Regulatory Assets and Liabilities

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



Regulatory Assets and Liabilities At September 30
	2011		2010
Current regulatory assets
Deferred nuclear generating units	$	236	$	391
Unrealized losses on commodity derivatives	225		184
Environmental cleanup costs – Kingston ash spill	73		76
Fuel cost adjustment receivable	7		84
Deferred capital leases	2		14
Deferred outage costs	—		42
Total current regulatory assets	543		791

Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	5,807		4,711
Unrealized losses on swaps and swaptions	1,164		797
Nuclear decommissioning costs	1,012		898
Environmental cleanup costs - Kingston ash spill	874		987
Deferred nuclear generating units	709		1,565
Construction costs	619		—
Non-nuclear decommissioning costs	519		410
Environmental agreements	346		—
Unrealized losses on commodity derivatives	221		144
Other non-current regulatory assets	234		244
Total non-current regulatory assets	11,505		9,756

Total regulatory assets	$	12,048	$	10,547

Current regulatory liabilities
Unrealized gains on commodity derivatives	$	153	$	57
Fuel cost adjustment tax equivalents	127		—
Capital leases	—		6
Total current regulatory liabilities	280		63

Non-current regulatory liabilities
Unrealized gains on commodity derivatives	285		106

Total regulatory liabilities	$	565	$	169

Deferred Nuclear Generating Units and Construction Costs. In July 2005, the TVA Board approved the amortization, and inclusion into rates, of TVA’s $3.9 billion investment in the two deferred nuclear generating units at Bellefonte over a 10-year recovery period beginning in 2006. In August 2011, the TVA Board approved the completion of Bellefonte Unit 1. Approximately $619 million of the remaining balance in the deferred nuclear generating units regulatory asset will not continue to be amortized into rates, but will be included in the Bellefonte plant asset balance at completion. This amount has been segregated into a separate non-current regulatory asset account titled Construction costs. Accordingly, the amount of annual amortization to be included in rates will decrease beginning in 2012. The amount to be amortized over the next fiscal year is included as a current regulatory asset on the balance sheet.

Unrealized Gains (Losses) on Commodity Derivatives

Unrealized Gains (Losses) on Coal Contracts. Unrealized gains (losses) on coal purchase contracts, included as part of unrealized losses on commodity derivatives, relate to the mark-to-market ("MtM") valuation of coal purchase contracts that contain options to purchase additional or fewer quantities. These contracts qualify as derivative contracts but do not qualify for cash flow hedge accounting treatment. As a result, TVA recognizes the changes in the market value of these derivative contracts as a regulatory liability or asset. This treatment reflects TVA’s ability and intent to recover the cost of these commodity contracts on a settlement basis for ratemaking purposes through the total fuel rate mechanism. TVA has historically recognized the actual cost of fuel received under these contracts in fuel expense at the time the fuel is used to generate electricity. These contracts expire at various times through 2013. Unrealized gains and losses on contracts with a maturity of less than one year are included as a current regulatory asset or liability on the balance sheet. See Note 13.

Deferred Gains and Losses Relating to TVA’s Financial Trading Program. Deferred gains and losses relating to TVA’s Financial Trading Program (“FTP”) represent net unrealized gains and losses on swaps, futures, options, and combinations of these instruments and are also included as part of unrealized losses on commodity derivatives. The program is used to reduce TVA’s economic risk exposure associated with electricity generation, purchases, and sales. TVA defers all FTP mark-to-market unrealized gains or losses as regulatory liabilities or assets, respectively, and records realized gains or losses in fuel and purchased power expense to match the delivery period of the underlying commodity product. Net unrealized losses at September 30, 2011, and September 30, 2010, were approximately $234 million and $254 million, respectively. This accounting treatment reflects TVA’s ability and intent to recover the cost of these commodity contracts in future periods through the fuel rate. The current regulatory asset/liability for net unrealized gains and losses, included as part of the commodity derivatives, represents deferred gains and losses from contracts with a maturity of less than one year.

Environmental Cleanup Costs – Kingston Ash Spill. In August 2009, TVA began using regulatory accounting treatment to defer all actual costs incurred and expected future costs related to the Kingston Fossil Plant ("Kingston") ash spill. The TVA Board approved a plan of amortizing these costs over 15 years beginning October 1, 2009. At September 30, 2009, TVA’s remediation cost estimate of $933 million was deferred as a regulatory asset. During 2010, the estimate was revised and increased by $192 million to a total estimate of $1.1 billion. The additional amount will be amortized over the remaining term of the initial life. Amounts included as a current regulatory asset on the balance sheet represent the amount to be amortized in the next 12 months. Any future revisions to the estimate will be amortized as a change in estimate over the remaining term.

