ITEM 1.  BUSINESS

The Corporation

The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by legislation enacted by the U.S. Congress in response to a request by President Franklin D. Roosevelt.  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 to a population of over nine million people.

TVA manages the Tennessee River, its tributaries, and certain shorelines 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.  TVA performs these management duties in cooperation with other federal and state agencies which have jurisdiction and authority over certain aspects of the river system.  In addition, the TVA Board of Directors (the "TVA Board") established two councils — the Regional Resource Stewardship Council and the Regional Energy Resource Council — under the Federal Advisory Committee Act to advise TVA on its stewardship activities in the Tennessee Valley and its energy resource activities.

Initially, all TVA operations were funded by federal appropriations.  Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA’s stewardship, economic development, and multipurpose activities ended in 1999.  Since 1999, TVA has funded all of its operations almost entirely from the sale of electricity and power system financings. TVA’s power system financings consist primarily of the sale of debt securities and secondarily of alternative forms of financing such as lease arrangements.  As a wholly-owned government corporation, TVA is not authorized to issue equity securities.

Service Area

TVA's service area, the area in which it sells power, is defined by the TVA Act. TVA 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. Under the TVA Act, subject to certain minor exceptions, TVA may not, without specific authorization from the U.S. Congress, enter into contracts that would have the effect of making it, or the wholesale customers of TVA ("local power company customers" or "LPCs") that distribute TVA power, a source of power supply outside the area for which TVA or its LPCs were the primary source of power supply on July 1, 1957.  This provision is referred to as the “fence” because it bounds TVA’s sales activities, essentially limiting TVA to power sales within a defined service area.

Note

See Power Supply and Load Management Resources — Coal-Fired for a discussion of coal-fired units .     

In addition, the Federal Power Act ("FPA") includes a provision that helps protect TVA’s ability to sell power within its service area.  This provision, called the "anti-cherrypicking" provision, prevents the Federal Energy Regulatory Commission ("FERC") from ordering TVA to provide access to its transmission lines to others to deliver power to customers within TVA’s defined service area.  As a result, the anti-cherrypicking provision reduces TVA’s exposure to loss of customers.

In 2017 , the revenues generated from TVA’s electricity sales were $10.6 billion and accounted for virtually all of TVA’s revenues. TVA’s revenues by state for each of the last three years are detailed in the table below.

Note

(1) Represents revenue capitalized during pre-commercial operations of $22 million at Watts Bar Nuclear Plant ("Watts Bar") Unit 2, Paradise Combined Cycle Plant, and Allen Combined Cycle Plant in 2017 and $18 million at Watts Bar Unit 2 in 2016. See Note 1 — Pre-Commercial Plant Operations .

Customers

TVA is primarily a wholesaler of power, selling power to LPCs which then resell power to their customers at retail rates.  TVA’s LPCs consist of (1) municipalities and other local government entities ("municipalities") and (2) customer-owned entities ("cooperatives") .  These municipalities and cooperatives operate public power electric systems whose primary purpose is not to make a profit but to supply electricity to the general public or the cooperative's members.  TVA also sells power directly to certain end-use customers, primarily large commercial and industrial loads and federal agencies with loads larger than 5,000 kilowatts ("kW") . Whether TVA or a LPC serves a new power customer is determined by reference to the TVA-LPC wholesale power contract. The contract contains a formula that balances the size of the LPC and the amount of any TVA infrastructure investment to determine which party is entitled to serve the new customer.  In addition, power in excess of the needs of the TVA system may, where consistent with the provisions of the TVA Act, be sold under exchange power arrangements with other specific electric systems. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues .

Note

(1) Represents revenue capitalized during pre-commercial operations of $22 million at Watts Bar Unit 2, Paradise Combined Cycle Plant, and Allen Combined Cycle Plant in 2017 and $18 million at Watts Bar Unit 2 in 2016. See Note 1 — Pre-Commercial Plant Operations .

Local Power Companies

Revenues from LPCs accounted for approximately 91 percent of TVA’s total operating revenues in 2017 .  At September 30, 2017 , TVA had wholesale power contracts with 154 LPCs.  Each of these contracts requires the LPC to purchase from TVA all of its electric power and energy consumed within the TVA service area. Nearly all LPCs purchase power under contracts that require five, ten, or fifteen years notice to terminate.

The number of LPCs with the contract arrangements described below, the revenues derived from such arrangements in 2017 , and the percentage of TVA’s 2017 total operating revenues represented by these revenues are summarized in the table below.

Note

(1)  Ordinarily, the LPCs and TVA have the same termination notice period; however, in contracts with five of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Two of the LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.  Also, under TVA’s contract with Bristol Virginia Utilities, a five-year termination notice may not be given by the LPC until January 2018.

TVA’s two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with five-year and 10-year termination notice periods, respectively.  Sales to MLGW and NES accounted for 10 percent and nine percent, respectively, of TVA’s total operating revenues in 2017 .

The power contracts between TVA and LPCs provide for the purchase of power by LPCs at the wholesale rates established by the TVA Board.  Under Section 10 of the TVA Act, the TVA Board is authorized to regulate LPCs to carry out the purposes of the TVA Act through contract terms and conditions as well as through rules and regulations.  TVA regulates LPCs primarily through the provisions of TVA’s wholesale power contracts.  All of the power contracts between TVA and the LPCs require that power purchased from TVA be sold and distributed to the ultimate consumer without discrimination among consumers of the same class and prohibit directly or indirectly discriminatory rates, rebates, or other special concessions.  In addition, there are a number of wholesale power contract provisions through which TVA seeks to ensure that the electric system revenues of the LPCs are used only for electric system purposes.  Furthermore, almost all of these contracts specify the resale rates and charges at which the LPC must resell TVA power to its customers.  These rates are revised from time to time, subject to TVA approval, to reflect changes in costs, including changes in the wholesale cost of power.  

TVA also regulates LPC policies for customer deposits, termination of service for nonpayment, information to consumers, and billing through a service practice policy framework. TVA’s regulatory framework provides for consistent regulatory policy for ratepayers across the Tennessee Valley, while recognizing local considerations. The regulatory provisions in TVA’s wholesale power contracts are designed to carry out the objectives of the TVA Act, including the objective of providing for adequate supply of power at the lowest feasible rates. See Rates — Rate Methodology below.

Other Customers

Revenues from directly served industrial customers accounted for approximately seven percent of TVA’s total operating revenues in 2017 .  Contracts with these customers are subject to termination by the customer or TVA upon a minimum notice period that varies according to a number of factors, including the customer’s contract demand and the period of time service has been provided. TVA also serves seven federal customers, ‎including U.S. Department of Energy ("DOE") facilities and military installations, which accounted for approximately one percent of TVA’s total operating revenues in 2017 .

Rates

Rate Authority

The TVA Act gives the TVA Board sole responsibility for establishing the rates TVA charges for power. These rates are not subject to judicial review or to review or approval by any state or federal regulatory body. Under the TVA Act, TVA is required to charge rates for power that will produce gross revenues sufficient to provide funds for:

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.

Rate Methodology

In view of demand for electricity, the level of competition, and other relevant factors, TVA believes it is reasonable to assume that rates, set at levels that will recover TVA's costs, can be charged and collected from customers. Further, the TVA Board has the discretion to determine when costs will be recovered in rates. As a result of these factors, TVA records certain assets and liabilities that result from the self-regulated ratemaking process that could not otherwise be so recorded under accounting principles generally accepted in the United States. See Note 1 — Cost-Based Regulation and Note 7 .

TVA uses a wholesale rate structure that is comprised of a base rate and a fuel rate that is automatically determined each month by the operation of the fuel cost adjustment formula. In setting the base rates, TVA uses a debt-service coverage ("DSC") methodology to derive annual revenue requirements in a manner similar to that used by other public power entities that also use the DSC rate methodology. Under the DSC methodology, rates are calculated so that an entity will be able to cover its operating costs and to satisfy its obligations to pay principal and interest on debt. This ratemaking approach is particularly suitable for use by entities financed primarily, if not entirely, by debt, such as TVA.

TVA's revenue requirements for costs or projected costs (other than the fuel, purchased power, and related costs

covered by the fuel rate) are calculated under the DSC methodology in order to produce gross revenues sufficient to fund requirements specified in the TVA Act listed under Rate Authority above .

The DSC methodology reflects the cause-and-effect relationship between TVA's costs and the corresponding rates it

charges for power. Once the revenue requirements (or projected costs) are determined, they are compared to the projected revenues for the year in question, at existing rates, to arrive at the shortfall or surplus of revenues as compared to the projected costs. Power rates are adjusted by the TVA Board to a level deemed to be sufficient to produce revenues approximately equal to projected costs (exclusive of the costs collected through the fuel rate).

A comprehensive rate restructuring was approved by the TVA Board on August 21, 2015, and implemented on October 1, 2015. The rate restructuring resulted in structural changes to base rates to improve cost alignment with capacity-related on-peak demand charges and seasonal time-of-use ("TOU") energy rates that differ by on-peak and off-peak periods to better reflect how TVA incurs generation costs. Minor changes in revenue allocation were made to improve alignment with cost-of-service, to keep industrial rates competitive, and to keep residential rates affordable. The 2015 TOU rate was unanimously adopted by TVA’s LPCs and by nearly all of TVA’s directly served customers.

TVA recovers fuel costs and tax equivalents payments associated with fuel cost adjustments through a monthly rate adjustment reflecting the costs paid by TVA for fuel. Prior to fiscal year 2016, all customers paid the same monthly base fuel rate. On August 21, 2015, the TVA Board approved a new methodology to more accurately allocate fuel costs to two groups of customers: Standard Service (residential and small commercial customers) and Non-Standard Service (large commercial and industrial customers), each with a different monthly fuel rate better reflecting their group’s contribution to total fuel costs. Fuel costs are now allocated to these customer groups in relation to their average hourly loads and TVA's hourly incremental dispatch costs. Total monthly fuel costs include costs for natural gas, fuel oil, coal, purchased power, emission allowances, nuclear fuel, and other fuel-related commodities as well as realized gains and losses on derivatives purchased to hedge the costs of such commodities.

In 2013, the TVA Board approved continuing the collection of Environmental Adjustment ("EA") charges to fund investment in environmental projects. TVA’s EA was modified in 2015 to conform to the new wholesale and large-customer base rate designs. While revised slightly, the EA was designed to collect approximately the same revenue as before the rate structuring, approximately $415 million and $421 million in 2017 and 2016, respectively.

Subsequent to discussions with LPCs over the past two years, TVA made a rate change proposal to LPCs around the need for further improvements to wholesale and retail pricing during the fourth quarter of 2017. It is intended that changes keep rates low, ensure fairness in rates, and bring more stability in bills while being more responsive to customer choices. The proposed changes account for reliable grid service to ensure 24/7 on-demand energy when distributed energy resources may

not be available. In addition, it is anticipated that the proposed changes would allow consumers to make more informed investment decisions and stimulate economic growth.

