TVA Cost of Service

Joint Accounting Conference Huntsville, Alabama

May 16, 2014

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• What? Why? How?

• What: It’s a study. Nothing more, nothing less.

• Why: If you can’t measure it, you can’t control it!

• How: No single costing methodology is superior to any other, and the choice of methodology will depend on the unique circumstances of each utility. TVA developed the RCA/200 methodology approximately ten years ago and began using it and comparing it to other cost allocators.

“Equity is the mother of confusion.”

—British economist W. Arthur Lewis on the unresolved conflicts about “fair” cost apportionment

What is Cost of Service ?

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Revenue and Costs

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Cost of Service Process

Functionalization Classification Allocation

Fixed/VariableGeneration

Transmission

Other

Energy - Resource Cost Allocation (RCA)

Demand - Top 200 Hours

FERC Methodology – 12 CP

Based on above relationships

Energy-Related

Demand-Related

Demand-Related

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• Costs are FUNCTIONALIZED as

generation, transmission, and other

• Generation costs are CLASSIFIED as

fixed and variable

• Costs are ALLOCATED using

RCA/200 methodology

Functionalization, Classification, Allocation

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TVA General Ledger

FERC Description FY 2012 Balance FERC Description FY 2012 Balance FERC Description FY 2012 Balance

403 DEPRECIATION EXPENSE 1,612,231,166.81 509 ALLOWANCES 892,811.62 553 MAINTENANCE OF GENERATING AND ELECTRIC PLANT 25,254,803.84

407.3 REGULATORY DEBITS 243,198,738.50 510 MAINTENANCE SUPERVISION AND ENGINEERING 62,536,472.56 554 MAINTENANCE OF MISCELLANEOUS OTHER POWER GENERATION PLANT17,785,612.02

408.1 TAXES OTHER THAN INCOME TAXES, UTILITY OPERATING INCOME622,473,269.29 511 MAINTENANCE OF STRUCTURES 22,811,874.22 555 PURCHASED POWER 1,188,684,674.86

411.1 ACCRETION 54,060,636.00 512 MAINTENANCE OF BOILER PLANT 182,471,664.89 556 SYSTEM CONTROL AND LOAD DISPATCHING 35,864,036.08

411.8 GAINS FROM DISPOSITION OF ALLOWANCES (19,361.19) 513 MAINTENANCE OF ELECTRIC PLANT 32,971,977.72 557 OTHER EXPENSES 378,767.33

417 REVENUES FROM NONUTILITY OPERATIONS (294,983,118.26) 514 MAINTENANCE OF MISCELLANEOUS STEAM PLANT 17,357,471.20 560 OPERATION SUPERVISION AND ENGINEERING 6,958,896.64

417.1 EXPENSES OF NONUTILITY OPERATIONS 303,782,265.54 517 OPERATION SUPERVISION AND ENGINEERING 435,860,339.33 561.1 LOAD DISPATCH-RELIABILITY 2,141,566.94

419 INTEREST AND DIVIDEND INCOME (21,212,508.02) 518 NUCLEAR FUEL EXPENSE 317,987,452.63 561.2 LOAD DISPATCH-MONITOR AND OPERATE TRANSMISSION SYSTEM5,294,390.99

421 MISCELLANEOUS NONOPERATING INCOME (6,716,608.87) 519 COOLANTS AND WATER 21,917,661.92 561.3 LOAD DISPATCH-TRANSMISSION SERVICE AND SCHEDULING 1,488,360.33

421.1 GAIN ON DISPOSITION OF PROPERTY (3,562,085.79) 520 STEAM EXPENSES 35,408,102.19 562 STATION EXPENSES 5,577,156.13

421.2 LOSS ON DISPOSITION OF PROPERTY 4,549.41 523 ELECTRIC EXPENSES 32,112,252.71 563 OVERHEAD LINE EXPENSE 6,921,570.78

426.1 DONATIONS 1,040,673.11 524 MISCELLANEOUS NUCLEAR POWER EXPENSES 103,312,793.05 566 MISCELLANEOUS TRANSMISSION EXPENSES 75,276,516.62

426.5 OTHER DEDUCTIONS 5,630,723.28 528 MAINTENANCE SUPERVISION AND ENGINEERING 39,086,877.55 567 RENTS 7,882,750.94

427 INTEREST ON LONG-TERM DEBT 1,329,923,475.03 529 MAINTENANCE OF STRUCTURES 31,061,709.97 569.1 MAINTENANCE OF COMPUTER HARDWARE 370,387.51

428 AMORTIZATION OF DEBT DISCOUNT AND EXPENSE 38,163,409.83 530 MAINTENANCE OF REACTOR PLANT EQUIPMENT 230,575,258.39 569.2 MAINTENANCE OF COMPUTER SOFTWARE 1,571,512.21

