Exhibit 99.1
Fuel Cost Pressures
TVA is Facing
Tom Kilgore
President and CEO
TVA
August 6, 2008
TVA is Facing
Tom Kilgore
President and CEO
TVA
August 6, 2008
2
The Big Picture
• Prices for fuels commonly used to make electricity are skyrocketing.
• Increases driven primarily by global supply and demand challenges.
• TVA region not immune to these cost pressures.
• Historic drought continues to reduce low-cost hydro generation.
• Potential impacts on next Fuel Cost Adjustment (FCA).
3
How TVA Recovers Fuel Costs
• Quarterly Fuel Cost Adjustments (FCA) began in October 2006.
• Sound business practice to help TVA match revenue with costs for fuel
and purchased power in a timely manner.
and purchased power in a timely manner.
• Recovered through monthly consumer power bills, depending on
individual energy use.
individual energy use.
• Many utilities across the U.S. - including most of TVA’s neighbors - use
FCA mechanisms routinely to adjust their rates for fuel and purchased
power charges.
FCA mechanisms routinely to adjust their rates for fuel and purchased
power charges.
4
Fuel Prices Are Soaring
Cumulative Percent Increase in Market Fuel Prices*
Oil prices make national news, but market prices for coal
have increased twice as much as oil in the same period
have increased twice as much as oil in the same period
* Price comparison from Dec. 07 through July 24, 2008.
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Source: Pira
World Coal Prices
Europe - - CIF
S. Africa FOB
Australia - - FOB
US - - FOB
Japan - - CIF
• As demand has grown,
disruptions have driven prices
higher in all markets:
disruptions have driven prices
higher in all markets:
– European coal is up 92%
since May 2007.
since May 2007.
– Coal delivered to Japan is up
124% over the same period.
124% over the same period.
U.S. prices are very likely to increase as the gap
closes between markets
closes between markets
Increasing Global Coal Prices
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Cost Pressures: Coal
Growing Demand
– Dramatic increases in demand for coal by Asian markets tightening
worldwide supply and demand balance. In 2007 alone, China added
the equivalent of about six total TVA coal-fired systems - or about one
plant every 7 to 10 days.
worldwide supply and demand balance. In 2007 alone, China added
the equivalent of about six total TVA coal-fired systems - or about one
plant every 7 to 10 days.
Tightening Supply
– Recent flooding in Midwest slowed or stopped deliveries of coal. A
major new rail construction project under way through 2010 will cause
traffic to be rerouted, increasing congestion and delays.
major new rail construction project under way through 2010 will cause
traffic to be rerouted, increasing congestion and delays.
– European countries are buying more U.S. coal because of the
devaluation of the dollar.
devaluation of the dollar.
Rising Price
– Coal prices are up more than 100% in the U.S. in the last year.
Virtually all transportation companies (truck, barge, and rail) have fuel
surcharges that TVA is subject to; these have all doubled in the last
year.
Virtually all transportation companies (truck, barge, and rail) have fuel
surcharges that TVA is subject to; these have all doubled in the last
year.
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Cost Pressures: Natural Gas
Growing Demand
– Since 2000, more than 166,000 megawatts of gas-fired generation
have been built in the U.S.; demand for gas-fired electricity has grown
55%.
have been built in the U.S.; demand for gas-fired electricity has grown
55%.
Tightening Supply
– Higher priced markets - China, India, Japan and Spain - are attracting
Liquefied Natural Gas (LNG) shipments. The result is a 65% decline
in LNG imports to the U.S. since last October.
Liquefied Natural Gas (LNG) shipments. The result is a 65% decline
in LNG imports to the U.S. since last October.
Rising Price
– Natural gas prices have increased by more than 65% since
December 2007.
December 2007.
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Cost Pressures: Purchased Power
Growing Demand
– Over the past six months, TVA purchased 12% more power from the
market than it did during this same period last year.
market than it did during this same period last year.
Tightening Supply
– Bulk of purchased power on the market comes from natural gas
plants. Utilities, like TVA, are buying natural gas plants to serve their
system needs. This reduces the amount of power available on the
market and increases the price.
plants. Utilities, like TVA, are buying natural gas plants to serve their
system needs. This reduces the amount of power available on the
market and increases the price.
Rising Price
– TVA’s purchased power totaled $701 million during the first six
months of 2008, up $220 million from the same period last year. Peak
prices for June and July of this year have been 63% higher on
average than the same months of last year.
months of 2008, up $220 million from the same period last year. Peak
prices for June and July of this year have been 63% higher on
average than the same months of last year.
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2008 Cumulative Market Price Increases for Purchased Power
Since January, the price of on-peak purchased power
is up more than 75 percent
is up more than 75 percent
2008 Purchased Power Increases
76% Increase
• The Valley’s demand for
power and the regional
drought mean that TVA is
having to buy more power
from the market.
power and the regional
drought mean that TVA is
having to buy more power
from the market.