On August 23, 2017, the TVA Board approved an annual base rate adjustment with the goal of increasing 2018 revenues by approximately $195 million. This adjustment equates to an approximately 2.4 percent wholesale rate increase (excluding fuel).

Power Supply and Load Management Resources

General

TVA seeks to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, buying, building, or leasing assets or entering into power purchase agreements.  TVA also intends to employ a diverse mix of energy generating sources and is working toward obtaining greater amounts of its power supply from clean (low or zero carbon emitting) resources.

Power generating facilities operated by TVA at September 30, 2017 , included 29 conventional hydroelectric sites, one pumped-storage hydroelectric site, eight coal-fired sites, three nuclear sites, 16 natural gas and/or oil-fired sites, one diesel generator site, 16 solar energy sites, digester gas cofiring capacity at one coal-fired site, and biomass cofiring potential (located at coal-fired sites), although certain of these facilities were out of service as of September 30, 2017 . See Item 2, Properties — Generating Properties — Net Capability for a discussion of these facilities.  TVA also acquires power under power purchase agreements of varying durations including short-term contracts of less than 24-hours in duration. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses .

The following charts show TVA's generation and purchased power by generating source as a percentage of all electric power generated and purchased (based on kilowatt hours ("kWh") ) for the periods indicated:

Note

Renewable resources (non-hydro) from TVA facilities are less than one percent for all periods shown, and therefore are not represented on the charts above. Purchased power contains the majority of non-hydro renewable energy supply.

Extended Power Uprate . On August 14, 2017, the Nuclear Regulatory Commission ("NRC") approved TVA’s request for a 465 MW extended power uprate ("EPU") project at Browns Ferry. TVA plans to begin implementing the EPU project during the plant refueling outages in the spring of 2018 for Unit 3, the fall of 2018 for Unit 1, and the spring of 2019 for Unit 2. Full EPU power is expected be achieved following the noted outages for each unit. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Extended Power Uprate and Note 21 — Administrative Proceeding Regarding Browns Ferry Nuclear Plant Extended Power Uprate.

Other Nuclear Initiatives . TVA has submitted an Early Site Permit Application to the NRC to license small modular reactors ("SMRs") at TVA’s Clinch River Site in Oak Ridge, Tennessee. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Small Modular Reactors .

Other Nuclear Matters. Operating nuclear facilities subjects TVA to waste disposal, decommissioning, and insurance requirements, as well as litigation risks. See Fuel Supply — Nuclear Fuel below for a discussion of spent nuclear fuel and low-level radioactive waste, Note 21 — Contingencies for a discussion of TVA's nuclear decommissioning liabilities and the related trust and nuclear insurance, and Note 21 — Legal Proceedings for a discussion of legal and administrative proceedings related to TVA's nuclear program, which discussions are incorporated herein by reference.

Coal-Fired

TVA began its coal-fired plant construction program in the 1940s, and its coal-fired units were placed in service between 1951 and 1973. Coal-fired units are either active or retired. TVA considers units to be in an active state when the unit is generating, available for service, or temporarily unavailable due to equipment failures, inspections, or repairs. All other coal-fired units are considered retired. As of September 30, 2017 , TVA had eight coal-fired plants consisting of 33 active units, accounting for 9,055 MW of summer net capability, and 26 retired units.

Coal-fired plants have been subject to increasingly stringent regulatory requirements over the last few decades, including those under the Clean Air Act ("CAA") and the regulations promulgated thereunder. Increasing regulatory costs have caused TVA to consider whether or not to make the required capital investments to continue operating these coal-fired facilities. In April 2011, TVA entered into two agreements (collectively, the "Environmental Agreements") to address a dispute under the CAA.  The first agreement is a Federal Facilities Compliance Agreement with the Environmental Protection Agency ("EPA") .  The second agreement is with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation.  Under the Environmental Agreements, TVA agreed to retire 18 of its 59 coal-fired units by the end of 2017 and was generally absolved from any liability, subject to certain limitations and exceptions, under the New Source Review ("NSR") requirements of the CAA for maintenance, repair, and component replacement projects that were commenced at TVA's coal-fired units prior to the execution of the agreements. TVA also agreed to retire, repower, or install air pollution controls on 16 of the remaining coal-fired units. Failure to comply with the terms of the Environmental Agreements would subject TVA to penalties stipulated in the agreements. TVA is taking the actions necessary to comply with the Environmental Agreements, and is confident that it has adequate capacity to meet the needs of its customers after units are retired under the Environmental Agreements. See Natural Gas and/or Oil-Fired below .

The following table summarizes the actions TVA is required to take under the Environmental Agreements and other coal-fired generation related actions taken or to be taken by TVA.

Notes

(1) Selective catalytic reduction systems ("SCRs")

(2) If TVA decides to add emission controls to these units, TVA must continuously operate the emission controls once they are installed.

(3) Convert to renewable biomass

After TVA completes the actions described in the above table, TVA anticipates that it will have 7,891 MW of summer net capability of coal-fired generation, a reduction of 6,682 MW from TVA's coal-fired capacity as of September 30, 2010. TVA is moving toward a more balanced generation plan with greater reliance on lower-cost and cleaner energy generation technologies. TVA’s long-range plans will continue to consider the costs and benefits of significant environmental investments at its remaining coal-fired plants.

Natural Gas and/or Oil-Fired

On September 30, 2017 , TVA’s natural gas and oil-fired fleet consisted of 102 combustion turbine power blocks ( 87 simple-cycle units and 15 combined-cycle power blocks).  The 87 simple-cycle units provide a maximum of 5,731 MW of summer net capability. The 15 combined-cycle power blocks provide a maximum of 5,672 MW of summer net capability. Eighty of the simple-cycle units and one combined-cycle power block are fueled by either natural gas or fuel oil. The remaining seven simple-cycle units and 14 combined-cycle power blocks are fueled by natural gas only. Sixty of the simple-cycle units are currently capable of quick-start response allowing full generation capability in approximately 10 minutes. The economic dispatch of natural gas-fired plants depends on both the day-to-day price of natural gas and the price of other available intermediate resources like coal-fired plants. TVA uses simple-cycle units to meet peaking or backup power needs.

TVA’s strategy of portfolio diversification and air emissions reductions includes the addition of natural gas-fired plants to its generation fleet. In April 2017, TVA completed a natural gas-fired facility at the Paradise Fossil Plant ("Paradise") with a generation capacity of approximately 1,100 MW. At September 30, 2017 , TVA had one natural gas-fired generation facility under construction. The facility, with an expected generation capacity of approximately 1,100 MW, is being constructed at the Allen Fossil Plant ("Allen") . This facility is expected to be completed in 2018. Upon completion of the facility at Allen, the existing coal-fired units will be retired. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Natural Gas-Fired Units .

    

See Item 2, Properties — Generating Properties, Note 9 , Note 10 , and Note 13 for a discussion of lease arrangements into which TVA has entered in connection with certain combustion turbine units. Because of TVA's strategy of portfolio diversification and reduction of air emissions, TVA may decide to make further strategic investments in natural gas-fired facilities in the future by purchase, construction, or lease.

Hydroelectric

Conventional Hydroelectric Dams . TVA maintains 29 conventional hydroelectric dams with 109 generating units throughout the Tennessee River system for the production of electricity.  At September 30, 2017 , these units accounted for 3,777 MW of summer net capability.  The amount of electricity that TVA is able to generate from its hydroelectric plants depends on a number of factors, including the amount of precipitation and runoff, initial water levels, generating unit availability, and the need for water for competing water management objectives.  When these factors are unfavorable, TVA must increase its reliance on higher cost generation plants and purchased power.  In addition, a portion of energy generated by nine U.S. Army Corps of Engineers ("USACE") dams on the Cumberland River system contribute to the TVA power system.  See Weather and Seasonality below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Dam Safety and Remediation Initiatives.

Raccoon Mountain Pumped-Storage Plant .  The four units at Raccoon Mountain Pumped-Storage Plant ("Raccoon Mountain") were placed in service during 1978 and 1979. The units, with a total net summer capability of 1,616 MW, are utilized to balance the transmission system as well as generate power. TVA uses electricity generated by its coal-fired and nuclear plants during periods of low demand to operate pumps that fill the reservoir at Raccoon Mountain. Then, during period of high or peak demand, the water is released and the pumps reverse to work as power generating turbines.

Hiwassee Hydro Unit 2.   Hiwassee Hydro Unit 2 has a unique reversible turbine/generator that acts as a pump and a turbine enhancing TVA’s ability to balance baseload generation.  Hiwassee Hydro Unit 2 has a summer net capability of 86 MW.

Hydro Modernization Program . In 1992, TVA began a Hydro Modernization Program to address reliability issues related to its hydroelectric units. At September 30, 2017 , modernization had been completed on 59 conventional hydroelectric units, including Pickwick Landing Dam ("Pickwick") Unit 4 and Watauga Unit 1 in 2017, and Raccoon Mountain. The modernization projects resulted in 432 MW of increased capacity from the conventional hydroelectric units, with an average efficiency gain of approximately five percent. Pickwick Unit 3 and South Holston Unit 1 are currently undergoing major maintenance projects to ensure long-term reliability. Hydroelectric generation will continue to be an important part of TVA's energy mix, so TVA continues to assess its remaining conventional hydroelectric units for opportunities to improve reliability through major maintenance projects.    

Other Renewable Energy Resources

    

TVA's renewable energy portfolio includes both TVA-owned assets and renewable energy purchases. TVA owns 16 solar sites. Certain coal-fired units have the capability for digester gas and biomass cofiring, which is accounted for as coal-fired generation summer net capability. The TVA-owned solar sites provide approximately 1 MW of summer net capability.

TVA tracks its renewable energy claims through the management of renewable energy certificates ("RECs") . The RECs, which each represent 1 MWh of renewable energy generation, are principally associated with non-hydroelectric renewable energy. In May 2017, TVA retired over 4.5 million RECs, which were principally from purchased power. Additionally, TVA retires RECs on behalf of customers in the Green Power Switch ^® ("GPS") program and other customer-based programs that enable customers to claim RECs.

Diesel Generators

As of September 30, 2017 , TVA had one diesel generator plant consisting of five units, and this facility accounted for 9 MW of summer net capability.

Distributed Energy Resources

During 2015, the TVA Board approved the 2015 Integrated Resource Plan ("IRP") as a guide in making decisions about the energy resources TVA may use to meet future demand for electricity in the Tennessee Valley. The purpose of integrated resource planning is to meet future power demand by identifying the need for generating capacity and determining the best mix of resources to meet the need on a least-cost, system-wide basis. These resources, together with other options that are typically connected to the distribution systems of the LPCs, represent a new component in the utility marketplace called distributed energy resources ("DER") . The 2015 IRP affirms the merits of a diverse portfolio including energy efficiency/demand response resources and renewable energy. Changes to TVA load forecasts and the recognition of the increasing penetration of generation and energy management technologies require an awareness of the evolving role of energy efficiency, demand response, and renewable generation.