429 AMORTIZATION OF PREMIUM ON DEBT - CREDIT (10,242,682.92) 531 MAINTENANCE OF ELECTRIC PLANT 5,778,495.16 569.3 MAINTENANCE OF COMMUNICATION EQUIPMENT 2,713,533.47

431 OTHER INTEREST EXPENSE 86,369,062.57 532 MAINTENANCE OF MISCELLANEOUS NUCLEAR PLANT 38,686,154.85 570 MAINTENANCE OF STATION EQUIPMENT 21,173,506.26

432 ALLOWANCE FOR BORROWED FUNDS USED DURING CONTSTRUCTION (AFUDC) - CREDIT(171,088,095.90) 535 OPERATION SUPERVISION AND ENGINEERING 13,257.25 571 MAINTENANCE OF OVERHEAD LINES 28,788,506.02

442 COMMERCIAL AND INDUSTRIAL SALES (1,442,580,676.85) 537 HYDRAULIC EXPENSES 23,376.22 890.1 NONPOWER DEPRECIATION EXPENSE 9,282,241.34

445 OTHER SALES TO PUBLIC AUTHORITIES (117,386,125.54) 538 ELECTRIC EXPENSES 862,847.71 890.2 NONPOWER EXPENSE 712,004.10

447 SALES FOR RESALE (MUNI-COOP/DISTRIBUTOR) (9,505,693,267.06) 539 MISCELLANEOUS HYDRAULIC POWER GENERATION EXPENSES 52,909,594.20 904 UNCOLLECTIBLE ACCOUNTS 98,328.70

447.1 SALES FOR RESALE (OFF-SYSTEM) (20,192,303.50) 541 MAINTENANCE SUPERVISION AND ENGINEERING 17,169,057.20 908 CUSTOMER ASSISTANCE EXPENSES 63,439,643.67

450 FORFEITED DISCOUNTS (3,721.84) 542 MAINTENANCE OF STRUCTURES 2,686,444.27 920 ADMINISTRATIVE AND GENERAL SALARIES 27,214,995.04

451 MISCELLANEOUS SERVICE REVENUES (23,643,874.75) 543 MAINTENANCE OF RESERVOIRS, DAMS AND WATERWAYS 13,107,972.37 923 OUTSIDE SERVICES EMPLOYED 25,000.00

454 RENT FROM ELECTRIC PROPERTY (18,485,845.26) 544 MAINTENANCE OF ELECTRIC PLANT 17,345,000.96 924 PROPERTY INSURANCE 38,529,466.55

456 OTHER ELECTRIC REVENUES (92,211,079.01) 545 MAINTENANCE OF MISCELLANEOUS HYDRAULIC PLANT 35,193,469.72 925 INJURIES AND DAMAGES 88,062,955.71

456.1 OTHER ELECTRIC REVENUE ASSOCIATED EXPENSES 1,587,573.82 546 OPERATION SUPERVISION AND ENGINEERING 6,385,113.64 926 EMPLOYEE PENSIONS AND BENEFITS 26,574,042.09

500 OPERATION SUPERVISION AND ENGINEERING 246,517,384.70 547 FUEL 516,522,859.85 928 REGULATORY COMMISSION EXPENSES 27,562,741.54

501 FUEL 1,845,369,130.50 548 GENERATION EXPENSES 48.04 929 DUPLICATE CHARGES-CREDIT (3,286,439.03)

502 STEAM EXPENSES 218,179,841.89 549 MISCELLANEOUS OTHER POWER GENERATION EXPENSES 50,567,362.27 930.2 MISCELLANEOUS GENERAL EXPENSES 949,102,216.67

506 MISCELLANEOUS STEAM POWER EXPENSES 71,958,560.62 551 MAINTENANCE SUPERVISION AND ENGINEERING 1,928,104.93 931 RENTS (19,536.92)

508 OPERATION SUPPLIES AND EXPENSES (NONMAJOR ONLY) 65,737.93 552 MAINTENANCE OF STRUCTURES 227,564.70

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Costs and Allocation Methods

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Functions Costs Included 2007 2008 2009 2010 2011 2012 2013

Generation 41% 42% 43% 30% 37% 35% 36%Variable Costs $3,762 $4,304 $4,835 $3,290 $4,447 $3,928 $3,935

Generation 30% 31% 28% 33% 32% 36% 34%Fixed Costs $2,798 $3,210 $3,159 $3,557 $3,816 $4,079 $3,808

8% 8% 7% 8% 7% 7% 8%

$781 $777 $803 $819 $805 $804 $844

Other 16% 15% 17% 25% 18% 17% 17%Fixed Costs $1,437 $1,537 $1,973 $2,768 $2,161 $1,907 $1,924

