1. TVA Cost of Service Joint Accounting Conference Huntsville, Alabama May 16, 2014

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3. TVA Restricted Information – Deliberative and Pre-Decisional Privileged What? Why? How? What: It’s a study. Nothing more, nothing less. Why: If you can’t measure it, you can’t control it! How: No single costing methodology is superior to any other, and the choice of methodology will depend on the unique circumstances of each utility. TVA developed the RCA/200 methodology approximately ten years ago and began using it and comparing it to other cost allocators. “Equity is the mother of confusion.” —British economist W. Arthur Lewis on the unresolved conflicts about “fair” cost apportionment What is Cost of Service ? 3

4. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Revenue and Costs 4

5. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Cost of Service Process 5

6. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Costs are FUNCTIONALIZED as generation, transmission, and other Generation costs are CLASSIFIED as fixed and variable Costs are ALLOCATED using RCA/200 methodology Functionalization, Classification, Allocation 6

7. TVA Restricted Information – Deliberative and Pre-Decisional Privileged TVA General Ledger 7

8. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Costs and Allocation Methods 8

9. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Resource Cost Allocation (RCA) Methodology assigns variable costs based on class / customer usage and TVA’s hourly power supply cost for each hour of the year Variable Cost Allocation Methodology 9

10. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Energy Cost Allocation Illustration 10

11. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Top 200 (200) Methodology assigns fixed costs based on class / customer load during TVA’s Top 200 peak hours of the year Fixed Cost Allocation Methodology 11

12. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Top 200 Hours Fiscal Years 2001 - 2013 12

13. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Transmission and ancillary services Methodology allocates costs based on class / customer load share during each of TVA’s 12 monthly system transmission peaks (12CP) of the fiscal year Transmission Cost Allocation Methodology 13

14. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Other fixed costs Methodology allocates costs based on class / customer share of variable, fixed, and transmission costs Other Cost Allocation Methodology 14

15. TVA Restricted Information – Deliberative and Pre-Decisional Privileged COS for Fiscal Year 2013 – by Customer 15

16. TVA Restricted Information – Deliberative and Pre-Decisional Privileged COS for Fiscal Year 2013 – by Class 16

17. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Comparison of Alternate Allocators Fiscal Year 2013 17

18. TVA Restricted Information – Deliberative and Pre-Decisional Privileged Alternate Allocators Considered 18

19. TVA Restricted Information – Deliberative and Pre-Decisional Privileged TVA/TVPPA/TVIC Rate Design Guiding Principles 19 1.Rates must recover all costs. 2.Rates must track cost of service. 3.Rates must send efficient pricing signals. 4.Rates must balance precision with simplicity. 5.Rates must be stable. 6.Rates must be competitive.

20. TVA Restricted Information – Deliberative and Pre-Decisional Privileged ANSWERSKEYWORD a. Realistic Cost Aggregation297024 b. Resource Cost Allocation297028 c. Reasonable Contract Allotment 297067 d. Required Charge Apportionment 297071 What does “RCA” in “RCA/200” stand for? Text a KEYWORD to 22333 or Submit responses at PollEv.com

21. TVA Restricted Information – Deliberative and Pre-Decisional Privileged ANSWERSKEYWORD a. The 200 hottest hours in the fiscal year. 297075 b. The 200 hours with the highest power supply cost in fiscal year 297076 c. The 200 days with the highest peak demands in the fiscal year. 297078 d. The 200 highest hourly system demands in the fiscal year. 297079 What does “200” in “RCA/200” represent? Text a KEYWORD to 22333 or Submit responses at PollEv.com

22. QUESTIONSKEYWORD a. Bicentennial Mall State Park 297097 b. Norris Municipal Park297098 c. Chattanooga-Hamilton County Bicentennial Library Fountain 297106 d. Wilson Dam Waterfall Sculpture in Florence 297111 Where is the monument with “The greatest thing” quotation? Text a KEYWORD to 22333 or Submit responses at PollEv.com