Get documents about "Final Argument, Heritage Contract Stepped Rates
Document Sample
IN THE MATTER OF
The Utilities Commission Act (the Act)
and
A Request of the Lieutenant Governor in Council
of the Province of British Columbia
pursuant to Section 5(1) of the Act to the
British Columbia Utilities Commission (the Commission)
to Inquire into and Advise on a
Heritage Contract for BC Hydro’s Existing Generation Resources,
Stepped Rates and Transmission Access
and
Terms of Reference Issued March 25,2003 Pursuant to Order in Council 0253 and
Section 5(2) of the Act (Terms of Reference)
and
Order G-23-03 of the Commission Directing BC Hydro to File a Proposal
Regarding a Heritage Contract,
Stepped Rates and Transmission Access
FINAL ARGUMENT
OF
BRITISH COLUMBIA HYDRO AND POWER AUTHORITY
AUGUST 20,2003
Table of Contents
-
1 ..............................
.............................
.....
..............................
INTRODUCTION........................
-
2 .................
..................
..................
THETERMS REFERENCE THE EVIDENCE.................
OF AND
-
3 CONTRACT: REVENUE
HERITAGE REQUIREMENT FIXED PRICE~FIXED
VS. ...............4
QUANTITY
-
4 BC HYDRO'S HERITAGE CONTRACT PROPOSAL ......................................................................
Special Directive No. 4 and Special Direction No. 8 ....................................................... .9
4.1
_.
-
4.2 Surplus Hvdro, Trade Income and the Transfer Pricinq Aqreement.. ............................. 10
-
4.3 Requlatory Framework for Maximizing and Allocatinq Trade Revenues ....................... . I 2
-
4.4 The Brevity of the Heritage Contract ............................................................................ . I 3
-
5 AN ANALYSIS CBTE's MODEL
OF .........................................................................................
-
6 STEPPED RATES ...................................................................................................................
6.1
_. Tier 2 Rate .................................................................................................................. ..23
-
6.2 Tier 2 Pricinq Options.................................................................................................. ..27
6.3
_ . Tier 1 Rate And Tier l/Tier 2 Split ................................................................................. 28
-
6.4 Load Aqareqation.. ....................................................................................................... .30
-
6.5 Demand Charqe ........................................................................................................... .31
-
7 RETAILACCESS ..............................,,..........,,.....................................................................31
Access Principles ......................................................................................................... .33
-
7.1
-
7.2 Imbalance Charqe ......................................................................................................... 33
- BC Hvdro's Existinq Access Principles ......................................................................... .35
7.3
-
8 ........................................................................................................................
SCHEDULING
-
9 ...............................................................................................
SUMMARY CONCLUSIONS
AND
Appendix A: Terms of Reference Cross-Referenced to BC Hydro Proposal
Appendix B: Special Directive No. 4
Appendix C: Special Direction No. 8
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING CONTRACT. STEPPED RATES AND ACCESS PRINCIPLES - AUGUST
A HERITAGE 20,2003
1 Introduction
This proceeding represents the first opportunity for a formal hearing to be conducted in
connection with the implementation of a key component of the Province of British Columbia’s
new Energy Plan: the re-regulation of BC Hydro’s rates. As such, this hearing represents the
beginning of a process which will unfold over the next two years. This Argument will discuss the
evidence in the context of the Terms of Reference for this particular process and, as well, in the
context of the two-year program that BC Hydro sees evolving to fully implement this component
of the Energy Plan.
2 The Terms of Reference and the Evidence
The recommendations sought from the Commission arising from this proceeding are quite
focussed. This hearing is to be a precursor to later process, not an end in itself. As specified in
the Terms of Reference‘:
“WHEREAS the Energy Plan contemplates that the Commission should conduct
an inquiry to develop and refine certain policy areas relating to regulation of BC
Hydro prior to the commencement of its review of BC Hydro’s rates...”
Thus, this inquiry is designed to facilitate the revenue requirement process which will
occur later, as discussed in more depth below.
The Terms of Reference deal with two entirely distinct issues. The first relates to the
establishment of a Heritage Contract that will ensure that customers of BC Hydro receive the
benefit of its existing low-cost resources on an embedded cost basis for a minimum of ten
years. The second is the design of a stepped rate for industrial customers.
It is clear from the Terms of Reference that the two issues are entirely distinct. That is, the
Heritage Contract is intended to set out the commitment of government to ensure the low-cost
resources of BC Hydro continue to benefit domestic customers in BC. That commitment is
entirely independent of any particular rate design.
On the other hand, the stepped rate initiative is a specific target dealt with elsewhere in the
Energy Plan which the government wishes implemented as a matter of priority and, in respect of
1
Exhibit 2, fifth recital.
ARGUMENT THE 8C HYDRO AND POWER AUTHORITY
FINAL OF
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST 20,2003
2
which, it was expedient to obtain detailed recommendations from the Commission before full
implementation occurs. As will be discussed in more depth below, attempts were made by
some intervenors to link the two initiatives, particularly by providing that the pricing provisions in
connection with the stepped rate reflect the cost of the Heritage Resources.2 There is nothing in
the Terms of Reference to require or even recommend this course and any link between the
cost of the Heritage Resources and the design of the stepped rate must be justified on the basis
of rate design principles, as opposed to the provisions of the Terms of Reference. The relevant
rate design principles are discussed below in the stepped rate sections of this Argument.
Pursuant to paragraph 6 of the Terms of Reference, the Commission required:
“BC Hydro to file by April 30, 2003 a proposal that identifies the detailed
recommendations and reasons that BC Hydro believes should be contained in
the Commission’s report to the Lieutenant Governor in Council.”
BC Hydro discharged that obligation in two volumes which became Exhibits 8 and 8-1 in this
proceeding. The former dealt with the Heritage Contract and the latter with stepped rates.
In Exhibit 8, BC Hydro outlined a proposal which it believes best serves the Terms of Reference
and which became known as the revenue requirement model. BC Hydro championed this
model as best serving the objectives that the Energy Plan lays out for the Heritage Contract.
Those objectives can be found at page 38 in Table 1 of the Energy Plan, which summarizes the
policy actions and their benefits. The Heritage Contract is clearly identified there as providing
for low electricity rates and secure, reliable supply for BC energy consumers, thereby enhancing
economic opportunities in the province as a whole.
In its evidence, BC Hydro stressed the linkage between the Heritage Contract and these
particular objective^.^ The Energy Plan, as observed by a number of parties, has four
cornerstones, but it is clear from the Plan, read as a whole and as summarized in Table 1 at
page 38, that the purpose of the Heritage Contract is to serve the two highlighted by BC Hydro:
low electricity rates and secure, reliable supply. Other objectives, such as the encouragement
of the private power industry, are also to be served by the Energy Plan, but not by the Heritage
Contract. This is made clear from the benefits that are identified for independent power
Transcript vol. 8 , p.1642, lines 11-13 (Saleba).
3
For example, Exhibit 8 , pp.v-vi and Transcript vol. 3, p.516, line 11 to p.517, line 26 (Elton).
FINALARGUMENT THE 6C HYDRO AND POWER AUTHORITY
OF
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
3
producers at page 37 of the Energy Plan, in which it is indicated that they can expect to benefit
from the prohibition on BC Hydro from constructing new generation, the creation of a separate
transmission company to further enhance the independence of transmission in British Columbia,
and the introduction of stepped rates. Nowhere is the Heritage Contract referred to as a benefit
for the independent power c~mmunity.~
Before leaving the discussion of the Terms of Reference, it is worth responding to two
suggestions that were made in counsel's opening submissions. The first made on behalf of the
Joint Industry Electricity Steering Committee (JIESC) is the notion that the Terms of Reference
invite the Commission to comment on any aspect of Special Direction No. 8 that an intervener
may wish it to.5 The second, made by Columbia Basin Trust Energy Inc. (CBTE), is almost the
converse. It suggests that the Commission ought not comment on the value of any of the
initiatives that are the subject matter of the Terms of Reference.' BC Hydro respectfully submits
that common sense and proper interpretation suggest a middle course between these two
extremes.
The request by JIESC to have the Commission make recommendations on what it thinks ought
to go into the determination of BC Hydro's return on equity for all of BC Hydro ignores the clear
limiting language found in paragraph 1 of the Terms of Reference. If there could have been
any doubt as to the intention of the Terms of Reference, the second paragraph under that
heading removes it. The Commission is clearly directed to make recommendations on
changes required to Special Direction No. 8 or Special Directive No. 4 in order to "implement
the Commission's Recommendationswith respect to paragraph 3 of the Terms of Reference."
Paragraph 3 is exclusively concerned with the Heritage Contract. Thus, the Commission is
directed to concern itself with steps that are necessary to implement the Heritage Contract, not
to provide its opinions on what return the Province generally should seek to make on its
investment in BC Hydro.
4
CBTE took a contrary position in its testimony, but was unable to point to any express linkage in the
Energy Plan between the Heritage Contract and furtherance of this particular objective - see Transcript
vol. 10, p.2130, line 13 to p.2138, line 9 (El-Ramly).
5
Transcript vol. 2, p.332, line 1 to p.333, line 2.
6
Transcript vol. 2, p.371, line 16 to p.372, line 13.
FINALARGUMENT THE BC HYDRO
OF AND POWER AUTHORITY
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A 20,2003
PRINCIPLES - AUGUST
4
On the other hand, acting on the suggestion by CBTE that the Commission should remain silent
on any concerns it may have with respect to stepped rates would be to allow form to dominate
substance. Stepped rates are one of the issues this hearing is about and the Province should
not be deprived of any knowledge the Commission has acquired about them.
During the course of the hearing, CBTE’s witnesses made a further, perhaps inconsistent,
submission relating to the Terms of Reference. They suggested that development of the fixed
price/fixed quantity Heritage Contract model they advocate would in very large measure await
BC Hydro’s next revenue requirement hearing.’ In BC Hydro’s respectful submission, this
would require the Commission to abdicate its core responsibility under the Terms of Reference.
The purpose of the proceeding has been to resolve issues in advance of the revenue
requirement hearing, not defer issues to it.
BC Hydro’s Heritage Contract proposal is fully described in Exhibit 8, and in its responses to the
Information Requests it received, and no purpose is served by generally repeating the evidence
here. BC Hydro simply relies on Exhibit 8 in its entirety as a proposal as to the form the
Heritage Contract should take, and those responses. Regarding its stepped rate proposal, BC
Hydro relies on the evidence summarized in section 6 below. For convenience, a table is
provided at Appendix A that cross-references the specific requirements of the Terms of
Reference with BC Hydro’s Heritage Contract proposal, and its stepped rate proposal.
3 Heritage Contract: Revenue Requirement vs. Fixed PricelFixed
Quantity
The only significant attack on BC Hydro’s proposal came from CBTE, which filed its own
alternate proposals. Those proposals have been variations of what has been referred to as the
“fixed pricelfixed quantity” model, although they provide in some cases for quantities and prices
that change over the term of the contract. It is unknown whether the CBTE model has attracted
the support of any other party. Certainly, a number of the major customer groups appeared to
be resolutely opposed to it. That opposition is not surprising.
