Forecasting Best Practice Review

1. Forecasting Best Practice • Review April 20, 2011 4/15/11

2. Topics • Overview of TVA forecasting functions • Common Structures • Peer Comparisons • Observations • Summary

3. TVA Forecasting Function Overview Load & Commodity

4. Common Structures - Commodities • Commodities generally follow one of the following structures: • Completely in-house, concentrated in several business unit with staffs comparable to those at TVA • OR • Partially in-house, components are divided among one or more business units where some long term fundamentals being purchased • Both require similar support for similar deliverables, with a key difference being the concentration or dispersion of employees within the company. Knowledge and accountability follow the dispersion.

5. Common Structures - Load & Revenue • Load Forecasting generally follow one of the following structures: • Completely in-house concentrated in one business unit (like TVA) • Or • Completely in-house concentrated in several business units (holding company vs. operating companies). One utility supplements their own operating company projections with consultant supplied forecast for PUC purposes. • Revenue Forecasting generally follows the following structure: • Completely in-house concentrated in one business unit or in several business units (operating companies)

6. Comparison Matrix – Commodity Forecasting

7. Comparison Matrix – Load & Revenue

8. Who we talked with… Never responded to inquiry

9. Peer Comparison - Commodities • Duke : • Purchases A long-term commodity forecast for THE baseline planning case • 2 FTE devoted to managing the process and “many” from various departments contribute with their other duties, potentially creating a gap between inputs, assumptions, and impacts • Duke prefers different consultants for different commodities based on each firm’s strength and reputation therefore it is doubtful that they have a fully integrated forecast • Regulatory, Economic, and Environmental assumptions driving forecast are set across many departments and do not appear to be as coordinated compared to TVA • Recent regrets include a consultant’s inability or refusal to model EPA Transport Rule to the Duke interpretation • Must “accept results and limitations” from purchased forecasts due to timing and inability to provide feedback and rethink results, e.g. EPA Transport Rule was not incorporated in time • Ameren: • Purchases parts of fuels forecasts from 2 consultants who often have competing environmental views • Produces electricity forecast in-house • Only ONE approved commodity forecast planning case is produced per year • Fuel forecasts are supported by 10 regulated and 10 non-regulated employees, 8 of which are dedicated to full-time forecasting roles • “try to minimize conflicting assumptions where possible, but often unable to do so”

10. Peer Comparison - Commodities • Entergy: • Entergy uses the same tool (Horizons) and similar processes as TVA to develop commodity forecasts in-house • Commodity functions similar to ours span 3 departments with 16 FTEs, 10 of which are said to be dedicated to commodities only • “Corporate” and “Market Planning/Portfolio” are the two primary groups, where “Portfolio Planning” also performs TVA-like commodity forecasting functions • SCS: Did not respond after repeated contact • Progress: Did not respond after contact

11. Peer Comparison -Load & Revenue • Duke : • Load Forecasting dept. focuses on long term load projections for 5 states with 8 employees • Produces THE baseline forecast plus _ others??? • Revenue, sales, delivery point, and short term load forecasts are produced, but in other areas of company • Supports the reporting, PUC and other compliance requirements • Ameren: • Load forecasting dept. is responsible for long term energy and peak forecasts, short term (3 per year) monthly peak and energy forecasts, sales and revenue forecasts and transmission demand forecasts. • They operate in two states and have 8 employees in the forecasting dept. They have not used a consultant in 5 years. • SCS: • Utilizes a consultant for total load forecast at the holding company level to aid with PUCs which are not binding on the individual operating companies. • Each operating company produces a long term load, sales and revenue and hourly load forecasts for their service territories. They have about 5 load employees in each of the 4 operating companies. • Three or four scenarios are requested at the beginning of the year and completed by each of the operating companies during the year.

12. Peer Comparison - Load & Revenue, con’t • Entergy: • The holding company load forecasting dept. is responsible for long term hourly load forecast and the sales and revenue forecast. The forecasts are by sector and include hourly forecasts for use by their planning staff. • The holding company load, sales and revenue forecasting functions utilize 4 people with IT assistance. • The operating company is responsible for all the short term load and revenue work, each with their own set of employees • The transmission delivery point forecast is completed in another department within the company. • Progress: Did not respond after repeated inquiries • Others: include general notes from ITRON conference

