By Brian Dumaine REPORTER ASSOCIATES Lorraine Carson and Brett Duval Fromson

(FORTUNE Magazine) – With $15 billion in nongenerating power plants, the Tennessee Valley Authority was in a jam. So it hired a hotshot admiral from the nuclear Navy and gave him an army of engineers to make the plants work. Result: TVA is worse off than it was before. THE MOST AMBITIOUS nuclear power program in the U.S. is in danger of becoming its most expensive scrap heap. Of the nine nuclear power reactors built by the Tennessee Valley Authority at a cost of $15 billion, not a single one is operating. Now a plan to fix them has careened wildly off course. A former admiral in the U.S. Navy, hired to get the nuclear program running, is charged by government officials with conflict of interest and violation of federal pay guidelines, while others raise questions of cronyism and bad judgment. Early in October two congressional committees held hearings into his management of the agency. In the meantime electricity rates for the TVA's seven million customers -- some among the nation's biggest businesses -- are on the rise. The nonworking plants are costing TVA $1 million a day in lost power that has to be purchased elsewhere. FORTUNE has uncovered evidence that the TVA tried to suppress inspection records showing that one of the plants -- in Watts Bar, Tennessee -- could be unsafe. An inspector for Hartford Steam Boiler Inspection & Insurance Co., a Connecticut firm that checks nuclear plants, claims that he was forced by TVA and superiors of his own company to approve a safety report against his will. The incident is particularly disturbing because Hartford Steam Boiler, which has had a good record till now, performs similar inspections for utilities around the country. The company says it has done nothing wrong. TVA will not discuss the matter. At the center of the controversy is Admiral Steven White, 58, a portly 33- year Navy veteran whom the TVA hired to get its plants on line. A protege of the late Admiral Hyman Rickover, White commanded the North American submarine fleet and then, as the Navy's chief procurement officer, managed its $30- billion-a-year budget. Now White is accused of breaking federal pay ceiling regulations, as well as violating conflict-of-interest laws prohib- iting federal employees from doing business with companies in which they have a financial interest. The growing scandal is a sad chapter in the history of what was once considered a model federal agency. Founded in 1933 as part of President Roosevelt's New Deal, the TVA built hydroelectric and coal-fired power plants to supply electricity to Tennessee and six other states (Alabama, Georgia, Kentucky, Mississippi, North Carolina, and Virginia). In 1966 it was ready to enter the nuclear age with a grandiose plan that eventually called for the construction of 17 nuclear reactors scattered throughout Alabama, Mississippi, and Tennessee. But by the late 1970s the TVA discovered that demand for electricity was not growing as fast as it had anticipated. By 1984 it canceled plans for eight reactors on which the agency had already spent $4 billion. The TVA's nuclear plans now seem jinxed. All five of the reactors that were completed are shut down for safety reasons, including bad welding and wiring as well as faulty inspection procedures. Construction on the other four reactors has been slowed. Hundreds of TVA workers, polled in a confidential employee survey, identified 1,700 potential safety and operational problems at Watts Bar alone. Private utilities all over the country have stumbled over the immense complexities of building and operating nuclear power plants. The TVA has been further handicapped by a lack of strong leadership and nuclear expertise. It is run by a board of three presidential appointees. At the beginning of this year they were Richard Freeman, a Chicago railroad lawyer named by Jimmy Carter in 1977, and two friends of former Tennessee Senator and Senate Majority Leader Howard Baker, appointed by President Reagan in 1981. These were attorney John Waters, a close political associate of Baker's, and Charles ''Chili'' Dean, head of a small electric power wholesaler in Knoxville. A critic of Dean's recently cracked that putting him in charge of TVA was like making the local Chevy dealer chairman of General Motors. The TVA board now has just two members; Freeman quit in February. The TVA also operates in an odd power vacuum. It has been authorized to borrow up to $30 billion from the federal government without approval from anyone. Whenever the TVA needs money for construction or repairs, it simply borrows it. The TVA board has carte blanche to raise rates. Though still among the lowest in the U.S., the utility's electric power costs have already climbed 10% because of the nuclear shutdowns. More increases are expected. Asserts a congressional aide: ''You ain't seen nothing yet.'' At the heart of the TVA's difficulties has been a sloppy organizational ) structure. Responsibility for the nuclear plants was divided among several divisions. No central body coordinated engineering and construction. According to a Department of Labor report: ''In the absence of control from above, TVA's separate divisions degenerated into feudal fiefdoms, which were controlled by bureaucratic princes competing for power.'' TVA's managers also live by a NASA-like code that emphasizes staying on schedule and getting the job done. That philosophy was reflected in a 1979 safety report sent to the chief of quality engineering. The memo requested more manpower for TVA's quality control program at the Sequoyah plant near Chattanooga. But the chief warned, ''Don't do anything that would delay fuel loading,'' and the safety inspection was not completed. With all the reactors shut down, TVA's board reluctantly realized in the summer of 1985 that it needed help to solve its problems. Tennessee Senators Albert Gore and James Sasser, with the weight of two million Tennessee rate payers behind them, soon began to push for stronger medicine: the appointment of a powerful nuclear czar. Shortly afterward, TVA was presented