The original proposal filed by CBTE’ conceded and all subsequent evidence acknowledges that
a long-term fixed price/fixed quantity model forces the parties to monetize the risks associated
7
Transcript vol. 10, p.2127, line 11 to p. 2128, line 17.
a
Exhibit 16.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING HERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
5
with the additional uncertainties that result from a long-term commitment. In the CBTE model,
those risks are to be borne by the shareholder of the generation company and, in consequence,
CBTE acknowledges that additional compensation must be paid to that shareholder.
In the Quebec model and in CBTE's original submission, the additional compensation to the
shareholder was significant. In Quebec, it was manifest primarily in setting the supply obligation
at a relatively low amount, and by not allocating any of the benefits of trade revenues to
BC
cu~torners.~ Hydro estimates that applying the Hydro Quebec model to it would result in BC
Hydro's revenue requirement being $2154265 million per year greater than under its Heritage
Contract This assertion was never challenged in cross-examination.
In CBTE's original proposal, the additional compensation took the form of a 1YOper year
reduction in volume available to ratepayers each year and, as well, a zero to 5% price premium
and an unspecified potential premium on return on equity.
In CBTE's final submission, the premium had reduced itself to $35 million per year, which could
be accomplished with a 0.5% annual reduction in energy volumes with no other risk or price
premium." While CBTE suggested that the basis for this significant reduction in the risk
premium could be found in the additional data provided by BC Hydro1*,it may be that the
impetus for it stemmed from the flat rejection of the significant additional costs associated with
the risk premiums in their various forms that CBTE had originally suggested; that is, BC Hydro's
customers could not have made it clearer that they were not interested in paying the additional
That
premium that the CBTE proposal im~1ied.l~ outright rejection may well have prompted
CBTE to sharpen its pencil with respect to the risk premium that it believed necessary in order
to adequately compensate the generator for the risks that were being imposed upon it, and to
progressively broaden force majeure provisions to further mitigate that those risks. Indeed, Mr.
9
That is, 93.7% of the average-water capability of Hydro Quebec's low incremental cost generation,
compared to 100% of the capability of virtually all of BC Hydro's resources, including those that do not
have low incremental costs, under the Terms of Reference - see BC Hydro response to BCUC 1R
#2.110.1, at pp.2-3.
10
BC Hydro response to BCUC IR #2.110.1, at p.4.
11
Exhibit 16-5. slide 17.
12
See, for example, Exhibit 24-1, cover page and p.4 under heading "CBTE Proposed Risk Allocation"
13
Exhibit 26-3, pp.3 and 7 and at the July 7 pre-hearing conference.
FINALARGUMENT THE BC HYDRO
OF AND POWER AUTHORITY
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
6
Epp went so far as to concede that the broadening of the force majeure re-opener would at
some point remove any substantive difference between its model and the BC Hydro p r ~ p o s a l . ' ~
The industrial customers, at least, continue to be unimpressed. Messrs. Potts, Scott and
Fitzgerald all expressed their unwillingness to pay an additional amount, be it $35 million or
something substantially more, in order to take out an insurance policy. They understood that
these costs were in addition to the costs that they could otherwise expect to pay for the
provision of electricity and they doubted whether, as an insurance policy, those costs were
worthwhile. All of them made clear that their basic position was that their companies were
prepared to pay the costs of the supply of electricity, whatever it turns out to be, and did not
wish to hedge that cost by taking out an insurance policy by paying BC Hydro an additional
amount. In addition, Mr. Potts made clear that he doubted the reliability of the insurer. l5 While
a completely separate consideration, it is one that cannot be ignored.
Mr. Potts' concerns with respect to the ultimate willingness of government to pay points to a
fundamental concern with respect to the approach advocated by CBTE. The CBTE model
would impose on BC Hydro a risk it does not wish to take and would impose a payment on the
ratepayer (to pay for the mitigation of that risk) which the customer does not wish to pay. In
other words, instead of a freely negotiated bargain in the marketplace in which two parties agree
to enter a contract for ten years, the CBTE proposal would force the parties to get together
where neither wished to. An imposed contract of this sort is unlikely to serve the interests of
either party to it.
In terms of the specifics of CBTE's proposal, it is plain that the $35 million premium suggested
The
by CBTE is, at best, a guess based on inadequate data and, more likely, woefully 10w.l~
number was derived by a model developed by Dr. El-Ramly, who acknowledged that he had not
previously testified in relation to deriving rates of return and risk premiums and was not expert at
He
identifying, let alone quantifying, all the risks that go into such an e~ercise'~. acknowledged
14
Transcript vol. I O , p.2119, lines 21-24
15
Transcript vol. 8A, p.1745, line 6 to p.1748, line 1 (JIESC panel) and Exhibit 26-3, p.7 (Guenther). Note
that Dr. El-Ramly endorsed, without prompting, the insurance analogy: Transcript vol. 9, p.2022, lines 22-
26.
16
BC Hydro response to BCUC IR #3.114.0 (Exhibit 38).
l7 Transcript vol. 9, p.2019.
ARGUMENT THE BC HYDRO AND POWER AUTHORITY
FINAL OF
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A PRINCIPLES -AUGUST20,2003
7
there were a number of risks that the CBTE model simply ignores." Finally, the CBTE model
was based on data obtained from BC Hydro through the Information Request process, which
Mr. Epp agreed could likely be improved upon if BC Hydro was engaged itself in the exercise of
~
performing the calculations in q ~ e s t i 0 n . l None of this is to cast aspersions on the efforts of Dr.
El-Ramly and Mr. Epp - no doubt they did the best they could with the data they had. However,
it is to suggest that the result is not one upon which anybody could reasonably expect to take a
$1 billion gamble and certainly not one which it would be remotely responsible to use to impose
contractual obligations on parties who manifestly do not wish to take that gamble.
In his final day of testimony, Mr. Epp appeared to acknowledge that the Commission did not
have sufficient information to make a recommendation on the risk premium. Rather, he said
that the quality of the data could be improved at the upcoming revenue requirements hearing
and the precise price and quantity determined at that time.20 BC Hydro rejects that suggestion.
As articulated above, the purpose of this hearing is to grapple with precisely these issues prior
to the revenue requirement hearing. To do otherwise would add the following issues (at least)
to an already crowded revenue requirement proceeding:
. determination of the most appropriate way to build in the risk premium and its allocation
between BC Hydro's lines of business, whether by an increase to BC Hydro's return on
equity, by a price premium, by a reduction in the export revenue "facility charge'' or, as
CBTE would have it, a reduction in the supply obligation;*'
quantification of each element at risk (and the most appropriate statistical method for the
analysis);
coincidental with the development of the risk premium, development of the appropriate
re-opener clause or clauses (the scope of which must turn on the risk premium and the
confidence levels inherent in it); and
18
For example, see Transcript vol. 9, p.2035. For a fuller treatment of this issue, see pp.17-18 below.
"Transcript vol. 10, p.2130.
20
Transcript vol. 10, p.2127, line 11 - p.2128, line 17.
21
Exhibit 16-5, slide 17 and Exhibit 24-1, p.8.
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
8
. development of a regulatory construct necessary to deal with the inevitable conflicts of
interest between BC Hydro’s generation and distribution lines of business.22
The difficulties in this approach, and the risks inherent in it, were implicitly recognized by CBTE
in their recommendation that the terms and conditions for renewal of the Heritage Contract be
determined five years before the end of the contract‘s term.23 It is illogical at best to suppose
that while the process of renewing the Heritage Contract should occur 5 years in advance, the
initial contract should be imposed immediately after its terms are worked out at BC Hydro’s
revenue requirement hearing.
While the data could no doubt be improved upon, the risks associated with a ten-year projection
cannot be. The essential problem with the fixed price/fixed quantity model is that neither BC
Hydro nor its customers think that the cost of monetizing the risks associated with ten years of
uncertainty make economic sense. Accordingly, neither want to engage in the exercise. No
amount of sophisticated analysis and development of data will remove those essential
uncertainties nor the resulting reluctance of the parties to employ further resources in pursuing
the exercise.
CBTE suggests that in the revenue requirement model proposed by BC Hydro, the
disadvantages associated with unpredictable hydrologic conditions are all to be passed onto the
ratepayers. This is only partially true.
In the revenue requirement model, the ratepayers do pay the actual costs of the system,
whatever they turn out to be. To this extent, they are at risk. However, the ratepayers do not
face the potential for large variations in the annual cost of energy under BC Hydro’s proposal.
That is because of the Heritage Deferral Account that is a key part of it. When significant
short-term fluctuations in the actual cost of delivering energy from the Heritage Resources occur
due to particular water or market conditions, the Heritage Deferral Account can smooth out the
impact on customers by offsetting them against fluctuations in Trade Income and by bringing
them into rates when it is convenient to do so. Thus, one of the reasons for purchasing
insurance, to avoid the “lumpiness” of unanticipated costs, is rendered unnecessary by BC
Hydro’s proposal. The remaining reason, that over ten years the actual cost will be higher than
~
’* See below at pp.15-16 for a fuller treatment of this issue.
23
Transcript vol. I O , p.2117, lines 13-17 (El-Ramly).
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDING HERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
9
that implied by the fixed price/fixed quantity model advocated by CBTE, is clearly one that
customers are prepared to self-insure and are unprepared to pay BC Hydro a premium to
assume.
4 BC Hydro’s Heritage Contract Proposal
In general, the focus of debate at the hearing was on the appropriate conceptual model. There
was little controversy surrounding the particular form BC Hydro’s revenue requirement model
took. However, the following aspects of the proposal warrant brief discussion or elaboration:
1. The form of legislative changes required to implement the proposal;
2. The calculation of surplus hydro and Trade Income;
3. The regulatory framework for maximizing and allocating trade revenues; and
4. The brevity of the Heritage Contract.
4.1 Special Directive No. 4 and Special Direction No. 8
At Appendix B is a proposed Special Directive No. 4 to BC Hydro, revised to effect the
elimination of the Rate Stabilization Account.
At Appendix C is a proposed Special Direction No. 8 to the Commission, revised to legislatively
effect BC Hydro’s Heritage Contract proposal as follows:
0 “Trade income”, the “heritage deferral account”, the “heritage contract“, the “heritage
resources” and the “heritage payment obligation” are defined (section 1);
0 References to the Rate Stabilization Account are eliminated (section 1 and section 5);
0 The Commission is directed, for the purposes of determining BC Hydro’s revenue
requirement, to treat BC Hydro’s proposed form of Heritage Contract as if it were a
legally binding agreement (section 4.1(a)). Because the Heritage Contract defines the
Heritage Payment Obligation on a cost basis this provision ensures that forecast costs of
energy provided under the Heritage Contract are brought into rates on a cost-of-service
basis.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
10
0 The Commission is also directed to determine BC Hydro’s forecast of energy in excess
of the energy supplied under the Heritage Contract on a cost of service basis (section
4.1(b)).
0 Determining BC Hydro’s cost of energy for revenue requirement purposes on a cost-of-
service basis is subject to any “performance based ratemaking” mechanism the
Commission might wish to employ pursuant to section 60 (b.1) of the Act (concluding
clause of section 4.1).
0 The Commission is empowered to alter the Heritage Contract in certain limited
circumstances (section 4.2).
0 In determining BC Hydro’s revenue requirement the Commission is directed to account
for a forecast amount of Trade Income (section 5).
0 The Commission is directed to establish the Heritage Deferral Account for the purpose of
recording any differences between actual and forecasts of Trade Income and Heritage
Payment Obligation (section 5.1).
