Performance Planning Procedure 2

Scope

This procedure defines the TVA process for project review and approval and for managing the enterprise portfolio of Capital and Operating and Maintenance (O&M) Projects.

The intent of the Project Justification Process is to ensure that the TVA enterprise-wide project portfolio provides the maximum benefit/return to meet TVA’s goals and strategic plan. The goals of this process are accomplished by:

1. Implementing the concept of Top Down Budgeting by establishing top tier financial targets followed by the allocation to the individual Strategic Business Unit (SBU).
2. Establishing a matrixed approach for project review and approval based on project categorization.
3. Providing a standardized format and criteria for initiation, prioritization, review and approval of projects supporting and providing linkage to TVA’s strategic objectives.
4. Ensuring appropriate controls and documentation for project changes.
5. Providing a structured process for tracking and monitoring project execution and reporting the benefits/returns achieved as a result of completing the project.
   
   

This process applies to TVA’s Capital and O&M projects having an estimated total project cost greater than $250K. It is the responsibility of SBU Executive Management to ensure that each organization’s project portfolio spending and goals align with and optimize the enterprise-wide TVA project portfolio.

Procedure

This process describes the project categorization and funding allocation process. The process defines the requirements for project initiation, prioritization, review and approval, execution, change, and assessment/evaluation. A tiered approach for project funding, review and approval is defined based on project categorization.

Each SBU is responsible for identifying, prioritizing, and justifying project needs to support TVA’s vision, goals, and strategic direction. Projects to support these objectives and to address system performance, commitments, equipment failures, asset preservation, and other issues within each SBU will be initiated and assigned to one of the following project classifications. These classifications include New Generation, Clean Air, Research and Development (R&D), Commitment, Safety, Regulatory, Asset Preservation, System Requirements, Capacity Growth, Reimbursable, and Economic/Revenue.

These classifications will be grouped in three key categories: Strategic Projects, Base Projects, and Discretionary Projects. The Strategic Projects category will include New Generation, Clean Air, R&D, and Regulatory (greater than $8M) projects. The Base Projects category will include projects classified as Safety, Regulatory (less than or equal to $8M), Commitments, Asset Preservation, and System Requirements. Finally, the Discretionary Projects category will include Capacity Growth, Reimbursable, and Economic/Revenue. Projects will be entered in the Project Justification System (PJS) which serves as the official database containing supporting project data and project approval status.

Funding allocations for each project category will be established based on TVA’s strategic plan and available project funding as established by the Chief Financial Organization (CFO) in coordination with the Board of Directors. Funding for Strategic Projects will be requested from the Chief Executive Officer (CEO) as projects are identified. Funding for Base and Discretionary Projects will be allocated using the concept of Top Down Budgeting targets. The targets for Base Projects will be allocated to each SBU. Funding for Discretionary Projects will be allocated from the target by the Project Management Council (PMC). As each project is prioritized and funded, it will be “Tagged” in the PJS. The list of “Tagged” projects comprises the SBU 5-Year Project Plan.

A Project Authorization Matrix based on project category and estimated project cost will be implemented to review and approve projects. It is the responsibility of each SBU to manage its 5-Year Project Plan and to make adjustments when required to stay within approved funding allocations.

The PMC, consisting of SBU officers, will have oversight responsibility for TVA project planning and control. This Council will provide a forum for control and communication of project management issues. The Council will also be the prioritization and reviewing authority for Discretionary Projects. A Project Management Peer Team consisting of project management personnel from across the SBUs will provide a forum for project processes. The Peer Team will report to the PMC.

Project Categorization and Funding Methodology

Projects are initiated, owned, and managed by an SBU. To provide flexibility to manage projects according to specific SBU needs and requirements, a project categorization system requiring a matrixed level of review and approval has been established. A funding methodology for each project categorization has also been established. Projects will be classified in one of three categories and funded as described below:

1. Strategic Projects
   
   Strategic Projects are projects that are initiated or sanctioned by the Board or Management Council which are in direct support of the strategic plan. Strategic projects are normally one time multi-year projects or project plans or programs consisting of multi-projects to meet a strategic initiative. Strategic projects include those classified as New Generation, Research and Development, Clean Air, Regulatory (greater than $8M), and others as required. Projects may be approved individually or collectively as part of a comprehensive plan or program. Funding for these projects and/or plans is requested from the Management Council by the PMC Chairperson. Strategic Projects are reviewed by the Management Council and approved by the CEO and TVA Board as required per the Project Authorization Matrix. The SBU is responsible for managing the strategic project or program within the approved funding allocation.
   
   
2. Base Projects
   
   Base Projects are specific to an SBU to maintain its mission. Base projects include those classified as Safety, Regulatory (less than or equal to $8M), Commitment, Asset Preservation, and System Requirements. These projects are funded by multi-year Top Down Targets established by the CFO and allocated to each SBU. Base Projects are prioritized and managed at the SBU level and are reviewed and approved using the Project Authorization Matrix.
   
   
3. Discretionary Projects
   
   Discretionary Projects include those projects that are classified as Economic/Revenue, Capacity Growth, and Reimbursable. These projects are funded by multi-year Top Down Targets established by the CFO. Projects are prioritized at the PMC level through a vetting process among the submitted list of SBU prioritized projects. After prioritization, the project is approved using the Project Authorization Matrix.
   
   

Project Initiation Process

TVA’s goals and strategic objectives, performance issues, external constraints and regulations, and asset preservation provide the basis for identifying project initiatives. Additionally, emergent issues may result in new projects or changes in the project portfolio priorities. As part of the mission to meet its strategic objectives and maintain operating assets, each SBU is to fund project identification initiatives within its base O&M funding on a level of effort basis. If during this initiative the SBU determines that a more detailed study or preliminary engineering work is required to determine project feasibility, the SBU may request “study phase” funding from their allocation and approval as described in the Project Prioritization and Funding Process Section and the Project Review and Approval Process Section.

