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Long-Range Financial Plan Key Planning Assumptions

Long-Range Financial Plan Key Planning Assumptions. Governance Council. Meeting date : January 18, 2011. Board Committee:. Topic : LRFP Financial Plan Update and FY2012 Power Supply Plan Key Assumptions. Summary : Review of key long term planning

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Long-Range Financial Plan Key Planning Assumptions

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  1. Long-Range Financial Plan Key Planning Assumptions

  2. Governance Council Meeting date: January 18, 2011 Board Committee: Topic: LRFP Financial Plan Update and FY2012 Power Supply Plan Key Assumptions Summary: Review of key long term planning assumptions as a follow-up to the 12/13/10 Executive Council briefing Responsibility: Strategy and Planning Summary: … Decision Outcome expected: Supporting facts: Major issues/questions: • Natural gas prices forecast to be significantly lower than and coal prices forecast to be significantly higher than FY2011 forecasts. Higher firm natural gas transportation costs expected • MW weighted average age of uncontrolled plant of 53 years • Holistic approach to “cost of retention” including existing regulation, regulation expected with high probability, as well as carbon constraints • Dramatically higher levels of TVA-sponsored EE/DR programs (Southeast Leader) • Present changes to and agree on key planning assumptions to be used as the starting point for FY 2012 power supply plan and the business planning process • Discuss portfolio results from System Planning’s analysis of fossil assets relative to the TVA portfolio • Compare power rates for TVA and peers through 2014 Options/ Recommended Outcomes/ Key Takeaways: 1. Agree on FY2012 planning assumptions 2. System Planning portfolio analysis: Idle: Remaining two units at JSF, Widows Creek 1-6, Johnsonville 1-10, Shawnee 1-9, Colbert 5, Allen 1-3 Control: Gallatin 1-4, Colbert 1-4, Widows Creek 7-8 3. Relative rate position versus peers is unchanged 1 TVA Restricted Information - Deliberative and Pre-Decisional Privileged

  3. Key Drivers

  4. Portfolio Analysis to Guide Investment Decisions • Given approaching regulatory constraints, System Planning has developed the capability to expand optimization of TVA portfolio to include existing assets, as well as expansion • With the assistance of Fossil Power Group*, System Planning carried out an extensive portfolio analysis, beginning with FY2011 PSP framework and extending into Draft FY2012 PSP, encompassing over 115 cases studied using Ventyx’s System Optimizer framework • System Optimizer is a mixed integer linear programming algorithm that models TVA’s portfolio and develops least cost plans to serve load, subject to a number of constraints • By including all known costs of maintaining existing assets and capturing the value of those assets relative to replacement, the resulting optimized portfolio provides economic information that can assist in determining the following, in a no-regrets framework: • Which assets are unlikely to be controlled, for which no significant capital should be invested in the near term? • Which assets should be controlled with capital beginning FY2012? • Which assets are “in-play” meaning there is value in flexibility, but no clear signal to support significant investment in FY2012? * FPG worked extensively with SP to determine costs to meet both existing and likely regulatory constraints, levels of maintenance capital needed to maintain plants over long periods of time, as well as identify risks and potential sources of flexibility. Several review sessions of preliminary results were also held in effort to identify issues, challenges, and to continue dialogue.

  5. Key takeaways, draft planning recommendations, and next steps Flexibility • Economics indicate that Colbert 1-4 should not be controlled using TVA’s current planning assumptions, but flexibility exists at this site to delay the decision and “learn”, which could impact value of retaining the asset. Since COF 1-4 was controlled in 47% of the cases studied, significant value in retaining option. For planning purposes, recommend COF 1-4 be modeled as scrubbed but at latest date consistent with regulatory compliance • For planning purposes, recommend COF5 be idled consistent with FY2011 plan • Economics support installing controls at Gallatin 1-4, consistent with FY2011 planning assumption, based on being controlled in 78% of total cases studied • Economics do not support installing controls at Shawnee 1-9 (controlled in less than 13% of cases studied). However, flexibility exists to delay this decision for better information and further analysis of alternatives, including retaining a portion of the units and idling the remainder. For planning purposes, recommend that SHF1-9 be modeled as idled at latest date consistent with regulatory compliance, but be reviewed in FY2012 • No Regrets • Economics support not controlling John Sevier 3-4, model as idle at earlier of MACT or EPA Agreement as consistent with FY2011 LRFP • Economics support not controlling remainingWidows Creek units or Johnsonville 1-10, idle dates should be kept consistent with FY2011 LRFP 116 Case Studies No Regrets Flexibility

  6. Summary of Planning Recommendations Develop Business Case 1Reevaluate in 1-year. 2Evaluate performance improvements; determine long term operational feasibility. 3The draft EPA Agreement calls for TVA to retire WCF units in sequential order (Units 1&2 by 07/31/13, Units 3&4 by 07/31/14, and Units 5&6 by 07/31/15). Although TVA has or plans to retire two WCF units by each of the EPA established dates, TVA is not retiring the units in sequential order. Before signing, the EPA Agreement will need to be revised to reflect TVA's order of retiring WCF units.

  7. Retail Rate Comparison – Follow up from December 13, 2010 Meeting • TVA’s relative position has not changed from what was presented in December • A significant gap exists to 1st Quartile Performance in 2014 (~$1.1B) • The Rates Advisory Panel will address the metrics, targets and shortfalls • Additional information will be presented at Governance Council in February 6

  8. Projected Peer Holding Company Average Retail Rates Preliminary Source: EIA-826 (TVA Direct Served Industry and Peers); ESS (TVA Distributors); peer forward-looking data from public sources 7

  9. Projected Peer Utility Average Retail Rates Preliminary Highest Quartile 9.8 Highest Quartile 8.9 Median 8.9 Median 8.2 Lowest Quartile 7.4 Lowest Quartile 7.7 8 Source: EIA-826 (TVA Direct Served Industry and Peers); ESS (TVA Distributors); peer forward-looking data from public sources

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