0 The Commission may bring positive or negative Heritage Deferral Account balances into
BC Hydro’s revenue requirement at its discretion (section 5.2 and section 4).
The proposed Special Direction also contains a new section 3.1 to reflect the proposed
recommendations relating to stepped rates.
4.2 Surplus Hydro, Trade Income and the Transfer Pricing Agreement
BC Hydro proposes to define Trade Income in Special Direction No. 8 as Powerex’s audited net
income, subject to a floor and ceiling of $0 and $200 million re~pectively.~~
Powerex’s audited net income will be calculated using generally accepted accounting principles
as applied to transactions between Powerex and third parties, transactions between Powerex
and BC Hydro, and associated transmission and other expenses. Transactions between
24
Transcript vol. 5, p.1114, line 21 to p.1115, line 12 (O’Riley).
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
11
Powerex and BC Hydro, including Powerex’s use of the Trade Account, will be governed by the
Transfer Pricing Agreement.25
There are three important elements of the Transfer Pricing Agreement that are relevant to BC
Hydro’s Heritage Contract proposal:
1. Sales of Surplus Hydro Electricity will accrue directly to the benefit of BC Hydro’s
ratepayers;
2. Point-to-point transmission costs incurred by BC Hydro in respect of Powerex’s trading
activities will be allocated against Powerex’s net income; and
3. An appropriate cost of energy will be allocated to net electricity exports through the use of
the Trade Account.
The first two provisions are important because they reduce the likelihood of the $200 million
ceiling being reached. The third is important as it removes any inappropriate incentive that BC
Hydro might have to draft reservoirs so as to increase net electricity exports in a particular year
to increase Trade Income where it is otherwise close to $200 million. These elements are
effected by the Transfer Pricing Agreement, through the following provisions.
Sections 5.1, 3.2.1 and 8.1.1 provide that if BC Hydro makes Surplus Hydro Electricity available
to Powerex and a sale occurs, Powerex will pay to BC Hydro the Electricity Transfer Price for
each MWh of Surplus Hydro Electricity delivered to Powerex. The revenue received by BC
Hydro from such sales directly offsets the Heritage Payment Obligation. The transfer appears as
a cost to Powerex, reducing its net income.
Section 9.2 provides that Powerex shall pay to BC Hydro the point-to-point transmission costs
incurred by BC Hydro for Powerex’s trading activities, excluding sales of Surplus Hydro
Electricity and certain other BC Hydro obligations. These costs reduce Powerex’s net income.
Sections 6.1 and 6.2 provide that Powerex may sell to BC Hydro or purchase from BC Hydro
electricity for trade purposes. Amounts sold to or purchased from BC Hydro for this reason are
recorded in the Trade Account, which at any time may have a positive or negative balance.
25 Exhibit 43.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING
A HERITAGE
CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
12
Amounts sold to BC Hydro increase the balance of the Trade Account, and amounts purchased
from BC Hydro decrease the balance of the Trade Account.26
The price Powerex pays for electricity purchased from BC Hydro is determined in Sections
8.2.1.2 and 8.2.2.1. Section 8.2.1.2 provides that if the Trade Account balance is positive, the
price Powerex pays for net purchases (and which is debited from the Trade Account) is the
weighted average cost of the electricity recorded in the Trade Account. Section 8.2.2.1 provides
that if the Trade Account balance is negative the price Powerex pays for net purchases is the
prevailing Electricity Transfer Price.27 The effect of this distinction is to provide Powerex with a
price signal that generally discourages it from taking the balance of the Trade Account negative
unless market conditions objectively make it economic to do so. This also has the effect of
discouraging Powerex from increasing net exports for the purpose of increasing Trade Income.
4.3 Regulatory Framework for Maximizing and Allocating Trade
Revenues
Paragraph 3(h) of the Terms of Reference requires the Commission to make recommendations
regarding the appropriate regulatory framework for the maximization and allocation of trade
revenues and the minimization of the expenses and delays associated with regulatory oversight
of activities relating to trade. BC Hydro's response to this requirement has a number of different
elements, as follows:
1. BC Hydro's evidence was that maximizing overall trade revenues without compromising
the Heritage Contract objectives of low rates and secure reliable supply requires the continued
integrated coordination between BC Hydro's generation and distribution lines of business and
Powerex, and the alignment of their respective interests, which BC Hydro proposes to effect
through its regulatory model generally.28
26
It is important to bear in mind that the Transfer Pricing Agreement provides not only for transactions
between Powerex and BC Hydro for trade purposes through the Trade Account, but also for BC Hydro to
sell surplus hydroelectricity and to purchase electricity to meet its domestic needs. See Transcript vol. 5,
p.1115, line 18 to p.1116, line 3 and vol. 4, p.765, line 24 to p.769, line 24 (O'Riley).
27
The Electricity Transfer Price is described generally in Exhibit 8, section 3.3.4, as the Mid-Columbia
index price plus the cost of transmission between Mid-Columbia and the BC border.
28
Transcript vol. 3, p.516, line 11 to p.517, line 26 (Elton).
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
13
2. The day-to-day activities of Powerex and the many individual transactions it enters into
in a given year should not be the subject of Commission review. As stated in section 3.4 of
Exhibit 8:
"An efficient trading operation requires flexibility to adapt to changing
market rules and circumstances; on ability to make timely decisions; and
a focus on market conditions."
Thus, the Commission should continue to ensure it is informed regarding Powerex's trading
activity by requiring the continued production of Export Trade Reports, but should not become
directly involved in overseeing Powerex's activities.*'
3. The efficiency with which Powerex markets BC Hydro's surplus and manages trade
income opportunities should only become an issue in the context of BC Hydro's overall revenue
requirements hearing.30
4.4 The Brevity of the Heritage Contract
During cross-examination, some parties made much of the fact that a $1 billion contract was
being captured in three simple pages.31In BC Hydro's respectful submission, these questions
were premised on a misunderstanding of the nature of BC Hydro's Heritage Contract proposal.
If BC Hydro and its ratepayers were willing to take a $1 billion gamble they would no doubt want
to set out the respective rights of BCH Distribution and BCH Generation in a way that would be
enforceable if one party were significantly disappointed by the results of the gamble. In that
case a long and complex agreement would be required. The complex Transfer Pricing
Agreement that forms a necessary underpinning to BC Hydro's regulatory construct would be a
very small part of the documentation required to implement the fixed price/fixed quantity model.
Generally, BC Hydro's proposal does not require such a rigorous approach and, indeed, would
not benefit from it. Contracting of that sort, by its nature, requires inflexibility. The parties do
their best to introduce certainty by providing rigid contractual formulas and let the results fall
where they may. BC Hydro has emphatically rejected that approach as being incompatible with
the security and reliability of supply and low-cost rates. Having rejected that approach, a rigid
29
Exhibit 8, section 3.4 and Transcript vol. 4, p.744, lines 4-1 5 (Little).
30
Transcript vol. 4, p.744, lines 4-1 5 (Little) and BC Hydro response to BCOAPO IR #I
.31.1
31
For example, see Transcript vol. 3, pp.571-2 and vol. 4, pp.859-70.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING
A HERITAGE
CONTRACT, STEPPED RATES
AND ACCESSPRINCIPLES - AUGUST20,2003
14
contractual model ceased to be an appropriate objective. Rather, a flexible structure which
would make maximum use of the existing regulatory framework for the regulation of BC Hydro
became refer able.^^ The result is a short, flexible contract which simply witnesses the joint
recognition by the generation and distribution lines of business of the future regulatory treatment
that both expect with respect to the costing and provision of Heritage Resources. The proposed
Heritage Contract does that and it is respectfully submitted that the record did not disclose any
basis for revising the form of contract as proposed in appendix C to Exhibit 8.
5 An Analysis of CBTE’s Model
The evidence also significantly elaborated the issues relating to CBTE’s model, a discussion of
which follows.
1. CBTE’s Model Does Not Conform to the Terms of Reference: In a number of ways the
CBTE model does not conform with the Terms of Reference. In particular:
(i) The CBTE proposal does not identify what changes to legislation are required to
implement it, and in particular whether the fixed price/fixed quantity contract could be effected
through changes to existing special directions, or whether at the other extreme new statutes
would be required for implementation.
(ii) The CBTE model assumes that BC Hydro’s generation line of business would be
unregulated at least to some degree,33which is inconsistent with the Energy Plan.34
(iii) CBTE’s preferred alternative to deal with the risk premium issue would be to reduce the
amount of Heritage Energy by an annual amount (whether 1% or %%). This too is inconsistent
with the Terms of Reference, which require that the benefits of the Heritage Contract to be
allocated to ratepayers be determined under average water condition^.^^
32
Transcript vol. 3, p.572 (Elton) and vol. 4, p.860, line 13 to p.869, line 16 (Spafford).
33 Transcript vol. 10,p.2168, lines 7-13 and p.2028, lines 18-22 (El-Ramly).
34
Exhibit 1, pp.8-9.
35
Exhibit 2, para. 2(d) and 3(d).
FINALARGUMENT THE BC HYDRO AND POWER AUTHORITY
OF
PRINCIPLES - AUGUST 20,2003
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A
15
(iv) The CBTE model fails to allocate equity, internal management costs or the cost of BC
Hydro’s transmission assets between BC Hydro’s distribution and generation lines of business,
as required by paragraph 3 (b) of the Terms of Reference. That allocation is of far more
importance in any fixed price/fixed quantity model than it is in BC Hydro’s revenue requirement
model.
2. CBTE’s Model Does Not Identify the Requlatorv Construct That It Requires: Mr. Epp
conceded that CBTE had not attempted to develop the regulatory model that would be required
in association with its proposal. The significance of this shortcoming was highlighted in the
exchange with the CBTE panel regarding disputes between BCH Generation and BCH
Distribution about re-opening the Heritage Another example is the conflicts that
could arise between the two lines of business regarding the marketing of surplus e l e ~ t r i c i t y . ~ ~
More generally, the whole question of how to deregulate a portion of BC Hydro while leaving the
remainder fully regulated was not resolved.
The CBTE model would be much better suited to a situation in which BCH Generation and BCH
Distribution were separate companies. That possibility had been the subject of speculation prior
to the Energy Plan, but was squarely rejected in the Plan. It is hard to escape the conclusion
that CBTE has not fully accepted this rejection.
CBTE suggested that details of the regulatory framework can be resolved at BC Hydro’s next
revenue requirement hearing. This solution is simply inadequate. A regulatory construct
addressing the regulatory treatment of BC Hydro’s lines of business must self-evidently be in
place before risks can be monetized, since those lines of business can be expected to have
different views of the magnitude and likelihood of the risks involved. More generally, it would be
impractical at best for the Commission to simply recommend a fixed pricelfixed quantity model
with a view to filling in the price at a revenue requirement hearing because, as Mr. Spafford
testified38when that proposition was put to him:
~~ ~ ~ ~
36 Transcript vol. 10, p.2122, line 14 to p.2125, line 18.
37
Transcript vol. 10, p.2107, line 19 to p.2109, line 8 .
38
Transcript vol. 5, p.1045, line 9 to p.1056, line 9.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING HERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
16
“So I think there’s quite a debate around even the broad parameters of a
fixed price/fixed quantity model that you would have to engage in, in order
to actually save just the determination of price to a revenue requirements
hearing.”