with what seemed a ready-made solution by Stone & Webster Engineering Corp., a Boston firm that had worked on troubled nukes in at least three states. Like other companies in the depressed nuclear industry, Stone & Webster was out prospecting for new business. The company's engineering revenues were off about 8%. In October, Stone & Webster approached TVA with an offer to send a team of eight consultants to review the problems. The company figured it would find the trouble spots and then win a follow-up contract to make repairs. TVA accepted. The board was feeling the pressure for action. According to board member Waters, the head of the Nuclear Regulatory Commission had told the board that it would have to change the agency's top management. White led the Stone & Webster team. When he left the Navy in January 1985, he planned to spend his days in the seat of a tractor, cultivating 200 acres of soybeans on his Charlottesville, Virginia, farm. But that soon palled, and he decided to go back to work. He found a job at Stone & Webster through a tiny Annandale, Virgina, consulting group called Beta, which specializes in placing retired nuclear Navy officers in the power industry. After two weeks of looking around, White & Co. made their report in December. It found flaws in the management structure and safety procedures. White seemed like the man to fix them, so the board offered him a job. He turned down positions as an adviser to the current head of nuclear operations, Hugh Parris, as well as a job as his assistant. The board then offered White Parris's job. To this, White said okay. Parris says he was ''shocked'' by the decision. He says he never recommended that the board hire White as a consultant, much less as head of the divison. Three months after the appointment, Parris rejected a demotion and resigned. Before he took the job, White made three demands. He wanted a salary comparable to that of the head of a big utility and far higher than the TVA's federally mandated ceiling of $72,500. He also wanted to keep his Navy officer's pension of $53,724 a year, which he would lose if he went directly on the TVA payroll. Finally, he asked for a free hand to hire anyone he wanted, including employees from Stone & Webster. That could violate a conflict-of-interest law that forbids federal workers from doing business with any firm from which they receive financial benefit. The TVA board worked around these problems by making White a ''contract manager'' for two years. His salary would be paid by Stone & Webster, which would be reimbursed by TVA. White would get $355,200 a year, making him the highest-paid worker in the federal government. Parris, his predecessor, had made $71,000. White would also be explicitly allowed to hire nuclear managers from companies he had been associated with, Stone & Webster and Beta. To make sure he was in compliance with the law, White had his contract vetted by lawyers from both TVA and Stone & Webster. White took office in January and quickly brought in 800 outside engineers and administrators from Stone & Webster as well as Bechtel Corp., General Electric, and six other companies. TVA already had 3,000 engineers on permanent staff, and Parris had added 1,000 temporary engineers. So far White has doled out $10 million in TVA contracts to Stone & Webster. The agency's board also let White take on two Beta executives. Each gets $127.50 an hour. In the first five months of this year Beta billed TVA for 1,858 hours of work, collecting $236,958. At that rate Beta will get about $1.3 million for part-time work over the two-year life of White's contract. Stemar, a corporation set up by White (the name is short for Steven and Mary Anne, White's wife), can get up to 10% in ''administrative costs'' for each Beta employee TVA uses -- or an estimated $130,000 over the next two years. Exactly when reports about White's prodigious hiring and spending began to raise questions is a matter of controversy. Former chief TVA counsel Herbert Sanger began to have second thoughts soon after White's hiring. He now says: ''Hell, I warned them all along that it was illegal, but they ignored it.'' Board members disagree; they say it was several months before Sanger told them about his feelings. Says Chairman Chili Dean: ''Back in January no one said it was illegal or unethical.'' On May 5 Sanger wrote a blistering memo to the board, asserting that both its members were in violation of conflict-of- interest laws. Two months later he resigned unexpectedly and went into private practice. White has now come under attack from a variety of directions. A report by the General Accounting Office concluded that since White was performing government duties in a job normally filled by a government worker, he was in fact a government employee. So he was violating the rules against making more than $72,500, as well as ''double-dipping'': drawing a federal pension while receiving a government salary. IN JUNE the federal Office of Government Ethics, part of the executive branch, entered the dispute. At Sanger's instigation, Director David Martin wrote the TVA board in late June saying that White was violating the federal conflict-of-interest law. Convicted violators pay fines of up to $10,000 and spend as much as two years in prison. Martin demanded that White enact a hiring freeze. White did so, but replied: ''What we have here may look like a conflict, but the difference is my integrity.'' Martin also leveled charges against some of the nuclear powerhouses on the job. As Martin saw it, they too have run afoul of the conflict-of-interest law. The companies are suppliers to TVA but their contracts may be overseen by their own employees, who were hired by White and are now on the TVA payroll as consultants. When the employees' jobs at TVA are over, they will return to their positions at Bechtel, General Electric, and the others. For the time being, the disposition of the conflict-of-interest case has remained an internal matter at the TVA. The conflict questions are being investigated by the TVA's own inspector general, Norman Zigrossi. Formerly head of the FBI's