TVA is primarily a wholesale power provider, and the LPCs are the service provider for most end-use customers. Due to this public power business model, TVA is working with LPCs and others in the region to optimize new and existing DER offerings and delivery mechanisms. TVA plans to engage LPCs as it considers new and innovative ways to ensure that evolving resource portfolios remain reliable and provide the most value to all customers. This engagement is part of an emerging DER strategy to leverage the strengths of the public power model with distributed energy resources that are economic, sustainable, and flexible and considers three key focus areas:

    

The IRP considered a broad range of feasible supply-side and demand-side options and assessed them with respect to economic and environmental impacts. Energy efficiency was modeled as a selectable, supply-side equivalent resource. Implementing energy efficiency programs will require close cooperation among TVA, local stakeholders, LPCs, and electric customers, particularly around deployment of additional energy efficiency resources. The success of energy efficiency depends on end-use customer participation. Energy efficiency standards, including DOE standards, TVA’s energy efficiency programs, and individual customer and consumer actions, accounted for seven percent of TVA’s 2017 resource mix and six percent of TVA’s 2016 resource mix.

TVA, in cooperation with its customers, continues to implement a broad portfolio of programs and projects through the EnergyRight ^® Solutions ("ERS") program. The ERS program includes electrification, energy efficiency, demand response, and system load enhancement programs and projects designed to help reduce long-term energy supply costs in the TVA service area. Through these programs, TVA realized 379 gigawatt hours ("GWh") and 381 GWh of energy efficiency savings in 2017 and 2016 , respectively. This portfolio also provided 1,547 MW and 1,614 MW of demand response in 2017 and 2016 , respectively, to provide system reliability and offset the need for new generation.

Renewable Energy Programs. TVA's GPS program is a voluntary REC program that supports the production of renewable energy by allowing consumers to purchase such energy blocks either through the LPCs or from TVA for directly served customers. Supply for the retail portion of the program is sourced from within the TVA service area and sold in 150 kWh blocks.  In addition to the GPS program, TVA continues to test a lower-priced bulk option under GPS, Southeastern RECs, that allows for larger customers located within certain portions of TVA's service area to purchase RECs. Supply for the bulk option is sourced from TVA-contracted purchased power outside of the TVA service area. In total, consumers participating in both GPS and Southeastern RECs purchased 67,550 MWh and 164,577 MWh of renewable energy, respectively, in CY 2016.

TVA continues to offer the Green Power Providers ("GPP") program for the purpose of encouraging the development of small-scale solar, wind, biomass, and hydroelectric generation systems across the Tennessee Valley that are 50 kW or less. As of September 30, 2017 , the combined participation for the original Generation Partners ("GP") pilot program and the GPP program comprised 105 MW of installed operating capacity with nearly 4 MW of additional approved capacity in the GPP program that has yet to become operational.

The Renewable Standard Offer ("RSO") program was a voluntary program that began in 2011 to increase the amount of renewable energy generated in TVA's service territory. This program offers pre-set prices, terms, and conditions for power

generated by selected, commercially available renewable energy technologies. Solar, wind, biogas and specific biomass projects are included in the program. Projects must be greater than 50 kW, but no greater than 20 MW, in nameplate capacity. As of September 30, 2017 , TVA had over 93 MW of installed operating capacity with nearly 104 MW of additional approved capacity under contract. The RSO offering ended in 2015, but the program remains open to projects that have existing capacity allocations and are in the process of being completed.

In an effort to continue to evaluate the value of small to medium scale renewable projects, TVA extended the Solar Solution Initiative ("SSI") , by transitioning the program to the Distributed Solar Solutions ("DSS") pilot at the beginning of 2016. SSI was a targeted incentive program that aimed to support the existing local solar industry while also serving as a recruitment tool for new industry in the Tennessee Valley region by retaining and adding investment and jobs. The program provided incentive payments for mid-sized (greater than 50 kW up to 1 MW) solar projects in TVA's RSO program if the projects used local certified installers in the Tennessee Valley region. As of September 30, 2017 , TVA had over 36 MW of installed operating capacity under the SSI program with nearly 9 MW of additional approved capacity under contract. DSS is designed to encourage renewable energy projects that are directed by TVA’s LPCs. Projects can range in size from greater than 50 kW up to 2 MW of solar electric energy. For CY 2017, TVA awarded 10 MW of renewable solar capacity to seven projects, all in different LPC territories.

New energy management systems and energy storage technologies present opportunities for more sophisticated and integrated operation of the entire grid. The advent of electric vehicles and small-scale renewable generation has hastened the development of battery technologies that have the potential to mitigate the intermittent supply issues associated with many renewable generation options. Implementation of the technologies in conjunction with two-way communication to the site creates the potential for better management of other DER on the grid.

Onsite energy management technologies and the proliferation of companies interested in providing services to support and aggregate the impacts of such systems provide another DER avenue. Such systems can afford the consumer benefits through reduced consumption, increased comfort, detailed energy use data, and savings from time-sensitive rate structures. TVA and LPCs must consider the integration of the impacts from changes in energy usage patterns resulting from the application of such systems.

Demand response systems that take advantage of the increasing communications sophistication to homes, businesses, and distribution system assets also afford the opportunity for more granular control of system demand. Technologies can manage individual customer systems to shift usage from peak to off-peak periods and create significant reductions in the need for peak generation output. More sophisticated distribution control systems can also lower peak demand through control of excess voltage on the grid on either a dispatchable or continuous basis.

TVA is leading an initiative to determine the value of DER for its system. Initial efforts are focused on small-scale distributed (rooftop) solar, but the method is general enough to allow for other distributed options. Work is ongoing, led by a team that includes technical support from the Electric Power Research Institute ("EPRI") , to develop a methodology to identify site preferences on the distribution systems of the LPCs. This work, along with locational analysis already completed by TVA, will help in placing utility-scale solar in furtherance of the IRP recommendations as well as distributed solar to meet the needs of LPCs. See Research and Development below .

Purchased Power and Other Agreements

TVA acquires power from a variety of power producers through long-term and short-term power purchase agreements as well as through spot market purchases.  During 2017 , TVA acquired approximately 12 percent of the power that it purchased on the spot market, approximately two percent through short-term power purchase agreements, and approximately 86 percent through the long-term power purchase agreements described below, including agreements for long-term renewable generation resources.

A portion of TVA’s capability provided by power purchase agreements is provided under contracts that expire between 2023 and 2038 , and the most significant of these contracts (excluding wind contracts) are described in the table below.

Notes

(1) Power delivery is expected to commence in December 2018.

(2) TVA’s contract with SEPA is for 405 MW of capacity; however, at September 30, 2017, TVA’s capacity under the contract was 347 MW because of repairs being completed by the USACE.  TVA expects this period of reduced capacity to be in effect until 2019.    

   

TVA executed a power purchase contract with a solar facility located in northwest Alabama and expanded its supply of renewable energy when the facility was commissioned in November 2016. A second solar facility under contract located in western Tennessee is expected to begin commercial operation during the first quarter of 2018. TVA, along with others, contract with the Southeastern Power Administration ("SEPA") to obtain power and energy from nine USACE hydroelectric facilities on the Cumberland River system.  The agreement with SEPA can be terminated upon three years’ notice.  The contract requires SEPA to provide TVA an annual minimum number of hours of energy for each megawatt of TVA’s capacity allocation, and all surplus energy from the hydroelectric facilities on the Cumberland River system.  These contracts have been included in the table above.     

Under federal law, TVA is required to purchase energy from qualifying facilities (cogenerators and small power producers) at TVA's avoided cost of either generating this energy itself or purchasing this energy from another source. TVA fulfills this requirement through the Dispersed Power Production Program. As of September 30, 2017 , there were 30 generation sources, with a combined qualifying capacity of 258 MW, whose power TVA purchases under this law.

As of September 30, 2017 , TVA was a party to contracts with eight wind farms for the purchase of energy. TVA's most significant wind contracts are described in the table below.

In addition, TVA has contracted for 27 MW of nameplate renewable energy capacity from 15 wind turbine generators located on Buffalo Mountain near Oak Ridge, Tennessee, 4.8 MW of nameplate capacity from a landfill gas facility near Knoxville, Tennessee, and 4.5 MW of nameplate capacity from a solar farm in Haywood County, Tennessee.

Fuel Supply

General

TVA’s consumption of various types of fuel depends largely on the demand for electricity by TVA’s customers, the availability of various generating units, and the availability and cost of fuel. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses.

Nuclear Fuel

Current Fuel Supply . Converting uranium to nuclear fuel generally involves four stages: the mining and milling of uranium ore to produce uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride gas; the

enrichment of uranium hexafluoride; and the fabrication of the enriched uranium hexafluoride into fuel assemblies.  For its forward four-year (2018-2021) requirements, TVA currently has 100 percent of its uranium mining and milling, conversion services, enrichment services, and fabrication services requirements either in inventory or under contract with various suppliers.  TVA anticipates being able to fill its needs beyond this period by normal contracting processes as market forecasts indicate that the fuel cycle components will be readily available. See Note 15 — Counterparty Risk .

TVA, DOE, and certain nuclear fuel contractors have entered into agreements providing for surplus DOE highly enriched uranium (uranium that is too highly enriched for use in a nuclear power plant) to be blended with other uranium.  The enriched uranium that results from this blending process, which is called blended low-enriched uranium ("BLEU") , is fabricated into fuel that can be used in a nuclear power plant.  This blended nuclear fuel was first loaded in a Browns Ferry reactor in 2005 and the last reload of BLEU material was loaded in a Browns Ferry reactor in the spring of 2017. BLEU fuel was loaded into Sequoyah Unit 2 three times but is not expected to be used in the Sequoyah reactors in the future. There is a potential to receive additional BLEU fuel beginning in 2018, and it would be used in future Browns Ferry reloads.

Under the terms of an interagency agreement between the DOE and TVA, in exchange for supplying highly enriched uranium materials for processing into usable BLEU fuel for TVA, the DOE participates in the savings generated by TVA’s use of this blended nuclear fuel.  See Note 1 — Blended Low-Enriched Uranium Program for a more detailed discussion of the BLEU project.

