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Strategic Pricing Plan

Strategic Pricing Plan. Central District Power Accountants Association Franklin, Tn. March 19, 2015. Future Wholesale / Retail Billing Options. How does it relate to the Strategic Pricing Plan ?. What do You see ?. Agenda. Strategic Pricing Plan What To Expect, When You Are Expecting

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Strategic Pricing Plan

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  1. Strategic Pricing Plan Central District Power Accountants Association Franklin, Tn. March 19, 2015

  2. Future Wholesale / Retail Billing Options • How does it relate to the Strategic Pricing Plan ? • What do You see ?

  3. Agenda • Strategic Pricing Plan • What To Expect, When You Are Expecting • The Great Circle of Life • Jerry McGuire • Real-time Cost Accounting • Paul Simon The ideas expressed are those of the author and NOT of TVA

  4. Strategic Pricing Plan

  5. Strategic Pricing Plan – What & Why? TheStrategic Pricing Plan isa 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

  6. Strategic Pricing Plan – Process Converged on Rate Change Elements and preparing for October Implementation

  7. COS • How we incur and allocate cost Cost of Service – Who Should Pay How Much? COST OF GOODS SOLD Allocation based on Cost Causation Principles TVPPA TVIC In a perfect world, Revenues = Costs TVA

  8. Structure • How we collect revenue Structure - Why Is It Important ? Objective: Changes in load lead to changes in revenue that match changes in cost

  9. Competitive Balance – Competitive Relative To What ? • Competitive Balance • How well our rates perform against COS and competition Cost of Service Benchmarking Independent Assessments We have heard from customers that our rates are not as competitive as we believe

  10. Products & Programs – How We Differentiate • Products & Programs • How we further differentiate based on class or operating behavior Interruptible & Curtailment Programs • Reliability • 5 MR • 60 MR • Reserve Preservation • Economics • Economy Buyback Price Responsive Products • 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

  11. What To Expect, When You Are Expecting !

  12. 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

  13. First Wholesale Rate Change What To Expect, When You Are ExpectingFuture Focus • Wholesale / Retail Rate Alignment effort concurrent with current and future rate designs • Drive wholesale fixed cost recovery changes “Fixed Cost Recovery” Hasn’t Changed in ~40 years

  14. Focus On Retail Rate Design What To Expect, When You Are Expecting …. A What Is Your Cost of Goods Sold ?

  15. Historic Timeline of Rate Changes and Adjustments 3 Rate Changes in 25 years

  16. What To Expect, When You Are ExpectingFuture Timeline of Rate Changes 5 Rate Changes in 10 years Rate Change October 2015 Rate Change 3 Increased Fixed Cost Recovery, Coincident Peak Billing 2015 2017 2019 2021 2023 Rate Change 4 Rate Change 2 Changes in Retail Rate Design are the key to successful transition

  17. The Great Circle Of Life

  18. TVA Wholesale Rate - 1933 In the beginning …. Declining blocks

  19. Structure Changes – Energy TVA Original Proposal – Modified At LPC’s Request Improve fixed cost recovery, move pricing closer to marginal cost

  20. Gerry Maguire

  21. Structure Changes – Standard Service • Narrow on-peak window • On-peak window during transition months • On-peak/max demand charges • Energy rates reflective of marginal cost Illustrative First step toward coincident peak demand. Next step will be working with LPCs to align their retail rates.

  22. Structure Changes – Demand 1 1 2 1 1 2 2 2 2 Max on/off-peak Customer demand 1 2 Manage to TVA’s peak rather than managing to individual peak demands

  23. System Level Impacts • Wholesale Redesign Leads To Customer Bill Impacts • Much more narrow than last rate change April 2011 Wholesale Rate Change Bill Impact Range + / - 3% • +0.5% A • -0.75%

  24. Show Me The Money – Wholesale ! At Wholesale - LPC had reduction in 2 of 3 years A Identify worst of 3 TVA Fiscal Year Impacts A TVPPA R&C asked for and received further enhancements to this approach … “12 Month Rolling Impact” • 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

  25. Show Me The Money – Retail ! • Retail Rate Adjustments • Retail Adjustments based on maximum impact • Calculations based on “Worst Case” • Very Conservative approach to maintain / improve LPC’s Operating margin Retail rates conservatively adjusted to prevent RLPC impacts B B

  26. Real-time Cost Accounting

  27. Total Monthly Fuel Cost: An Accountants Dream … Real-time Cost Allocation Average Cost Based Fuel System Dispatch based on Economics Load Shape Influences Dispatch Cost Proposed Allocation of Fuel Costs

  28. Paul Simon’s50 Ways To Get In Trouble …..

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