3. CBTE’s Model Does Not Maximize the Overall Value of BC Hvdro’s Svstem: BC
Hydro’s revenue requirement model is premised on the view that maintaining the maximum
over-all system value for the benefit of ratepayers requires the continuation of the integrated
manner in which BC Hydro currently runs its Mr. Spafford testified that a fixed
price/fixed quantity model will compromise system value by providing an incentive to BC
Hydro’s distribution line of business to take as much Heritage energy as it can when market
prices are high, and take as little Heritage energy as possible when market prices are
This was referred to as “average pricing inefficiencies” by Chairman Hobbs in the closing hour
of the proceeding, and after lengthy cross-examinationand questions by the Commission,
Dr. El-Ramly admitted this was a deficiency in the CBTE modeL4’
What is not clearly resolved on the record is the cost of the average pricing inefficiencies.
Generally, CBTE’s evidence was that it was relatively unimportant, while BC Hydro’s evidence
was that it was significant enough to cause it to re-consider any early inclination it had for a
fixed price/fixed quantity model. On this point, BC Hydro submits that the evidence of BC Hydro
ought to be preferred over that of Mr. Epp or Dr. El-Ramly simply for reasons of credibility. First,
BC Hydro is currently operating its system and for this reason alone can be expected to have
better knowledge of how its capability can best be utilized than can Mr. Epp or Dr. El-Ramly,
given the recent significant shifts in energy markets and energy trading and their absence from
BC Hydro and Powerex since 1995.42 Mr. Spafford’s evidence in this area was particularly clear
and unambiguous. Second, BC Hydro has no motivation for preferring one model over another
except for its stated goals of maintaining maximum system value for the benefit of ratepayers.
Indeed, one might reasonably expect that BC Hydro’s generation line of business at least would
prefer a fixed pricelfixed quantity model so it could develop its business interests. By contrast,
39
Transcript vol. 3, p.516, line 11 to p.517, line 26 (Elton).
40
Transcript vol. 5, p.1121, line 2 to p.1122, line 5.
41
Transcript vol. I O , p.2168, line 15 to p.2181, line 21.
42
and
BC Hydro response to BCUC IR # I .37.0, Exhibit 16-4.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
17
CBTE would financially benefit from higher retail electricity prices, a lower quantity of Heritage
Energy, and a BC Hydro distribution line of business that was acquiring relatively more energy
from the wholesale market during the spring freshet than at other times of the year - each of
which would be a result of the CBTE In these circumstances the evidence of BC
Hydro with regard to the relative cost of average price inefficiencies ought to be accepted.
Quite apart from the credibility of the evidence, CBTE's testimony on this point ought to be
~~~
rejected because it contains a false premise. Dr. E l - R a m l argued that a distribution utility
would not shift its scheduled deliveries of Heritage Energy over the course of the year so as to
lower the cost of acquiring additional resources from IPP's or the market. In fact, he suggested
that to do so would amount to speculation and thus be imprudent. BC Hydro respectfully
submits that this is quite wrong. BC Hydro's distribution line of business will have an obligation
to acquire its total portfolio as cheaply as possible. As its load grows above 49,000 GWh it will
have to go to IPP's and the market for its incremental needs. It will want to schedule its
Heritage Energy deliveries in the way that it reasonably believes will minimize the cost of the
incremental acquisitions from lPPs and the market. That will likely mean acquiring energy when
it is abundant and taking Heritage Energy when it is not.45
4. CBTE's Model Does Not Account for All Relevant Risks: CBTE acknowledged that eight
risk factors identified by BC Hydro were indeed legitimate risks that would be faced by BC
Hydro's generation line of business under the CBTE Of those, Mr. Epp conceded
that the following risks were not addressed in the CBTE proposal, or were addressed only
through the undefined force majeure clause:
43
Transcript vol. 9, p.1951, line 19 to p.1952, line 25 and p.2028, lines 6-12.
44
Transcript vol. 9, p.2056, line 6 to p.2064, line 23. Note that Mr. Epp did not seem to quite share his
colleague's views. See, for example, Transcript vol. 9, p.2058, lines 6-12, and p.2059, line 22 to p.2060,
line 3.
45
Transcript vol. 5, p.1121, lines 7-22 (Spafford).
46
Exhibit 25, pp.4-6, and Transcript vol. 9, p.2030, lines 13-15.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS PRINCIPLES - AUGUST 20,2003
REGARDINGHERITAGE
A
18
0 the risk of operating constraints imposed by water use plans adversely affecting the
quantity of energy available to BC Hydro’s generation line of business to meet its supply
ob Iigat io n;47
0 the risk of extended generation
the risk of operating and maintenance costs being higher than foreca~t;~’
0 the risk of business sustaining costs being higher than forecast, including the risk of
planned capital expenditures being higher than forecast and the “aging” risk;50
0 the risk of Burrard Thermal being de-commissioned (as contemplated by the Energy
In addition, Dr. El-Ramly conceded that his model did not explicitly consider political risk,
regulatory risk or business risk in a broad sense.52 All of these risks are relevant in determining
the appropriate return on equity and should have been considered before determining the risk
premium necessary if the CBTE model is adopted.
5. CBTE’s Trade Revenue Assumptions Are Too Hiqh: Dr. El-Ramly admitted in cross-
examination that the CBTE model, and in particular the $100 million credit to distribution in
consideration for the use by generation for trade activity, does not take account of any
diminishment in trade revenues (from $100 million) that can result from the average price
inefficiencies arising from the CBTE Moreover, Mr. O’Riley testified that under a
47
Transcript vol. 9, p.2031, lines 8-15.
4a
Transcript vol. 9, p.2032, lines 4-1 1.
49
Transcript vol. 9, p.2032, line 12 to p.2034, line 2.
50
Transcript vol. 9, p.2035, lines 7-25.
51
Transcript vol. 9, p.2047, line 13 to p.2048, line 10. At vol. 9, p.2051, lines 19-20 and vol. I O , p.2086,
lines 10-14, Mr. Epp agreed that the cost consequences of Burrard Thermal being de-commissioned
would be very significant.
52
Transcript vol. 9, p.2018, line 18 to p.2019, line 13.
53
Transcript vol. 10, p.2091, line 19 to p.2092, line 13.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND ~
REGARDING HERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST 20,2003
19
fixed pricelfixed quantity model, a more rigorous assessment of expected trade revenues would
be required.54
6. CBTE’s Model Incorrectly Assumes a Known Demand Curve: Mr. Spafford testified that
over time BC Hydro’s demand curve is expected to change and that change in not predi~table~~,
while the CBTE model assumes that the demand curve face faced by BC Hydro’s distribution
line of business will be p r e d i ~ t a b l e . ~ ~
7. CBTE’s Model is Inconsistent Reqardinq Upqrades of Heritaqe Resource: Mr. Epp
testified that BC Hydro’s distribution line of business ought to have a right of first refusal to
acquire energy on a cost-of-service basis from any upgrades BC Hydro’s generation line of
business might want to make at existing Heritage This begs the question of why
BCH Generation, which would be free to earn a profit where it would choose to make
such an investment, or how it could be compelled to, in the face of other more attractive
investment opportunities.
8. CBTE’s Model lncents Forecast Bias: An advantage of BC Hydro’s Heritage Contract
proposal is that there is no incentive on BC Hydro to underestimate its expected trade revenues,
or overestimate its forecast cost of energy under the Heritage Contract. Similarly, there are no
corollary incentives for BC Hydro’s ratepayers. By contrast, the CBTE proposal would cause
BC Hydro’s generation line of business and Powerex on one hand, and BC Hydro’s distribution
line of business on the other, to take contrary views of those issues that would further lengthen
the revenue requirement hearing that is CBTE’s preferred venue for resolving those issues.
The evidence of Dr. El-Ramly was that at best the process would be as difficult as it was before
BC Hydro’s rates were
54
Transcript vol. 5, p.1051, lines 8-17.
55
Transcript vol. 4, p.867, lines 2-8; see also BC Hydro response to BCUC IR #I .O.
.21
56 Transcript vol. 9, p.1911, line 24 to p.1911, line 7.
57 Transcript vol. 9, p.1930, line 24 to p.1931, line 14.
58
Transcript vol. 9, p.2020, line 13 to p.2021, line 22 (El-Ramly).
59
Transcript vol. 9, p.1893, line 15 to p.1894, line 12 and p.1961, lines 2-23.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS PRINCIPLES - AUGUST
REGARDINGHERITAGE
A 20,2003
20
9. CBTE's Model is Inadequate to Deal with Asvmmetry of Risk Reqardinq Trade
Revenues and Water Conditions: Dr. El-Ramly agreed that in low water years market prices
rise much higher than they decrease in high water years, but said that the CBTE model
accounts for that asymmetry by picking higher market prices in low water years and more
probable low prices during surplus years." Adjusting for this asymmetry in this way may or may
not be adequate. On the information provided by CBTE, it is simply not possible to tell.
IO. CBTE Model Minimizes Extent of Price Volatility bv Excludinq California Data: The $35
million risk premium identified by CBTE in their most recent proposal is based in part on
forecasts of future market prices, which in turn are developed from historical market prices. In a
number of the analyses and simulations performed by CBTE the extremely high wholesale
prices of 2000-2001were omitted from the analysis." This omission is at best unexplained (or
not understandable) and at worst is a substantive defect in the model insofar as it ignores the
events that BC Hydro say makes it likely that the $35 million risk premium is too low. To the
extent that the omission is unexplained or not understandable on the record it highlights again
the significant technical issues the Commission would have to resolve if CBTE's proposal was
finalized in a revenue requirement hearing.
11. CBTE's Assessment of Default Risk Is Misleadinq: In slide 22 of Exhibit 16-5CBTE
purports to show graphically the probability of BC Hydro becoming bankrupt in the first 1O-year
term of the Heritage Contract. On its face the probabilities look quite low, but as Dr. El-Ramly
admitted in cross-examination, the probability over the term of the Heritage Contract (Le., the
cumulative probability) is an amount equal to slightly less than the areas under each of the
curves.62 For the $400 million curve, the cumulative probability would appear to be between
10% and 15% by the year 201 5, which BC Hydro submits is quite significant. Even the more
remote but nevertheless identifiable 2% chance of a $1 billion shortfall may be seen as an
unacceptable risk for a Crown owned public utility.
12. CBTE Has Failed to Define the Reopener Clauses: Mr. Epp admitted that CBTE had not
attempted to prescribe the circumstances in which the CBTE Heritage Contract would be
60
Transcript vol. 10, p.2164, lines 6-17.
61
For example, Exhibit 16-5, slide 9, and Exhibit 24-3, pp.6 and 8 .
62
Transcript vol. 10, p.2114, line 17 to p.2115, line 6.
FINALARGUMENT THE 6C HYDRO POWER AUTHORITY
OF AND
PRINCIPLES - AUGUST
REGARDINGHERITAGE CONTRACT, STEPPED RATES AND ACCESS
A 20,2003
21
reopened or otherwise define a force majeure clause.63 Given the concession referred to above
that with a broad enough force majeure clause, the distinction between CBTE's model and BC
the
Hydro's proposal becomes illusory,64 CBTE model is substantively incomplete and cannot
serve as the basis of a Commission recommendation.
