es.

Recommendation: TVA staff recommends adoption of the Fuel Sources
standard as written. TVA will review its fuel diversity at least one time per year
as it develops its Power Supply Plan.

Basis for the Recommendation: TVAs generating assets already have a very
diverse fuel mix, and its existing yearly resource planning process meets this
PURPA fuel sources standard and accordingly we recommend adopting this
standard as written. TVA evaluates a variety of supply and demand side
resources to achieve an optimal portfolio, which results in a diverse percentage
of fuel-type resources, including renewable technologies, in the final resource
mix.

Background: In 2005, domestic coal supplies produced approximately half of
power output, and uranium and natural gas accounted for about 19 percent each.
Hydro and oil fuel supplies account for about 7 percent and 3 percent
respectively. The remaining 2 percent includes generation from renewable
technologies such as wind, wood, solid waste, solar, etc. (Source: U.S.
Department of Energy, Energy Information Administration (EIA), 2005 preliminary
data). TVA agrees that a portfolio of diverse fuel resources for power generation
reduces the fuel cost risk associated with relying on a minimum number of fuel
types. Fuel diversification also reduces the chance that embargoes, strikes,
transportation constraints, or other disruptions will interrupt power production.

TVAs generating assets have a very diverse fuel mix. These assets include 29
conventional hydroelectric plants and 1 pumped hydro storage plant which
equate to about 16 percent of TVAs total winter dependable capacity. TVAs 11
coal-fired plants reflect about 41 percent and its 3 nuclear plants equate to about
20 percent of the total mix. Eight combustion turbine plants and 9 diesel
generator units account for about 16 percent of the capacity. Purchase power
contracts, including a long term lignite-fired plant, combined cycle tolling/lease
agreements and a methane gas contract make up about 7 percent. The
remaining percentage includes renewable assets of a digester gas plant, 3 wind
4-20-07

page
2
turbines, 16 solar photovoltaic sites, as well as demand-side management direct
load control arrangements. (Source: TVA SEC 10-Q Quarterly Financial Report)

As stated above, TVAs existing yearly resource planning process is in
compliance with this PURPA fuel diversity standard. TVA evaluates numerous
supply and demand side resources to achieve an optimal portfolio, which results
in a diverse mix of resources. In order to meet its growing load and reserve
requirement, TVA must construct or acquire capacity. Numerous proven
technologies and diverse fuel resources, including renewable technologies, are
considered in TVAs capacity and generation expansion process. A detailed
least-cost, risk adjusted operational and financial analysis is performed as part of
this portfolio decision-making process. Fuel and technology diversity are also
considered as well. Those resources that best meet these objectives and
provide the best portfolio mix are selected for future capacity needs. As
distributors begin to own generation, these resources will also be included in the
capacity planning and energy portfolio fuel mix decision making process as well.

TVA will continue to examine the resource plan going forward, taking into
account retirements, additions, and changes due to new regulations to ensure
that it continues to maintain fuel diversity.