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

2. TVA Restricted Information – Deliberative and Pre-Decisional Privileged 1 What do You see ? Future Wholesale / Retail Billing Options  How does it relate to the Strategic Pricing Plan ?

3. 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 2 The ideas expressed are those of the author and NOT of TVA

4. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Strategic Pricing Plan 3

5. 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?

6. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Strategic Pricing Plan – Process COS How we incur and allocate cost Structure How we collect revenue Competitive Balance How well our rates perform against COS and competition Products & Programs How we further differentiate based on class or operating behavior Converged on Rate Change Elements and preparing for October Implementation 5

7. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Cost of Service – Who Should Pay How Much? 6 COST OF GOODS SOLD Allocation based on Cost Causation Principles In a perfect world, Revenues = Costs COS How we incur and allocate cost TVPPA TVIC TVA

8. TVA Restricted Information – Deliberative and Pre-Decisional Privileged 7 Structure - Why Is It Important ? Structure How we collect revenue Objective: Changes in load lead to changes in revenue that match changes in cost

9. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Competitive Balance – Competitive Relative To What ? 8 Competitive Balance How well our rates perform against COS and competition We have heard from customers that our rates are not as competitive as we believe Cost of Service Benchmarking Independent Assessments

10. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Products & Programs – How We Differentiate 9 Products & Programs How 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

11. TVA Restricted Information – Deliberative and Pre-Decisional Privileged What To Expect, When You Are Expecting ! 10

12. TVA Restricted Information – Deliberative and Pre-Decisional Privileged What To Expect, When You Are Expecting TVA’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 11

13. 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 12 What To Expect, When You Are Expecting Future Focus “Fixed Cost Recovery” Hasn’t Changed in ~40 years First Wholesale Rate Change

14. TVA Restricted Information – Deliberative and Pre-Decisional Privileged 13 What To Expect, When You Are Expecting …. A What Is Your Cost of Goods Sold ? Focus On Retail Rate Design

15. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Historic Timeline of Rate Changes and Adjustments 3 Rate Changes in 25 years 14

16. TVA Restricted Information – Deliberative and Pre-Decisional Privileged What To Expect, When You Are Expecting Future Timeline of Rate Changes 5 Rate Changes in 10 years 15 Rate Change October 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

17. TVA Restricted Information – Deliberative and Pre-Decisional Privileged 16 The Great Circle Of Life

18. TVA Restricted Information – Deliberative and Pre-Decisional Privileged TVA Wholesale Rate - 1933 Declining blocks 17 In the beginning ….

19. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Structure Changes – Energy 18 Improve fixed cost recovery, move pricing closer to marginal cost TVA Original Proposal – Modified At LPC’s Request

20. TVA Restricted Information – Deliberative and Pre-Decisional Privileged 19 Gerry Maguire

21. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Structure Changes – Standard Service 20 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. Season On-peak Demand Max Demand On-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 $0.000 Illustrative

22. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Structure Changes – Demand 21 Manage to TVA’s peak rather than managing to individual peak demands CustomerTodayProposed 15MW * 9.28 $/kW$46,4005MW * 9.38 $/kW$46,900 25MW * 9.28 $/kW$46,400 5MW * 2.75 $/kW + 3MW * 6.63 $/kW $33,640 Max on/off-peak Customer demand 1 2 2 1 2 1 1 2 1 2 2

23. TVA Restricted Information – Deliberative and Pre-Decisional Privileged System Level Impacts 22 Wholesale Redesign Leads To Customer Bill Impacts Much more narrow than last rate change A +0.5% -0.75% April 2011 Wholesale Rate Change Bill Impact Range + / - 3%

24. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Show Me The Money – Wholesale ! 23 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 Identify worst of 3 TVA Fiscal Year Impacts 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”

25. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Show Me The Money – Retail ! 24 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 Retail rates conservatively adjusted to prevent RLPC impacts B

26. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Real-time Cost Accounting 25

27. 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 26

28. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Paul Simon’s 50 Ways To Get In Trouble ….. 27