In addition to the foregoing, Mr. Spafford testified to a number of shortcomings in the CBTE
A
proposal and BC Hydro provided in the form of an undertaking a fuller list of shortcoming~.~~
number of those shortcomings overlap with the issues described above, while a number of them
are only touched upon in the foregoing discussion. In support of its position that the
Commission ought to reject the CBTE proposal, (indeed, any fixed pricelfixed quantity model)
in favour of BC Hydro's Heritage Contract proposal, BC Hydro relies on all the issues described
in those materials, with the exception of the concern expressed in item 3(h) concerning serial
correlation relating to hydroelectric generation capability. Material filed by CBTE after Exhibit 59
was prepared suggests that serial correlation was considered in connection with this variable.
However, it appears it was not rigorously considered in connection with a number of other
potentially significant variables and that remains a weakness of the
6 Stepped Rates
The second major area of BC Hydro's proposal relates to stepped rates. This portion of the
proposal is fully described in Exhibit 8-1, which sets out stepped rate design issues and options;
Exhibit 8-2, which sets out BC Hydro's stepped rate proposal; Exhibit 29, which discusses
access principles; and Exhibit 38, which elaborates BC Hydro's position with respect to Tier 2
pricing. No purpose is served by repeating the evidence here. BC Hydro simply relies on the
evidence in its entirety, as a proposal as to the form the stepped rate should take. This portion
of the final argument will deal with the significant stepped rate issues that emerged during the
course of the hearing.
63
Transcript vol. 10, p.2119, line 5 to p.2120, line 3.
64
Transcript vol. I O , p.2119, lines 21-24
65
Transcript vol. 4, p.823, line 26 to p.827, line 2, and Exhibit 59.
66
See, for example, the discussion regarding inflation and foreign exchange risk at Transcript vol. I O ,
pp.2101 to 2105 (El-Ramly).
ARGUMENT THE BC HYDRO
FINAL OF AND POWER AUTHORITY
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
22
A high degree of consensus was reached with respect to the stepped rate design and principles
and, when the smoke had cleared, only a few issues remained to be resolved, at least amongst
the major parties leading evidence on the topic. All parties agreed on a basic rate form that
requires calculation of a base load consumption (customer baseline or 'CBL") for each stepped
rate customer, and includes the following three basic parameters:
1. a Tier 2 rate;
2. a Tier 1 rate; and
3. an amount of energy, as a percentage of CBL, billed at each of the two rates.
While BC Hydro does not have a direct financial interest in one rate design over another, BC
Hydro does believe that the stepped rate design chosen should not fundamentally change the
balance that is being struck in its current rate design between its different customer classes, or
indeed within each customer class. 67 Based on that observation, and on the requirements of
the Energy Plan, BC Hydro believes the following three basic principles are required for
acceptable stepped rate designs:
1. the stepped rate should be a mandatory tariff;
2. the stepped rate should be "revenue and bill neutral" at historical consumption
levels; and
3. consumption changes at the Tier 2 rate should be "margin
There appears to be unanimous agreement that the stepped rate should be a mandatory tariff,
meaning that industrial customers should not be able to choose whether to take service under
the stepped rate or to continue taking service under Rate Schedule 1821.
While at various times there were differing views about the extent to which revenue and margin
neutrality should be fundamental principles of the rate, in BC Hydro's submission the principles
67
Transcript vol. 2, p.455, lines 8-26 (Elton); and p.318, line 10 to p.319, line 4 (Sanderson).
68
BC Hydro's three basic principles for acceptable stepped rate designs are elaborated in Exhibit 8-1,
Chapter 2, pp. 3-4.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
23
are important and the Energy Plan requires them.69 Moreover, all of the parties who actively
participated in the proceeding supported these principles, except for the JIESC who gave them
qualified support.7o
BC Hydro believes that compromise of the revenue and margin neutrality principles at this time,
f
in favour o a different approach, could inadvertently establish a new method for allocation of BC
Hydro's revenue requirement to customer classes. BC Hydro submits that the adequacy of the
contribution to BC Hydro's overall revenue requirement of any class of customers, or of any
individual customer, should not be considered in the context of the introduction of a new rate
form such as the stepped rate. It should only be considered in the context of all BC Hydro's
rates during a full rate design proceeding. The IPPBC panel was also of the view that changes
in the revenue contribution from the industrial class is an allocation of costs between rate
classes issue that is not on the table in this pr~ceeding.~'
Proceeding from the assumption that the stepped rate will be revenue and bill neutral, the
choice of any two of the three stepped rate parameters identified above will mean that the third
is simply a mathematical derivation of the first two. Attempting to fix all three parameters would,
as Commissioner Bradley pointed out, over-determine the rate.72
6.7 Tier 2 Rafe
CBTE and BC Hydro agreed that of the three parameters, the most important and the starting
point is the Tier 2 rate.73The Energy Plan is clear that the last block of energy consumed
69
The Energy Plan, p.33, under "Stepped Rates for Conservation and Energy Efficiency", states that at
the existing consumption level, the total cost to the consumer and the total revenue to the distribution
company offering the rate will be unchanged. Thus, the rate will be revenue and bill neutral at CBL
consumption, relative to the existing Rate Schedule 1821.
70
Mr. Potts said that he expects the JIESC approach to be very close to bill neutral and that there were
limits on his willingness to compromise bill neutrality (Transcript vol. 8, p.1701, line 19 to p.1703, line 8)
and Mr. Saleba agreed that inter-class cost shifting is a legitimate concern that needs to be addressed by
the Commission in its recommendations to government (Transcript vol. 8, p.1659, line 26 to p.1660, line
8).
71
Transcript vol. 7, p.1531, line 18 to p.1533, line 5 (Campbell).
72
Transcript vol. 8, p.1740, line 16 to p.1741, line 4 (Commissioner Bradley).
73
Transcript vol. 9, p.2016, line 9 to p.2017, line 13 (El-Ramly); Exhibit 8-2, Section 2.1, p.4.
ARGUMENT THE BC HYDRO AND POWER AUTHORITY
FINAL OF
PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A 20,2003
24
(i.e., Tier 2) should reflect the cost of new supply.74 BC Hydro interprets "new supply" to mean
future supply; that is, supply that has not yet been obtained.75
BC Hydro believes that the Tier 2 rate must not be higher than or lower than its true cost of new
supply, and therefore the Tier 2 rate must be set at BC Hydro's opportunity cost. If the Tier 2
rate is higher than BC Hydro's opportunity cost, BC Hydro would be giving customers a credit
for load reductions that exceeds the value of the energy the customers save, reducing earnings
and/or shifting costs to other customers. If the Tier 2 rate is lower than BC Hydro's opportunity
costs, it may provide insufficient incentive for customers to change their consumption patterns,
resulting in missed savings opportunities.
BC Hydro set out in Exhibit 38 the reasons why it prefers, at least initially, a one-year Tier 2
price.76 First, BC Hydro believes it would be risky to guarantee a Tier 2 price for longer than
one year shortly before it files an application for a new revenue requirement. Second, BC Hydro
believes it would be prudent to test the new rate design for at least a year before committing to
any particular design for a longer term. Third, locking in a Tier 2 rate for longer than one year
increases the risk of cost shifting.
There is a significant potential for cost shifting if the Tier 2 rate is fixed for a long term whether
or not there is retail access.77 Using historical prices, had the Tier 2 price been fixed at 6#/kWh,
BC Hydro could have had an annual revenue loss of over $36 million in four of the past six
years.78While two of the past six years would have yielded positive results, those years (2000
and 2001) were anomalous and the circumstances that produced the high prices in those years
are not expected to occur again.7g On the other hand, if the Tier 2 price had been set using a
readily available forward market price, the potential revenue loss in 2002 would have been cut
~~ ~
74
Energy Plan, Policy Action #21, p.33.
75
Transcript vol. 4, p.730, lines 15-18 (Elton).
76 Exhibit 38, Paper entitled "BC Hydro's Position With Respect To Tier 2 Pricing", pp.2-3.
77
The magnitude of potential cost shifting is discussed in Exhibit 29, Section 4, pp.8-IO.
78 Exhibit 29, Section 4.1, p.10.
79
Transcript vol. 6 , p.1365, line 21 to p.1366, line 4 (Lusztig).
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
25
in half." Thus, the Tier 2 price should be set based on an unbiased view of the forward market
so that BC Hydro's revenue losses and gains tend to zero over time."
BC Hydro proposes to use the forward price of a one-year contract for mid-C delivery as a proxy
for its opportunity cost. BC Hydro sees mid-C as a competitive, robust market with a lot of
transactions and a lot of market participants, and BC Hydro has confidence in mid-C as a
market price indicator for this region.82The mid-C one-year forward provides an objective,
verifiable reference point for ratemaking purposes, and BC Hydro believes that it is an
acceptable compromise between the competing goals of avoiding costs shifting and providing
stable price signals for investment.
The JIESC panel appeared to accept that the Tier 2 rate should be based on the cost of new
supply as a principle,83but nevertheless wished to escape its application on the basis of other
In
factors such as predictability and a~ceptability.'~ BC Hydro's respectful submission, that
position is not available to them. The industrial's proposal and their preference for a solution
based on backward looking costs is simply incompatible with the notion that Tier 2 is to be
based on the cost of new supply which is a forward looking concept, not a backward looking
one.
It is BC Hydro's respectful submission that the methodology for determining the Tier 2 price
comes down to a choice of whether a shorter-term forward price, which is BC Hydro's proposal,
or a longer-term forward price, which is CBTE's proposal, is preferable. It is worth pointing out
at this juncture that the CEC agrees with both BC Hydro and CBTE on this point, since it
proposes that both a one-year mid-C forward price and a longer-term LRIC-based Tier 2 price
should be offered to stepped rate The IPPBC panel preferred a longer-term price
80
Exhibit 29, Section 4.1, p.10.
81
Transcript vol. 6, p.1301, lines 17-20 (Fussell); and p.1366, lines 9-19 (Lusztig).
82
Transcript vol. 4, p.732, lines 18-24 (Little).
a3
Transcript vol. 8, p.1626, line 25 to p.1627, line 22; p.1676, lines 3-8 and lines 24-25; and p.1736, lines
11-12 (Saleba).
84
Transcript vol. 8, p.1676, lines 12-16 (Saleba).
85 Exhibit 28, p.2, and Transcript vol. 2, p. 356, line 20 to p. 357, line 2 (Weafer).
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING
A HERITAGE PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
26
from an investment point of view,86but agreed with Commissioner Bradley that new IPP
investment in capacity will tend to be in response to the BC Hydro RFP market and not in
response to the retail market under the Tier 2 price.87 The IPPBC panel said that contractual
arrangements in the retail market will tend to be shorter and more complex than the RFP
contracts,88and agreed that the ability to choose a shorter-term forward price would create
additional opportunities for them.89
The IPPBC panel accepted that BC Hydro's Tier 2 pricing proposal is prudent, and, while
preferring that transmission costs be added to the mid-C price, concluded that "it's not bad".90
The industrials prefer a stable longer-term Tier 2 price, but said that they currently make
assessments of average future costs for many of the factor inputs they use in their proce~ses.~'
BC Hydro understands that customers would be able to perform the same sort of analysis on
electricity prices that they currently perform for other commodity purchases; that is, they would
look at forecasts of future prices, entertain a portfolio of purchases to spread the costs around,
and look at revisions to their industrial process to reduce reliance on the product, with the
objective of ending up with an average cost they are comfortable Thus, customers are in
a position to deal with variability in the Tier 2 price.
