TVA Regulatory Update Cameron Heck, Senior Manager, Regulatory Policy & Compliance May 17, 2018 Outline TVAs Role as Regulator Regulatory Landscape LPC Retail Broadband Deployment Guidance TVA REGULATORY UPDATE | 2 TVAs Role as Regulator But somebodys gotta do it! TVA REGULATORY UPDATE | 3 TVAs Role as Regulator While state regulatory authority
rests on state law, TVAs regulatory authority rests on the federal TVA Act As regulators, the TVA Board protects electric ratepayers interest in receiving electric service at rates as low as feasible TVA REGULATORY UPDATE | 4 TVAs Role as Regulator The 4Rs Rates as low as feasible (non-profit) Restricted use of electric system assets and funds Ratepayers non-discrimination Rules and regulations The Valleys Regulatory Model Balancing TVAs regulatory responsibility and oversight with LPC local control
TVA REGULATORY UPDATE | 5 TVAs Role as Regulator TVAs role as regulator is critical to the Valleys public power model LPC Accounting Staff and TVA Regulatory Analysts are essential to the integrity of the business model Consistent implementation and oversight is necessary for regulatory credibility TVA REGULATORY UPDATE | 6 TVA Regulatory Oversight - Timeline Regulatory Resources Regulatory Staff 50 45 Strict Enforcement
Field Accountants/Regulatory Analysts Distributor Compliance Beginnings of Balanced Regulation Lenient Enforcement Balanced Regulation Number of Staff 40 35 Pre-1992
30 25 20 2006 OIG Report 15 10 2008 OIG LPC Audits start 2011 Board 2017 Resolution on DA/DC 2010 Regulation and merged to
OIG Report DC formed RAC 5 0 Pre-1992 1992-2006 20072011 2011-Present TVA REGULATORY UPDATE | 7 TVAs Role as Regulator Provides regulatory assurance and protects the public power model and Valley ratepayers interests within TVAs regulatory framework. Our team provides: Oversight of TVAs retail regulatory
standards Policy development and guidance Power contract regulatory compliance Retail rate analysis Financial data integrity assurance A challenging, engaged, missiondriven workplace environment Complaint Resolution Process management TVA REGULATORY UPDATE | 8 Regulatory Landscape Ignoring Compliance is RISKY BUSINESS TVA REGULATORY UPDATE | 9 Regulatory Landscape
Financial Thresholds LPCs with cash ratios exceeding 33% are classified as having high cash reserves TVA will notify identified LPCs and request 1) justification for cash level or 2) capital spending plans to reduce cash Pole Attachment Rate Implementation Status As of January 1, 2018, all LPCs should be undertaking efforts to comply with TVAs pole attachment regulation 128 contract amendments executed; 127 LPC pole attachment rates approved Compliance testing to begin in FY2019 Century Link and AT&T 2009 TVPPA joint use agreements approved TVA REGULATORY UPDATE | 10
Regulatory Landscape Distributed Energy Resources (DER) DER market disrupters and consumer demands create business challenges for TVA and LPCs DER activities will be evaluated in light of TVAs regulatory framework Accounting Updates DARS Focus Groups reviewing feedback; more on project details in coming months District Annual Report Training to be offered June 4-15 GASB-75 impact to FY 18 Annual Reports TVA REGULATORY UPDATE | 11 Portfolio Planning Overview Transitions analyst work plans from a 100% coverage approach to a more customized approach designed to help improve an LPCs regulatory and financial health. Optimizes available resources and provides a greater level of
assurance by prioritizing analyst execution based on risk factors specific to each LPC. 2018 STRATEGIC REGULATORY PLANNING DISTRICT MEETINGS | 12 2018 Regulatory Timeline June 4-15 LPC Annual Report Training District training for LPC accounting staff July August 15 August 30 High Cash
Annual Report Pole Attachment Rate Template Review list of newly identified LPCs with CD; request 1:1s; issue regulatory letter LPCs submit annual report to TVA through DARS LPCs submit 2018 pole attachment rate template through Online Connection to produce 2019 pole
attachment rates September 15 High Cash LPCs submit high cash justification or capital spend plans FY19 Pole Attachment Compliance Testing TVA begins compliance testing LPC implementation of the TVA-approved pole attachment rate 2018 STRATEGIC REGULATORY PLANNING DISTRICT MEETINGS | 13
LPC Retail Broadband Deployment Guidance TVA REGULATORY UPDATE | 14 Key Areas of TVAs Regulatory Focus Rates as low as feasible (non-profit) Restricted use of electric system assets and funds Ratepayer non-discrimination Rules and regulations TVA REGULATORY UPDATE | 15 Broadband Background LPCs interest to offer broadband service or expand existing services for electric and non-electric purposes has increased.
2017 State of Tennessee approved legislation for cooperatives to engage in broadband. 2003 Today Future 2 LPCs offered broadband / telecom 26 LPCs offer broadband, telecom, cable, TV, and/or internet services
2 LPCs currently deploying 20 LPCs expressing interest TVA REGULATORY UPDATE | 16 Regulatory Considerations in Broadband Deployment The wholesale power contract prohibits the use of electric system funds or assets for non-electric purposes in order to protect ratepayers from the risks associated with non-electric business ventures like broadband. LPCs may use electric system funds for broadband for electric system purposes (AMI, SCADA). In these situations, the LPC must: 1. Not commingle funds between the electric department and the LPCs other departments or lines of business; and
2. Ensure proper allocation of any joint costs between the electric department and other departments or lines of business. TVA REGULATORY UPDATE | 17 Regulatory Considerations in Broadband Deployment Under certain limited circumstances, TVA may agree to the use of reasonable reserve funds as a loan or collateral for a loan to an LPC retail broadband division. These limited circumstances require an interdivision loan agreement between TVA and the LPC to ensure reasonable protections exist for electric ratepayers in the event of loan default or if the business is not successful.
How does TVA determine if such a loan of reserve funds is appropriate and ratepayers are protected? Collateral and favorable LPC interdivision loan terms (interest rate, etc.) Broadband business plan evaluated for reasonableness. TVA REGULATORY UPDATE | 18 TVA Review of Broadband Business Plan TVAs review of LPC broadband business plans are limited to: Strategic purpose Assumptions Sound business logic
Costs Financial targets Revenues Internal rate of return
Net present value Market-share benefits to the electric system Payback period Competitive analysis and market risk TVA REGULATORY UPDATE | 19 LPC/TVA Considerations To ensure compliance with wholesale power contract provisions, LPCs should engage TVA when considering an investment in broadband,
particularly if the LPC intends to use electric system funds for nonelectric purposes. LPCs Ensure any new business or service is consistent with state law. Contact your CSM or Regulatory Analyst to initiate discussions. Submit a business plan to TVA as soon as possible. TVA Review the proposed business plan for reasonableness. Under certain circumstances, TVA may agree to the use of electric system funds as a loan to a retail broadband division. Include a 10-yr pro forma of the financials for both
electric and broadband. Ensure pole attachment rates and joint costs are allocated between divisions/subsidiary. Pole attachment rates must be calculated according to TVAs pole attachment calculations and guiding principles. TVA REGULATORY UPDATE | 20 Resources OnlineConnections > Regulatory Assurance Page Regulatory Assurance: Regulatory Assurance & Compliance LPC Regulatory Analysts
Regulatory Policy & Compliance TVA Restricted Information - Deliberative and Pre-Decisional Privileged TVA REGULATORY UPDATE | 21
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