1. Identify Project Initiatives
   
   Analysis is part of continuous planning for accomplishing TVA’s strategic objectives and maintaining the operating assets and includes, but is not limited to, failure and root cause analysis, negative trend evaluation, external requests, conflicts with goals, regulatory interests, deficiencies, studies, tests, economics, risk assessments, and priorities. In summary, the project identification process includes as appropriate:
   
   
   1. Performing Analysis - Analysis to identify opportunities or underlying causes of problems is the basis for developing alternatives to address the problem or opportunity.
      
      
   2. Developing Alternative Solutions - The SBU will identify and evaluate each feasible solution and assess its potential for addressing the root cause of the problem or opportunity. As part of this process, the SBU will assess whether an initiative is already in place to address the issue; whether an initiative is in place, and with appropriate modifications, could address the issue; or whether a new initiative solution will be required. In developing alternative solutions, the SBU shall:
      
      
      1. Establish performance criteria and life expectancy.
      2. Review the identified alternatives (scope, cost, and preliminary technical/economic analysis) and/or develop additional alternatives.
      
      
   3. Choosing the Optimal Solution - The SBU will identify the optimal solution to address the problem or opportunity after assessing the scope of the effort, developing cost estimates, and quantifying the expected benefits. In identifying the optimal solution, the SBU will develop and conduct internal review(s) with affected stakeholders as appropriate to:
      
      
      
      1. Select and recommend the most effective and efficient alternative to resolve the problem.
      2. Identify the potential impacts (operations, maintenance, environmental, safety, etc.) of the selected alternatives to affected organizations.
      3. Review and further develop the engineering scope and project cost for the selected alternative.
      4. Ensure environmental reviews have been evaluated ( TVA Practices and Procedures, Environmental Management Procedure 2, Environmental Review).
      5. Develop a conceptual engineering and implementation schedule for budget planning, considering outage schedules and requirements.
         
         
2. Complete the Project Justification Package
   
   The SBU will enter each project in the PJS by completing the Project Justification Form.
   
   
   
   

   NOTE Projects (Capital or O&M) less than or equal to $250K are not required to be listed individually asstand-alone projects in the PJS. Capital and O&M projects with total cost $250K or less will be grouped together and approved as a “bucket.”

   
   
   
   The Project Justification Form includes:

   1. Project description, problem description, project scope, related performance metrics, reason for change, etc.
   2. Accurate description of assets to be placed in service and assets to be retired.
   3. Project category (see Appendix B).
   4. Critical Success Factor supported by the project.
   5. Project phase (study and preliminary engineering, detailed engineering, and implementation) approval being requested. (Concurrent phase approval may be requested but approval will be at the discretion of the authorizing individual. Reference Appendix E for phase authorization considerations.)
   6. Estimated costs by phase, including the level of accuracy of the estimates, and phase start and end dates.
   7. Anticipated benefits from the project with supporting cost/benefit analysis and resulting economic metrics.
   8. Assessment of risks (quantified to the extent practical) to meeting the cost, schedule, and benefit claims.
   9. Environmental cost estimate for each project provided in accordance with the guidelines of Appendix C, “Identification of Environmental Costs in Projects.”
      
      

   NOTE 1) Information Technology (IT) and Telecom projects shall be indicated in PJS to facilitate review and recommendation to the PMC by the IT Council in accordance with TVA Practices and Procedures, Performance Planning Procedure 1, "IT Investment Review Board", or the Telecom Advisory Panel (TAP) as appropriate. Information security shall be considered as an integral component in the project planning process for all information technology acquisitions submitted to the PMC. 2) Projects requiring an asset retirement obligation (ARO) review shall be identified in accordance with the guidelines provided in Appendix D, "Identification of Asset Retirement Obligations (ARO's).” ARO costs are not to be included in the project cost benefit analysis.

   
   
   

3. Complete/Coordinate SBU Project Reviews
   
   The SBU will provide an internal review and approval for each project (either newly generated or revised) and will coordinate appropriate reviews (i.e., asset classification reviews, IT Council reviews, TAP project reviews, ARO reviews) prior to seeking funding and approval. Business Unit (BU) approval in PJS indicates the project(s) is ready for proceeding with the prioritization and funding process.
   
   
   

   NOTE Asset Classification Reviews and Asset Retirement Obligation Reviews (AROs) are provided by theCFO’s Controller organization and are to be completed before the project approval is obtained. This will be in accordance with the appropriate accounting policies and procedures.

   
   
   
   

Project Prioritization and Funding Process

After identifying projects, SBUs will prioritize their projects for funding. Consideration should be given to strategic intent, operational risks, and economic value. Project prioritization will consider project Classification, Profitability Index (PI) and Payback as calculated by the PJS along with other factors (sunk costs, secondary issues with other project categories, etc.) which would necessitate a higher or lower priority ranking.

If multiple projects are required to address an issue or if projects are part of an overall program to address a specific need, they should be aggregated in a combined total cost and approved for funding by the appropriate level as defined in Project Review and Approval Process Section. A project shall not be divided into “sub-projects” to circumvent the authorization process. For projects requiring Board approval, approval may be obtained by specific project or by project plan/program which contain multiple related projects (i.e. Clean Air).

