STRATEGIC CONFERENCE SYDNEY AUSTRALIA FEBRUARY 28, 2006 INVENTORY OPTIMIZATION BY DAN OLIVER

Generating Plants Transmission System UTILITY System Distributor Customers Residential, Commercial, Industrial Directly Served Industries Interconnection Points

11 fossil plants (59 units) 3 nuclear plants (5 units) 29 hydro plants (109 units) 4 combustion turbine plants (48 units) 1 pumped storage station 17,000 miles of transmission line Generating Facilities

Win-Win-Win… Win for UTILITY Win for UTILITY Supplier Partners Win for UTILITY Customers 158 power distributors 62 direct serve industries Over 8 million people in an 80,000 sq mile service area Public users of land and recreational facilities Communities with economic development assistance CUSTOMERS SERVED CUSTOMERS SERVED

A key part of the Supply Chain challenge continues to be the change from a price focus to a Total Ownership Cost (TOC) focus: TOC Focus PURCHASE COST Actual Opportunity or “TOC” (The whole iceberg) Perceived Opportunity (Above the Waterline) FORECASTING: equipment life/failures system improvements system capacity technology drivers TECHNICAL: reliability standardization design / scope clarity configuration management PROJECT JUSTIFICATION: project justification criteria business unit alignment TVA-wide ROI analysis INVENTORY PRACTICES: inventory ownership (SMI, consignment) risk mitigation re-deployment of useable RETIREMENT PRACTICES: disposal cost secondary users OPERATIONAL PRACTICES: install & support costs maintenance costs capacity utilization training costs CONTRACTING: TVA leverage potential technology convergence re-bid frequency

TYPICAL INVENTORY SITUATIONS DESIRE TO REDUCE SIGNIFICANT CAPITAL INVESTMENT IN INVENTORY CONCERN FOR BALANCING INVENTORY WITH RELIABILITY DESIRE TO CONTROL FUTURE INVENTORY GROWTH CONCERN FOR COMPLIANCE TO SARBANES OXLEY

TYPICAL REASONS FOR INVENTORY GROWTH OVERBUYING FOR MAINTENANCE OR CAPITAL IMPROVEMENTS CANCELLED OR DEFERRED MAINTENANCE RETURNS AFTER COMPLETION OF WORK ADDITION OF NEW ITEMS INCREASES TO EXISTING MIN/MAX’S INCREASED PRICES

PROGRAM ELEMENTS STRATIFY INVENTORY DATA IDENTIFY APPROPRIATE STRATEGY FOR EACH INVENTORY CLASS ESTABLISH TARGETS IMPLEMENT PROPOSED ALGORITHMS IMPLEMENT EACH STRATEGY TRACK RESULTS

TYPICAL STRATIFICATION EXAMPLES CLASSIFICATIONLOCATIONCOMMODITY DOLLAR VALUE OVERSTOCK/SURPLUS SLOWMOVING – NO ISSUE IN X YEARS

PROGRAM SUCCESSES $147M REDUCTION OVER 5.5 YEARS SIGNIFICANT CASH FLOW IMPROVEMENT SUCCESSFUL IN DIVERSE MRO INVENTORIES NO IMPACT TO OPERATION AND RELIABILITY

INVENTORY OPTIMIZATION HIGHLIGHTS OBTAIN SENIOR MANAGEMENT BUYIN PERFORM INVENTORY ANALYSIS STRATIFY INVENTORY SET INVENTORY REDUCTION TARGETS TRACK PROGRESS COMMUNICATE TO ALL LEVELS OF ORGANIZATION CELEBRATE SUCESSES

Months Supply - Active Browns Ferry Sequoyah Watts Bar NSI

Outstanding On Order Net ROP/ROQ Changes

INVENTORY PERFORMANCE FY02 GROWTH REDUCTIONSTRATEGIES M M October 2001 Beginning Inventory $ M September 2002 Ending Inventory $99.401M FYTD 1358 GROWTH DRIVERS Planned Work Receipts Non-Inv Planned Work Receipts Inv Initial Stock REDUCTION DRIVERS Shared Inventory ROP/ROQ Reduction Dollars ($000) Writeoffs Adjust- ments Normal Receipts

756 INVENTORY PERFORMANCE FY02 September 2002 Ending Inventory $28.686M October 2001 Beginning Inventory $29.106M GROWTH REDUCTIONSTRATEGIES 7,184K 6,764K FYTD INVENTORY PERFORMANCE FY02 September 2002 Ending Inventory $23.378M October 2001 Beginning Inventory $23.473M GROWTH REDUCTIONSTRATEGIES 2,864K 2,769K FYTD GROWTH DRIVERS Planned Work Receipts Non-Inv Planned Work Receipts Inv Initial Stock REDUCTION DRIVERS Shared Inventory ROP/ROQ Reduction Dollars ($000) GROWTH DRIVERS Planned Work Receipts Non-Inv Planned Work Receipts Inv Initial Stock REDUCTION DRIVERS Shared Inventory ROP/ROQ Reduction Dollars ($000) 1358 INVENTORY PERFORMANCE FY02 September 2002 Ending Inventory $33.053M October 2001 Beginning Inventory $33.136M GROWTH REDUCTIONSTRATEGIES 5,758K 5,675K FYTD GROWTH DRIVERS Planned Work Receipts Non-Inv Initial Stock REDUCTION DRIVERS Shared Inventory Adjust- ments ROP/ROQ Reduction Dollars ($000) Normal Issues Planned Work Receipts Inv INVENTORY PERFORMANCE FY02 GROWTH REDUCTIONSTRATEGIES 73K 0 K October 2001 Beginning Inventory $14.357M September 2002 Ending Inventory $14.284M FYTD 1358 GROWTH DRIVERS REDUCTION DRIVERS Shared Inventory Dollars ($000) Adjust- ments Adjust- ments Writeoffs Normal Receipts Writeoffs Normal Receipts Adjust- ments Normal Issues Writeoffs

FY05 Materials Indicators March 2005

SERVICE OFFERINGS BENCHMARKING BILL OF MATERIAL DEVELOPMENT INVENTORY DATA ANALYSIS PHYSICAL INVENTORY SUPPLIER MANAGED INVENTORY INVESTMENT RECOVERY WAREHOUSING MATERIAL STANDARDIZATION PROCEDURE DEVELOPMENT

Rev. 6/6/05 INVENTORY OPTIMIZATION SUPPLIER MANAGED INVENTORY REVERSE ENGINEERING PROCEDURES SUPPLY CHAIN INVESTMENT RECOVERY POOLED INVENTORY INVENTORY OPTIMIZATION MODEL SARBANES OXLEY SHARED INVENTORY MATERIAL STANDARDIZATION KPI’S GOALSANALYSIS RATIONALIZATION BILL OF MATERIAL