Mixed Oxide Nuclear Fuel. Under the DOE Surplus Plutonium Disposition ("SPD") Program, mixed oxide ("MOX") fuel would be fabricated with surplus plutonium and depleted uranium as a replacement for commercial uranium fuel. In February 2010, the DOE and TVA entered into an interagency agreement to evaluate the potential use of MOX fuel in reactors at Browns Ferry and Sequoyah. As part of the evaluation of MOX fuel, TVA participated as a cooperating agency in the DOE's development of the April 2015 final supplemental environmental impact statement that addresses the potential use of MOX fuel in the TVA reactors. A decision to use MOX fuel is not required or expected for several years. At the earliest, based on the expected production rate of MOX fuel, TVA could start using a small number of MOX fuel assemblies in TVA reactors after 2020. TVA's three criteria for implementing MOX fuel are that it must be environmentally and operationally safe; it must be economical compared to other nuclear fuel used by TVA; and it must be licensed by the NRC for use.  If TVA decides to use MOX fuel and the NRC approves its use, some changes in the operation of the reactors are expected, and additional equipment may be required. As TVA continues to evaluate fuel options, current fuel supply plans do not include MOX fuel.

Low-Level Radioactive Waste.   Low-level radioactive waste ("radwaste") results from certain materials and supplies used in the normal operation of nuclear electrical generation units. TVA sends shipments of radwaste to burial facilities in Clive, Utah and Andrews, Texas.  TVA is capable of storing some radwaste at its own facilities for an extended period of time, if necessary.

Spent Nuclear Fuel.   All three nuclear sites have dry cask storage facilities.  Sequoyah will need additional capacity by 2028.  Watts Bar will need additional capacity by 2041.  Browns Ferry will need additional storage capacity by the end of 2020.  A project is underway at Browns Ferry to build another independent spent fuel storage installation pad, and is scheduled for completion by January 2020. To recover the cost of providing long-term, onsite storage for spent nuclear fuel, TVA filed a breach of contract suit against the United States in the Court of Federal Claims in 2001. As a result of this lawsuit and related agreements, TVA has collected approximately $217 million through 2017 .

Tritium-Related Services.   TVA and the DOE are engaged in a long-term interagency agreement under which TVA will, at the DOE’s request, irradiate tritium-producing burnable absorber rods ("TPBARs") to assist the DOE in producing tritium for the Department of Defense ("DOD") .  This agreement, which ends in 2035, requires the DOE to reimburse TVA for the costs that TVA incurs in connection with providing irradiation services and to pay TVA an irradiation services fee at a specified rate per TPBAR over the period when irradiation occurs.

In general, TPBARs are irradiated for one operating cycle, which lasts about 18 months.  At the end of the cycle, TVA removes the irradiated rods and loads them into a shipping cask.  The DOE then ships them to its tritium-extraction facility.  TVA loads a fresh set of TPBARs into the reactor during each refueling outage.  Irradiating the TPBARs does not affect TVA’s ability to safely operate the reactors to produce electricity.

TVA has provided irradiation services using only Watts Bar Unit 1 since 2003. Although the interagency agreement provides for irradiation services to be performed at Watts Bar and Sequoyah, TVA expects the Watts Bar site to provide sufficient capacity to fulfill this agreement in the near term. In December 2015, the DOE notified TVA of future increased needs for tritium requiring the use of a second reactor. TVA was a cooperating agency in the February 2016 DOE Final Supplemental Environmental Impact Statement for the Production of Tritium in a Commercial Light Water Reactor. On April 5, 2017, due to an anticipated need for more TPBARs, the DOE announced its preferred alternative for irradiation services which included use of an additional reactor. As a result of TVA’s assessment and concurrence with the DOE’s alternative, TVA is planning to submit a license amendment to the NRC in CY 2017 to authorize the irradiation of TPBARs in Watts Bar Unit 2. Subject to approval of the license amendment, tritium production in Watts Bar Unit 2 is projected to start in the fall of 2020. The DOE's decision also allows for irradiation of TPBARs at the Sequoyah site in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term.

Coal

Coal consumption at TVA’s coal-fired generating facilities during 2017 and 2016 was approximately 21 million tons and 24 million tons, respectively.  At September 30, 2017 , and September 30, 2016 , TVA had 36 days and 31 days of system-wide coal supply at full burn rate, respectively, with net book values of $253 million and $252 million, respectively.

TVA utilizes both short-term and long-term (longer than one year) coal contracts.  During 2017 , long-term contracts made up 98 percent of coal purchases and short-term contracts accounted for the remaining two percent.  TVA plans to continue using contracts of various lengths, terms, and coal quality to meet its expected consumption and inventory requirements.  During 2017 and 2016 , TVA purchased coal by basin as follows:

The following charts present the proportion of each delivery method TVA utilizes for its coal supply for the periods indicated:

Generally, total system coal inventories were at or below target levels for 2017 due to higher than planned coal-fired generation requirements to support less hydroelectric generation. However, some facilities were above the target levels as TVA began to adjust inventory levels for unit retirements.

Natural Gas and Fuel Oil

During 2017 , TVA purchased a significant amount of its natural gas requirements from a variety of suppliers under contracts with terms of up to three years and purchased substantially all of its fuel oil requirements on the spot market. See Note 15 — Derivatives Not Receiving Hedge Accounting Treatment — Derivatives Under FTP . The net book value of TVA’s natural gas inventory was $15 million and $7 million at September 30, 2017 , and 2016 , respectively. The net book value of TVA’s fuel oil inventory was $87 million and $86 million at September 30, 2017 , and 2016 , respectively. At September 30, 2017 , 80 of the combustion turbines that TVA operates were dual-fuel capable, and TVA has fuel oil stored on each of these sites as a backup to natural gas.

TVA purchases natural gas from multiple suppliers on a daily, monthly, seasonal, and annual basis.  During 2017 , daily, monthly, seasonal, and annual contracts accounted for 38 percent, 11 percent, 20 percent and 31 percent of purchases, respectively.  TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet.  During 2017 , TVA transported natural gas on eight separate pipelines, with approximately 37 percent being transported on a single pipeline. During 2017 , TVA maintained a total of approximately 1,188,500 Million British thermal unit(s) ("mmBtu") per day of firm transportation capacity on 7 major pipelines, with approximately 35 percent of total firm transportation capacity being maintained on a single pipeline.

TVA utilizes natural gas storage services at six facilities with a total capacity of 8.83 billions per cubic feet ("Bcf") of firm service and 0.80 Bcf of interruptible service to manage the daily balancing requirements of the eight pipelines used by TVA, with approximately 31 percent of the total storage capacity being maintained at a single facility. During 2017 , storage levels were generally maintained at between 40 and 80 percent of the maximum contracted capacity at each facility. As TVA’s natural gas requirements grow, it is anticipated that additional storage capacity will be acquired to meet the needs of the generating assets as well as their operating requirements.  In 2018, TVA does not expect to add a significant amount of firm capacity to its storage portfolio.

Transmission

The TVA transmission system is one of the largest in North America.  TVA’s transmission system has 69 interconnections with 13 neighboring electric systems, and delivered nearly 155 billion kWh of electricity to TVA customers in 2017 .  In carrying out its responsibility for transmission grid reliability in the TVA service area, TVA has operated with 99.999 percent reliability since 2000 in delivering electricity to customers. See Item 2, Properties — Transmission Properties .

To the extent that federal law requires access to the TVA transmission system, TVA offers transmission services to others to transmit wholesale power in a manner that is comparable to TVA's own use of the transmission system.  TVA has also adopted and operates in accordance with its published Transmission Standards of Conduct and separates its transmission function from its power marketing function.

TVA is subject to federal reliability standards that are set forth by the North American Electric Reliability Corporation ("NERC") and approved by FERC. These standards are designed to maintain the reliability of the bulk electric system, including TVA’s generation and transmission system, and include areas such as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings. TVA recognizes that reliability standards and expectations continue to become more complex and stringent for transmission systems. At present there are approximately 90 mandatory standards subject to enforcement containing approximately 1,300 requirements and sub-requirements that must be met. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Regulatory Compliance — Transmission Issues .

Additional transmission upgrades may be required to maintain reliability.  TVA invested $ 404 million between 2011 and 2017 to maintain reliability as a result of retired coal-fired units, and estimates future expenditures to be approximately $ 30 million for 2018 to 2020. Upgrades may include enhancements to existing lines and substations or new installations as necessary to provide adequate power transmission capacity, maintain voltage support, and ensure generating plant and transmission system stability. In May 2017, the TVA Board approved a $300 million multi-year, strategic fiber initiative that will expand TVA’s fiber capacity and improve the reliability and resiliency of the transmission system.  The network expansion is designed to help meet the power system’s growing need for bandwidth as well as accommodate the integration of new, distributed energy resources. 

Weather and Seasonality

Weather affects both the demand for and the market prices of electricity. TVA’s power system is generally a dual-peaking system in which the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which average temperatures in the five largest cities in TVA's service area vary from 65 degrees Fahrenheit. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales of Electricity.

The summer of 2016 was the hottest and driest in the Tennessee Valley since 2010 - a trend that continued into the first six months of 2017. Rainfall in the Upper Basin of the Tennessee Valley was 101 percent of normal for 2017 and 103 percent of normal in 2016 . Also, runoff was 79 percent of normal in 2017 and 104 percent of normal in 2016 . Runoff is the amount of rainfall that is not absorbed by vegetation or the ground and actually reaches the rivers and reservoirs that TVA manages. TVA’s conventional hydroelectric generation decreased 11 percent in 2017 as compared to 2016 , and decreased eight percent in 2016 as compared to 2015 . Conventional hydroelectric generation was approximately 82 percent of normal in 2017 and 93 percent of normal in 2016 .

Competition

TVA provides electricity in a service area that is largely free of competition from other electric power providers. This service area is defined primarily by provisions of law and long-term contracts. The fence limits the region in which TVA or LPCs which distribute TVA power may provide power. The anti-cherrypicking provision limits the ability of others to use the TVA transmission system for the purpose of serving customers within TVA’s service area.  State service territory laws limit unregulated third parties' ability to sell electricity to consumers. All TVA wholesale power contracts and many contracts between LPCs and their customers are requirements contracts. However, other utilities may use their own transmission lines to serve customers within TVA's service area, and third parties are able to avoid the restrictions on serving end-use customers by selling or leasing a customer generating assets rather than electricity. These threats underscore the need for TVA to strategically price its products and services and design rates to be competitive.  There have also been some efforts in the past to erode the anti-cherrypicking provision, and the protection of the anti-cherrypicking provision could be limited and perhaps eliminated by congressional legislation at some time in the future. 

TVA also faces competition in the form of emerging technologies.  Improvements in energy efficiency technologies, smart technologies, and energy storage technologies may reduce the demand for centrally provided power. The growing interest by customers in generating their own power through distributed generation (including solar power) has the potential to lead to a reduction in the load served by TVA as well as cause TVA to re-evaluate how it operates the overall grid system to continue to provide highly reliable power at affordable rates.  See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources.

Finally, TVA and other utility companies are facing an evolving marketplace of increased competition driven by customer choice and behavior. As technology develops, consumers' demands for access to diverse products and services may increase, creating opportunities for growth with new products and services resulting from emerging technologies.