Fuel Cost Adjustment Receivable. The fuel cost adjustment provides a mechanism to regularly alter rates to reflect changing fuel and purchased power costs, including realized gains and losses relating to transactions under TVA’s FTP. There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in rates. Balances in the fuel cost adjustment regulatory accounts represent overcollected or undercollected revenues to offset fuel and purchased power costs and are recovered or refunded in fuel rates.

Starting with the October 1, 2009, billing period, all fuel cost adjustments have been made on a monthly basis instead of a quarterly basis. Therefore, since October 1, 2009, the balance has been a current regulatory asset or liability. Monthly adjustments allow the rates to be more closely aligned with TVA’s costs. The fuel cost adjustment formula also contains a deferred account which is used to reconcile the difference between actual and forecasted fuel and purchased power costs. The difference between the amounts is included in the deferred account, and starting with the October 1, 2009, billing period, 50 percent of the account has been disbursed or collected on a monthly basis. This change to a monthly fuel cost adjustment formula has resulted in smaller reconciliations and faster liquidation of any balances in the account. With the change to the monthly fuel cost adjustment formula on October 1, 2009, the remaining balance in the existing deferred liability account balance at that date of approximately $822 million was liquidated over a nine-month period from October 1, 2009, through June 30, 2010.

Deferred Capital Leases. Deferred capital lease asset costs represent the difference between the Federal Energy Regulatory Commission's ("FERC") Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act ("Uniform System of Accounts") model balances and the balances under GAAP guidance. Under the Uniform System of Accounts, TVA recognizes the initial capital lease asset and liability at inception of the lease; however, the annual expense under the Uniform System of Accounts is equal to the annual lease payments, which differs from GAAP treatment. This practice results in TVA’s capital lease asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to each capital lease. These costs are being amortized over the respective lease terms as lease payments are made. The amount to be amortized over the next 12 months is included as a current regulatory asset on the balance sheet. These costs are included in current regulatory assets.

Deferred Outage Costs. The cost of fuel used in TVA’s nuclear units has been amortized and accounted for as a component of fuel cost adjustment. Nuclear refueling outage and maintenance costs were deferred and amortized on a straight-line basis over the estimated period until the next refueling outage. In 2010, TVA began expensing outage and maintenance costs as incurred. Previously deferred outage costs continued to be amortized as the remaining amounts were collected in rates and were included as a current regulatory asset on the balance sheet. The remaining costs were fully amortized during 2011.

Deferred Pension Costs and Other Post-retirement Benefit Costs. TVA measures its benefit obligations related to pension and other post-retirement benefit (“OPEB”) costs at the year-end balance sheet date. TVA recognizes the funded status of the plans on the balance sheet which in an unregulated environment would result in a corresponding offset to accumulated other comprehensive income (“AOCI”). “Incurred cost” is a cost arising from cash paid out or obligation to pay for an acquired asset or service, and a loss from any cause that has been sustained and has been or must be paid for. In the cases of pension and OPEB costs, the unfunded obligation represents a projected liability to the employee for services rendered, and thus it meets the definition of an incurred cost. Therefore, amounts otherwise charged to AOCI for these costs will be recorded as a regulatory asset since TVA has historically recovered pension and OPEB expense in rates. Through historical and current year expense included in ratemaking, the TVA Board has demonstrated the ability and intent to include pension and OPEB costs in allowable costs and in rates for ratemaking purposes. As a result, it is probable that future revenue, if necessary, will result from inclusion of the pension and OPEB regulatory assets in allowable costs for ratemaking purposes.

These regulatory assets are classified as long-term consistent with the pension and post-retirement liabilities and not amortized to the statement of operations over a specified recovery period. They are adjusted either upward or downward each year in conjunction with the adjustments in the unfunded pension liability as calculated by the actuaries. Ultimately this regulatory asset will flow through the statement of operations in the form of pension expense as the actuarial liability is eliminated in future periods. These costs are included in other non-current regulatory assets. See Note 18 — Obligations and Funded Status.

Unrealized Losses on Swaps and Swaption. TVA uses regulatory accounting treatment to defer the mark-to-market unrealized gains and losses on certain swap and swaption contracts to reflect that the gain or loss is included in the ratemaking formula when these transactions actually settle. The value of the swap and swaptions is recorded on TVA’s balance sheet as a non-current regulatory asset with realized gains or losses, if any, recorded in TVA’s statement of operations.