13. Peer vs. TVA Observations • Most utilities’ long term forecasting groups produce either only one planning case or maximum of three Long Term forecasts • F&CI is also responsible for producing daily, weekly, monthly plus a wide range of scenario forecasts that the typical utility “forecasting” group does not develop • Load forecasting functions are done in-house via multiple departments • Several TVA commodity forecasting functional components are decentralized at other utilities • TVA Portfolio Risk Oversight Council (PROC) and SarBox require independence of commercial and forecasting (market curves) activities to maintain best practices • FTEs required to do similar functions are the same or greater than at TVA, but are often decentralized, which decouples the ability to understand and explain the results • Duke originally estimated a savings from external forecasts due to reducing FTEs required to maintain data gathering. This would not represent a savings for TVA since this is already outsourced • Other utilities’ forecasts and processes do not appear to be as integrated as TVA’s • TVA has purchased parts of the fuel forecasts in the past with very limited results. Knowledge and understanding of the forecast was suboptimal, and accountability was mixed at best

14. Summary • Regardless if forecasts are purchased from a consultant or not, each firm utilizes more employees than TVA currently uses to support all load and commodity forecasting functions in F&CI • TVA appears to produce more quantities of forecasts and more integrated forecasts • Other utilities who purchase parts of the forecasts confess a regret that key drivers often conflict • Other utilities appear to have a more stable planning environment and do not seem to have as much “churn” as we do

15. Appendix

16. F&CI: Deliverables • TWICE ANNUALLY • • long term load forecasts (peak and energy forecast for the residential, C&I, direct Served Industrial, Federal sectors) • • coincident and non-coincident delivery point load forecasts (1,100 delivery points) • • residential and C&I retail electric and natural gas price forecasts • • distributor energy forecasts for each of the 155 TVA distributors. • • long-term spot electricity, coal, gas, oil, emissions allowances fundamental forecasts • • long-term electric capacity forecasts • • long-term US and regional economic forecasts • • long-term inflation forecasts • • long-term TVA escalation forecasts • • long-term transportation escalation forecasts • • long-term US interest rate forecasts • ANNUALLY • • SERC winter and summer assessments • • SERC reliability assessment • • budget escalation rate forecast • • long-term economic and inflation outlook reports • AD HOC (numbers approximate) • • 150 requests for competitive intelligence • • 125 requests for assistance with escalation rates and/or economic analysis • • 10 in-depth competitive intelligence special studies • • Multiple integrated scenario forecasts, including ranges, stochastics, and sensitivities • • Multiple forecasts/impact analyses for TVA projects including IRP/environmental impact statements and scenario analyses as part of the planning process DAILY • coal mark-to-market curves WEEKLY • coal, gas, emissions allowances, and spot electricity price 120-day forecasts • near-term hourly load forecasts • business insights summary documents (“Competitive Wire”) BI-WEEKLY • coal, gas, oil, emissions allowances, and spot electricity price 20-year market update forecasts MONTHLY • revenue forecasts updated for the fuel cost adjustments • comparisons of competitive generation and capacity (size and fuel mix) • economic actual, forecast, and update reports • TVA Performance economic indicator reports • weather impact analyses • competitive rates (49 different views across 10 holding companies and 20 utilities) QUARTERLY • billing unit forecasts for over 150 different energy and peak billing sectors • revenue forecasts using the billing unit forecast. • SOX certifications • short-term load forecasts • short-term US and regional economic forecasts • coal and gas alternative transportation updates • reagent forecast updates • 10Q and 10K segment submittals including economic, weather and load inputs F&CI: April 2011 Forecasting & Competitive Intelligence TVA Restricted – Deliberative and Pre-Decisional Privileged