Research and Development

TVA makes annual investments in science and technological innovation to help meet future business and operational challenges. Each year, TVA’s annual research portfolio is updated based on a broad range of operational and industry drivers that help assess key technology gaps, performance issues, or other significant issues that should be addressed through research and development. Core research activities directly support optimization of TVA's generation and transmission assets, air and water quality, energy utilization, and distributed/clean energy integration.

In the area of energy utilization, TVA evaluates emerging energy efficiency and load management technologies for market and program readiness. TVA's efforts are directed towards demonstrating and validating the performance, reliability, and consumer acceptance of new efficiency technology as well as the value of energy efficiency and load management technologies for the consumer, the LPCs, and TVA.

TVA is also beginning the assessment of potential electrification programs that may improve resource utilization and reduce environmental impacts (especially in the transportation sector). TVA is continuing its evaluation of potential electric vehicle adoption strategies through coordination of activities with EPRI and industry stakeholders related to operational fleet requirements. The needs of LPCs to provide guidance on matters of plug-in electric vehicle grid integration and readiness for various transportation electrification technologies are also areas of focus.

    Research in this area of electrification applications includes compatibility of charging stations to work efficiently with various types of electric vehicles, impact of charging stations on the power grid, refinement of power-system control processes to maximize energy efficiency, and development of smart charging strategies to maximize the potential of electricity to replace petroleum as the transportation fuel of choice.

TVA and its LPCs are engaged in several initiatives related to grid modernization, including research into technologies and applications with the potential to advance an intelligent transmission and distribution system. Smart meter technology has the potential to shift usage patterns away from peak demand times which could change costs significantly. Additionally, an intelligent transmission system would give TVA the ability to nearly instantaneously diagnose problems, make corrections, and engage transmission and generation resources quickly so that power would keep flowing. This could promote reduced emissions, lower energy costs, and add greater flexibility to accommodate the new consumer-generated sources under TVA’s renewable energy programs. See Power Supply and Load Management Resources — Distributed Energy Resources.

Finally, TVA is evaluating smaller, clean power sources that can be aggregated to provide power necessary to meet regular demand. Research efforts into these clean DER seek to understand the scope and impact of DER on operations and business economics and to develop strategies for adapting to the evolving electricity landscape in the Tennessee Valley. Of particular interest are investigations into the potential applications of battery storage and modeling existing and expected solar power deployments in the Tennessee Valley to evaluate the full extent of system impacts of those renewable resources. Initial economic analyses have been conducted to identify the value of DER (particularly photovoltaic solar generation) to both TVA and the LPC system. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources.

Investments in TVA’s research portfolio are supported through partnership and collaboration with LPCs, EPRI and other research consortiums, the DOE and other federal agencies, national labs, peer utilities, universities, and industry vendors and participation in professional societies.

Flood Control Activities

The Tennessee River watershed has one of the highest annual rainfall totals of any watershed in the United States, averaging 51 inches per year. During 2017 , approximately 54 inches of rain fell in the Tennessee Valley. TVA manages the Tennessee River system in an integrated manner, balancing hydroelectric generation with navigation, flood damage reduction, water quality and supply, and recreation. TVA spills or releases excess water through its dams in order to reduce flood damage to the Tennessee Valley. TVA typically spills only when all available hydroelectric generating turbines are operating at full capacity and additional water still needs to be moved downstream.

 

Environmental Stewardship Activities

TVA’s mission includes managing the Tennessee River, its tributaries, and federal lands along the shoreline to provide, among other things, year-round navigation, flood damage reduction, affordable and reliable electricity, and, consistent with these primary purposes, recreational opportunities, adequate water supply, improved water quality, and natural resource protection.  There are 49 dams that comprise TVA’s integrated reservoir system. Each dam may also have ancillary structures used to support or assist the main dam's function. The reservoir system provides approximately 800 miles of commercially navigable waterways and also provides significant flood reduction benefits both within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers. The reservoir system also provides a water supply for residential and industrial customers, as well as cooling water for TVA’s coal-fired plants, combined cycle plants, and nuclear power plants. TVA’s Environmental Policy, which was adopted by the TVA Board in 2008, provides objectives for an integrated approach related to providing cleaner, reliable, and low-cost energy, supporting sustainable economic growth, and engaging in proactive environmental stewardship in a balanced and ecologically sound manner. The Environmental Policy provides additional direction in several environmental stewardship areas, including water resource protection and improvements, sustainable land use, and natural resource management.

TVA serves the people of the TVA region through the integrated management of the Tennessee River system and public lands, which includes approximately 11,000 miles of shoreline, 650,000 surface acres of reservoir water, and 293,000 acres of reservoir lands.  TVA accomplishes this mission and supports the objectives of the TVA Environmental Policy through implementation of its natural resources stewardship strategy.  Within this strategy, TVA confirms a desire to remain agile, balance competing demands, and be a catalyst for collaboration in order to protect and enhance biological, cultural, and water resources as well as create and sustain destinations for recreation and opportunities for learning and research.  As part of the strategy, TVA will also assist water-based community development with technical support, land agreements, and permitting using planning, clear regulations, meaningful guidelines, and consistent enforcement. Additional guidance for carrying out many of TVA's essential stewardship responsibilities is provided in TVA's Natural Resource Plan. The Natural Resource Plan will be reviewed and updated as needed.

Economic Development Activities

Since its creation in 1933, TVA has promoted the development of the Tennessee Valley. Economic development, along with energy production and environmental stewardship, is one of the primary statutory purposes of TVA. TVA works with its LPCs, regional, state, and local agencies, and communities to showcase the advantages available to businesses locating or expanding in TVA's service area. TVA's primary economic development goals are to recruit companies to locate in the Tennessee Valley, encourage expansion of existing business and industry that provide quality jobs, and assist communities in the Tennessee Valley with economic growth opportunities. TVA seeks to meet these goals through a combination of initiatives and partnerships designed to provide financial assistance, technical services, industry expertise, and site-selection assistance to new and existing businesses.

Economic development programs developed by TVA include those which focus on supporting all communities including rural and economically distressed communities across the Tennessee Valley by working in close partnership with other federal and state organizations. TVA also jointly offers incentive programs with participating LPCs. These programs offer competitive incentives to existing and potential power customers in certain business sectors that make multi-year commitments to invest in the Tennessee Valley. In addition to financial support for these programs, TVA offers resources to communities and economic

developers in the areas of recruitment, leadership development, industrial product preparedness (sites and buildings), planning, and project assistance.

TVA's economic development efforts helped recruit or expand over 200 companies into the TVA service area during 2017 . These companies announced capital investments of over $8.3 billion and the expected creation and/or retention of over 70,000 jobs.

Regulation

Congress

TVA exists pursuant to legislation enacted by Congress and carries on its operations in accordance with this legislation.  Congress can enact legislation expanding or reducing TVA’s activities, change TVA’s structure, and even eliminate TVA.  Congress can also enact legislation requiring the sale of some or all of the assets TVA operates or reduce the United States’s ownership in TVA.  To allow TVA to operate more flexibly than a traditional government agency, Congress exempted TVA from all or parts of certain general federal laws that govern other agencies, such as federal labor relations laws and the laws related to the hiring of federal employees, the procurement of supplies and services, and the acquisition of land.  Other federal laws enacted since the creation of TVA that are applicable to other agencies have been made applicable to TVA, including those related to paying employees overtime and protecting the environment, cultural resources, and civil rights.

Securities and Exchange Commission

Section 37 of the Securities Exchange Act of 1934 (the "Exchange Act") requires TVA to file with the SEC such periodic, current, and supplementary information, documents, and reports as would be required pursuant to Section 13 of the Exchange Act if TVA were an issuer of a security registered pursuant to Section 12 of the Exchange Act.  Section 37 of the Exchange Act exempts TVA from complying with Section 10A(m)(3) of the Exchange Act, which requires each member of a listed issuer’s audit committee to be an independent member of the board of directors of the issuer.  Since TVA is an agency and instrumentality of the United States, securities issued or guaranteed by TVA are “exempted securities” under the Securities Act of 1933, as amended (the “Securities Act”), and may be offered and sold without registration under the Securities Act.  In addition, securities issued or guaranteed by TVA are “exempted securities” and “government securities” under the Exchange Act.  TVA is also exempt from Sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy solicitations) insofar as those sections relate to securities issued by TVA, and transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act.  Also, since TVA securities are exempted securities under the Securities Act, TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for these securities.

Federal Energy Regulatory Commission

Under the FPA, TVA is not a “public utility,” a term which primarily refers to investor-owned utilities.  Therefore, TVA is not subject to the full jurisdiction that FERC exercises over public utilities under the FPA.  TVA is, however, an “electric utility” and a “transmitting utility” as defined in the FPA and, thus, is directly subject to certain aspects of FERC’s jurisdiction.

Under Section 215 of the FPA, TVA must comply with certain standards designed to maintain transmission system reliability.  These standards are approved by FERC and enforced by NERC.

Under Section 210 of the FPA, TVA can be ordered to interconnect its transmission facilities with the electrical facilities of independent generators and of other electric utilities that meet certain requirements.  It must be found that the requested interconnection is in the public interest and would encourage conservation of energy or capital, optimize efficiency of facilities or resources, or improve reliability.  The requirements of Section 212 of the FPA concerning the terms and conditions of interconnection, including reimbursement of costs, must also be met.

Under Section 211 of the FPA, TVA can be ordered to transmit wholesale power provided that the order (1) does not impair the reliability of the TVA or surrounding systems and (2) meets the applicable requirements of Section 212 concerning terms, conditions, and rates for service, as well as the anti-cherrypicking provision of Section 212, which precludes FERC from ordering TVA to wheel another supplier's power if the power would be consumed within TVA's defined service territory.  Under Section 211A of the FPA, TVA is subject to FERC review of the transmission rates and the terms and conditions of service that TVA provides. The purpose of this review is to ensure comparability of treatment of such service with TVA's own use of its transmission system and that the terms and conditions of service are not unduly discriminatory or preferential.  

Sections 221 and 222 of the FPA, applicable to all market participants, including TVA, prohibit (1) reporting false information on the price of electricity sold at wholesale or the availability of transmission capacity to a federal agency with intent to fraudulently affect the data being compiled by the agency and (2) using manipulative or deceptive devices or contrivances in connection with the purchase or sale of power or transmission services subject to FERC’s jurisdiction.

Section 206(e) of the FPA provides FERC with authority to order refunds of excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including TVA, in price gouging situations if such sales are through an independent system operator or regional transmission organization under a FERC-approved tariff.

Section 220 of the FPA provides FERC with authority to issue regulations requiring the reporting, on a timely basis, of information about the availability and prices of wholesale power and transmission service by all market participants, including TVA.

Under Sections 306 and 307 of the FPA, FERC may investigate electric industry practices, including TVA’s operations previously mentioned that are subject to FERC’s jurisdiction.