The SBU will seek project funding as described below:

1. Strategic Projects
   
   
   1. The SBU presents the strategic project or comprehensive plan or program to the PMC for review during the quarterly PMC meeting.
   2. After PMC review, the PMC Chairperson will schedule project review with the Management Council and notify the SBU representative of the schedule to present review.
   3. Upon a favorable Management Council review, the SBU indicates “Tagged Project” in PJS and proceeds with project approval as described in Project Review and Approval Process section Item A. Project approval should be obtained during the Management Council presentation when possible.
      
      
2. Base Projects
   
   
   1. CFO provides multi-year top down target allocations to the SBU.
   2. The SBU will prioritize its list of base projects and identify those projects that can be supported within the SBU target allocations.
   3. The SBU will indicate “Tagged Project” in PJS for those within the target allocations and will proceed with project approval as described in Project Review and Approval Process section Item A.
   4. The SBU may maintain base projects in PJS which are outside the funding allocations and hold for funding availability provided they are not “Tagged.”
      
      
3. Discretionary Projects
   
   
   1. CFO provides multi-year top down target allocations to the PMC.
   2. SBU develops a prioritized list of discretionary projects and presents to the PMC. This list is compiled for the 4th quarter PMC meeting and updated quarterly as required.
   3. PMC develops a combined prioritized list and identifies those projects that can be supported within the target allocation. The PMC notifies SBU of approved discretionary projects.
   4. The SBU will indicate “Tagged Project” in PJS for approved discretionary projects and proceeds with project approval as described in Project Review and Approval Process section Item A.
   5. The SBU may maintain discretionary projects in PJS which are outside the funding allocation and hold for funding availability provided they are not “Tagged”.
      
      
      

Project Review and Approval Process

After Project funding has been obtained, project approval is required as defined in Table 1, Project Authorization Matrix, using the process described below. The SBU is responsible to ensure funds have been allocated prior to requesting project approval. All projects which are processed for approval must be marked as “Tagged Project” in PJS.

A phase authorization process for projects may be considered when either: a) approval for “study phase” only is needed to finalize project feasibility; b) projects have large costs or are highly complex; or, c) as determined by the management reviewer. The three phase project authorization process is outlined in Appendix E. The Project Justification Form will indicate which phase(s) approval is being sought.

1. Routine Approval for Funded (Tagged) Projects
   1. SBU obtains approval as defined in the Project Authorization Matrix and documents on the Project Justification Form.
   2. Upon approval, SBU representative informs CFO PJS system administrator of approvals and system administrator marks PJS as “PMC Approved.”
   3. SBU Business Services confirms PMC approval in PJS and issues short codes as required.
   4. SBU implements projects through approved phase(s).
   5. SBU determines at the completion of the approved phase if additional approval is required for remaining phases, revises Project Justification Form, and obtains remaining phase(s) approval as required per Item A.1 in this Section.
      
      

   
   
   
   

2. Emergent Approval for Non-funded (non-Tagged) Base Projects
   1. Upon the need to advance implementation of a non-funded prooject, SBU reprioritizes projects and verifies current funding allocation is maintained.
   2. SBU tags/untags projects in PJS based on reprioritization.
   3. SBU obtains project approval as defined in Item A of this Section.
   
   
   
3. Approval for Emergency Projects
   The emergency project approval process is limited to only those projects that meet the definition of “emergency project” in Definitions Section.
   
   
   

   NOTE Work required to mitigate an imminent safety issue or to return an asset to operational readiness may proceed in parallel with project review and approval. However, formal approval of all documentation should not exceed 30 days from the date work begins. If formal approval cannot be obtained within the 30 day period, the SBU must provide a status of the emergency project with a scheduled date for obtaining formal approval from the CEO to the PMC.

   
   
   
   

   1. SBU determines if the project can be funded within its funding target by reprioritizing projects. If the SBU can fund the project within its funding allocation, it should follow the steps in Item B of this Section for project approval.
   2. For projects the SBU cannot fund within its funding target, the SBU submits the emergency project to the PMC, CFO, and CEO.
   3. If the CEO agrees with the emergency project after review, the CEO provides funds for the project. The CEO may request the SBU to propose reductions in its Base and/or Discretionary Project funding targets in order to fund the emergency project. Formal approval documentation will follow the steps in Item A of this Section.

Project Execution

Project execution includes preparing detailed project plans, identifying milestones, and evaluating plan performance (including developing metrics to monitor plan, tracking milestones, identifying cost and resource variances, and assessing risk).

Each SBU will be responsible for the proper planning of their projects. Project planning should be documented and include a written plan that encompasses allocation of resources (staffing, materials) and task prioritization.

Each SBU will have in place a process for forecasting project costs and schedules and for identifying changes to a project’s cost, schedule, scope, and benefits for those projects in the approved project plan.

Each SBU will conduct regular reviews of projects that are in-progress and identify impacts to the approved project budget, schedule, scope, or benefits.

Each SBU will determine if any approved project exceeds the following limits:

COST - the forecasted project cost must be within $250K or 20% (whichever is less) of the approved current fiscal year project cost.

SCHEDULE - the forecasted project in-service date must not be greater than 60 days beyond the scheduled in-service date. Exceptions to this include schedule changes as a result in timing of an outage or change in customer in-service date. These exceptions should be handled as a reprioritization of the SBU 5-Year Project Plan.

SCOPE/COST/BENEFIT ANALYSIS - changes must not result in a fundamental change to the approved project solution or objectives or in any significant reduction in the dollar value of the claimed benefits associated with the economic indicators (e.g., PI, IRR, NPV, payback).

Projects forecasted to exceed these limits (above) must be revised and reauthorized per Project Change Process Section.

Project Change Process

Implementation and Documentation

Each SBU must ensure that the project change process is followed and adequately documented when it:

• Corrects, suspends, or cancels problem projects
• Accelerates or delays projects

(Adjusts priority either to meet emerging issues or emergency projects, or due to a change in an outage or change in a customer in-service date.

