Energy @ Gowlings – October 2007

Edited by Paul Harricks

Contents

• Regulation of Electricity Distributors in Ontario

• Alberta Removes Threshold on Wind Power Generation

• Government and the Private Sector Advancing Clean Coal Technology

• NEB Releases Short Term Natural Gas Deliverability Report

• Canadian Council of Chief Executives Releases Clean Growth Report

• OPA Reports Progress on Renewable Energy Standard Offer Program

• OPA Releases 2008 Business Plan

Regulation of Electricity Distributors in Ontario

By Tom Brett

The pace of regulatory developments affecting electricity Local Distribution Companies (LDCs) in Ontario has accelerated over the last year, and shows no sign of abating. The Ontario Energy Board (OEB) is working to place the LDCs into a conventional arm's length regulatory framework, commensurate with what it sees as the commercial nature of their operation. These efforts include several recent decisions and policy documents:

• A new policy on cost of capital for LDCs including both capital structure (affects cost of capital and Payments in Lieu of Taxes (PILS)) and the formula for determining returns on equity, and the use of, and allowed interest rates on, debt, issued in February 2007 (EB-2006-0088).

• A report of the OEB on the regulatory treatment of Conservation Demand Management (CDM) programs, both LDC and Ontario Power Authority (OPA)-sponsored, issued on March 2, 2007 (EB-2006-0266), and a more recent policy paper issued on July 27, 2007 (EB-2007-0097) on regulatory barriers to conservation and demand management. The OEB approved, with some modifications, Toronto Hydro's CDM plan for 2007, on September 11, 2007 (EB-2007-0096).

• An OEB Staff Discussion Paper dated March 30, 2007 to initiate the consultation process in relation to the electricity distribution rate design review (EB-2007-0031).

• A report on comparators and cohorts entitled "Benchmarking the Costs of Ontario Power Distributors" (EB-2006-0268) dated April 25, 2007.

• An OEB Staff Discussion Paper dated June 4, 2007 on potential changes to the customer risk management option available to LDCs (EB-2007-0635).

• A consultation paper on proposed changes to the Affiliate Relationships Code, issued on June 15, 2007 (EB-2007-0662).

• A discussion paper and contracted research report on distributed generation issued on July 13, 2007 (EB-2007-0630).

• An OEB report dated July 23, 2007 (EB-2007-0028) on Rate Making Associated with Distributors Consolidation, which sets out the OEB's policy on key rate-making issues that may be associated with consolidation in the electricity distribution sector.

• A decision dated August 8, 2007 on the smart meters proposal for early adopters, which has set the regulatory framework for smart meter programs (EB-2007-0063).

• Work on a third generation incentive rate-making plan has started with the issuance of the OEB's Discussion Paper on August 2, 2007 (EB-2007-0673).

• A decision on Hydro One's transmission rate application on August 16, 2007 (EB-2006-0501).

• The OEB has also identified the 26 LDCs that will rebase their revenue requirements in 2008. The "chosen" LDCs filed cost of service rates on a forward test year by August 15th of this year.

In addition to these OEB regulatory initiatives, the OPA has published its Report to the Ontario Government for a Clean Energy Standard Offer Program, and launched a consultation process with stakeholders. It has retained a consultant to review the principal issues with a view to publishing draft program guidelines early in 2008. The OPA has also launched a full consultative exercise on DR III, which it will implement some time before the end of 2007. Finally, the OPA filed its Integrated Power System Plan with the OEB on August 29^th. A Notice of Application should be issued very soon, calling for interventions and setting out a draft Issues List. While the OPA has said that its Plan does not address the distribution sector, it has a number of implications for distributors.