Under Sections 316 and 316A of the FPA, FERC has authority to impose civil penalties of up to $1 million per day for each violation on entities subject to the provisions of Part II of the FPA, which includes the above provisions applicable to TVA.  Criminal penalties may also result from such violations.

Finally, while not required to do so, TVA has elected to implement various FERC orders and regulations pertaining to public utilities on a voluntary basis to the extent that they are consistent with TVA’s obligations under the TVA Act.

Nuclear Regulatory Commission

TVA operates its nuclear facilities in a highly regulated environment and is subject to the oversight of the NRC, an independent federal agency which sets the rules that users of radioactive materials must follow.  The NRC has broad authority to impose requirements relating to the licensing, operation, and decommissioning of nuclear generating facilities.  In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA’s operating licenses.

Environmental Protection Agency

TVA is subject to regulation by the EPA in a variety of areas, including air quality control, water quality control, and management and disposal of solid and hazardous wastes.  See Environmental Matters below .

States

The Supremacy Clause of the U.S. Constitution prohibits states, without congressional consent, from regulating the manner in which the federal government conducts its activities.  As a federal agency, TVA is exempt from regulation, control, and taxation by states except in certain areas where Congress has clearly made TVA subject to state regulation. See Environmental Matters below.

Other Federal Entities

TVA’s activities and records are also subject to review to varying degrees by other federal entities, including the Government Accountability Office and the Office of Management and Budget ("OMB") .  There is also an Office of the Inspector General which reviews TVA’s activities and records.

Taxation and Tax Equivalents

TVA is not subject to federal income taxation.  In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions.  Section 13 of the TVA Act, however, does require TVA to make tax equivalent payments to states and counties in which TVA conducts power operations or in which TVA has acquired properties previously subject to state and local taxation.  The total amount of these payments is five percent of gross revenues from the sale of power during the preceding year excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances.  Except for certain direct payments TVA is required to make to counties, distribution of tax equivalent payments within a state is determined by individual state legislation.

Environmental Matters

TVA’s activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other issues. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MWs whose emissions are not required to be reported to the EPA) have been reduced from historic peaks. Emissions of nitrogen oxide ("NO _x ") have been reduced by 92 percent below peak 1995 levels and emissions of sulfur dioxide ("SO ₂ ") have been reduced by 97 percent below 1977 levels through CY 2016. For CY 2016, TVA’s emission of carbon dioxide ("CO ₂ ") from its sources was 69 million tons, a 34 percent reduction from 2005 levels. This includes 1,829 tons from units rated at less than 25 MWs whose emissions are not required to be reported to the EPA. To remain consistent and provide clear

information and to align with the EPA’s reporting requirements, TVA intends to continue to report CO ₂  emissions on a calendar year basis.

  

Clean Air Act

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air pollution. The major CAA programs that affect TVA’s power generation activities are described below.

National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM") , SO ₂ , nitrogen dioxide ("NO ₂ "), carbon monoxide, and lead. Over the years, the EPA has made the NAAQS more stringent. Each state must develop a plan to be approved by the EPA for achieving and maintaining NAAQS within its borders. These plans impose limits on emissions from pollution sources, including TVA fossil fuel-fired plants. Areas meeting a NAAQS are designated as attainment areas. Areas not meeting a NAAQS are designated as non-attainment areas, and more stringent requirements apply in those areas, including stricter controls on industrial facilities and more complicated permitting processes. TVA fossil fuel-fired plants can be impacted by these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS. EPA designated the Knoxville area as attainment with the 1997 annual fine PM NAAQS effective August 19, 2017, and in attainment with the 2006 24-hour fine PM NAAQS effective September 27, 2017.

All areas of the Tennessee Valley meet the 2008 ozone NAAQS. On October 1, 2015, the EPA issued a final rule to revise the ozone NAAQS to 70 parts per billion ("ppb") from the 2008 standard of 75 ppb. On November 6, 2017, the EPA Administrator signed a final rule establishing initial air quality designations for most areas in the United States with respect to the 2015 ozone standard. All areas within the Tennessee Valley were designated by the EPA as Attainment/Unclassifiable for the 70 ppb standard.

On March 2, 2015, the United States District Court for the Northern District of California approved a consent decree between the EPA and certain environmental petitioners in Sierra Club v. McCarthy . The consent decree set a schedule for the EPA to complete nationwide area designations with respect to the 2010 1-Hour SO ₂ NAAQS based on monitored air quality levels and SO ₂ source emission rates and amounts. Air quality modeling was required in 2016 to determine designation of areas around five TVA coal-fired plants. No areas around any TVA generating units were designated non-attainment. Lower SO ₂ permit limits well within the capability of existing control equipment are in place for Gallatin. The impacted Paradise coal Units 1 and 2 have been retired.    

Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in July 2011, requiring several states in the eastern United States to improve air quality relative to the 1997 ozone NAAQS and the 1997 and 2006 fine particle NAAQS by reducing power plant emissions that contribute to pollution in other states.  CSAPR replaced the Clean Air Interstate Rule ("CAIR") , a similar but less stringent rule. The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") vacated CSAPR before implementation began, but the D.C. Circuit’s vacatur was reversed by the U.S. Supreme Court in April 2014.  Upon further proceedings on remand, the D.C. Circuit granted the EPA’s motion to restore CSAPR but delayed the compliance deadlines by three years.  Under the revised compliance deadlines, Phase I emission reductions in SO ₂ and NO _x became effective on January 1, 2015, and were followed by Phase II reductions on May 1, 2017.  TVA complies with CSAPR aided by significant prior reductions in SO ₂ and NO _x emissions and planned future reductions.

 

On September 7, 2016, the EPA issued an update to CSAPR to address cross-state pollution relative to the 2008 ozone NAAQS, and also to respond to a July 2015 remand of the CSAPR emission budgets for certain states by the D.C. Circuit.  In this update, the EPA implemented more stringent Phase II reductions for NO _x that become effective on May 1, 2017.  TVA has not had and does not currently anticipate significant changes to its operations based on the September 7, 2016, EPA Cross-State Air Pollution Update Rule ("CSAPR Update Rule").

Mercury and Air Toxics Standards for Electric Utility Units . The D.C. Circuit upheld the Mercury and Air Toxics Standards ("MATS") rule on April 15, 2014. In June 2015, however, the United States Supreme Court (“Supreme Court”) left the rule in place but remanded it back to the EPA, finding that the EPA was required to consider cost before deciding whether the regulation of hazardous air pollutants emitted from steam electric utilities was appropriate and necessary. In response to the Supreme Court's remand, the EPA published the final Supplemental Finding That It is Appropriate and Necessary to Regulate Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units in April 2016. Several groups have filed petitions with the D.C. Circuit challenging the EPA’s determination. The MATS rule remains in effect while these challenges are pending, and TVA’s MATS compliance strategy will not be affected by these challenges. Also in April 2016, in response to a request from TVA, the EPA issued an administrative order under the CAA to allow operation of Paradise coal-fired Units 1 and 2 for a year beyond the original MATS compliance date of April 15, 2016. The additional year allowed these units to continue to operate while the new natural gas-fired generation facility being built at the site became operational. The natural gas-fired generation facility reached commercial operation in the spring of 2017, and Paradise coal-fired Units 1 and 2 have been retired.

The Environmental Agreements. See Note 21 — Legal Proceedings — Environmental Agreements for a discussion of the Environmental Agreements, which discussion is incorporated herein by reference.

Acid Rain Program. Congress established the Acid Rain Program to achieve reductions in emissions of SO ₂ and NO _x , the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO ₂ emissions from power plants. TVA continues to reduce SO ₂ and NO _x emissions from its coal-fired plants, and the SO ₂ allowances allocated to TVA under the Acid Rain Program are sufficient to cover the operation of its coal-fired plants. In the TVA service area, the limitations imposed on NO _x emissions by the CSAPR program are more stringent than the Acid Rain Program. Therefore, TVA forecasts that the Acid Rain Program will have no impact on TVA other than administrative reporting.

Regional Haze Program . In June 2005, the EPA issued the Clean Air Visibility Rule, amending its CY 1999 regional haze rule, which had established timelines for states to improve visibility in national parks and wilderness areas throughout the United States with a target of reaching no anthropogenic impacts on visibility in these areas by 2064. One requirement under the amended rule is that certain types of older existing sources are required to install best available retrofit technology. No additional controls or lower operating limits are required for any TVA units to meet best available retrofit technology requirements. On January 10, 2017, the EPA published the final rule "Protection of Visibility: Amendments to Requirements for State Plans." The rule would change some of the requirements for Regional Haze State Implementation Plans ("Regional Haze SIPs") . TVA does not expect significant impacts to its operations from these changes, but specific impacts are not possible to predict until the rule is final and future Regional Haze SIPs are submitted to the EPA and approved.

Opacity. Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO ₂ and NO _x emissions can adversely affect opacity performance, and TVA and other utilities are addressing this issue. The evaluation of utilities' compliance with opacity requirements is coming under increased scrutiny, especially during periods of startup, shutdown, and malfunction. State implementation plans developed under the CAA typically exclude periods of startup, shutdowns, and malfunctions, but on June 12, 2015, the EPA finalized a rule to eliminate such exclusions. The EPA rule required states to modify their implementation plans by November 12, 2016. Kentucky, Tennessee, and Mississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the EPA final rule before the D.C. Circuit. On April 24, 2017, the D.C. Circuit, at the request of the new EPA Administrator, ordered this litigation to be held in abeyance pending the EPA's review to determine whether to reconsider all or part of the rule. TVA does not expect significant impacts from these rule changes.

On October 1, 2017, the Kentucky Division for Air Quality published proposed revised startup/shutdown regulations for new and existing indirect heat exchangers. TVA’s Shawnee and Paradise plants have boilers which will be subject to these rules when finalized and incorporated into their air permits.

Petition to Expand the Ozone Transport Region. On December 9, 2013, eight of the twelve states that make up the Ozone Transport Region ("OTR") submitted a petition, pursuant to section 176A(a) of the CAA, requesting the EPA to add nine states, including Kentucky and Tennessee, to the OTR. The EPA failed to act on the petition within the 180-day period provided under the CAA. On October 6, 2016, six of the eight states filing the petition sued the EPA in the U.S. District Court for the Southern District of New York, asking the court to require the EPA to act on the petition by a date certain. In response to this lawsuit, the EPA published, on January 19, 2017, a notice in the Federal Register proposing to deny the petition on the basis that the CAA provides other options, such as the use of the “good neighbor provision” in Section 110, and Section 126, to address the impact of interstate air pollution.  The EPA also states that its CSAPR Update Rule is a significant step to control states’ emission reduction obligations under Section 110 to meet the 2008 ozone NAAQS.  The comment period on this proposal closed on May 15, 2017.  On October 27, 2017, the EPA denied the petition.

