1. Managing Retail Rate Changes Presented by Walter Haynes, Sr. Project Manager, Patterson & Dewar Engineers Central District Power Accountants Association March 19, 2015

2. Managing Retail Rate Changes Rate management is everyone’s business Cost of Service Study (COSS) Long-term Rate Strategy Retail Rate Adjustments Rate Change Trends in the Valley Monitoring Retail Adjustments 2

3. Who’s Responsible for Managing Retail Rates? Accounting – the bucket of money has to be re-filled every month Engineering & Operations – the distribution system has to be able to serve the peak loads Customer Service – has to understand the rates and be able to convey them to the customer Management – misaligned rates often seen as poor management in months when margins are poor Board – ultimate responsibility to the utility and to the customer 3

4. Cost of Service Study (COSS) COSS ◦Foundation for rate change process ◦Allocates expenses to proper class of customers ◦Wholesale power costs are easily allocated to proper class ◦LPC distribution costs are allocated to classes based on some methodology (it’s not an exact science) 4

5. Fixed vs Variable distribution costs Typical Fixed Distribution Costs based on Number of Customers ◦Meter reading, postage, Administrative and General Typical Fixed Distribution Costs based on customer usage ◦Substations, distribution plant (wire, transformers, etc) Typical Variable Distribution Costs ◦Wholesale power, labor (to a certain extent) Most distribution expenses are fixed in nature 5

6. COSS & Rate Design COSS provides guidance as to the proper allocation of costs to each class of customer COSS doesn’t do rate design – two separate processes Rate design begins after COSS – rate design must consider the social, political and PR effects of rate changes 6

7. Long-Term Rate Strategy TVA’s Strategic Pricing Plan (SPP) provides a guide for long-term rate strategy Goal is to collect revenue from each class of customer that accurately reflects the cost to serve that class (no class subsidization) Constantly evolving process as costs, customer usage, and social norms change 7

9. Retail Rate Changes in the Valley Historically, TVA designed all LPC retail rates schedules Very little change has been made to basic rate structure 9

10. General Lighting & Power Rate (G-1), 1956 G-1 A <50 kW demand G-1 B 50-5,000 kW demand G-1 C >5,000 kW demand

11. Trends in Retail Rate Changes Increased Customer Charges with corresponding reductions in energy charges ◦Fixed cost collection (Customer Charge) vs Variable cost collection (energy rate) ◦When sales are steady or growing and the customers within the class were fairly homogeneous, rate design really wasn’t as important ◦It’s a changing world today 11

12. Distributed Generation Residential options ◦More efficient appliances ◦Stricter building standards ◦Solar ◦Wind ◦Fuel cells ◦??? things not even being talked about today 12

13. Distributed Generation DG creates a divide between customers within the class ◦Those having the economic means to take advantage of DG and those who don’t All within the class need access to the LPC power grid What is this access value? (fixed cost for LPC to provide access) 13

14. Distributed Generation Remember those Residential class Fixed costs (metering, A&G, distribution plant, taxes, maintenance, etc) Within the Residential class, who should pay? How does the LPC fairly collect Fixed costs from the Residential class? 14

15. Distributed Generation Residential Customer Charges (Access fees) ◦What about Grandma on fixed income? ◦Grandma uses an average of 1,000 kWh per month ◦What about Mr. Affluent who has all the latest in DG and now touts his “Net-Zero Usage” home? ◦“You’re just anti-solar” (wind, environmental, etc) ◦Mr. Affluent uses an average of 0 kWh per month 15

16. Net-Zero Energy Building 16 From Wikipedia, the free encyclopedia A zero-energy building, also known as a zero net energy (ZNE) building, net-zero energy building (NZEB), or net zero building, is a building with zero net energy consumption, meaning the total amount of energy used by the building on an annual basis is roughly equal to the amount of renewable energy created on the site. These buildings consequently do not increase the amount of greenhouse gases in the atmosphere. They do at times consume non-renewable energy and produce greenhouse gases, but at other times reduce energy consumption and greenhouse gas production elsewhere by the same amount. Most zero net energy buildings get half or more of their energy from the grid, and return the same amount at other times.

17. Fair Value of Access to the Grid The ABC LPC has a RS Customer Charge of $14/month Their latest COSS indicates that if ABC were to collect 75% of their Fixed costs to the RS class through the Customer Charge, it would be $27/month If ABC’s average RS bill is 1,300 kWh per month, an increase of $13 in CC would be offset by a reduction in energy by $0.01/kWh (assuming a present energy charge of $0.10/kWh) 17

18. Fair Value of Access to the Grid So how does Grandma fare? ◦Present average monthly bill = $114.00 ($14 CC + 1,000 kWh @ $0.10 each) ◦Under higher CC and lower energy = $117.00 ($27 CC + 1,000 kWh @ $0.09 each) – a 2.6% increase How about Mr. Net-Zero ◦Present average monthly bill = $14.00 ◦Under higher CC = $27.00 Artificially low Customer Charges have a built-in subsidy for Net-Zero (Near-Zero) use homes. Grandma subsidizes Mr. Affluent. 18

19. Trends in Retail Rate Changes Traditional GSA-1 class - <15,000 kWh & <50 kW demand Different Customer Charges for GSA-1 Low-use and High- use Customers Very wide disparity of customers within this class ◦The garage behind the house to the convenience store operating 24/7 19

20. Typical GSA-1 Frequency Distribution 20

21. GSA-1 Low Use Bill Impacts 21

22. GSA-1 High Use Bill Impacts 22

23. Monitoring Retail Rate Adjustments With the 1 st rate change at the LPC, the job has just begun Always watch for unintended consequences The biggest missing piece today is actual class usage data ◦Will improve with AMI and MDMS The roadmap is just a guide that continually needs updating 23

24. The end Comments? Questions? Walter Haynes Senior Project Consultant Patterson & Dewar Engineers, Inc. 4261 Sango Road | Clarksville, TN 37043 pdengineers.com M: (931) 494-4449 whaynes@pdengineers.com 24