• Higher natural gas prices are
pushing up the price of
purchased power.
pushing up the price of
purchased power.
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Historic drought conditions in the Valley are forcing TVA to
replace its lowest-cost power source with one of the most
expensive - purchased power
replace its lowest-cost power source with one of the most
expensive - purchased power
U.S. Drought Monitor
Historic Drought Continues
• TVA region is in a third year of
drought.
drought.
• TVA hydro generation is down 50%
in FY 2008.
in FY 2008.
• TVA is buying more purchased power
than originally planned because of
the drought.
than originally planned because of
the drought.
• This summer TVA is buying more
than 1,000 megawatts of power on a
daily basis - the equivalent of one
nuclear unit - to replace the loss of
hydro power.
than 1,000 megawatts of power on a
daily basis - the equivalent of one
nuclear unit - to replace the loss of
hydro power.
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FY 2007 vs. FY 2008-to-Date
Due to the drought, 2008 rainfall to date is 23% below normal in
the Eastern Tennessee Valley. Runoff—which is needed to fill
the reservoirs—is 52% below normal.
the Eastern Tennessee Valley. Runoff—which is needed to fill
the reservoirs—is 52% below normal.
Total Hydro Generation Comparison
National Rate Pressures
- July 28, 2008
Entergy Urges Electricity
Conservation in Passing Along 28
Percent Rate Increase
Conservation in Passing Along 28
Percent Rate Increase
- June 25, 2008
Dominion's 18 percent increase
likely only the beginning
likely only the beginning
- May 7, 2008
Expect a jolt when opening the
electric bill
electric bill
- May 27, 2008
Supply-demand imbalance boosts
oil prices
oil prices
- June 24, 2008
Coal producers struggle to meet
demand
demand
- June 16, 2008
Price jolt: Electricity bills going
up, up, up
up, up, up
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The
COMMERCIAL
APPEAL
U.S. electric utilities are seeing rate
increases up to 30%
increases up to 30%
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Mitigation Strategies
• TVA’s overall fuel strategies help limit exposure to volatile energy
markets.
markets.
• Disciplined purchasing approach. Securing long-term coal and
purchased power contracts to reduce TVA price exposure. For
example, at one of our plants, a coal contract expiring later this
year at $35 per ton will need to be replaced - and coal at the
current market is running $125 per ton.
purchased power contracts to reduce TVA price exposure. For
example, at one of our plants, a coal contract expiring later this
year at $35 per ton will need to be replaced - and coal at the
current market is running $125 per ton.
• Proactive hedging strategies. Hedged a portion of expected gas
needs for 2009.
needs for 2009.
• Increased storage. TVA doubled the amount of gas storage this
year, reducing spot market purchases.
year, reducing spot market purchases.
What TVA is Doing
While TVA’s coal costs are up 43% over the past five years, if
TVA had purchased that coal on the spot market, costs
TVA had purchased that coal on the spot market, costs
would be up 240%
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TVA is strategically building its nuclear generation portfolio,
which will reduce the Valley’s exposure to volatile
commodity fuel prices
which will reduce the Valley’s exposure to volatile
commodity fuel prices
What TVA is Doing
Long-Term Strategic Planning
• TVA’s plan for energy efficiency and demand reduction seeks to reduce the growth
in peak demand by up to 1,400 megawatts by the end of 2012.
in peak demand by up to 1,400 megawatts by the end of 2012.
• Local power distributors are partnering with TVA to help raise consumer
awareness on energy efficiency.
awareness on energy efficiency.
• TVA’s new generation will help reduce dependence on purchased power:
§ Browns Ferry Unit 1
§ Nuclear uprates will increase capacity of plants
§ Watts Bar Unit 2
§ 2,535 megawatts of combined cycle and combustion turbine generation acquired
in the past two years
in the past two years
§ Considering future options for Bellefonte Nuclear Site
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Fuel Cost Adjustment Impacts
• Coal, natural gas, and purchased power costs are increasing rapidly
and will increase future Fuel Cost Adjustments.
and will increase future Fuel Cost Adjustments.
• The continued drought causes a double hit to TVA:
– Significant loss of hydro generation
– Replacing this least-expensive source with higher-cost power
• Electric utilities across the country are seeing increases up to 30%.
• Expect escalating fuel costs and the effects of the persistent drought
to result in a significant FCA increase beginning October 1, 2008.
to result in a significant FCA increase beginning October 1, 2008.
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What Consumers Can Do
• Visit TVA.com to learn simple steps to help reduce energy use and help
offset rising electricity costs.
offset rising electricity costs.
• Take online or mail-in Home Energy Audit and receive a Free
Conservation Kit.
Conservation Kit.
• Low-interest financing available to Valley consumers looking to replace
heating and cooling systems for a high-efficiency heat pump through
energy right program.
heating and cooling systems for a high-efficiency heat pump through
energy right program.