strategic pricing plan central district power accountants association franklin, tn. march 19, 2015
TRANSCRIPT
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
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What do You
see ?
Future Wholesale / Retail Billing Options
How does it
relate to the
Strategic
Pricing
Plan ?
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Agenda
• Strategic Pricing Plan
• What To Expect, When You Are Expecting
• The Great Circle of Life
• Jerry McGuire
• Real-time Cost Accounting
• Paul Simon
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The ideas expressed are those of the
author and NOT of TVA
The ideas expressed are those of the
author and NOT of TVA
The Strategic Pricing Plan is a key initiative between TVA, local power
companies, the Tennessee Valley Public Power Association (TVPPA) and the
Tennessee Valley Industrial Committee (TVIC) designed to provide a clear,
long-term direction for power rates.
▪Defining where we are going: Our customers expressed that it is
time to better define our long-term direction.
▪Evolving utility industry: Customers are feeling the impacts of a
changing marketplace with things such as distributed generation. Our
pricing needs to reflect the current realities facing our industry.
▪Continuous Improvement: TVA is working with our customers to set
the course to more frequently align our pricing structure to stay
ahead of the evolving utility industry.
Creating the solution collaboratively with our customers
Strategic Pricing Plan – What & Why?
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Strategic Pricing Plan – Process
COSHow we incur and allocate
cost
StructureHow we collect revenue
Competitive Balance
How well our rates perform against COS and
competition
Products & ProgramsHow we further
differentiate based on class or operating behavior
Converged on Rate Change Elements and preparing for October Implementation
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TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Cost of Service – Who Should Pay How Much?
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COST OF GOODS SOLD Allocation based on Cost Causation Principles
In a perfect world, Revenues = Costs
COSHow we incur and
allocate cost
TVPPA
TVIC
TVA
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
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Structure - Why Is It Important ?
StructureHow we collect
revenue
Objective: Changes in load lead to changes in revenue that match changes in cost
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Competitive Balance – Competitive Relative To What ?
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Competitive Balance
How well our rates perform against COS and
competition
TVPPA SS
TVPPA MGS
TVPPA LGS TVIC SS
TVA SS
TVIC LGS
TVA LGS
TVIC MGS
TVA MGS
$40
$50
$60
$70
$80
$90
$40 $50 $60 $70 $80 $90
Uni
t Rev
enue
($/
MW
h)
Unit Cost ($/MWh)
We have heard from customers that our rates are not as competitive as we believe
Cost of Service
BenchmarkingIndependent Assessments
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Products & Programs – How We Differentiate
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Products & ProgramsHow we further
differentiate based on class or operating behavior
Interruptible & Curtailment Programs
Price Responsive Products
Reliability• 5 MR• 60 MR• Reserve Preservation
Economics• Economy Buyback•
• Off-Peak Pricing Overlay• Coincident Peak Billing• Real-time Pricing - Day - ahead• Real-time Pricing - Hour - ahead
We have heard from some customers that our products are not expansive enough …
Situational Products
• Valley Investment Initiative• Manufacturing Credit Product• Start-up & Test
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
What To Expect, When You Are Expecting !
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TVA Restricted Information – Deliberative and Pre-Decisional Privileged
What To Expect, When You Are ExpectingTVA’s Long Term Direction
Improve Fixed Cost Recovery • Appropriately value infrastructure investment• Increase fixed cost recovery at wholesale/retail to move towards
covering infrastructure investment
Improve Pricing Signals• Improve pricing structure and program/product pricing to provide
signals more reflective of embedded and marginal cost• On a continuum, move toward more dynamic pricing with coincident
peak billing, which can effectively be transferred to retail pricing• Support LPC wholesale and retail rate alignment improvement
Encourage Technology Investment• Interval metering and data management for retail rate design and
implementation• Load control & load shaping technology
Simplification and Competitiveness will remain key focus areas
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TVA Restricted Information – Deliberative and Pre-Decisional Privileged
• Wholesale / Retail Rate Alignment effort concurrent with current and
future rate designs
• Drive wholesale fixed cost recovery changes
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What To Expect, When You Are ExpectingFuture Focus
“Fixed Cost Recovery” Hasn’t Changed in
~40 years
First Wholesale
Rate Change
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
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What To Expect, When You Are Expecting ….
A
A
What Is Your Cost of Goods Sold ?
Focus On Retail Rate
Design
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Historic Timeline of Rate Changes and Adjustments
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
3 Rate Changes in 25 years
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TVA Restricted Information – Deliberative and Pre-Decisional Privileged
What To Expect, When You Are ExpectingFuture Timeline of Rate Changes
5 Rate Changes in 10 years
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Rate ChangeOctober 2015
Increased Fixed Cost Recovery,
Coincident Peak Billing
Rate Change 2
Rate Change 4
Rate Change 3
Changes in Retail Rate Design are the key to successful transition
2015 2017 2019 2021 2023
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TVA Wholesale Rate - 1933
Declining blocks
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In the beginning ….
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Structure Changes – Energy
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Improve fixed cost recovery, move pricing closer to marginal cost
TVA Original Proposal – Modified At LPC’s Request
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Structure Changes – Standard Service
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• Narrow on-peak window
• On-peak window during transition months
• On-peak/max demand charges
• Energy rates reflective of marginal cost
First step toward coincident peak demand. Next step will be working with LPCs to align their retail rates.
SeasonOn-peak Demand
Max DemandOn-peak Energy
Off-peak Energy
On/Off-peak Delta
Summer $7.49 $2.75 $0.054 $0.032 $0.022
Winter $6.63 $2.75 $0.044 $0.034 $0.010
Transition $6.63 $2.75 $0.034 $0.034 $0.000
Illustrative
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Structure Changes – Demand
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Manage to TVA’s peak rather than managing to individual peak demands
Customer Today Proposed
1 5MW * 9.28 $/kW $46,400 5MW * 9.38 $/kW $46,900
2 5MW * 9.28 $/kW $46,4005MW * 2.75 $/kW + 3MW * 6.63 $/kW
$33,640
Max on/off-peak Customer demand
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2
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1
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12
2
1
1
2
2
2
2
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
System Level Impacts
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Wholesale Redesign Leads To Customer Bill Impacts
• Much more narrow than last rate change
A
A
+0.5%
-0.75%
April 2011 Wholesale Rate Change Bill Impact Range + / - 3%
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Show Me The Money – Wholesale !
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Wholesale Redesign
Rate restructuring
Introduce Demand Charge – On-peak
Retain Maximum Demand Charge – reduced level
Narrowing of On-peak Period
Revenue Allocation - $11M increase in LPC Standard Service Revenue
Target
A
A
Identify worst of 3 TVA Fiscal Year Impacts
A
A
At Wholesale - LPC had reduction in 2 of 3 years
TVPPA R&C asked for and received further enhancements to this approach … “12 Month Rolling Impact”
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Show Me The Money – Retail !
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Retail Rate Adjustments
• Retail Adjustments based on maximum impact
• Calculations based on “Worst Case”
• Very Conservative approach to maintain / improve LPC’s Operating margin
B
BRetail rates conservatively adjusted to prevent RLPC impacts
B
B
TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Real-time Cost Accounting
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TVA Restricted Information – Deliberative and Pre-Decisional Privileged
Total Monthly Fuel Cost: An Accountants Dream … Real-time Cost Allocation
System Dispatch based on Economics
Load Shape Influences Dispatch Cost
Average Cost Based Fuel
Proposed Allocation of Fuel Costs
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