Changes to Projects

When changes are made the SBU must revise its metrics, present project adjustments with related analysis to the proper authority, and receive the proper approvals.

1. Revise PJ Package
   For any project that is revised due to a change described above or determined to be outside the limits described in Project Execution, the SBU will initiate a revised Project Justification Form with an explanation for the change and identification of the impacts on the project cost, schedule, scope, and/or benefits.
   
2. Coordinate Project Reviews
   The SBU must coordinate appropriate reviews for revisions to projects as described in Project Review and Approval Section item A. Schedule changes due to a change in an outage or change in a customer in-service date that do not result in a notable change in the authorized project cost do not require review and will be managed within the SBU 5-Year Project Plan.
   
3. Revise the 5-Year Project Plan
   SBUs must update the 5-Year Project Plan and ensure the total is within the target allocation. Once project changes receive approval, they become part of the SBU 5-Year Project Plan.

Project Closure and Review

After a project has been placed in-service, project closure reports shall be generated and project performance evaluated in accordance with this section. SBUs should present key metrics and costs of project implementation and analyze success of project completion in achieving the projected benefits.

1. SBUs Evaluate Project Performance
   
   The evaluation phase is concerned with reviewing the outputs from the project to validate test results, benefit achievement, and confirm project requirements have been completed. The evaluation should confirm configuration and acceptance tests and validate that all documentation has been completed including final drawings, required operations and maintenance procedure revisions, warranty provisions, capitalization, etc. The evaluation phase should allow sufficient time to evaluate project performance and be determined by the project implementation team.
   
   
2. Complete Project Closure Report
   
   A “Project Closure Report” will be generated from the PJS and completed by the SBUs. This report will document the success or failure of the project (cost, schedule, benefits, performance measures, lessons learned, assets placed in service, etc.)
   
   Completed Project Closure Reports will be submitted quarterly to the designated SBU representative. The SBU representative will review the completed project reports for benefits attained, lessons learned, and process improvement opportunities within the SBU.
   
   
3. Project Closure Review and Concurrence
   
   Project Closure Reports will be reviewed and approved in accordance with the original project authorization levels described in Table 1 by the SBU officer, SBU Executive, and the CEO as required. The review will be documented on the Project Closure Report.
   Project Closure Reports for Capital Projects over $8M and O&M Projects over $3M will receive a peer review by the Project Management Peer Team. Each Project Management Peer Team SBU representative will provide a summary of their Project Closure Reports completed during the quarter. Based on benefits attained, lessons learned, and process improvement opportunities identified, the Peer Team will make recommendations to the PMC as appropriate.
   

The 5-Year Project Plan

The list of “Tagged” projects in the PJS composes the SBU 5-Year Project Plan. This Project Plan is a “living” plan and is maintained as the SBU’s current list of funded projects that are either being implemented or are being planned to be implemented. Revisions to the Project Plan may be required due to revisions in the target allocations to meet the project demands of the individual SBU or due to changes in project metrics as projects are implemented. It is the SBU’s designated business unit’s responsibility to ensure the Project Plan is within the target allocations and to ensure the Project Plan is current.

The SBU is responsible for optimizing its Project Plan by determining if projects should be delayed or cancelled or if additional projects should be approved. The SBU must satisfy any challenge to the targeted allocations with a plan that simultaneously provides the least amount of impact on its operations and optimizes its Project Plan.

1. Annual 5-Year Project Plan Review and Update Process
   
   The annual review and update of the 5-Year Project Plan occurs during the Annual Planning / Rate Review process. The annual review/update incorporates the "next year" project listing in accordance with the Long Range Plan and reconciles the targets set by CFO. The 5-Year Project Plan will be reviewed and updated as follows:
   
   1. CFO provides the Top Down target for the next fiscal year and revised targets for the following four years.
   2. Each SBU will review its 5-Year Project Plan, incorporate new Base Projects, and reprioritize projects as required within the revised targets.
   3. The SBU will validate its current list of Discretionary Projects, add new Discretionary Projects, and submit the prioritized list of Discretionary Projects to the PMC.
   4. The PMC will review the prioritized list of current and new Discretionary Projects, prioritize and approve new projects to support the funding allocation.
   5. The SBU will make changes resulting from Steps 2 and 4 by initiating or revising any needed Project Justification Forms, and processing approvals as required in accordance with Sections 3.3 and 3.4A.
   6. The SBU designated business unit ensures the Project Plan is within the target allocation provides an updated 5-Year Project Plan to the PMC and continues to monitor projects.
   7. The 5-Year Project Plan and the Long-Range Plan will be updated to reflect any changes made to project expenditure plans as a result of the Annual Planning/Rate Review.

Roles and Responsibilities

1. Project Management Council (PMC)
   
   
   1. The mission of the PMC is to provide governance for TVA project performance and control and responsibilities include:
      1. Process discipline and rigor.
      2. Peer accountability.
      3. Communication mechanism for project changes and cross companyprojects.
      4. Forum for Discretionary Projects.
      5. Recommendations and execution for the Management Council.
      6. Providing oversight and direction for the Project Management Peer Team.
      
      
   2. The PMC chairman is appointed by the CEO and is responsible to:
      1. Schedule Quarterly PMC meetings.
      2. Develop agenda and facilitate quarterly PMC meetings.
      3. Assign lead for Project Management Peer Team.
      4. Maintain Project Justification Process SPP.
         