These initiatives, and others like them, have substantial financial and operating impacts on the LDCs, in both the short and long term. For example, not getting the rebasing "right" will inhibit an LDC's efforts to earn an appropriate rate of return. Not participating actively in the design work and decision-making process for the third generation incentive rate plan will likely lead to a plan that is disadvantageous for some LDCs. Both the rebasing exercise and the determinations of the initial incentive rate plan for the two major gas utilities were strongly contested affairs, with major regulatory battles between the utilities, customer groups and others over such issues as the base year cost of service, earnings sharing, the inflation index, the productivity factor, Z-factors, off-ramps and the treatment of capital expenditures. Toronto Hydro's recent 2008 rates proposal has highlighted the complexity of dealing with major capital expenditure programs under price cap programs.

In addition to its activity in the electricity sector, on January 5, 2007 the OEB published a Staff Discussion Paper for a proposed long-term (five years) incentive rate-making plan for the natural gas utilities (EB-2006-0209). On March 30, 2007 it published a detailed background paper by consultants on productivity factors for the plan. On May 3, 2007, the OEB directed Enbridge Gas Distribution Inc. (Enbridge) and Union Gas Limited (Union) to file applications for rates beginning January 1, 2008. Union and Enbridge filed very different plans in July -- Union's was a price cap plan, while Enbridge filed for a revenue cap. LDCs should take an interest in this proceeding as the shape of the plan(s) agreed to by the parties, or imposed by the OEB on the gas LDCs, will likely influence the plan developed for the electric LDCs, absent any compelling reason to the contrary. The OEB has spoken in the past of the need for symmetry between the electric and gas regulatory regimes. In its Scoping Paper for 3rd Generation Incentive Regulation for Electricity Distributors, Board Staff noted that (p. 2):

"…the evolution of rate-making in the electricity sector can be informed by the work that is currently underway to put in place an incentive regulation framework for natural gas distributors beginning with the 2008 rate year."

The electricity LDCs need to at least be aware of the important features of the gas plan to be able to develop their own positions for the 3rd Generation Incentive Plan. Recall that Enbridge and Union closely monitor electricity proceedings, and sometimes file comments.

More generally, exposure to the natural gas industry regulatory requirements can help the electricity LDCs navigate and influence the incipient electricity regulatory regime in many ways, including;

• In appreciating the nuances of working under a forward test year under cost of service rate-making;

• In the design and implementation of a third generation incentive rate-making regime;

• In dealing with the Affiliate Relationships Code; and

• Generally, in appreciating the manner in which the regulator works.

While the amount of regulatory activity is increasing, the new regulatory regime may present opportunities for enhanced returns, acquisitions, new service offerings and more effective operations for those LDCs that pursue the initiatives afforded by the new rules. Well-designed incentive rate-making plans can be beneficial to both utility ratepayers and shareholders.

Alberta Removes Threshold On Wind Power Generation

By Nicole Chen

The Alberta government recently announced the removal of the 900 MW threshold on wind power generation. This threshold was put in place by the Alberta Electric System Operator (AESO) in April 2006 as a temporary measure to ensure the reliability of Alberta's electricity system as additional wind power was added to the power grid. In 2007, the AESO and the Canadian Wind Energy Association (CanWEA) carried out a forecasting study to provide the necessary information to address these reliability issues.

The Market and Operational Framework for Wind Integration in Alberta, the nation's first sophisticated wind study, was published in March 2007 and described necessary mitigation measures, order of use of the mitigation measures, operational issues and obligations and associated cost recovery. The framework was generally accepted as reasonable and balanced and expressed the need for wind integration beyond 2,000 MW and it was found that the threshold was no longer necessary. Currently, there is about 5,500 MW of wind generation in the queue and more than 500 MW of wind power is forecasted to be connected to the grid by the end of the year. With this increase in wind power, Alberta will lead the country with over four percent of its total installed generation capacity being fuelled by wind. Currently, Canada has a national average of only one per cent.

Given the removal of the threshold, the AESO will start obtaining regulatory approvals for further transmission developments to accommodate wind power development in southern Alberta. An already approved transmission development is the 240kV line from Pincher Creek to Lethbridge forecasted to be in service early 2009, with its Need Application for Part A of the Southeast transmission project soon to be filed with the Energy and Utilities Board.

