emission Limitations for New CT Units Located In Nonattainment Areas With or Without an Hours of Operation Limit

as part of the minor NSR permitting action for a New CT Unit firing ULSD Fuel Oil to be located in a nonattainment area, requires TVA to install and operate an SCR and achieve a NO x emission rate of no greater than 6.0 ppm at 15% O 2 over an 8-hour rolling average rather than 42 ppm at 15% O 2 over an 8-hour rolling average as specified in Table D.2 below, then the 500 hour calendar year operational limitation described in Section B shall apply instead of the 100 hour calendar year operational limitation specified in this Section D.

Table D.1 – Emission Limitations for Natural Gas-fired Operation

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	5.0 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	1 Gr S/100 SCF	12-month rolling average	NA
Filterable PM 2.5	0.005 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	1.5 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

Table D.2 – Emission Limitations for ULSD Fuel Oil-fired Operation (not to exceed 100 hours during any calendar year, and only for either Testing or Natural Gas Curtailment)

Pollutant	Emission Rate	Averaging Period	Periods of Operation Subject to an Alternate BACT/LAER Emission Limitation to Be Established by the Permitting Authority as Part of the Permitting Process
NO x	42 ppm at 15% O 2	8-hour rolling average	Startup, shutdown, combustion tuning, fuel switching
SO 2	15 ppm S	NA	NA
Filterable PM 2.5	0.015 lb/mmBTU	Average of three 1-hour runs from stack test in accordance with reference method	NA
VOC	4.0 ppm at 15% O 2	Average of three 1-hour runs from stack test in accordance with reference method	Startup, shutdown, combustion tuning, fuel switching

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Tom Kilgore, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of the Tennessee Valley Authority;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Date: August 11, 2011		/s/ Tom Kilgore
			Tom Kilgore
			President and Chief Executive Officer

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, John M. Thomas, III, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of the Tennessee Valley Authority;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Date: August 11, 2011		/s/ John M. Thomas, III
			John M. Thomas, III
			Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION FURNISHED PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(b)

OR RULE 15d-14(b) AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Tennessee Valley Authority (the “Company”) for the quarter ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tom Kilgore, President and Chief Executive Officer of the Company, certify, for the purposes of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tom Kilgore

Tom Kilgore

President and Chief Executive Officer

August 11, 2011

EXHIBIT 32.2

CERTIFICATION FURNISHED PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(b)

OR RULE 15d-14(b) AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Tennessee Valley Authority (the “Company”) for the quarter ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Thomas, III, Chief Financial Officer of the Company, certify, for the purposes of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John M. Thomas, III

John M. Thomas, III

Chief Financial Officer

August 11, 2011