      
      
   3. The PMC consists of Officers of the following SBUs:
      1. Administrative Services - ADMIN
      2. Chief Financial Organization - CFO
      3. Customer Resources
      4. Fossil Power Group - FPG
      5. Power System Operations - PSO
      6. River System Operations and Environment - RSO&E
      7. TVA Nuclear - TVAN
      8. Enterprise Performance and Analysis - EP&A (at large member)
      
      
   4. The PMC chairman will schedule and conduct quarterly meetings to carry out PMC responsibilities. A quorum of five of these officers is required to conduct business. Substitutes are allowed but are not counted towards establishing the required quorum.
   
   
2. Project Management Peer Team
   
   
   1. The Project Management Peer Team responsibilities include:
      1. Oversight for Capital and O&M project assessment activities.
      2. Peer assessments and review activities.
      3. Forum for best practices and lessons learned.
      4. Implementation team for new processes and technology.
      5. Recommend SPP changes to the PMC, as appropriate.
      
      
   2. The Peer Team consists of personnel from the following SBUs:
      1. Administrative Services - ADMIN
      2. Chief Financial Organization - CFO
      3. Fossil Power Group - FPG
      4. Power System Operations - PSO
      5. River System Operations and Environment - RSO&E
      6. TVA Nuclear - TVAN
      7. Enterprise Performance and Analysis - EP&A (at large member)
   
   
3. Chief Financial Organization
   1. The CFO is responsible for establishing the project multi-year top-down target allocations and to ensure the targets are in alignment with the annual budget approved by the Board.
   2. The CFO serves as the administrator for the PJS, is the approving authorizing authority for project approvals in the PJS and for providing independent monitoring of project cost performance throughout the life of a project.
   3. The CFO is responsible to provide the discount rate to be used by all SBU’s in the evaluation of projects.
   4. The CFO is responsible for asset classification and ARO reviews.
   
   
4. Enterprise Performance and Analysis Organization
   1. EP&A serves as the administrator for the PMC and Project Management Peer Team.
   2. EP&A provides support for benchmarking metrics used in project evaluations.
   
   
5. SBU Designated Business Unit
   1. The designated business unit is responsible to ensure projects are initiated and approved in accordance with this SPP.
   2. The designated business unit confirms PMC approval in PJS and issues short codes as required.
   3. The designated business unit ensures the Project Plan is within the target allocations, provides an updated 5-Year Project Plan to the PMC and continues to monitor projects.
   4. The designated business unit is responsible to maintain the signed copies of the Project Justification Form and Project Closure Report.

Records

The Project Justification Form and the Project Closure Form are electronically controlled within the PJS.

Definitions

Emergency Projects - Those projects necessary to mitigate an imminent safety issue or failure of an operating asset/system.

Job Orders/Minor Projects - Individual Capital or O&M projects that are less than or equal to $250K. For accounting purposes, job orders are combined into a group commonly referred to as a “bucket” project.

Internal Rate of Return (IRR) - The rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Long-Range Plan - Those projects identified in the SBU Performance Plans and the SBU Long-Range Financial Plan that require funding beyond the 5-Year Project Plan. Specific project details for these projects will be reviewed when available and included as “placeholders” where appropriate. Annually, the first year of the Long-Range Plan is reviewed and added to the 5-Year Project Plan.

Net Present Value (NPV) - Calculated as the present value of the project’s cash inflows minus the present value of the project’s cash outflows, including initial investment. Projects that increase value to the company have a positive NPV.

Profitability Index (PI) - An index used to evaluate proposals for which NPVs have been determined. The PI is determined by dividing the NPV of the benefits by the NPV of the project’s total estimated costs. A PI value greater than 1.0 is acceptable and the higher the number is, the more financially attractive the proposal.

Project - A collection of activities/tasks with a limited scope, duration, and cost designed to accomplish a specific objective and/or deliverable. A project can be either Capital or O&M non-base work. A capital project is a work activity involving a new installation or replacement of a fixed assets accounting identified “retirement unit.” An O&M project is a work activity involving the repair, upgrade, or refurbishment of equipment or material that is not performed on a yearly basis or major generating station outage (i.e., a “one-time” activity not defined as a capital project). Facilities and IT projects/activities are included in these definitions.

Project Category - Three project categories based on classification. Categories include:

• Strategic Projects - projects which are initiated or sanctioned by the Board or Management Council which are in direct support of the strategic plan. Includes projects classified as New Generation, Clean Air, Regulatory (greater than $8M) and R&D.
• Base Projects - projects funded by a Top Down Budgeting target, managed at the SBU level. Includes projects classified as Safety, Regulatory (less or equal to $8M), Commitment, Asset Preservation and System Requirements.
• Discretionary Projects - projects funded by a Top Down Budgeting target, managed at the Project Management Council level. Includes projects classified as Economic/Revenue, Capacity Growth, and Reimbursables.

Project Classification - Used to group common types of projects into segments for more detailed analysis in project prioritization regarding strategic intent, operational risks, and economic value. Refer to Appendix B for the project classifications and their definitions.

Project Justification Form - The automated form contained within the PJS that captures the required information for all projects.

Project Justification System (PJS) - The official database containing supporting project data and project approval status.

Project Management Peer Team - Appointed SBU/BU project representatives that facilitate project process implementation and identify/implement opportunities for process improvements. The Peer Team meets at least once quarterly and its charter is to improve peer communications through sharing experiences, lessons learned, and ideas for promoting improved project and process performance and to standardize projects process(es).

Project Phase - A collection of logically related project activities, usually culminating in completion of a major deliverable. Project phases are mainly completed sequentially, but can overlap in some project situations. Phases can be subdivided into sub-phases and then components; this hierarchy, if the project or portions of the project are divided into phases, is contained in the work breakdown structure.