CBTE and BC Hydro are, despite their respective preferences for longer- or shorter-term Tier 2
pricing, are in substantial agreement in principle. The CBTE proposal for a longer-term LRIC-
based Tier 2 price is predicated on the assumption that customers would wish to make long-
term investments in demand-side management (DSM), cogeneration, or contracts with lPPqg3
and on the assumption that customers making such investments would leave BC Hydro service
86
Transcript vol. 7, p.1463, lines 13-15 (Campbell).
87
Transcript vol. 7, p.1556, line 9 to p. 1559, line 15. See also Transcript vol. 7, p.1487, line 20 to p.
1488, line 2 (Campbell).
88
Transcript vol. 7, p.1558, lines 17-26 (Campbell).
89
Transcript vol. 7, p.1464, line 23 to p. 1465, line 7 (Campbell).
90
Transcript vol. 7, p.1520, lines 4-1 9; and p.1521, lines 13-21 (Campbell).
91
Transcript Volume 8, Page 1706, lines 18-24 (Fitzgerald).
92 Transcript Vol. 8, p.1707, lines 7-19 (Fitzgerald).
93
Transcript vol. 9, p.1935, lines 20-26 (El-Ramly).
FINALARGUMENT THE BC HYDRO AND POWER AUTHORITY
OF
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A 20,2003
PRINCIPLES - AUGUST
27
for a long period of time; in fact, CBTE assumes “he’s leaving forever”.94 CBTE recognized that
the basis for determining the Tier 2 price should be matched to the term of commitment made
and
by the cu~torner,’~ acknowledged that the correct price signal for customers who wish to
leave BC Hydro service for only one year would be the one-year forward ~ r i c e . ’ ~
Thus, BC Hydro believes that all parties except JIESC accept that a one-year price for
customers who are only prepared to commit to wholly or partially leaving BC Hydro service for a
one-year period is appropriate. JIESC accepts that a one-year commitment is appropriate, but
still wants a backward looking price for “practical” reasons. As set out above, the JIESC
testimony on this point was not compelling and it is respectfully submitted that a one-year price
should be employed to match a one-year commitment in setting the Tier 2 price.
6.2 Tier 2 Pricing Options
For the reasons set out above, BC Hydro proposes that initially there should be a single Tier 2
However, BC Hydro is not fundamentally opposed to
price: the one-year mid-C forward ~ r i c e . ’ ~
~
the notion of Tier 2 pricing ~ p t i o n s . ’After BC Hydro and stakeholders have become more
experienced with the stepped rate and have learned about; for example, the extent of the
volume risk BC Hydro is truly facing, customers’ demand response to the marginal price signal,
and whether there are any unintended consequences, further Tier 2 pricing options including a
longer-term price and time-of-use pricing could be considered.” The term upon which the Tier
2 price is determined would require a corresponding commitment on the part of the customer -
there would need to be a commitment to price, term, quantity and shape, as well as a proper
94
Transcript vol. 10, p.2155, lines 19-23 (El-Ramly).
95
Transcript vol. 9, p.2014, line 9 to p.2015, line 12; and vol. I O , p.2154, line 10 to p.2155, line 4
(El-RamIy) .
96
Transcript vol. 9, p.1932, lines 17-24 (El-Ramly).
97
BC Hydro proposed a method for determining a one-year mid-C product in Section 2.1 of Exhibit 8-2.
98 Transcript vol. 6, p.1173, lines 18-21 (Lusztig); p.1253, lines 24-26 (Fussell); p.1399, line 20 to p.1400,
line 5 (Lusztig).
99
The stepped rate should be mandatory, meaning that customers should not be given the opportunity to
elect either the stepped rate or the 1821 rate. However, pricing options with respect to the Tier 2 rate
could be allowed after the stepped rate is implemented. Customers could, eventually, be able to elect a
long-term (LRIC), short-term (one-year), or time-of-use Tier 2 pricing option provided that the rates each
reflect BC Hydro’s opportunity cost over the corresponding term. (Transcript vol. 7, p.1419, line 11 to
p.1422, line 7; and p.1173, lines 18-21.)
ARGUMENT THE BC HYDRO
FINAL OF AND POWER AUTHORITY
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
28
imbalance charge.’” In the meantime, the single Tier 2 price should fit as many different types
of demand response as possible. For that purpose, it is thought that a shorter-term price and
shorter-term commitment provides more flexibility for stepped rate customers and less risk for
BC Hydro and non-participating customers. BC Hydro understands that those wishing to
undertake major investments would prefer a long-term, stable Tier 2 price. While this option
may be added in the future, Power Smart and Customer Based Generation initiatives will
continue to be available to support those investments.
Thus, the issue between CBTE, the CEC and BC Hydro with respect to Tier 2 pricing boils down
to the level of commitment that might be expected from customers as a general rule and, as
well, the number of different Tier 2 prices which would initially be available to customers. If that
is the case, BC Hydro continues to believe that initially the one-year price based on Mid-C
contracts is the most appropriate tool.
63
. Tier I Rate And Tier ?/Tier 2 Split
Once the Tier 2 price is determined, one additional design choice is available if bill neutrality is
to be ensured: either setting a Tier 1 rate or defining a Tier I/Tier 2 split. The choice of either of
these two parameters will dictate the other.
BC Hydro has recommended determining the split at 90/10; that is, 90% Tier 1 and 10% Tier 2,
and allowing the Tier 1 price to simply fall out from that. BC Hydro’s reasoning is twofold.
First, BC Hydro has concerns about the risk associated with a large Tier 2 volume. Determining
the Tier 1 rate at, for example, the cost of BC Hydro’s hydro resources, and allowing the split to
float, would result in a Tier 2 volume significantly larger than 10%. BC Hydro believes that the
volume risk becomes unacceptably large at something approaching 20%, and that an initial limit
of 10% strikes a reasonable balance between volume risk for BC Hydro and customer
opportunity.”’
Second, a floating split is likely to be more difficult to administer and BC Hydro expects that
customers would prefer the certainty of a fixed volume of their load exposed to market-based
100
Transcript vol. 6, p.1174, lines 2-14 (Fussell); and vol. 9, p.2013, line 23 to p.2015, line 12; and vol. I O ,
p.2154, line 25 to p.2155, line 23 (El-Ramly).
101
See Exhibit 8-2, Section 2.1, pp.6-7 for further discussion.
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
29
pricing, rather than a volume that varies from one year to the next. In a system where the split
floats, customers could make investments to reduce their usage of Tier 2 power (e.g.
contracting for supply from an IPP), only to find that their Tier 2 volume has decreased (or
increased) in the following year. BC Hydro believes that fixing the Tier 1TTier 2 split would
provide customers with more certainty than fixing the Tier 1 price and allowing the split to vary
from year to year as the Tier 2 price varies. Furthermore, if a fixed 90110 split were employed,
the Tier 1 price would not be expected to vary to a large degree.”*
BC Hydro understands that the industrials have expressed an interest in basing the Tier 1 price
on cost. The precise reasoning for that interest is unclear. Mr. Potts and others on the JIESC
panel forcefully expressed their preference for real verifiable costs, as they characterized
them.lo3 Certainly, BC Hydro recognizes the importance of rates being cost based.lo4 BC
Hydro continues to maintain that so long as the revenue neutrality principle is maintained, the
stepped rate that it proposes will be cost based and customers need have no fear that their
rates, taken as a whole, will wander significantly from cost. There is simply no evidence that
makes clear the basis for the industrials’ strong conviction in this area.
BC Hydro does not wish to minimize the significance of these convictions, however. Within
reasonable bounds, the 90/10 split with residually derived Tier 1 price is not a point that is
central to BC Hydro’s position; that is, it is the impracticality and potentially increased risk
associated with a floating split which strikes BC Hydro as dubious. If customers have a very
strong preference for a fixed Tier 1 price and accept the difficulties arising from a split that is
allowed to float, BC Hydro could implement a rate that serves that purpose.
102
As illustrated in Exhibit 67, during the post-2002 period the Tier 1 price would have been between
$22/MWh and $24.6/MWh. 2001 and 2002 were anomalous years and the extreme circumstances that
produced the high prices in those years are not expected to occur again. BC Hydro believes that the
post-2002 period is a much better indicator of the variability that would be expected in Tier 1 and Tier 2
prices going forward.
103
Transcript vol. 8 , p.1736, lines 19-22 (Saleba) and p.1704, lines 13-22 (Potts).
104
Transcript vol. 6, p.1234, line 22 to p.1235, line 4 (Lusztig).
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
30
It would be important, however, that the Tier 1 rate recover all of the fixed costs that BC Hydro
that is, the assets which BC Hydro has built are not just
incurs to serve the industrial class;1o5
the hydro resources, but also include its existing thermal resources.
Indeed, there is no basis in the Energy Plan or Terms of Reference for the industrial customers
distinguishing between the hydro and thermal resources in BC Hydro's system.1o6If the Tier 1
rate is to be cost based, then the Tier 1 rate should reflect all of the fixed costs of all of BC
Hydro's Heritage Resources as set out in Schedule A to the Terms of Reference, including
Burrard, Fort Nelson and Prince Rupert. If the Tier 1 price does not cover those costs, then BC
Hydro would have to look for recovery of those fixed costs through the Tier 2 rate.Io7 However,
BC Hydro opposes putting those fixed costs in the Tier 2 rate because the Tier 2 rate may then
exceed BC Hydro's cost of new supply, which could shift costs as discussed above, and
because those industrial customers who choose to take their supply from a source other than
BC Hydro for Tier 2 amounts would avoid those fixed costs, inevitably resulting in cost shifting.
For these reasons, if the Commission is persuaded to set the Tier 2 price at market and the Tier
1 price at the cost of the heritage resources, the cost of the latter should include all of the fixed
costs (but not the variable costs) of the thermal resources.
6.4 Load Aggregation
BC Hydro's concerns with respect to load aggregation are that customers should not be
encouraged to aggregate their CBL and then achieve significant savings simply by closing down
one of their facilities. BC Hydro is also concerned that if aggregation is allowed without
limitations, while the actual volume of Tier 2 energy at risk would not mathematically increase,
larger projects and a larger number of projects might take place and, thus, there would be as a
practical matter a potentially greater volume at risk.'" Mr. Potts accepted that there ought to be
controls on that behaviour and the aggregation of CBLs should only be allowed for operating
~~
f a c i l i t i e ~ . ' Limitations on aggregation would address the concerns that BC Hydro identified
105
Transcript vol. 6, p.1194, lines 21-25; p.1354, lines 1-9 (Lusztig); and p.1660, lines 9-16 (Saleba).
06
Transcript vol. 8, p.1684, line 4 (Potts).
107
Transcript vol. 6, p.1354, lines 1-9 (Lusztig).
108
Transcript vol. 6, p.1322, lines 2-15; and p.1158, lines 2-11 (Lusztig).
109
Transcript vol. 8, p.1700, lines 17-19 (Potts).
ARGUMENT THE BC HYDRO
FINAL OF AND POWER AUTHORITY
A CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE PRINCIPLES - AUGUST
20,2003
31
and it has no objection to load aggregation, provided that suitable limitations in this respect can
be developed.
