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Complexities of the Rate Change. Cost of Service, Hydro Credit, Environmental Adder, and Fuel Cost. TVPPA Accounting & Finance Conference October 21, 2011. Jim Sheffield. Cost of Service Studies. Two Kinds TVA – Generation & Transmission: “Power Cost”

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Complexities of the rate change

Complexities of the Rate Change

Cost of Service, Hydro Credit, Environmental Adder, and Fuel Cost

TVPPA Accounting & Finance Conference

October 21, 2011

Jim Sheffield

Cost of service studies
Cost of Service Studies

  • Two Kinds

    • TVA – Generation & Transmission: “Power Cost”

    • Distributor - Distribution Cost – Our Focus

  • What Does a C.O.S.S. Do?

    • FCA: Functionalization, Classification, Allocation

    • Functionalize: Gen, Trans, Distributor, Customer

    • Classify: Demand, Energy, Customer

    • Allocate to Class: Res, Com, Ind, Lighting

  • What C.O.S.S. Tell You

    • Demand Cost, Energy Cost, Customer Cost, by Class

  • Cost of service studies1
    Cost of Service Studies

    • Why Do a C.O.S.S.

      • Match prices to costs

      • Revenues collected reflect costs incurred

      • Changes in cost are matched by changes in revenue

      • Avoid cross-class subsidies, etc.

  • What Distributors are Learning

    • COSS’s information is useful, especially with new wholesale rates

    • Customer charges in general were (are) too low

    • Knowing costs is a big help in creating rates to recover costs

  • Hydro credit and debit
    Hydro Credit (and Debit)


    • TVA Act (Section 11): “…the projects herein provided for shall be considered primarily as for the benefit of the people of the section as a whole and particularly the domestic and rural consumers to whom the power can economically be made available, and…sale to and use by industry shall be a secondary purpose, to…secure a sufficiently high load factor and revenue returns which will permit domestic and rural use at the lowest possible rates…”

    • The General Power Rate Schedule states: “The base demand and energy charges…shall be increased or decreased to correspond to increases or decreases determined by TVA in the value of the hydro generation benefit allocated to residential customers.”

    Hydro preference credit and debit
    Hydro “Preference” Credit (and Debit)

    • How Much Money - $250 Million/Year

    • Calculation: No Preference Case VS Preference Case

      • No preference case – All Classes Receive Hydro

      • Preference case - Assigns TVA/SEPA hydro dams’ production to the residential class only

        • Reduces demand and energy costs assigned to residential

        • Increases costs to remaining firm customers

    • Difference between costs allocated to Residential in the two studies is the Hydro Preference Benefit amount

    Hydro preference credit and debit1
    Hydro “Preference” Credit (and Debit)

    • How Charged

      • Residential rates reduced by the $250 million

        • Customer charge based on number of residential meters

        • Energy portion reduces per kWh rate

      • Commercial and Industrial rates increased by $250 million

      • Reduction to Residential and increase to C&I balance; no impact to TVA

    Environmental adder
    Environmental Adder

    • For Clean Air Compliance

      • Effective October 2003, expires September 30, 2013

    • Collections

      • $365 million/Year for 10 Years

    • What Next

      • Costs Don’t Go Away

    Fuel cost
    Fuel Cost

    • Two Changes

      • Quarterly to monthly

      • From Fuel Cost Adjustment to Total Fuel Cost

    • Why: Fuel cost volatility caused inaccurate forecasts

      • 3-month forecast is actually 7 – 9 month ahead forecast

        • June – August forecast based on December/January data

      • Stable fuel, OK; Volatile fuel, not so much

      • Big Deferred Account; Perverse price signals

      • Monthly forecasts are accurate; valid price signals

      • Fuel Cost is not a “base rate” type of cost

    Fuel cost1
    Fuel Cost

    What’s in It

    • Contents based on FERC standards; conservative

    • Fossil Fuel Expense (Account 501) – “direct cost of fuel burned in TVA coal plants, including transportation and fuel treatment”

    • Purchased Power Expense (Account 555) – “Energy cost of purchased power”

    • Nuclear Fuel Expense (Account 518) – “cost of nuclear fuel amortization expense … including DOE spent fuel disposal charges”

    • Gas Turbine Fuel Expense (Account 518) – “direct cost of gas and oil burned in TVA plants”

    • Reagents Expense (Account 501.L) – “cost of emissions reagents such as limestone and ammonia”

    • Allowances Expense (Account 509) – “cost of emissions allowance expense such as sulfur dioxide and nitrogen oxides”

    Fuel cost2
    Fuel Cost

    • How Big is It

      • Around $4 Billion/Year

      • Total TVA Revenues Around $11 Billion/Year

      • About 36%

      • Over 1/3 of that is Purchased Power

  • Who is Overseeing It

    • TVPPA Fuel Cost Subcommittee, auditors (Ernst & Young) and TVA

  • Why the Concern?

    • Is a passthrough

    • Need transparency and accountability

  • Complexities of the rate change