Kentucky Federal Implementation Plan to Address Downwind Ozone Impacts . On June 2, 2016, the EPA missed its deadline to promulgate a federal implementation plan ("FIP") for Kentucky to address its obligation for ozone emissions originating in Kentucky that might be transported to New York and other downwind states and was sued by the Sierra Club for missing the deadline. On May 23, 2017, the U.S. District Court for the Northern District of California ruled that the EPA must promulgate the Kentucky FIP by June 30, 2018, sooner than the EPA had proposed. Until the EPA develops and releases a proposed FIP, expected impacts to TVA are not possible to determine. Kentucky utility unit emissions that contribute to ozone are already limited by the CSAPR Update Rule and are declining. Further reductions may not be required by the FIP.

Maryland Petition to Address Impacts from Upwind Electric Generating Units. On September 27, 2017, the State of Maryland filed a lawsuit against the EPA for failing to act within 60 days on Maryland’s petition under Section 126 of the Clean Air Act to address ozone impacts on Maryland from the NO _x emissions of 36 electric generating units, including TVA’s Paradise coal-fired Unit 3. On October 4, 2017, a group of seven environmental advocacy groups filed a similar complaint against the EPA. At issue in Maryland’s Section 126 petition are alleged excessive NO _x emissions from the 36 electric generating units as a result of SCR units not being operated continuously. Paradise coal-fired Unit 3 is equipped with a SCR unit that TVA continuously operates to the greatest extent technically practicable in order to minimize NO _x emissions. Until the EPA responds to Maryland’s Section 126 petition, it is not possible to determine the potential impacts of the petition on TVA.

Climate Change

Regulation . On August 3, 2015, the EPA issued the Clean Power Plan ("CPP"), a rule under section 111(d) of the CAA, to reduce carbon emissions from existing power plants burning fossil fuels. The Clean Power Plan establishes state-specific emission goals to lower CO ₂ emissions from power plants, targeting a 32 percent nationwide reduction in CO ₂ emissions from 2005 levels by 2030. The EPA established an “interim goal” that states must meet on average over the eight-year period from 2022-2029 and a “final goal” that states must meet in 2030 and thereafter based on a two-year average. States were required to submit to the EPA final plans, or “initial plans” with a request for an extension, by September 6, 2016. States that received an extension are required to submit final plans by September 6, 2018.

On February 9, 2016, the U.S. Supreme Court granted a stay of the Clean Power Plan. The stay will remain in place while the D.C. Circuit reviews the rule and during any subsequent appeals to the U.S. Supreme Court that may occur after the D.C. Circuit issues its opinion. The stay means that the Clean Power Plan has no legal effect while courts are reviewing the rule to determine whether it is lawful. The D.C. Circuit, sitting en banc, heard oral arguments on the Clean Power Plan on September 27, 2016.

On April 28, 2017, the D.C. Circuit issued an order, at the request of the EPA Administrator, holding the case in abeyance pending the EPA's review of the Clean Power Plan to determine whether to repeal or modify it. On October 10, 2017, the EPA published a notice in the Federal Register proposing to repeal the Clean Power Plan. The notice provides that the EPA has not determined whether it will promulgate a Section 111(d) rule and, if it will do so, when it will do so and what form the rule will take.

On August 3, 2015, the EPA also finalized New Source Performance Standards for carbon emissions from new, modified, and reconstructed power plants. These standards apply to two types of fossil fuel-fired sources: (1) stationary combustion turbines, generally firing natural gas, and (2) electric utility steam generating units, generally firing coal. These standards reflect the degree of emission limitation achievable through the application of the best system of emission reduction ("BSER") that the EPA has determined to be adequately demonstrated for each type of source. These standards apply to the new TVA combined-cycle plants at the Paradise site, which is already operating, and at Allen, which is under construction. The design of these plants enables them to comply with the new standards.

Executive Actions. To strengthen the Administration's efforts to increase government-wide energy efficiency and sustainability and implement goals in the President’s June 2013 Climate Action Plan, President Obama issued a memorandum on December 5, 2013, requiring that at least 20 percent of the total amount of energy consumed by each federal agency in any fiscal year, starting in 2020, be renewable energy. TVA is on track to achieve the aforementioned 2020 goal of the Presidential Memorandum. In addition, on March 25, 2015, President Obama issued Executive Order ("EO") 13693, which directed each federal agency to ensure that, starting in 2025 and continuing each year thereafter, no less than 30 percent of the total amount of building electric energy is renewable electric energy. TVA has submitted a climate adaptation plan as required by EO 13693, and TVA is aligning the federal climate adaption plan with climate resiliency planning. The Executive Order also established a clean energy target for federal agencies to achieve 25 percent of total building energy from renewable plus thermal energy by 2025.

On April 21, 2015, the Obama Administration released the initial installment of its Quadrennial Energy Review ("QER") . In the QER, the Obama Administration announced that the DOE is creating a partnership with 17 energy companies, including TVA, to improve infrastructure resilience against extreme weather and climate change. The first installment of the QER was published in April 2015, and the second installment was published in January 2017.

On March 28, 2017, President Trump issued EO 13783, “Promoting Energy Independence and Economic Growth.”  The EO reversed or altered many actions taken by the federal government in the last four years to address climate change and mandates that federal agencies review existing regulations and actions that potentially burden energy development and use.  Several EOs, policy statements, and reports that established climate change objectives were rescinded or revoked. The EPA is required to review and, if appropriate, suspend or revise specific rules including the Clean Power Plan.  The EPA, through the Department of Justice, has already requested the D.C. Circuit to hold all litigation relating to these rules in abeyance pending completion of the EPA’s review of the rules.  The EO does not cover all relevant policies, orders, and regulations related to climate change and did not rescind EO 13693, “Planning for Federal Sustainability in the Next Decade.”  EO 13783 also did not mandate that the EPA reconsider its finding under the CAA that greenhouse gas emissions cause climate change and therefore endanger public health and the environment. 

While EO 13783 requires review of all agency actions that potentially burden the safe, efficient development of domestic energy resources, the final specific requirements and impacts from implementation of this EO are not possible to predict at this time. It is likely that there will be some delay in the development of future greenhouse gas ("GHG") reduction requirements. TVA’s historical and projected GHG reductions are expected to meet the requirements of the currently stayed Clean Power Plan, and TVA’s new generating units are designed to meet the applicable GHG requirements for new units.

International Accords . On September 3, 2016, the United States formally accepted the Paris agreement. The agreement met the threshold of at least 55 countries that account for at least 55 percent of global greenhouse gas emission and

formally entered into force on November 4, 2016. The durability of the Paris agreement commitments is uncertain after the President’s announcement on June 1, 2017, that the U.S. would withdraw from the agreement. Under the terms of the agreement, the earliest possible effective date for withdrawal by the U.S. is November 4, 2020, four years after the agreement came into effect. Future U.S. regulation on greenhouse gases designed to meet the Paris agreement goals could impact TVA in ways that cannot be determined at this time.

Litigation . In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA. See Note 21 for additional information.

Indirect Consequences of Regulation or Business Trends . Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and subsequent impacts to business reputation and public opinion. See Power Supply and Load Management Resources above .

Physical Impacts of Climate Change. TVA manages the potential effects of climate change on its mission, programs, and operations within its environmental management processes. The goal of the adaptation planning process is to ensure TVA continues to achieve its mission and program goals and to operate in a secure, effective, and efficient manner in a changing climate by integrating climate change adaptation efforts in coordination with other state and local partners, tribal governments and private stakeholders. TVA's Climate Change Adaptation Plan was last updated in July 2017.

Actions Taken by TVA to Reduce GHG Emissions . TVA has reduced GHG emissions from both its generation stations and its operations.  As discussed earlier in this Item 1, Business, recent TVA Board actions have focused on TVA’s plan to balance its coal-fired generation by increasing its nuclear capacity, modernizing its hydroelectric generation system, increasing natural gas-fired generation, installing emission control equipment on certain of its coal-fired units, increasing its purchases of renewable energy, and investing in energy efficiency initiatives to reduce energy use in the Tennessee Valley.  Additionally, TVA has invested to reduce energy use in its operations.  The combination of more stringent environmental regulations, lower natural gas prices, and lower demand for energy across the Tennessee Valley has reduced the utilization of coal-fired generation.  These factors have resulted in lower CO ₂ emissions from the TVA system.

Renewable/Clean Energy Standards

Twenty-nine states and the District of Columbia have established enforceable or mandatory requirements for electric utilities to generate a certain amount of electricity from renewable sources.  One state within the TVA service area, North Carolina, has a mandatory renewable standard that, while not applying directly to TVA, does apply to TVA’s LPCs serving retail customers in that state.  TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the covered LPCs that sell TVA power in North Carolina.  Likewise, the Mississippi Public Service Commission adopted an energy efficiency rule applying to electric and natural gas providers in the state, and TVA is supplying information on participation in ERS efforts to support the covered Mississippi LPCs. 

Water Quality Control Developments

Cooling Water Intake Structures. On May 19, 2014, the EPA released a final rule under Section 316(b) of the Clean Water Act relating to cooling water intake structures ("CWIS") for existing power generating facilities. The rule requires changes in cooling water intake structures used to cool the vast majority of coal, gas, and nuclear steam-electric generating plants and a wide range of manufacturing and industrial facilities in the U.S.  The final rule requires cooling water intake structures to reflect the best technology available for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a cooling water intake structure. These new requirements will potentially affect a number of TVA’s fossil- and nuclear-fueled facilities and will likely require capital upgrades to ensure compliance. Most TVA facilities are projected to require retrofit of CWIS with “fish-friendly” screens and fish return systems to achieve compliance with the new rule. The rule is being implemented through permits issued under the National Pollutant Discharge Elimination System ("NPDES") in Section 402 of the Clean Water Act. State agencies administer the NPDES permit program in most states including those in which TVA’s facilities are located.  In addition, the responsible state agencies must provide all permit applications to the U.S. Fish & Wildlife Service for a 60-day review prior to public notice and an opportunity to comment during the public notice.   As a result, the permit may include requirements for additional studies of threatened and endangered species arising from U.S. Fish & Wildlife Service comments and may require additional measures be taken to protect threatened and endangered species and critical habitats directly or indirectly related to the plant cooling water intake. TVA’s review of the final rule indicates that the rule offers adequate flexibility for cost-effective compliance.  The required compliance timeframe is linked to plant specific NPDES permit renewal cycles (i.e., technology retrofits), and compliance is expected to be in the 2022-2024 timeframe.

Hydrothermal Discharges. The EPA and many states continue to focus regulatory attention on potential effects of hydrothermal discharges. Many TVA plants have variances from thermal standards under Section 316(a) of the Clean Water Act that are subject to review as NPDES permits are renewed. Specific data requirements in the future will be determined based on negotiations between TVA and regulators. If plant thermal limits are made more stringent, TVA may have to install cooling towers at some of its plants and operate installed cooling towers more often. This could result in a substantial cost to TVA.

