Transmission system code review

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       IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O.
       1998, c.15 (Sched. B);

       AND IN THE MATTER OF a proceeding pursuant to subsection
       19(4), and 74 of the Ontario Energy Board Act, 1998 to review the
       Transmission System Code and related matters.

            Submissions of Ontario Power Generation Inc. (“OPG”)
                                    on the
               “Preliminary Propositions to Phase One Issues”

                                   May 13, 2003

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                           Transmission System Code Review

                                       Phase One Issues


OPG supports the approach taken by the Board in its “Preliminary Propositions to Phase One

Issues” document, issued April 14, 2003 (“Preliminary Propositions”). OPG feels the overall

direction indicated by the Board in this document will move the Ontario energy market in a

positive direction to support competition and provide consumer benefits.

It is clear that the Board recognizes the important role interconnection issues play in the

development of new generation resources in the province. The policy directions outlined in the

Preliminary Propositions indicate a desire to ease the entry of new generation resources in

Ontario, and this is critical to the continued development of a competitive market. OPG supports

developing codes and connection procedures that favor this policy direction.

Ultimately, the propositions and principles established by the Board in Phase 1 of this

proceeding will be used to develop specific changes to the Transmission System Code (“TSC”).

Until that step is complete, there will be some uncertainty regarding the exact meaning of the

Preliminary Propositions and the manner in which they will be implemented. In fact, the history

of interconnection disputes in Ontario and elsewhere indicate that there is a high potential for

misunderstanding. In this submission, OPG has suggested wording changes that it believes will

help reduce this uncertainty.

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OPG looks forward to the point when it can review and comment on specific proposed changes

to the TSC. This will reduce uncertainties over the meaning of the proposed propositions, and

will allow OPG and others to consider the precise language that will be used to implement these

concepts in the TSC. In OPG’s submission, the transferring of policy directions into specific

language for TSC changes will be critical.

OPG’s comments on the Preliminary Propositions follow.


       •       Unnecessary transmission asset duplication is avoided

While OPG recognizes the logic behind avoiding duplication of resources, as a stand-alone

statement this principle could be misinterpreted. Someone might argue, for example, that any

duplication is, by definition, unnecessary. OPG recommends that the Board adopt the following

alternative wording: “Uneconomic investment in transmission assets is avoided.” In this

manner, the prevention of duplicative transmission facilities is not a goal unto itself, but is rather

a consideration in the evaluation of new facilities.

       •       Transmission assets are considered to be stranded assets only to the extent that
               their value has not been captured in the revenue requirement established for the
               purpose of rate setting. Assets which have been fully depreciated are not
               considered to be stranded by bypass, and assets which have been partially
               depreciated should be considered to be stranded only to the extent that their value
               has not been fully depreciated.

In OPG’s submission, there is the potential for confusion regarding the determination of when

assets might be considered stranded. The introduction of this paragraph should be clarified to

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read: “Transmission assets have the potential to become stranded assets through bypass only to

the extent...”

        •        Load customers should be held responsible for their load forecasts or pay a
                 charge that would reflect the associated cost of any deviation from the forecast as
                 determined by a true-up mechanism as necessary. To assist directly connected
                 load customers in implementing energy efficiency initiatives and to hold
                 distributors harmless from energy efficiency initiatives of their customers, there
                 are two proposed exceptions to this principle:
                 -      embedded generation units of less than 1MW; and
                 -      measures for energy conservation, energy efficiency, load management,
                        and the use of cleaner energy sources.

OPG has two issues with this proposition: the “cleaner energy sources” exception and the load

forecast deviation issue. In OPG’s submission, there is the potential for some ambiguity

regarding the definition of a cleaner energy source, and this term is also used for other

exceptions elsewhere in the Preliminary Proposition. (See proposition 6 regarding Transmission

System Bypass). The exception is an obvious recognition of the potential for pro-environmental

benefits of new, clean resources. OPG recommends that OEB clarify this term.

With respect to the load forecast issue, clarification is needed regarding how load forecasts will

be developed, and what time horizons will be considered. It does not seem appropriate, for

example, to require the remaining customers in a region to pay increased charges simply because

other customers leave the region.

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       3.      Each connection agreement with any new customer should specify the amount of
               capacity that has been allocated to each delivery point for that customer. This
               will be referred to as the Capacity Assigned to Customers (CATC). For existing
               customers, the amount of CATC per delivery point should be deemed to be the
               greater of either:……………

OPG submits that there is potential for confusion regarding whether the CATC relates only to

connection assets or to both connection assets and network assets. OPG views the proposition to

relate to connection assets only. The allocation of network capability is plagued by complexities

and unintended consequences, and runs counter to the other propositions taken by the Board in

this proceeding. OPG recommends that the Board make clear that the CATC applies only to

connection assets.