6.5 Demand Charge
BC Hydro proposes that the stepped rate apply only to the industrial customers’ energy charge.
The demand charge should be based on a CBL demand and should be fixed.’” Thus, a
customer’s demand charge would remain fixed so long as the customer continues to consume
within the proposed deadband around CBL (plus or minus 10%). The demand charge would be
adjusted to reflect a changed CBL, for example, as a result of efficiency investment that reduced
consumption below the CBL deadband.’” This approach is consistent with the manner in which
demand has been determined and charged under BC Hydro’s Real Time Pricing (RTP) and
Time-of-Use (TOU) pilot programs.
Similarly, BC Hydro proposes that customers not be allowed to aggregate their demand
charges. If the demand charge for customers with multiple sites were based on an aggregated
single peak, as distinct from using the sum of the customer’s non-coincident peaks, these
customers’ demand charge would decrease without any short or medium term benefit for BC
Hydro or its other customers. Thus, aggregation of the demand charge would shift costs.
7 Retail Access
BC Hydro expects that in a retail access regime customers will likely wish access to some, but
not all, of the traditionally bundled energy products supplied by BC Hydro. BC Hydro believes
that derivation of distinct rates for ancillary services and more robust terms and conditions to
avoid arbitrage between supply from BC Hydro and other sources need to be developed before
retail access is permitted.
Thus, BC Hydro continues to believe that the Commission should recommend to government
that retail access not be introduced until the BCTC assumes responsibility for open access
transmission and can make adjustments to the rates, terms and conditions of access to
transmission service. Based on the schedule described more fully in section 8 below, stepped
rates and retail access could not be in place until shortly before BCTC’s new rates.
110
Transcript vol. 6, p.1347, line 16 to p.1349, line 1 (Fussell).
111
Transcript vol. 6, p.1348, lines 22-24; and p.1352, lines 17-19 (Fussell).
ARGUMENT THE BC HYDRO
FINAL OF AND POWER AUTHORITY
REGARDING CONTRACT, STEPPED RATES AND ACCESS
A HERITAGE PRINCIPLES - AUGUST
20,2003
32
Numerous witnesses spoke about the need for certainty of the rules for market access.”* The
IPPBC panel said that investment decisions cannot be made and lPPs will not build until they
know what the transmission access rules are, and that there will not likely be any significant new
investment in IPP projects during 2004.113Rushing to put interim rules in place that will only be
shortly superseded when BCTC’s tariff is approved will not provide certainty to the IPP
community because there is a fair chance that the tariff and terms for transmission access will
Furthermore, retail access is complex and
be changed once BCTC makes that applicati~n.”~
ought not to be implemented on a piecemeal basis.’I5
The above clearly suggests that retail access should not be implemented until BCTC’s tariff is in
place. Given that there would not likely be any new investment in lPPs prior to that time, it
appears that there would be little if any benefit for lPPs or customers from implementing interim
retail access, but there would be significant risks. Moreover, delaying retail access would allow
customers and BC Hydro to gain experience with the stepped rate before the addition of retail
access.
If retail access is nevertheless desired before BCTC’s rates are in effect, BC Hydro has
proposed how it could be implemented using BC Hydro’s existing WTS tariff.’I6 BC Hydro
understands that, among the parties who desire interim retail access, the preferred way to
implement it would be to nominate lPPs wishing to serve industrial loads as Network Resources
under BC Hydro’s Network Integration Transmission Service (NITS) c~ntract.’’~
112
Transcript vol. 2, p.379, lines 11-14 (Austin); vol. 3, p.628, lines 6-12 (Elton); vol. 3, p.628, line 20 to
p.629, line 4 (Little); and vol. 7, p.1534, line 5 to p.1535, line 17 (Campbell).
113
Transcript vol. 7, p.1448, lines 2-14 (Campbell).
114
Transcript vol. 3, p.629, lines 4-12 (Little).
115
Transcript vol. 3, p.629, line 16 to p.630, line 4 (Little); and vol. 6, p.1180, line 23 to p.1181, line 6
(Lusztig).
116
See BC Hydro’s paper entitled “BC Hydro’s Position With Respect to Access Principles Required for
Retail Access“, which forms part of Exhibit 29.
117
This approach is described in Exhibit 29, pp.5-6.
FINALARGUMENT THE BC HYDRO AND POWER AUTHORITY
OF
A HERITAGE
REGARDING PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
33
7.7 Access Principles
Absent retail access and with an appropriately designed Tier 2 rate, access principles are
unnecessary.l18 However, BC Hydro has set out the access principles that would be necessary
if retail access were to be implemented using BC Hydro's NITS contract.'1g
Specifically, those wishing to obtain retail access under the umbrella of NITS would have to
agree with BC Hydro to the generation schedule of their alternate source of supply so that BC
Hydro can ensure the load shape supplied by the third party is appropriate and so that BC
Hydro would be able to reconcile actual deliveries with that which was scheduled and, thus,
calculate any imbalance directly after the fact. Further, they would have to agree to pay BC
Hydro the higher of the prevailing Tier 2 rate and the market value of acquiring the imbalances
based on actual market conditions. The alternate supplier would also have to agree that it
would not be compensated for any positive imbalances, though a deadband comparable to that
in the WTS energy imbalance rate would be appropriate.
Finally, customers would have to commit to use BC Hydro's NITS service for at least one year to
permit BC Hydro to know what obligations it will have to serve under its NITS contract. The
commitment would need to be renewed each year to prevent seasonal arbitrage.
These access principles were the subject of questions during the hearing and are discussed in
further detail below.
7.2 Imbalance Charge
The stepped rate design, and in particular the low Tier 1 rate, virtually assures that customers
who choose to pursue retail access or customer based generation will continue to take part of
their load from BC Hydro.12' Thus, BC Hydro will need a way to distinguish how much energy
the customer takes from BC Hydro and how much it takes from the alternate supplier (IPP,
marketer or CBG). BC Hydro would require that the customer provide a forecast hourly
schedule of the load shape the IPP, marketer or CBG would be delivering.12' Having made that
Exhibit 29, p.3.
119
Exhibit 29, pp.5-6.
Transcript vol. 6, p.1316, lines 17-22 (Lusztig).
121
Transcript vol. 6, p.1312, lines 6-8; and p.1316, lines 2-9 (Fussell).
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
34
commitment, BC Hydro would charge an energy imbalance charge to the extent that schedule
was not actually supplied within a deadband comparable to that in the WTS energy imbalance
rate,122
and the customer leaned on BC Hydro’s BC Hydro would not compensate
the alternate supplier for positive imbalances outside the deadband.
BC Hydro has concluded that the existing WTS tariff energy imbalance charge is inadequate for
retail and that customers who choose to obtain some or all of their energy from an
alternate supplier would have to agree to pay BC Hydro the higher of the prevailing Tier 2 rate
and the market value of acquiring the imbalances based on actual market condition^.'^^
Whether the imbalance charge is set at the higher of market and Tier 2, or just market, is, as
described by Chairman Hobbs, a question about who should get the benefit of the opportunity
value that is there.126
Currently, BC Hydro will buy as much energy from the market as it can during low price periods
to either serve domestic load, or hold it and sell it at an opportune time when the price is
higher.127There is a limitation on how much energy BC Hydro can buy in terms of both
Therefore, if the market price is lower
transmission limitations and generation limitations.128
than the Tier 2 rate and market purchases must be diverted to serve imbalances around an
IPP/customer contract, providing that energy to the IPP/customer would deprive BC Hydro, and
An
its customers as a whole, of that benefit.12g imbalance charge that is the higher of market
and the Tier 2 rate would keep BC Hydro and all of its customers whole. An imbalance charge
that is just market plus administrative costs would shift that benefit to the IPP/customer at the
122
The deadband would be similar in concept to the WTS deadband, but the appropriate width of the
band would need to be determined for the context of lPPs and retail access. (Transcript vol. 6, p.1308,
line 19 to p.1309, line 14 (Lusztig).
123
Transcript vol. 6, p.1311, lines 13-18; p.1316, lines 2-9 (Fussell); and p.1316, line 26 to p.1317, line 6
(Lusztig).
124
Exhibit 8-2, Section 4.2, p.11; and Exhibit 29, Section 2.2, p.5.
125
Exhibit 29, Section 2.3, p.6.
126 Transcript vol. 7, p.1425, lines 3-7 (Chairman Hobbs).
127
Transcript vol. 7, p.1423, line 16-24 (Fussell).
128
Transcript vol. 7, p.1423, line 24 to p.1424, line 5 (Fussell).
129
Transcript vol. 7, p.1424, lines 6-18 (Fussell).
FINALARGUMENT THE BC HYDRO
OF AND POWER AUTHORITY
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
35
expense of BC Hydro and its other customers. This would be contrary to BC Hydro's
interpretation of the Energy Plan that the benefit of the Heritage Resources and the benefits of
trade go to all ratepayer^.'^'
73
. BC Hydro's Existing Access Principles
Chairman Hobbs asked the BC Hydro witnesses a number of questions about the applicability
of BC Hydro's existing wholesale access principles in a retail access regime. BC Hydro's
existing access principles provide a starting point for thinking about access principles for retail
access, but they are not sufficiently robust to deal with the increased arbitrage opportunities
provided by retail access combined with the stepped rate. In particular:
the stepped rate provides a much better price signal at the margin compared to the
pricing regime under BC Hydro's existing access principles;131
0 the City of New Westminster was not able to react or arbitrage its price in the same way
that an industrial customer could because it could not make its own load decisions - it
was one step removed from its customers who actually made such decisions; 13' and
0 BC Hydro has an obligation to serve its retail customers and if they call on BC Hydro's
system it has an obligation to serve that load.133
Thus, BC Hydro's existing access principles are inadequate for retail access in the stepped rate
context. BC Hydro continues to believe that access principles cannot be finally determined until
the full rate design is identified. The final structure of the stepped rate design significantly
influences the number, nature and extent of the arbitrage opportunities that BC Hydro and its
customers need to concern themselves about. For example, the access principles that would
be required if the Tier 2 rate was set as proposed by CBTE, which assumes customers who
choose retail access leave BC Hydro service forever, would be very different than the access
principles required if the Tier 2 rate was set as proposed by BC Hydro. Thus, the complexity of
130
Transcript vol. 7, p.1425, lines 8-23 (Fussell).
131
Transcript vol. 6, p.1375, line 14-20; and p.1376, lines 5-8 (Lusztig).
132
Transcript vol. 6, p.1375, line 21 to p.1376, line 2; and p.1376, lines 8-10 (Lusztig).
133
Transcript vol. 6, p.1381, line 22 to p.1382, line 3 (Lusztig).
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
20,2003
36
the access principles is very much a function of the rate design that is ultimately proposed by
the C o m m i ~ s i o n . ' ~ ~
BC Hydro anticipates that the access principles required for retail access in the context of the
stepped rate would be similar in substance to those set out above for retail access under BC
Hydro's NITS contract and those in BC Hydro's existing access principles, but the final form of
the access principles will very much depend on the stepped rate design ultimately chosen and
on the form of BCTC's tariff.'35
8 Scheduling
During the course of the hearing, the Chair asked BC Hydro to address the question of
scheduling over the next 18 months as part of its final argument. This section will respond to
that request by laying out in chronological order the events that it sees with respect to it and
BCTC's rates over the next 18 months.