In addition to further regulatory approvals, the AESO is holding a stakeholder consultation on the Market and Operational Framework in October and hopes to complete the following over the next one or two years:

• Technical Requirements for Power Management;

• Wind Forecasting;

• System Operator Tools;

• Market and Operational Rules;

• Generation Scenario Development and Transmission Planning;

• Interconnection Queue Management; and

• Diversity and Wind Integration beyond 2,000 MW.

For more details, please refer to the Market & Operation Framework Implementation Plan at www.aeso.ca

Government And The Private Sector Advancing Clean Coal Technology

By Michael Morrison

The Honourable Gary Lunn, Minister of Natural Resources, has announced that the Canadian Government and the Government of Alberta will partner with EPCOR Utilities Incorporated (EPCOR) and the Canadian Clean Power Coalition in a $33 million research and development project for the advancement of clean coal technology. The funding will be in equal portions from the Canadian Government, through ecoENERGY Technology, EPCOR and the Government of Alberta through the Alberta Energy Research Institute.

This is a front-end engineering design project leading to construction of a full-scale coal gasification power plant aimed at demonstrating advanced clean coal technology. The project is to be located at EPCOR's Genesee Generating Station west of Edmonton and is scheduled for completion in 2009. It is anticipated that the new technology will further reduce emissions of air pollutants associated with coal-fired generation and take advantage of opportunities for carbon capture and storage, reducing greenhouse gas emissions to almost zero. Should the new technology prove viable, a 500 MW generating station could be in operation as early as 2015.

The Honourable Doug Horner, Minister of Alberta Advanced Education and Technology said, "When we decided to support EPCOR through this study in 2006, Alberta recognized the importance of producing power from our vast coal reserves with reduced environmental impact."

According to the Alberta Government, Canada is ranked tenth in the world in total proven coal reserves with Alberta's 33.6 gigatonnes representing 70 per cent of Canada's reserves. The Government also notes that, "Alberta's coal contains more than twice the energy of all of the province's other non-renewable energy resources, including conventional oil and pentanes, natural gas, natural gas liquids, and bitumen and synthetic crude."

NEB Releases Short Term Natural Gas Deliverability Report

By Michael Morrison

The National Energy Board (NEB) has issued its Short Term Canadian Natural Gas Delivery Report 2007 - 2009. It indicates that there will be a decrease from 483 million cubic metres per day at the end of 2006 to a range of 410 to 449 million cubic meters per day.

The Chair of the NEB, Gaéton Caron, noted that, "The drilling pace that sustained Canadian natural gas deliverability is gone, for the moment." During 2006, drilling in the Western Canadian Sedimentary Basin (WCSB) slowed for the following reasons:

• Continued high costs including labour;

• The increasing Canadian dollar value affecting profit margins on U.S. exports;

• Stable, moderate natural gas prices reducing return on investment; and

• Investment in oil and oil sands development which competes for investment capital with natural gas drilling.

Although a reduction in deliverability is forecast, ongoing drilling is increasingly focusing on the deeper, western side of the WCSB. This area requires more complex, and therefore more expensive, drilling. However, the potential for larger returns is high. "We see cause for optimism as deeper drilling and improved techniques help producers deliver tighter gas from deeper wells. In the longer term, Canadians should rest assured that their natural gas needs will be met as other sources, such as unconventional gas, liquefied natural gas, or gas from frontier areas, enters Canada's energy market.", said Caron.

The report also noted that the deliverability of coalbed methane continued to grow during the period from 2003 to 2006 to about 23 million cubic metres per day, up from 14.5 million cubic metres per day that the NEB previously forecast in 2006.