       8.      Where a transmission customer can demonstrate that Available Capacity will not
               meet its needs for supply of new load, that customer should have the right to
               arrange for its own connection facility requirements. Where a transmission
               customer opts to build its own connection facilities, as opposed to using Available
               Capacity, those new facilities should only be used for the new load (i.e., the
               customer should not be allowed to transfer existing load from the transmitters’
               facilities). A customer may waive the right to construct its own connection
               facilities to serve new load as part of a contractual negotiation. In order to be
               effective and enforceable, such a waiver must be in writing, and should include a
               reference to the Section of the Code bestowing the right, and should stipulate that
               the Customer has waived the right voluntarily, and without undue influence or

There is an issue of economic efficiency, which contradicts the proposed principle. When faced

with the need to construct new facilities, a competitive firm will consider a full range of options

that could include replacing the existing facility and transferring all existing load to the new

facility. In part, this is an economy of scale issue that recognizes that a single, large, new

interconnection facility may have significant advantages over an incremental addition to an old,

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outdated, and undersized interconnection facility. As a result, there should not be a specific

prohibition against such transfers. To the extent that the transfer results in a stranded investment

in the original facility, the customer should pay for that cost. The calculation of this stranded

cost needs to be detailed in the TSC. Starting from the depreciated value of the asset (i.e., net of

depreciation), adjustments should be made to reduce the stranded cost by any savings in the

transmitter’s O&M costs. In addition, the stranded cost should be reduced to the extent that the

network service provider would not have recovered the full value of the asset in the course of

expected operations absent the action that caused the stranding.


       1.      The Code should contain a definition of “embedded generation” which addresses
               such factors as ownership, location and other relevant factors.

OPG agrees that a definition is needed, and recognizes the difficulty of establishing a definition

that meets the needs of the industry and objectives of the Board. In OPG’s submission

ownership is not an appropriate basis for the determination, because special financing

mechanisms and partnering relationships are commonly used in the industry that would

complicate ownership determination. Flexibility in the definition may also be important in

meeting other objectives of the Board in promoting new generation. We recommend that the

Board start by relying on existing rules and regulations that establish criteria for determining

whether a transmission line requires Board approval. In essence, if the new generation facility is

located in a fashion that does not require Board-approved transmission facilities to provide

service to customers, then it should be considered embedded. This criterion is provided in

Subsection 92(1) of the Ontario Energy Board Act, 1998. If a new generator requires Board-

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approved transmission facilities, then the applicant would have the opportunity within the

approval process to make the case that it is in the public’s interest for the Board to rule that the

new facility is embedded generation.

       3.      The Code should contain provisions establishing the right of load customers to
               construct their own connection facilities (e.g., transformation stations) regardless
               of the existence of Available Capacity, provided that the new facilities are
               designed to meet needs created by the development of new loads that are not
               presently served by existing transmission connection facilities. The construction
               of such facilities should not be considered bypass. New load is defined as load
               which exceeds the CATC and based on the greater of either:
                       a) the highest monthly peak load over the past 5 years for the relevant
                          delivery points; or
                       b) the available capacity of the existing feeder positions associated with
                       the relevant delivery point.

The comments made regarding proposition 8 under Available Capacity apply here. There may

be circumstances where it is economically rational to build new connection facilities for both

new and existing load. The economic consequences from doing so should be addressed through

a charge related to the value of assets that are stranded to the extent that their value has not been

fully depreciated, not by a prohibition against constructing such facilities.

       4.      The Code should contain provisions which establish that the development of new
               embedded generation should not be considered to be system bypass. Any
               measures that discourage such development should be prohibited and where such
               measures are in existing agreements they should be unenforceable.

OPG supports this proposition and considers it a critical element of the overall system of

incentives that are necessary to promote new generation capacity in the province.

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        5.      The Code should contain provisions that would require transmitters to replace
                connection facilities that have become fully depreciated at no charge to the
                customers served from that facility. The Code should, however, allow customers
                to construct their own connection facilities to replace transmitter’s assets which
                have been fully depreciated and are, therefore, not considered to be stranded. If
                the connection facilities serve more than one customer, the same rule applies. If,
                in this situation, some of the customers choose to remain with the transmitter’s
                connection pool, the transmitter will provide for appropriate new facilities at no
                charge to these customers.

It would appear that the objective of this proposition is to ensure that customers are not exposed

to new stranded costs brought about by the transmitter’s rebuilding of connection facilities that

have reached the end of their life. OPG supports this principle. The language used in the

proposition, however, is problematic. There is no reason to require a transmitter to replace a

facility simply because it has become depreciated, as this is unlikely to match the end of the

facility’s operating life.

        6.      The Code should contain provisions which establish that reductions in load
                attributable to measures for energy conservation, energy efficiency, load
                management or use of cleaner energy sources should not be considered system
                bypass. Measures discouraging such activities, such as a transmitter imposing a
                minimum payment obligation to cover present loads, should be prohibited and
                where such measures are in existing agreements they should be unenforceable.

As mentioned earlier, this definition of “cleaner energy sources” is important to this proposition

and OPG’s earlier recommendation applies equally here.