Washington, D.C., office, Zigrossi and his staff of 38 investigators, many former FBI agents, started his inquiry in May. His report is several months overdue. For legal advice, the TVA board hired Robert Strauss, former Democratic national party chairman, at $250 an hour to render an opinion on whether the law had been broken. That report is also overdue. White rankles at the various charges against him. He still claims that he cannot violate the federal pay-cap rules because he works for Stone & Webster, not the government. The conflict-of-interest assertions, he adds, should get thrown overboard too. Since Stone & Webster guarantees his salary for two years, regardless of whether he stays with TVA, he argues that he is not beholden to the company and thus has no incentive to steer contracts to it. DESPITE THE GROWING furor, one TVA manager apparently remained blind to the conflict-of-interest problems. William Drotleff, a Stone & Webster executive hired by White as TVA's manger of nuclear engineering, wrote a memo to White on August 15, recommending that 62% of 159 positions open in his division be filled by Stone & Webster employees. White says that he was ''pissed as hell'' when he saw the memo. He says it was a ''mistake'' and that Drotleff had violated his orders. In late September, White announced that Drotleff had been ''recalled'' to Stone & Webster's Cherry Hill, New Jersey, offices, though he had done a ''fine job'' for TVA. Even as White confronts his critics, he faces new allegations about an attempted cover-up of safety questions at the Watts Bar plant. In March 1984 an outside inspector from Hartford Steam Boiler named Howard Haston discovered that TVA had failed to test welds on crucial steam and water pipes leading into the reactor building. By the time Haston made his finding, TVA workers had already installed 56 of these pipes. Once installed, the pipes are extremely costly and time-consuming to test. TVA issued a safety report recommending that the pipes be ''used as is.'' Haston refused to sign it. An untested weld, he argued, violated minimum safety standards. A burst pipe could set off a serious nuclear accident. A campaign then developed to force Haston to sign the report. A subsequent internal investigation disclosed that managers at TVA's engineering codes and standards office called Haston's bosses at Hartford Steam Boiler to complain about his refusal to sign. Under heavy pressure from his Hartford supervisor, Harold L. Robison, Haston signed the safety report with a caveat that reads: ''My signature per written and verbal direction of H. L. Robison.'' $ Construction continued at Watts Bar, and in February 1985 TVA certified that the giant 1,270 megawatt plant was ready for an NRC operating license. TVA had an independent investigative staff, and in March one of its members, Jerry Smith, began receiving anonymous phone calls about pressure on Hartford inspectors. Smith was also getting death threats at the same time. He informed the board about the phone calls, but the board did nothing until August, when an extortion letter, also anonymous, arrived, threatening to publicize the welding problems unless TVA persuaded Hartford Steam Boiler to boost the pay of its inspectors from about $20,000 a year to $30,000. According to TVA investigators, Marcus Bressler, the head of TVA's engineering codes office, tried to cover up the breach of safety standards. He warned Hartford Steam Boiler to get its inspectors in line or TVA would not renew its inspection contract, which had just expired. In late August Mansour Guity, another independent TVA investigator, looked into the extortion letter at the instigation of the TVA board. He found no evidence to tie the letter to Hartford inspectors, but he did find out about the pressure Bressler had exerted to cover up the safety violation. Last March, White abolished the independent investigative staff, saying it was proving divisive. He handed the Hartford investigation over to his inspector general, ex-FBI agent Zigrossi, where it remains unresolved. Guity and Smith complained to the U.S. Labor Department that they had been harassed and intimidated by TVA management for raising safety issues. In August, the Labor Department ruled in their favor and TVA agreed to give them comparable jobs and pay their legal fees. Guity, a nuclear engineer, has since been offered a transfer to TVA coal plants, and Smith, also a nuclear engineer, has been assigned to TVA's equal opportunity office. Asserts Guity: ''Anyone who tells the truth around here is an enemy of the state.'' ACCORDING TO congressional sources, the Hartford Steam Boiler incident was confirmed in a draft report by the Nuclear Regulatory Commission's office of investigation, headed by Ben Hayes. A congressional aide familiar with the case says he thinks Hayes is sitting on the report because he is afraid the NRC commissioners might fire him for troublemaking. James Asselstine, a maverick NRC commissioner watching the case, says: ''Every time Hayes turns up another problem, it gives the industry a black eye. It's a 'circle the wagon' mentality, and some NRC commissioners would like to muzzle him.'' In all the hubbub, no one at TVA yet knows what is needed to fix the nonworking reactors or how much the job will cost. Chairman Chili Dean, for one, considers the situation under control. ''Things have finally quieted down here,'' he says. In Washington, though, things are just heating up. At congressional hearings early in October, Representative Pat Schroeder, chairman of the Civil Service subcommittee, said White would have to take a salary cut to $72,000, and Representative Ron Wyden of Oregon, a member of the House Oversight Committee, called for White's resignation. White recently said that he needs at least 1,000 more workers to get the job done, but he can't fix TVA's nukes until the conflict question is cleared up. He has threatened to resign if the inquiry drags on much longer. What happens if White resigns? Says TVA board member Waters: ''I guess I'll just have to go to the President and say, 'Here are the keys to $15 billion in nukes.' ''