Steam-Electric Effluent Guidelines . On November 3, 2015, the EPA published a final rule to revise the existing steam- electric effluent limitation guidelines ("ELGs") that updates the existing technology-based water discharge limitations for power plants nationwide.  The new ELGs establish more stringent performance standards for existing and new sources that will require power plants that generate more than 50 MW to regulate discharges of toxic pollutants from seven primary wastewater streams.  The primary impact for TVA is on the operation of existing and any potential new coal-fired generation facilities.  The rule has the potential to impact long-term investment decisions being made relative to the long-term compliance and operability of TVA coal-fired units. Compliance with new requirements is required in the 2018-2023 timeframe and will necessitate major upgrades to wastewater treatment systems at all coal-fired plants. Dry fly ash handling is mandated by the rule.  The rule also requires either dry bottom ash handling systems or “no discharge” recycle of bottom ash transport waters.  In addition, new technology-based limits on flue gas desulfurization wastewater require primary physical or chemical treatment and secondary biological treatment to meet extremely low limits for arsenic, mercury, and selenium.  On April 12, 2017, in response to Petitions for Reconsideration by the Utility Water Act Group and the Small Business Administration, the EPA Administrator announced his decision to reconsider the ELG rule.   The EPA also proposed a rule to postpone the rule’s compliance deadlines pending the EPA’s reconsideration of the rule.

On August 11, 2017, the new EPA Administrator announced his decision to conduct a rulemaking to potentially revise the new, more stringent effluent limitations that apply to bottom ash transport water and flue gas desulfurization ("FGD") wastewater in the 2015 rule.  A legal challenge of the rule is currently pending before the U.S. Court of Appeals for the Fifth Circuit.  At the EPA’s request, the court on August 22, 2017, entered an order severing and holding in abeyance the litigation related to the portions of the 2015 rule concerning bottom ash transport water, FGD wastewater, and gasification wastewater (which is not applicable to TVA) pending further agency action.  Thus, the litigation is indefinitely on hold as to the bottom ash transport water and FGD wastewater claims until the EPA’s further rulemaking has concluded.  The litigation will continue as to the other claims. 

On September 18, 2017, the EPA published a final rule postponing certain compliance/applicability dates to provide the EPA time to review and revise, as necessary, the new and stringent ELGs previously established for FGD wastewater and bottom ash transport water. The EPA pushed back the compliance dates for these two wastestreams from the 2018-2023 timeframe to 2020-2023. Other requirements and applicability dates of the rule for fly ash transport water, flue gas mercury control wastewater, and gasification wastewater remain in effect. As a result of these developments, it is not possible to predict the changes in the rule and TVA’s associated expenditures to attain compliance.

With regard to its Cumberland Fossil Plant ("Cumberland") , TVA contends the ELG rulemaking did not appropriately consider available data that could affect these national limits as they applied at Cumberland given its unique “once-through” scrubber design.  TVA has been working with the State of Tennessee and the EPA in an effort to address this issue. Compliance with the rule at Cumberland without modification to address the unique design could cause TVA to incur disproportionately high costs at Cumberland or experience other operational outcomes which TVA cannot predict at this time. The EPA’s reconsideration of the 2015 rule is likely to impact this issue at Cumberland and could result in TVA’s request needing revision or being unnecessary.

Other Clean Water Act Requirements . As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities, new water quality criteria for nutrients and other pollutants, new wastewater analytical methods, and regulation of pesticide discharges.

Cleanup of Solid and Hazardous Wastes

Liability for releases and cleanup of hazardous substances is imposed under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") , and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years.

TVA Sites. TVA operations at some of its facilities have resulted in contamination that TVA is addressing including at TVA's Environmental Research Center ("ERC") at Muscle Shoals, Alabama. At September 30, 2017 , TVA’s estimated liability for cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate is approximately $7 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the consolidated balance sheet. In addition, the ERC has an active groundwater monitoring program as part of a Resource Conservation and Recovery Act ("RCRA") Corrective Action Permit.

Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at certain non-TVA areas for which it may have some liability. See Note 21 — Contingencies — Environmental Matters .

Coal Combustion Residuals. The EPA published its final rule governing CCRs on April 17, 2015. The rule regulates CCRs as nonhazardous waste under Subtitle D of the RCRA. While states may adopt the rule's requirements into their regulatory programs, the rule does not require states to adopt the requirements. Although the rule became effective October 19, 2015, certain provisions have later effective dates. TVA’s review of the final rule indicates that the rule offers adequate flexibility for compliance. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key

Initiatives and Challenges — Generation Resources — Coal Combustion Residual Facilities for a discussion of the impact on TVA’s operations, including the cost and timing estimates of related projects.

    

On December 16, 2016, President Obama signed the Water Infrastructure Improvements for the Nation Act, which provides a path to CCR regulation implementation through state or federal-based permitting as an alternative to self implementation and enforcement through citizen suits in federal courts. Pending adoption of state permitting programs in states in TVA’s service area, TVA does not anticipate any impact on the design or implementation timeframe for TVA’s ongoing CCR activities at this time.

In August 2015, the Tennessee Department of Environment and Conservation ("TDEC") issued an order that (1) allowed TDEC to oversee TVA’s implementation of the EPA’s CCR rule and (2) required TVA to assess CCR contamination risks at seven of TVA’s eight coal-fired plants in Tennessee and to remediate any unacceptable risks.  The TDEC order does not allege that TVA is violating any CCR regulatory requirements nor does it assess TVA penalties.  The TDEC order sets out an iterative process through which TVA and TDEC will identify and evaluate any CCR contamination risks and, if necessary, respond to such risks. 

On August 4, 2017, the U.S. District Court for the Middle District of Tennessee ordered TVA to excavate the CCR materials from its CCR facilities at Gallatin and move them to a lined facility. See Note 8 — Background — Lawsuit Brought by TDEC and Lawsuit Brought by TSRA and TCWN and Note 21 — Legal Proceedings — Cases Involving Gallatin Fossil Plant CCR Facilities .

In May 2017, industry petitioners asked the EPA to reconsider the CCR rule and to incorporate new flexibility provided by the WIIN Act – specifically authority to make site-specific, risk-based decisions on implementing the federal criteria and to postpone upcoming regulatory deadlines during the new rulemaking.  The EPA had previously agreed through settlement to revisit several elements of the CCR rule, so it will already be re-opening the rule.  On September 14, 2017, the EPA announced that it plans to address the request to revisit key parts of its 2015 CCR rule.  In addition, on September 18, 2017, the EPA filed a motion to hold the CCR litigation in abeyance and to postpone oral argument in the case while it reconsiders the CCR rule.  The D.C. Circuit denied the EPA's motion and has rescheduled oral argument on litigation over the 2015 rule for November 20, 2017.  In addition, the EPA has been directed to file by November 15, 2017, a status report specifying which provisions of the CCR rule are, or are likely to be, subject to reconsideration and specifying a rulemaking timeline.  As a result of these developments, it is not possible to predict changes to the CCR rule and potential impacts on TVA.

Groundwater Contamination . Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities.  Seven of TVA’s coal-fired plants are in some level of state regulatory groundwater assessment.  Four of those plants (Colbert, Gallatin, Cumberland, and Shawnee) have investigations beyond monitoring and reporting.  Five of those (Gallatin, Shawnee, Paradise, Johnsonville, and Widows Creek) have groundwater remediation monitoring with state regulatory involvement. As a result of these assessments and increased attention, TVA may have to change how it manages CCRs at some of its plants, potentially resulting in higher costs. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residual Facilities, Note 8 — Background — Lawsuit Brought by TDEC and Lawsuit Brought by TSRA and TCWN and Note 21 — Legal Proceedings — Cases Involving Gallatin Fossil Plant CCR Facilities .

Environmental Investments

From the 1970s to 2017 , TVA spent approximately $6.7 billion on controls to reduce emissions from its coal-fired power plants. In addition, TVA has reduced emissions by idling or retiring coal-fired units and relying more on cleaner energy resources including natural gas and nuclear generation.

SO ₂ Emissions and NO _x Emissions. To reduce SO ₂ emissions, TVA operates scrubbers on 17 of its coal-fired units, with scrubbers currently under construction on two additional units, and switched to lower-sulfur coal at 20 coal-fired units. To reduce NO _x emissions, TVA operates SCRs on 18 coal-fired units with SCRs currently under construction on four additional units, operates selective non-catalytic reduction systems on four units, operates low-NO _x burners or low-NO _x combustion systems on 19 units, operates over-fire air on six cyclone units, optimized combustion on six units, and operates NO _x control equipment year round when units are operating (except during start-up, shutdown, and maintenance periods). TVA has also retired or announced plans to retire 33 of 59 coal-fired units. Except for seven units at Shawnee, the remaining coal-fired units will either have scrubbers and SCRs or be retired. See Power Supply and Load Management Resources — Coal-Fired above .

Particulate Emissions. To reduce particulate emissions of air pollutants, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, and/or bag houses.

There could be additional material costs if further reductions of GHGs, including CO ₂ , are mandated by legislative, regulatory, or judicial actions and if more stringent emission reduction requirements for conventional pollutants are established. These costs cannot reasonably be predicted at this time because of the uncertainty of these actions. A number of emerging EPA regulations establishing more stringent air, water, and waste requirements could result in significant changes in the structure of the U.S. power industry, especially in the eastern half of the country.

TVA currently anticipates spending significant amounts on environmental projects through 2025, including investments in new clean energy generation including natural gas, nuclear, and renewables to reduce TVA's overall environmental footprint.  TVA environmental project expenditures also result from coal-fired plant decommissioning and from effective ash management modernization. Based on TVA's decisions regarding certain coal-fired units under the Environmental Agreements, the amount and timing of expenditures could change.  See Power Supply and Load Management Resources — Coal-Fired above and Estimated Required Environmental Expenditures below.

    

Notes

(1) These estimates are subject to change as additional information becomes available and as laws or regulations change.

(2)  Includes costs associated with pond closures, conversion of wet to dry handling, and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projec ts. Includes approximately $140 million for Gallatin projects that are part of the original activities scheduled in TVA’s CCR Conversion Program and excludes costs resulting from any new requirements related to the Gallatin lawsuits. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Coal Combustion Residual Faci lities and Note 8.

(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 or transmission upgrades.

(4)  Includes projects that TVA is currently planning to comply with revised rules under the Clean Water Act (i.e., Section 316(b) and effluent limitation guidelines for

steam electric power plants).

Employees

On September 30, 2017 , TVA had 10,092 employees, of whom 3,580 were trades and labor employees.  Neither the federal labor relations laws covering most private sector employers nor those covering most federal agencies apply to TVA.  However, the TVA Board has a long-standing policy of acknowledging and dealing with recognized representatives of its employees, and that policy is reflected in long-term agreements to recognize the unions (or their successors) that represent TVA employees.  Federal law prohibits TVA employees from engaging in strikes against TVA.