5% 5% 5% 4% 6% 5% 5%

$452 $490 $544 $457 $662 $622 $548

$9,230 $10,318 $11,314 $10,891 $11,891 $11,340 $11,059

Taxes Payment In Lieu of Taxes

Total Costs

Transmission Transmission, Ancillary Services

Corp A&G, Reg. Asset, General Depr, Customer Exp

Fuel, Purchased Power, Corrective Maintenance

Operations, Preventive Maintenance, Depr, Interest

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

Resource Cost Allocation (RCA)

Methodology assigns variable costs

based on class / customer usage and

TVA’s hourly power supply cost for

each hour of the year

Variable Cost Allocation Methodology

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Customer 1

Customer 2

Customer 3

Power Supply Cost

$0

$20

$40

$60

$80

$100

0

1,000

2,000

3,000

4,000

5,000

1 2 3 4 5 6 7 8 9 101112131415161718192021222324

Resou

rce Cost ($

/MW

hkW

Hour

Customer 1 Customer 2 Customer 3 Power Supply Cost ($/ MWh)

Energy Cost Allocation Illustration

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Top 200 (200)

Methodology assigns fixed costs

based on class / customer load during

TVA’s Top 200 peak hours of the year

Fixed Cost Allocation Methodology

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Top 200 Hours Fiscal Years 2001 - 2013

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TVA Restricted Information – Deliberative and Pre-Decisional Privileged

Transmission and ancillary services

Methodology allocates costs based on

class / customer load share during

each of TVA’s 12 monthly system

transmission peaks (12CP) of the

fiscal year

Transmission Cost Allocation Methodology

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Other fixed costs

Methodology allocates costs based on

class / customer share of variable,

fixed, and transmission costs

Other Cost Allocation Methodology

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COS for Fiscal Year 2013 – by Customer

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COS for Fiscal Year 2013 – by Class

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LPC Standard ServiceG B

G C

G D

M B

M C

M D

$40

$50

$60

$70

$80

$90

$40 $50 $60 $70 $80 $90

Uni

t Re

venu

e ($

/MW

h)

Unit Cost ($/ MWh)

Local Power Companies - Standard Service G B G C G D M B M C M D

Revenue to Cost Comparison - Fiscal Year 2013

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

Comparison of Alternate Allocators Fiscal Year 2013

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$45

$50

$55

$60

$65

$70

$75

$45 $50 $55 $60 $65 $70 $75

Uni

t Rev

enue

($/M

Wh)

Unit Cost ($/MWh)

RCA/200 1CP 2(SW)CP 12CP 4(S)CP 4(S)1(W)CP

Net Revenue to Cost Comparison

Directly Served BCD Customers

Local power company (LPC) data includes standard service and large industrial customers; directly served customer (DS) data includes only B, C, and D schedule customers and excludes USEC.

Local Power Companies

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

Alternate Allocators Considered

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Top 20012CP 1CP 2(SW)CP 4(S)CP 4(S)1(W)CP

Capacity 3,115 2,995 3,171 3,078 3,172 3,134

Energy 2,810 2,810 2,810 2,810 2,810 2,810

Other 1,484 1,456 1,496 1,475 1,497 1,488

PILOT 423 415 426 420 426 424

Transmission 579 579 579 579 579 579

Total 8,411 8,255 8,483 8,362 8,484 8,435

8,411 8,255 8,483 8,362 8,484 8,435

0

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4,000

6,000

8,000

10,000

Mill

ions

of D

olla

rs

Local Power Companies Standard Service - Fiscal Year 2013

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

TVA/TVPPA/TVIC Rate Design Guiding Principles

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1. Rates must recover all costs.

2. Rates must track cost of service.

3. Rates must send efficient pricing signals.

4. Rates must balance precision with simplicity.

5. Rates must be stable.

6. Rates must be competitive.

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ANSWERS KEYWORD

a. Realistic Cost Aggregation

297024

b. Resource Cost Allocation

297028

c. Reasonable Contract Allotment

297067

d. Required Charge Apportionment

297071

What does “RCA” in “RCA/200” stand for?

Text a KEYWORD to 22333 or Submit responses at PollEv.com

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

ANSWERS KEYWORD

a. The 200 hottest hours in the fiscal year.

297075

b. The 200 hours with the highest power supply cost in fiscal year

297076

c. The 200 days with the highest peak demands in the fiscal year.

297078

d. The 200 highest hourly system demands in the fiscal year.

297079

What does “200” in “RCA/200” represent?Text a KEYWORD to 22333 or Submit responses at PollEv.com

QUESTIONS KEYWORD

a. Bicentennial Mall State Park

297097

b. Norris Municipal Park 297098

c. Chattanooga-Hamilton County Bicentennial Library Fountain

297106

d. Wilson Dam Waterfall Sculpture in Florence

297111

Where is the monument with “The greatest thing” quotation?

Text a KEYWORD to 22333 or Submit responses at PollEv.com