Retail Rate Design & Administration Grid Access Charge Louie Smith Retail Rate Design & Administration May 16, 2019 Tips: Presentation title should be Arial font, 40 points Title on this slide should be kept short and on a single line All fonts throughout presentation should be Arial font The TVA Color Palette theme color is already selected in TVA’s template

Grid Access Charge What? Why? How? Tips: Slide title should be Arial font, 32 points Title should be kept short and on a single line if at all possible To change the image, right click on it and click Change Picture.

TVA Products TVA Sells Two Products: Capacity To meet instantaneous demand across the valley Costs are largely fixed in nature – our assets Energy To meet hourly energy requirements every hour of the day Costs are primarily fuel, purchase power, and are variable in nature Tips: Slide title should be Arial font, 32 points Title should be kept short and on a single line if at all possible To change the image, right click on it and click Change Picture.

Small Commercial & Industrial TVA Electric Service Standard Service Residential (4 Million) Small Commercial & Industrial (700,000) Wholesale Large Customers (B C D) Local Power Companies (154) Large Commercial (~100) Large Manufacturing (~400) Large Customers (B C D) Retail Directly Served (~56) Federal (~6) Large Manufacturing (~50)

Rate Authority Local Power Company (LPC) Standard Service – 154 Local Power Companies (residential, small commercial and industrial) 1 Wholesale and retail rate authority established within the Power Contract Directly Served Customers - ~56 direct serve customers (large manufacturing and federal) 2 Retail Rate Regulator – according to TVA Board approved process Retail rate approver for 150 LPCs Non-discriminatory oversight for 4 LPCs 3

The Market is Changing The utility industry is entering a world of enhanced competition and choice, which presents opportunities for utilities that embrace and adapt to the change.

Long Term Pricing Direction Improve Fixed Cost Recovery Appropriately value infrastructure investment Increase fixed cost recovery at wholesale/retail Improve Pricing Signals Improve pricing structure and program/product pricing to provide signals more reflective of embedded and marginal cost Move toward more dynamic pricing Encourage Technology Investment Interval metering and data management Load control and load shaping technology Provide rates as low as feasible, ensure fairness

Rate Design Guiding Principles Rates must cover costs GUIDING PRINCIPLES “The guiding principles developed for the 2011 rate change (amended to include a principle dealing with rate competitiveness) continue to inform the 2018 rate change” Rates track cost of service These guiding principles are true at wholesale & retail Rates must send pricing signals Rates must balance precision with simplicity Rates must be stable Rates must be competitive & affordable

Incorporation of Technology Rate Design According to cost causation principles Matching revenues with costs incurred Least cost objectives Change Management Pace of Change Customer Bill Impacts Mandatory Vs. Voluntary Incorporation of Technology Outreach & Education Cost to Achieve

Recognizes value and cost provided by grid service Pricing Pricing aligned to cover cost while adding value to the customer and the system Rates better aligned to reflect costs Shift from energy to fixed Develop long-term pricing strategy Fixed Demand Energy Recognizes value and cost provided by grid service

Bill Comparison: Electricity vs. Cell Phones Electric Bill Cell Phone Bill While an electric bill is driven by customer usage, cell phone bill charges are fixed

Terms of Wholesale Rate Structure Reduce Energy Charges by 1/2 cent Grid Access Charge Rate of 1/2 cent Application Applied to LPC energy for previous 5 most recent years Reset Reset each year on a rolling basis Deferral Option Option to defer Grid Access Charge implementation to October 2019

TVA New Wholesale Rate Structure - 1/2 cent + 1/2 cent ~6% of TVA revenue Reduce Energy Charge Grid Access Charge (GAC) Recognizes value and cost provided by grid service

Improving Pricing 30% 90% 70% Cost to Serve a Residential Customer What a Residential Customer Pays 90% 70% VARIABLE Future: Pricing That Better Reflects Costs 30% BEST FIXED COST RECOVERY VARIABLE COSTS INDIVIDUAL IMPACTS FIXED COSTS Managed, incremental improvements over time

Grid Access Allocation

Default Rate Design (Residential)

Optional Rates - Risk Premium Calculation

Optional Rates - Residential