strategic pricing plan central district power accountants association franklin, tn. march 19, 2015

Strategic Pricing PlanCentral District Power Accountants AssociationFranklin, Tn.March 19, 2015

TVA Restricted Information – Deliberative and Pre-Decisional Privileged

2

What do You

see ?

Future Wholesale / Retail Billing Options

How does it

relate to the

Strategic

Pricing

Plan ?


Agenda

• Strategic Pricing Plan

• What To Expect, When You Are Expecting

• The Great Circle of Life

• Jerry McGuire

• Real-time Cost Accounting

• Paul Simon

3

The ideas expressed are those of the

author and NOT of TVA

The ideas expressed are those of the

author and NOT of TVA


Strategic Pricing Plan

4

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?


Strategic Pricing Plan – Process

COSHow we incur and allocate

cost

StructureHow we collect revenue

Competitive Balance

How well our rates perform against COS and

competition

Products & ProgramsHow we further

differentiate based on class or operating behavior

Converged on Rate Change Elements and preparing for October Implementation

6


Cost of Service – Who Should Pay How Much?

7

COST OF GOODS SOLD Allocation based on Cost Causation Principles

In a perfect world, Revenues = Costs

COSHow we incur and

allocate cost

TVPPA

TVIC

TVA


8

Structure - Why Is It Important ?

StructureHow we collect

revenue

Objective: Changes in load lead to changes in revenue that match changes in cost


Competitive Balance – Competitive Relative To What ?

9

Competitive Balance

How well our rates perform against COS and

competition

TVPPA SS

TVPPA MGS

TVPPA LGS TVIC SS

TVA SS

TVIC LGS

TVA LGS

TVIC MGS

TVA MGS

$40

$50

$60

$70

$80

$90

$40 $50 $60 $70 $80 $90

Uni

t Rev

enue

($/

MW

h)

Unit Cost ($/MWh)

We have heard from customers that our rates are not as competitive as we believe

Cost of Service

BenchmarkingIndependent Assessments


Products & Programs – How We Differentiate

10

Products & ProgramsHow 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


What To Expect, When You Are Expecting !

11


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

12


• Wholesale / Retail Rate Alignment effort concurrent with current and

future rate designs

• Drive wholesale fixed cost recovery changes

13

What To Expect, When You Are ExpectingFuture Focus

“Fixed Cost Recovery” Hasn’t Changed in

~40 years

First Wholesale

Rate Change


14

What To Expect, When You Are Expecting ….

A

A

What Is Your Cost of Goods Sold ?

Focus On Retail Rate

Design


Historic Timeline of Rate Changes and Adjustments

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

3 Rate Changes in 25 years

15


What To Expect, When You Are ExpectingFuture Timeline of Rate Changes

5 Rate Changes in 10 years

16

Rate ChangeOctober 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


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The Great Circle Of Life


TVA Wholesale Rate - 1933

Declining blocks

18

In the beginning ….


Structure Changes – Energy

19

Improve fixed cost recovery, move pricing closer to marginal cost

TVA Original Proposal – Modified At LPC’s Request


20

Gerry Maguire


Structure Changes – Standard Service

21

• 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.

SeasonOn-peak Demand

Max DemandOn-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 $0.034 $0.000

Illustrative


Structure Changes – Demand

22

Manage to TVA’s peak rather than managing to individual peak demands

Customer Today Proposed

1 5MW * 9.28 $/kW $46,400 5MW * 9.38 $/kW $46,900

2 5MW * 9.28 $/kW $46,4005MW * 2.75 $/kW + 3MW * 6.63 $/kW

$33,640

Max on/off-peak Customer demand

12

2

12

1

11

12

2

1

1

2

2

2

2


System Level Impacts

23

Wholesale Redesign Leads To Customer Bill Impacts

• Much more narrow than last rate change

A

A

+0.5%

-0.75%

April 2011 Wholesale Rate Change Bill Impact Range + / - 3%


Show Me The Money – Wholesale !

24

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

A

Identify worst of 3 TVA Fiscal Year Impacts

A

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”


Show Me The Money – Retail !

25

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

BRetail rates conservatively adjusted to prevent RLPC impacts

B

B


Real-time Cost Accounting

26


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

27


Paul Simon’s

50 Ways To Get In Trouble …..

28

strategic pricing plan central district power accountants association franklin, tn. march 19, 2015

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