Stakeholder - Any party or parties that have an interest in, input to, or will be the recipient of the products or services delivered by the project. This includes the asset owner, who is the ultimate owner of the project when all activities are completed.

Strategic Business Unit (SBU) - Each organization within the TVA operating groups are strategic business units (FPG, PSO, RSO&E, TVAN, etc.). For this process, the smallest business unit for power operations is each plant and the smallest business unit for other organizations is each major organizational division.

5-Year Project Plan - The SBU list of projects within the Top Down budgeting targets in the current fiscal year and the next four fiscal years which are “tagged” in the PJS.

Resources

• TVA Practices list
• TVA Procedures list

Revision History

Effective Date: 12/31/2006

Revision: 001

Appendix

Appendix A - Flowchart

Appendix A - Flowchart Instructions

Flowchart Instructions

Project Initiation

Activity A1 - SBU identifies performance gap, selects best project option, and initiates PJS Form.

Project Prioritization and Funding

Decision D1 - Determine project category - Strategic Project, Base Project, or Discretionary Project.

Activity A2 - CFO provides top down target allocations to the SBU and PMC. (Steps B.1 and C.1)

Activity A3 - The PMC reviews the strategic project or comprehensive plan or program during the quarterly PMC meeting and schedules Management Council review. (Step A.1 and A.2)

Activity A4 - After PMC review, the Management Council will review the strategic project as presented by the SBU representative. (Step A.2)

Decision D2 - Management Council concurs with Project? (Step A.2)

Activity A5 - The SBU will prioritize its list of base projects and identify those projects that can be supported within the SBU target allocations. (Step B.2)

Activity A6 - SBU develops a prioritized list of discretionary projects and presents to the PMC. This list is compiled for the 4th quarter PMC meeting and updated quarterly as required. (Step C.2)

Activity A7 - PMC develops a combined prioritized list and identifies those projects that can be supported within the target allocation. The PMC notifies SBU of approved discretionary projects. (Step C.3)

Activity A8 - SBU “tags” project in PJS. (Steps A.3, B.3, C.4)

Project Review and Approval

Activity A9 - SBU obtains approval as defined in the Project Authorization Matrix and documents on PJF. (Step A.1)

Decision D3 - SBU approve Project? (all projects)

Decision D4 - PMC approval required? (all Discretionary Projects)

Decision D5 - PMC approve Project?

Decision D6 - CFO/CEO approval required? (Capital Projects greater than $8M and O&M Projects greater than $3M)

Decision D7 - CFO/CEO approve Project?

Decision D8 - Board approval required? (Capital Projects greater than $50M) (note - CEO determines if Board approval is required)

Decision D9 - Board approve Project?

Activity A10 - Notify SBU Project denied and SBU "untags" project and updates PJS. (Step A.1)

Activity A11 - Upon approval, the CFO PJS system administrator marks PJS as "PMC Approved” as requested by the SBU. (Step A.2)

Project Execution

Activity A12 - SBU implements project through approved phase(s). (Step A.4)

Decision D10 - SBU determines at the completion of the approved phase if additional approval is required for remaining phases, revises Project Justification Form, and obtains remaining phase(s) approval as required per Project Execution Section item A.1. (Step A.5)

Project Change

Activity A13 - For any project that is revised due to a change or determined to be outside the limits described in the Project Execution Section, the SBU will initiate a revised PJF with an explanation for the change and identification of the impacts on the project cost, schedule, scope, and/or benefits.

Decision D11 - Determine if a review of the change is required. (Project Change Section item 2A)

Activity A14 - Revise the PJF and the SBU must coordinate appropriate reviews as described in Project Review and Approval Section item A (Activity A8) (Project Change Section item 2B)

Project Closure and Review

Activity A15 - Complete the PJS Closure Report and reviews.

5-Year Project Plan Review and Update Process

Activity A16 - CFO provides the Top Down target for the next fiscal year and revised targets for the following four years. (The 5-Year Project Plan section item A.1)

Activity A17 - Each SBU will review its 5-Year Project Plan, incorporate new Base Projects, and reprioritize projects as required within the revised targets. (The 5-Year Project Plan section item A.2)

Activity A18 - The SBU will validate its current list of Discretionary Projects, add new Discretionary Projects, and submit the prioritized list of Discretionary Projects to the PMC.(The 5-Year Project Plan section item A.3)

Activity A19 - The PMC will review the prioritized list of current and new Discretionary Projects, prioritize and approve new projects to support the funding allocation. (The 5-Year Project Plan section item A.4)

Activity A20 - The SBU will make changes resulting from Activity A16 and A18 by initiating or revising any needed Project Justification Forms, and processing approvals as required in accordance with Activities A9. (The 5-Year Project Plan section item A.5)

Activity A21 - The SBU designated business unit ensures the Project Plan is within the target allocation provides an updated 5-Year Project Plan to the PMC and continues to monitor projects. (The 5-Year Project Plan section item A.6)

Activity A22 - The 5-Year Project Plan and the Long-Range Plan will be updated to reflect any changes made to project spend plans as a result of the Annual Planning/Rate Review.(The 5-Year Project Plan section item A.7)

Appendix B - Project Categories and Classifications

Strategic Projects Category

New Generation - Significant new generation projects which are approved by the Board or CEO. New generation projects are identified in accordance with TVA-SPP-29.3, “Power Supply Acquisition Process.” Review and approval of the project will be coordinated through TVA Practices and Procedures, Performance Planning Procedure 2, Project Justification Process.

Clean Air - Projects within the clean air plan.

Research and Development - Projects within the R&D portfolio. R&D projects are identified in accordance with R&TA-SDP-15.2, “R&D Research Portfolio Development.” Review and approval of the portfolio will be coordinated through TVA Practices and Procedures, Performance Planning Procedure 2, Project Justification Process.