Nuclear Decommissioning Costs. Nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA’s nuclear generating units under the Nuclear Regulatory Commission ("NRC") requirements and (2) recognition of changes in the liability, TVA’s nuclear decommissioning trust ("NDT"), and certain other deferred charges under the accounting rules for AROs. These future costs will be funded through a combination of the NDT, future earnings on the NDT, and, if necessary, additional TVA cash contributions to the NDT, and future earnings thereon. See Note 1 — Investment Funds. There is not a specified recovery period; therefore, the regulatory asset is classified as long-term consistent with the NDT investments and ARO liability.

Non-Nuclear Decommissioning Costs. TVA has established an asset retirement trust ("ART") to more effectively segregate, manage, and invest funds to help meet future AROs. The funds from the ART may be used, among other things, to pay the costs of retiring non-nuclear long-lived assets. The costs of retiring non-nuclear long-lived assets represent the net deferred costs related to the future closure and retirement of TVA's non-nuclear long-lived assets under various legal requirements. The regulatory asset initially created related to this adjustment totaled $350 million. The offset to this adjustment was a one-time decrease to depreciation, amortization, and accretion expense. These future costs can be funded through a combination of investment funds already set aside in the ART, future earnings on those investment funds, and future cash contributions to the ART and future earnings thereon. There is not a specified recovery period; therefore, the regulatory asset is classified as long-term consistent with the ART investments and ARO liability.

Environmental Agreements. In conjunction with the Federal Facilities Compliance Agreement with the EPA and the agreement with Alabama, Kentucky, North Carolina, Tennessee, the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation (collectively, the “Environmental Agreements”) (see Note 20 — Legal Proceedings — Environmental Agreements), TVA recorded certain liabilities totaling $360 million ($290 million investment in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects; $60 million to be provided to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects with preference for projects in the Tennessee River watershed, of which $4 million was paid in the fourth quarter of 2011; and $10 million in civil penalties). The TVA Board determined that these costs would be collected in customer rates in the future and, accordingly, the amounts were deferred as a regulatory asset. During the three months ended June 30, 2011, the civil penalties of $10 million were expensed, and they were subsequently paid in July 2011. The remaining amounts will be charged to expense and recovered in rates over future periods as payments are made.

Other Non-Current Regulatory Assets

Debt Reacquisition Costs. Reacquisition expenses, call premiums, and other related costs, such as unamortized debt issue costs associated with redeemed Bond issues, are deferred under provisions of the Uniform System of Accounts. These costs are deferred and amortized (accreted) on a straight-line basis over the weighted average life of TVA’s debt portfolio (even though TVA is not a public utility subject generally to FERC jurisdiction) and are included in other non-current regulatory assets.

Nuclear Training Costs. As a result of refurbishing and restarting Browns Ferry Nuclear Unit 1 in 2007 and the construction and startup of Watts Bar Unit 2, nuclear training costs associated with these units have been deferred as a regulatory asset and will be amortized over a cost recovery period equivalent to the expected useful life of the operating nuclear units. These costs are included in other non-current regulatory assets.

Retirement Removal Costs. Retirement removal costs that are not legally required are capitalized into fixed assets to be depreciated consistent with the lives in the depreciation study. See Note 1 — Property, Plant, and Equipment, and Depreciation — Depreciation. The TVA Board has consistently provided rates to cover the depreciation of these assets; therefore, these assets are probable of future recovery and are included in other non-current regulatory assets.

Fuel Cost Adjustment Tax Equivalents. The fuel cost adjustment structure includes a provision related to the current funding of the future payments TVA will make. As TVA records the fuel cost adjustment, the percent of the calculation that relates to a future asset or liability for tax equivalent payments is recorded as a current regulatory asset or liability and paid in the following fiscal year.

Capital Leases. As a result of a capital lease of office space payment stream requiring larger cash payments during the latter years of the lease term than during the early years of the lease term, TVA levelized the annual lease expense recognition related to this lease in order to promote the fair and equitable cost recovery from ratepayers. These levelized costs were being amortized over the lease term. In 2011, TVA purchased the building subject to this lease, and with the final payment, removed the remaining regulatory liability that was included as a current regulatory liability on the September 30, 2010 Balance Sheet.

Preconstruction Costs. Certain preliminary work and costs associated with engineering, design, and licensing activities, as well as the procurement of long lead-time components for the partially completed Bellefonte Unit 1, had been deferred as a regulatory asset pending the TVA Board’s decision on the completion of the project. On August 18, 2011, the TVA Board decided to complete Bellefonte Unit 1, and the costs were moved to construction in progress. At September 30, 2010, no such preconstruction asset had been established.