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       1.      The Code should establish the principle that Network costs incurred in
               establishing new or enhanced connections for load customers should be borne by
               the Network pool. Similarly, Network costs to connect new generation should be
               borne by the Network pool. The Code should allow for exceptional situations for
               a party to seek a different allocation of specific Network costs from the Board.

OPG supports this proposition and considers it a cornerstone to the framework established in this

proceeding that will allow for the competitive entry of new generation resources. While OPG

recognizes the need for some exceptions to the general rule that network costs should be borne

by the network pool, OPG encourages the Board to use this in only rare and unique

circumstances to not undermine the general principles that promote wholesale competition.

       6.      The Code should contain provisions to indicate that O&M costs are the
               responsibility of the owner of the assets. A transmitter’s O&M costs associated
               with the connection of a new or upgraded load customer will be recovered
               through connection pool rates. A transmitter’s O&M costs associated with the
               connection of a new or upgraded generator will be recovered as a capital
               contribution, at the time of connection, equal to the present value of attributable
               O&M costs over the expected life of the connection.

OPG supports the notion that O&M costs are the responsibility of the owner of the assets. With

respect to a generator interconnection, it is not clear what O&M costs will be incurred by the

transmitter, since OPG expects that generators will install, own and operate their own connection

facilities. OPG expects that there will be either no costs borne by the transmitter, or so little cost

that accounting for it in a capital contribution fashion is not worth the effort required to conduct

the regulatory process to determine the cost, and then the effort required to monitor it. Absent

additional information regarding the nature of these costs, OPG recommends that this provision

in the proposition should be dropped.

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       7.      The Code should contain provisions which establish that capital costs of
               monitoring and testing equipment for new or enhanced connections should be
               borne by the owner of the equipment. The costs associated with monitoring and
               testing activities should be borne by the party which owns the equipment
               regardless of whether or not the transmitter is the requesting party for such
               testing. A transmitter’s monitoring and testing costs associated with the
               connection of a load customer will be recovered through connection pool rates.
               A transmitter’s monitoring and testing costs associated with the connection of a
               generator are recovered as a capital contribution, at the time of connection,
               equal to the present value of attributable monitoring and testing costs over the
               expected life of the connection.

While OPG agrees in principle with this proposition, some reasonableness standard is necessary

to ensure that an unnecessary level of testing costs and monitoring equipment is not being

mandated. There should be explicit mechanisms in place for the expedited, independent review

by the Board of any costs considered excessive.

       11.     Existing transmission customers are expected to ensure that their equipment is
               robust enough to accommodate growth of the transmission system provided that
               such short circuit levels do not exceed the allowable “Fault Levels” listed in
               Appendix 2 of the Code. The Code and the Connection Agreement in Appendix 1
               should contain provisions requiring that transmission customers be responsible
               for upgrading their own equipment to the minimum baseline performance
               requirements established by the CIA study.

OPG agrees that transmission customers requesting a CIA study be responsible for upgrading

their equipment if necessary to meet the minimum baseline performance requirements. There is

some ambiguity, however, if the system change has a negative effect on a third-party

transmission customer located in the vicinity of the new connection. Currently, the IMO’s

connection assessment and approval process calls for CIA studies that identify any equipment

modifications required by third-party transmission customers as a result of any proposed

connection. OPG submits that it is appropriate for the connection proponent to pay for third-

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party transmission customer costs. OPG feels that the principle is both fair and necessary to

ensure economic efficiency. If the party proposing the new connection does not bear the third-

party interconnection modification costs, then investments may be made, that are not economic

and costs will be borne by parties neither benefiting from the change nor controlling the process.


       1.      The Code should contain provisions for the methodology transmitters are to use
               to calculate a capital contribution from customers. For load customers this
               methodology should be based on a discounted cash flow analysis using
               attributable costs and forecast revenues for the proposed connection. For
               generators the capital contribution should equal the total present value of
               connection including capital costs and the present value of attributable annual

This proposition needs to be clarified to make it clear that in the situation case where a generator

will build, own, and maintain the connection facility, there will not be any capital or operating

costs that need to be recovered by the transmitter.


       2.      The Code should contain a mechanism that includes a time-limited process for the
               resolution of disputes regarding compliance with the Code that arise during
               contract negotiations.

OPG supports this proposition in theory, but there is insufficient detail associated with the

process to complete a full review or determine whether the needs of new generators will be met.

The critical issue will be the timing and clarity of the dispute resolution process.


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       3.      The Code should contain a principle that any existing contracts which have
               provisions that are inconsistent with the Code are unenforceable, to the extent of
               the inconsistency.

The Board should identify a means by which either party to a contract can seek review of

specific provisions to determine whether they are unenforceable, in accordance with this

proposition. In addition, the Board should, at a later stage in the proceeding, identify the

provisions in transmitters existing contracts that it considers inconsistent with the Code.


       •       Provide a separate estimate for contestable and non-contestable work that can be
               audited if necessary to demonstrate no cross subsidy from non-contestable to
               contestable work.

The issue of cross subsidization is important and can be highly controversial. The Board needs

to provide a means for contesting the cost of interconnection work, and the distribution of costs

among contested and uncontested work.

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