Regulatory Projects Greater than $8M - Regulatory projects as defined under Base Projects will be considered a Strategic Project if the estimated cost is greater than $8M.

Base Projects Category

Safety - Projects (nuclear and/or industrial) that remove or mitigate an immediate threat to the safety and well-being of employees and/or the public.

Projects to replace a satisfactory long-term mitigation of a safety issue are not included in this category but are to be included in the economic category. The benefits used for the economic evaluation of the project would be the cost savings of the new project over the current mitigation method.

Regulatory - Projects that are required to comply with federal and/or state laws or regulations. The specific regulation should be referenced in the project documentation. Regulatory projects with a total estimated cost greater than $8M will be considered a Strategic Project.

Commitments - Projects that are performed to meet a TVA commitment to external stakeholders or that carry out TVA Strategic Initiatives approved/directed by the TVA Board or the Management Council.

System Requirement - Projects which must be completed in the near term to prevent seriously jeopardizing the reliability of the power system or the information technology infrastructure.

Examples include a generic power plant problem that has a high probability of interrupting 5% or more of system capacity during peak periods or a transmission system issue that threatens supply to a load center.

Asset Preservation - Projects which must be completed to maintain an asset in a condition to satisfy its intended operational capability.

These projects would include the repair/replacement of critical operational components, but would not include facility enhancements or improvements that do not directly impact operations. Projects that add capacity or upgrade systems/components are not included in this category.

Discretionary Projects Category

Capacity Growth - Projects that add generating capacity (up to 5 MWs) to an existing asset in the system.

Projects that restore lost generation are not included in this category. All transmission projects in this category support generation additions. All projects in this category require a cost-benefit analysis.

Economic/Revenue - Projects which provide financial benefits to TVA or improve the quality of life in the Valley. These benefits may be reduced costs, increased revenues, increased margin, avoided cost, etc., and are to be estimated in dollars. All projects in this category require a cost-benefit analysis.

Reimbursable - Projects performed by TVA (or TVA partners/contractors) for which TVA is reimbursed all costs by a customer or other outside body. Partial reimbursable projects are to be included in the appropriate category.

Appendix C - Identification of Environmental Costs in Projects

Purpose

The environmental component of Capital and O&M projects contributes to TVA’s Net Environmental Expense (NEE). The NEE is defined as “The Net of TVA Environmental Expenses” and was developed to support the Critical Success Factor “Manage the environmental and safety impacts of TVA operations on employees and the region” as required by the CSF achievement plan. The PJS will be used for capturing estimates of environmental components of projects. These actions will help automate tracking and reporting of environmental expenses and income in the TVA accounting system.

What are the environment components of a project?

The expenditures planned in a report year required for legislative or regulatory environmental compliance and environmental research.

When to include the whole project?

If the entire project is solely intended to meet a legislative or regulatory environmental compliance or environmental research requirement, include the whole amount.

When to include part of a project and what part

If a project is intended to meet a non-environmental need but has costs equal to or greater than $50,000 associated with meeting legislative or regulatory environmental compliance or environmental research requirements, an estimate of the environmental component is included in the Net Environmental Expense.

What not to include:

Environmental cost components less than $50,000 per project.

Appendix D - Identification of Asset Retirement Obligations (ARO's)

Background

Under current accounting rules TVA must recognize a liability for “legal obligations” associated with the future retirement of long-lived assets. These legal obligations can arise from laws, regulations, ordinances, licenses, permits or other statutes which would require TVA to spend money to perform certain actions upon the asset’s retirement. TVA is required to report the amount of financial obligation quarterly and therefore must keep the amount of liability current.

ARO refers to the financial obligation (estimated costs) that TVA will incur in the future upon retirement of an asset. AROs may include two types of costs:

• one-time costs associated with shut down and retirement/removal related to each ARO component (e.g. coal piles, ash ponds, PCB disposal, chemical ponds, etc),
• ongoing annual costs for maintenance and security

TVA has established AROs for existing qualifying assets such as ash ponds, coal piles, nuclear plants, chemical ponds, etc.; however there is a need to integrate the ARO identification on the front end for new assets placed in service as part of the project approval and completion process. As a result, the PJS will be used to identify projects and assets that will be placed in service that may have legal obligations associated with the retirement of such assets. Once these projects or assets are identified in the PJS they can be investigated further to determine if TVA should recognize a liability for the future retirement obligation.

What are some examples of assets that have associated AROS?

• Opening a new ash pond at a coal-fired plant;

• Opening a new chemical pond at a coal-fired plant;

• Creating a new coal pile at a coal-fired plant;

• New major equipment or systems installed at nuclear plants (e.g., steam generators) that replace existing equipment or systems and for which the original equipment or systems will remain on-site until the ultimate decommissioning date. The current decommissioning obligation would cover the original equipment while the new ARO would cover the replacement equipment.

• Installing an underground storage tank that is required to be removed and remediated upon retirement;

• Installation of equipment that is exposed to hazardous chemicals during normal operations and is required to be removed and disposed of at a special hazardous waste site upon its replacement or retirement.

• Contractual terms that require TVA to perform certain retirement activities when the asset is retired (e.g., contractual requirement to return purchased buildings or equipment to their original condition upon retirement).

What are some examples of assets that do not give rise to new AROS?

• Environmental remediation liability resulting from improper operations or catastrophe.

• The cost of a replacement part associated with normal equipment maintenance.

• Activities necessary to prepare an asset for an alternative use are not associated with the retirement of the asset.

• Activities related to the temporary idling of an asset.