17. Strategy & Business PlanningForecasting & Competitive Intelligence – Detail Functional Map Functions with Optimal Staffing and Budget (24) Forecasting & Competitive Intelligence Admin Forecasting Specialist Competitive Intelligence & Research Project Mgt Load & Revenue Forecasting Economic Forecasting Commodity Forecasting • Develop short term and LT TVA system peak and energy forecast • Develop long term fundamental TVA system peak and energy forecast • Provide delivery point forecast, long term peak demand forecasts for each of about 1200 TVA delivery points • Develop near term hourly load forecast, 35 moving to 120 day hourly TVA system load forecast adjusted for weekly temp. forecasts • Provide detail revenue forecast needed to support rate and financial analysis areas • Provide analytical support including interruptible load forecasts, energy for individual distributors and forecasts to support RUS requests • Improve processes to support user and customer needs • Manage key vendor contracts ( • Coordinate implementation and upgrade of models • Manage development of IT systems for infrastructure improvements • Develop processes and procedures, indicators, • Provide general staff support as needed • Provide support and backup to economic forecast function • Provide support and backup to revenue and sales forecast function • Assures that overall forecasting tools enhancements are initiated, managed and completed • Develop short and long term fuel, emission allowances, and wholesale electricity price forecasts with appropriate ranges and delivery for all • Provide electricity price forecasts including 72 stochastic paths for hourly detail for 20 years • Provide delivered fuel and electricity forecasts for use in scenario planning, risk analysis, project evaluations, electric capacity, generation, fuel transportation and financial evaluations • Benchmark and monitor commodity forecasts against others in industry for both assumptions and results and improve processes • Monitor and incorporate market developments into long term fundamental forecast • Support the daily MtM and bi-weekly Generation Plan and FCA process • Provide multiple integrated scenario forecasts • Increase customer communication and education for optimal forecast use and feedback • Develop TVA’s short term U.S. & TVA region economic forecasts • Develop TVA’s long term U.S. & TVA region economic forecasts • Produce TVA’s forecasts of inflation and non-fuel price escalation rates used throughout TVA • Provide escalation rates consulting services to TVA organizations, including Supply Chain; produce custom forecasts as requested • Provide analytical support including scenario analyses, economic impact analyses, and economic forecasts to support RUS requests • Produce monthly economic situation update, provide economic data support, and perform economic research as needed such as long term look at the development of regional economy • Produce an annual competitive outlook including competitor profiles, generation & capacity comparisons, clean air plans, rate comparisons, etc. • Provide updated comparisons of TVA against other utilities for key variables • Provide strategic view of marketplace and trends • Research estimates of future costs of renewable, clean air and other emerging technologies • Provide other economic/analytical research as needed or requested • Provide competitive analysis as requested by executives

18. Strategy & Business PlanningForecasting & Competitive Intelligence – Detail Functional Map Limited Capability Function Forecasting & Competitive Intelligence Capabilities with Lock in Current Staffing (19)and requested budget Admin Eliminated Function Forecasting Specialist Competitive Intelligence & Research Project Mgt Load & Revenue Forecasting Economic Forecasting Commodity Forecasting • Develop short and long term fuel, emission allowances, and wholesale electricity price forecasts with appropriate ranges and delivery for all • Provide electricity price forecasts including 72 stochastic paths for hourly detail for 20 years • Provide delivered fuel and electricity forecasts for use in scenario planning, risk analysis, project evaluations, electric capacity, generation, fuel transportation, and financial evaluations • Benchmark and monitor commodity forecasts against others in industry for both assumptions and results and improve processes • Monitor and incorporate market developments into long term fundamental forecast • Support daily MtM and bi-weekly Generation Plan and FCA process • Provide multiple integrated scenario forecasts • Increase customer communication and education for optimal forecast use and feedback • Develop short term and LT TVA system peak and energy forecast • Develop long term fundamental TVA system peak and energy forecast • Provide delivery point forecast, long term peak demand forecasts for each of about 1200 TVA delivery points • Develop near term hourly load forecast, 35 moving to 120 day hourly TVA system load forecast adjusted for weekly temp. forecasts • Provide detail revenue forecast needed to support rate and financial analysis areas • Provide analytical support including interruptible load forecasts, energy for individual distributors and forecasts to support RUS requests • Improve processes to support user and customer needs • Manage key vendor contracts ( • Coordinate implementation and upgrade of models • Manage development of IT systems for infrastructure improvements • Develop processes and procedures, indicators, • Provide general staff support as needed • Provide support and backup to economic forecast function • Provide support and backup to revenue and sales forecast function • Assures that overall forecasting tools enhancements are initiated, managed and completed • Develop TVA’s short term U.S. & TVA region economic forecasts • Develop TVA’s long term U.S. & TVA region economic forecasts • Produce TVA’s forecasts of inflation and non-fuel price escalation rates used throughout TVA • Provide escalation rates consulting services to TVA organizations, including Supply Chain; produce custom forecasts as requested • Provide analytical support including scenario analyses, economic impact analyses, and economic forecasts to support RUS requests • Produce monthly economic situation update, provide economic data support, and perform economic research as needed such as long term look at the development of regional economy • Produce an annual competitive outlook including competitor profiles, generation & capacity comparisons, clean air plans, rate comparisons, etc. • Provide updated comparisons of TVA against other utilities for key variables • Provide strategic view of marketplace and trends • Research estimates of future costs of renewable, clean air and other emerging technologies • Provide other economic/analytical research as needed or requested • Provide competitive analysis as requested by executives OEI Headcount not filled: 3 CI specialists 1 commodity specialist 1 forecast specialist

19. Scenarios are stories. They are works of art, rather than scientific analyses. The reliability of (their content) is less important than the types of conversations and decisions they spark… - Arie de Geus, The Living Company* * Arie de Geus is former corporate planning director for Royal Dutch/Shell, where he oversaw Shell’s pioneering efforts to apply scenario planning to its business plans