The full text of the report can be viewed by visiting:
http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/ntrlgs/ntrlgsdlvrblty20072009/ntrlgsdlvrblty20072009-eng.pdf

Canadian Council Of Chief Executives Releases Clean Growth Report

By Michael Morrison

The Canadian Council of Chief Executives has released a report entitled Clean Growth, Building a Canadian Environmental Superpower. The council describes itself as a not-for-profit, non- partisan organization composed of the chief executives of 150 of the country's leading enterprises and pre-eminent entrepreneurs. The report was developed under the auspices of the council's task force on environmental leadership. Among those on the task force are CEOs of the following energy sector companies:

• Bruce Power;

• Ultramar;

• Petro-Canada;

• Canadian Oil Sands Limited;

• GreenField Ethanol Inc.;

• Suncor Energy Inc.;

• Imperial Oil Limited;

• Direct Energy;

• NOVA Chemicals; and

• TransAlta Corporation.

The report puts forward five key propositions on how to move forward on addressing Canada's strategy for climate change and sustainable development. The propositions are starting points and not final answers to the complex issues facing Canada.

1. A national plan. To make a meaningful contribution to the global challenge of climate change, Canada needs a coherent national plan of action, one that sees government, industry and consumers working together toward shared goals.
2. The technology opportunity. The core of this national plan must focus on investment in the new technologies that can help both Canada and the rest of the world achieve a rising standard of living with a reduced environmental impact.
3. Targets and investment. Targets are a spur to environmental progress, but to be effective, they must be framed within a policy environment that keeps companies healthy and profitable and that both encourages and enables increased investment in new technologies.
4. The power of price signals. Encouraging businesses and individuals to change behaviour requires appropriate price signals, and these signals can be strengthened through carefully designed market-based mechanisms such as emissions trading and environmental taxation.
5. Canadian leadership globally. To achieve effective global progress in addressing climate change, Canada must champion a future international process that will ensure the participation of all major emitting countries.

The full text of the report can be viewed at:
http://www.ceocouncil.ca/publications/pdf/test_14a7f87d43da18e574aa830d322a9cbe/
Clean_Growth_ELI_Policy_Declaration_October_1_2007.pdf

OPA Reports Progress On Renewable Energy Standard Offer Program

By Michael Morrison

The Ontario Power Authority (OPA) has released its report on the progress of the renewable energy standard offer program (RESOP). During September 2007, the OPA executed 25 RESOP contracts bringing the total number of executed contracts to 165. There are still 115 applications still pending.

The following table summarizes the RESOP contracts executed during 2007.

The following graphs summarize the capacity by type of generation and number of contracts executed during 2007.

To view the full report, including a breakdown of projects, visit:
http://www.powerauthority.on.ca/sop/
Storage/52/4814_RESOP_Sept._2007_report.pdf

OPA Releases 2008 Business Plan

By Michael Morrison

The Ontario Power Authority (OPA) has filed its 2008 Business Plan. The OPA is requesting $67.5 million which is a 19 per cent increase over the 2007 budget.

The following are the significant activities that the OPA plans for 2008:

• Increasing conservation related activities towards meeting the 2010 target reduction of 1,350 MW in peak electricity demand. Twenty-nine conservation and demand management programs will be implemented with expected savings of 410 MW in electricity demand by year-end;

• Introducing and implementing a system to accurately evaluate, measure and verify conservation program data and results;

• Supporting and participating in the regulatory review of the Integrated System Plan (further information regarding the plan can be found in the September 11, 2007 issue of energy@gowlings );

• Procuring new electricity supply for high priority areas of the province where there is a critical need to ensure reliability, in particular, northern York region, the Greater Toronto Area and southern Ontario;

• Procuring additional renewable energy resources toward meeting the province's target of and addition of 2,000 MW in service by 2015;

• Improving the Renewable Energy Standard Offer Program and the Clean Energy Standard Offer Program as experience builds from their ongoing operation. Options for the long-term management and administration of the standard offer programs will also be explored with the participation of relevant stakeholders;

• Taking steps to promote the development of a forward market for Ontario electricity products and working closely with the Independent Electricity System Operator in considering the development of a day-ahead market; and

• Developing options for evaluating environmental attributes associated with supply and conservation contracts.

The full text of the OPA's business plan can be view at the following site:
http://www.powerauthority.on.ca/Storage/53/4894_2008_Business_Plan_Final.pdf

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