How and when are AROS identified:

The intent of these guidelines is to facilitate early identification of AROs in project planning such that an adequate evaluation can be made and all pertinent information can be obtained prior to placing the asset in-service.

At project initiation and for any subsequent project revision, the SBU will identify whether or not an ARO is believed to exist. When a potential ARO is believed to exist, the SBU selects "Potential ARO" = “Yes” in the PJS (Approvals page). The SBU should also supply the following information (as a minimum) in the text box provided:

• The name of the asset to be placed in service and subsequently retired in the future (brief description) and the future action that will be necessary to comply with a statute, permit, or regulation that creates the ARO.

• The specific statute, permit, or regulation indicating the future action (if known)

While this flag in PJS triggers an ARO review by the CFO and OGC, CFO independently performs an ARO review at the time of project classification.

How is the ARO determination made and what information is required?

The CFO will pull a list of projects at least once quarterly to identify any AROs that are anticipated. The CFO, in collaboration with the SBU and OGC, will make the determination that (1) an ARO is not required (and no further action is necessary) (2) an ARO must be recorded, or (3) an ARO has been identified but cannot yet be recorded. One of these three designations is required prior to project closure when the SBU has identified that there is a potential ARO.

When it is determined that an ARO must be recorded, the CFO will work with the SBUs to obtain all information necessary to record the ARO prior to placing the asset in-service. This information will include:

• Name of asset to be placed in service and subsequently retired in the future (brief description)

• Estimated Asset Retirement Date (mm/yyyy)

• Description of the future action required to retire the asset

• Specific statute, permit, or regulation that requires the action

• Estimated cost ($000) of the asset’s future retirement (in today’s dollars)

When this information has been successfully obtained, the CFO will reflect the ARO Review Status as “ARO recorded.”

When it is determined that an ARO has been identified but cannot yet be recorded, the CFO will work with the SBUs to determine when the ARO recording should take place.

What if the ARO review does not occur prior to project closure?

The intent of the process is to identify AROs in project planning to allow for timely ARO review and gathering of all pertinent information to properly record the ARO by the time the asset is placed in-service. However, if the “ARO Review Status” has not been designated upon project closure, the PJS will not permit project closure report completion until the appropriate ARO Review Status is selected. In this case, the SBU must work with the CFO to obtain the proper designation at the conclusion of the project.

Appendix E - Project Phase Authorization Process

Project Phase Authorization

To provide better management controls, projects may be divided into phases. A project phase is defined as a collection of logically related project activities, usually culminating in completion of a major deliverable. Project phases are mainly completed sequentially, but can overlap in some project situations. Phases can be subdivided into sub-phases and then components; this hierarchy, if the project or portions of the project are divided into phases, is contained in the work breakdown structure.

A single phase can be treated as separate, stand-alone project if needed. Funding and approval for each phase may be requested to provide management oversight on high cost and/or highly complex projects; however, approval should be in accordance with the authorization matrix based on the total project cost. Phase approval shall not be used to divide a project into smaller “sub-projects” to circumvent the authorization process. Phase approval may be requested for “study and preliminary engineering phase” only to determine project feasibility or to define more accurate cost estimates of the design and implementation phases prior to beginning these phases. A phase approach also provides a review period at phase completion to refine remaining phase project cost and schedule estimates, verify project benefits can be obtained, or identify areas that need additional attention prior to committing to the complete project.

For purposes of this procedure, a three phase project approach will be implemented. The phases are Study and Preliminary Engineering Phase, Detailed Engineering Phase and Implementation Phase, including project closure documentation, and are defined below.

Study and Preliminary Engineering Phases

Includes evaluation and/or preliminary engineering work to establish the objectives, scope, success criteria, and viability of the project. Activities include validation of alternatives and selection/recommendation of a solution. This phase includes concept approval, site walkdown visits, environmental reviews and scoping of the project. The long lead procurements should be identified and an estimate of the design phase expenditures and a projection of the total project costs and implementation resource requirements should be determined. An economic evaluation may be done at this phase. This phase is concluded when either the design authorization is approved or when the proposed project is canceled.

Detailed Engineering Phase

Includes all engineering work necessary to fully specify the actions required to implement the project. The project design will include specifications, design packages, procurement of long-lead material, implementation schedules, estimates of the implementations phase expenditure along with a projection of the total project costs, and validation of the economic evaluation of the project. This phase is completed with the approval of the design deliverables and the authorization of the implementation phase. This phase should be substantially completed before the Implementation Phase is begun.

Implementation Phase

Includes reflecting all documentation changes required to construct and test the recommended project solution, acceptance testing, and as-built preparation. Prefabrication is completed, old equipment removed, new equipment installed, required operating and maintenance procedure revisions are completed, and engineering analyses and configuration documentation are verified complete as part of this phase. In addition, design activities performed to support field changes during implementation are a part of this phase.

Use of the project phase approach may be implemented by the project initiator or directed by management. The SBU has the option of requesting concurrent phase authorization. Approval will be at the discretion of the authorizing individual. The cost and complexity of the project should be the primary drivers in determining if a phased approached should be used. The following guidelines may be considered to assist in determining if the phased approach should be used.

Phase authorization should be considered for:

• Projects that install a major upgrade or the project implements a new initiative.

• Projects that are highly complex or with high incremental costs.

• Study Phase only to provide preliminary engineering to determine project feasibility.

Phase authorization is not required for:

• Projects that have an estimated total project cost of less than $2M.

• Facility maintenance (i.e. roof replacements, painting, etc) projects.

• Projects that implement a like-for-like replacement i.e. same form, fit and function.

Appendix F - Project Justification Form

Appendix G - Project Closure Report