Pursuant to the Terms of Reference, the Commission is to respond with a report to government
by October 17, 2003. BC Hydro believes that it is reasonable to expect a government response
to that report in four to ten weeks. BC Hydro will then be able to file a revenue requirement
application. BC Hydro currently anticipates that it will be seeking a rate increase for fiscal 2005
- that is to say, commencing April 1, 2004 - and anticipates that it will likely ask that its rates
become interim at newly established levels as of that date. While the precise timing of its filing
for new rates depends on the precise timing of the government's report, it certainly expects to
file well in advance of April 1, 2004.
The revenue requirements application will rely in part on BC Hydro's capital spending and
resource acquisition plans for 2004/05. The latter will be determined in a short-term resource
plan BC Hydro expects to complete by November 30, 2003.
BC Hydro expects that its revenue requirement application will seek to adjust rates on a pro rata
basis, rather than undertake a new rate design. BC Hydro has not undergone a rate design
hearing since 1992 and believes that such a proceeding will be extremely complex and
134
Transcript vol. 6, p.1390, line 3 to p.1391, line 10 (Lusztig).
135
Transcript vol. 6, p.1383, line 7 to p.1385, line 6; and p.1391, line 25 to p.1392, line 22; vol. 7, p.1410,
lines 8-23 (Lusztig)
ARGUMENT THE BC HYDRO AND POWER AUTHORITY
FINAL OF
REGARDINGHERITAGE
A AND ACCESS
CONTRACT, STEPPED RATES PRINCIPLES - AUGUST
20,2003
37
time-consuming. It thinks it wholly impractical that such a hearing be undertaken at the same
time as a revenue requirement hearing, especially when the revenue requirement hearing will
be the first one in ten years. Attempting to combine the two hearings together is a recipe for an
extended, unfocused and undisciplined proceeding.
Although a general rate design would be highly inappropriate in connection with its 2004
revenue requirement proceeding, BC Hydro does believe that with the benefit of the
government's response to the report of this Commission with respect to stepped rates, it should
be possible to make a final order arising out of the revenue requirement hearing with respect to
stepped rates. Thus, BC Hydro believes that stepped rates should be capable of being
implemented at the same time that the Commission's decision with respect to revenue
requirement is issued. Under BC Hydro's current thinking with respect to timing, that could be in
the third quarter of 2004.
It might be possible to introduce stepped rates even earlier; that is, if BC Hydro's proposal with
respect to delaying retail access was to be accepted, there is no barrier to designing and
implementing a stepped rate even before a revenue requirement proceeding. From BC Hydro's
perspective, there is no reason that it could not file a new rate schedule implementing the
government's directions arising from the Commission's recommendationswithin 30 days of the
government's direction being received. Thus, stepped rates in effect on this limited basis by
February 1, 2004 are perfectly manageable.
The issue of retail access raises the question of BCTC's timing. The Transmission Corporation
Act requires that BCTC seek its own wholesale transmission rates by December 31, 2004. BC
Hydro believes that the requirements of that statute would be met so long as BCTC files a rate
application with the Commission by that date.
Notwithstanding the outside limit established by the legislation, BCTC, on the record of this
proceeding, indicated its intention to file for WTS rates in March or April 2004. On the
assumption that it can meet this schedule, those rates might be in effect by the third quarter of
2004. Once those rates are established, BC Hydro has indicated that it should be quickly able
to apply for the appropriate terms and conditions of generation access principles that should
apply in a retail access environment. Thus, BC Hydro should be able to file its application,
which at that point should be fairly quickly disposed of, by the third quarter of 2004 and likely
have it approved by the end of calendar year 2004.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A PRINCIPLES - AUGUST 20,2003
38
In these circumstances, BC Hydro does not believe that establishing interim rules for retail
access makes any sense. As Mr. Campbell candidly conceded on behalf of the Independent
Power Producers, who are the main beneficiaries of retail access, temporary rates which are
bound to change within a matter of months are unlikely to induce any significant investment by
IPPs, in any event.136Thus, the rush to establish temporary rules of retail access serves little
purpose.
The schedule outlined above contemplates decisions with respect to BC Hydro's revenue
requirement, BCTC's WTS rates and the final form of stepped rates, all before the end of 2004.
That ambitious schedule would then be followed by a rate design application which looked at all
of the interclass and intraclass allocation issues in BC Hydro's rate design which have been
dormant since 1992. That would be a major proceeding in itself. With the completion of that
proceeding, the re-regulation of BC Hydro would be complete.
9 Summary and Conclusions
Based on the submissions set out in this Argument, BC Hydro respectfully asks that the
Commission make the recommendations set out below in response to the Terms of Reference:
1. That the government revise Special Direction No. 8 as set out in Appendix C of
this Argument and to attach the form of Heritage Contract set out at appendix C
of Exhibit 8.
2. That Special Directive No. 4 be revised as set out in Appendix B of this Argument
to effect the elimination of the Rate Stabilization Account.
3. That the government direct the Commission to implement the recommendations
in the Commission's report to the Lieutenant Governor in Council on stepped
rates for BC Hydro's industrial and large commercial customers. Recommended
wording is included in paragraph 3.1 of Special Direction No. 8, attached as
Appendix C of this Argument. This wording assumes that the Commission will
make recommendations in its report that are sufficiently specific that they
facilitate the identification of all of the rate design features discussed in sections
6 and 7 of this Argument.
136
Transcript vol. 7, p. 1535, lines 6-13.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
39
,-
4. That the government acknowledge that the alignment of interests between BCH
Generation, Powerex and BCH Distribution permits the Commission to restrict its
oversight of Powerex to ensuring that its services are efficiently and
cost-effectively delivered to BC Hydro during BC Hydro's revenue requirement
proceedings.
BC Hydro submits that these relatively straightfonvard recommendationswill facilitate the
f
implementation of the first phase o the Energy Plan as it relates to the re-regulation of BC
Hydro and will permit BC Hydro to file a revenue requirement application in a timely way. New
rates established pursuant to that application will in turn ensure that the full benefits of BC
Hydro's existing resources continue to be conferred on its domestic ratepayers and that the
system continues to be operated so as to maximize those benefits. Thus, tvvo significant
objectives o the Energy Plan will have been accomplished.
f
ALL OF WHICH I RESPECTFULLY SUBMITTED.
S
Date: August 20, 2003 :
Chris W. Sanderson, Q-C.,
Lawson Lundell
Lawson Lundell
FINALARGUMENT OF THE 8C HYDRO AND POWER AUTHORITY
REGARDING HERITAGE CONTRACT, STEPPED RATES
A -
AND ACCESS PRINCIPLES AUGUST 20,2003
APPENDIX A
THE TERMS OF REFERENCE CROSS-REFERENCED TO BC HYDRO’S PROPOSAL
Recommendations How BC Hydro’s Proposal Reference
Required by Terms of Addresses the Issue
Reference
Whether any changes are Amendments are proposed to Appendices A and B and Final
required to legislation, Special Direction No. 8 and Argument at Section 4.1.
regulations, special directions Special Directive No. 4.
or special directives (para. 1).
Whether the Rate Stabilization Eliminate the Rate Exhibit 8, p. 33.
Account should be eliminated Stabilization Account.
(para. 1)
Whether an alternative Establish the Heritage Exhibit 8, pp. 33-38.
deferral account mechanism Deferral Account.
is desirable (para. 1).
Whether changes to para. 3 of No changes are required to Appendix C and Final
Special Direction No. 8 are para. 3 of Special Direction Argument at Section 7.
required to implement stepped No. 8 but a new section 3.1 is
rates, industrial access to proposed.
transmission, and industrial
access to BC Hydro
generation (para. 1).
What quantity of energy 49,000 GWh (Heritage Exhibit 8, pp. 19-21.
should be available under the Energy).
Heritage Contract (para. 3(a)).
What would the cost of Heritage Payment Obligation. Exhibit 8, pp.8-9.
supplying Heritage Energy be
set at (para. 3(b)).
FINALARGUMENT THE BC HYDRO POWER AUTHORITY
OF AND
CONTRACT, STEPPED RATES AND ACCESS PRINCIPLES - AUGUST
REGARDINGHERITAGE
A 20,2003
..
11
At what price should be The quotient of the Heritage Exhibit 8, pp.8-9.
Heritage Energy be supplied Payment Obligation and the
at (para. 3(c)). portion of Heritage Energy
actually taken in a year.
Exhibit 8, pp. 22-24.
shape and scheduling distribution line of business.
flexibility of Heritage Energy
deliveries (para. 3(d)).
What should be the principles As required by tariffs. Exhibit 8, p. 23
and impacts of providing
ancillary services to BC
Transmission Corp.
(para. 3(e)).
To what extent should the With Commission approval, Exhibit 8, p. 36.
terms and conditions of the when events materially
Heritage Contract vary during change the energy capability
the initial 10 year term of the Heritage Resources.
(para. 3(f)).
I
What are appropriate renewal Heritage Contract to remain in Exhibit 8, p. 39.
provisions for the Heritage effect until 4 years after any
Contract (para. 3(g)). government policy.
What is the appropriate With alignment of interests, Exhibit 8, pp. 31-32.
regulatory framework for regulations should be minimal.
maximizing trade revenue
(para. 3(h)(i)).
What is the appropriate All revenues from sales of Exhibit 8, pp. 25-30.
regulatory framework surplus hydro to the benefit of
regarding allocation of trade ratepayers; Powerex net
revenues (para. 3(h)(iii)). income to benefit of
ratepayers subject to $200
million ceiling and $0 floor.
ARGUMENT THE BC HYDRO AND POWER AUTHORITY
FINAL OF
REGARDING
A HERITAGE PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
...
111
What is an appropriate start Upon government response to Final Argument at Section 8.
date for the Heritage Contract Commission recommendation.
and necessary adjustments
(para. 3(i)).
What are the terms and Retail access should be Exhibit 8-2, p. I O ;
conditions of access to delaying until BCTC’s tariff is Exhibit 29, pp. 4-6; and
transmission for industrial and approved. An approach to Final Argument, Section 7.
large commercial customers allow retail access in the
(para. 4(a)). interim has been proposed,
but is not recommended.
What are the terms and Amendments are proposed to Exhibit 8-2;
conditions of stepped rates Special Direction No. 8. Exhibit 29;
(para. 4(b)). Principles for acceptable Exhibit 38;
stepped rate designs and a Final Argument, Section 6.
stepped rate structure are
proposed.
What are the terms and Access principles are not Exhibit 8-2, pp.10-11;
conditions of access to BC necessary under BC Hydro’s Exhibit 29;
Hydro generation for industrial stepped rate proposal. Final Argument, Section 7.
and large commercial Access principles have been
customers (para. 4(c)). proposed for retail access
should it be implemented in
the interim.
FINALARGUMENT THE BC HYDRO AND POWER AUTHORITY
OF
REGARDINGHERITAGE
A CONTRACT, STEPPED RATES AND ACCESSPRINCIPLES - AUGUST
20,2003
APPENDIX B
Special Directive No. 4 to the British Columbia Hydro and Power Authority:
Revised to Effect (in part) BC Hydro’s Heritage Contract Proposal
Application
1. This Special Directive is issued by the Lieutenant Governor in Council to the British
Columbia Hydro and Power Authority (“B.C. Hydro”) under authority of section 35 of the
Hydro and Power Authority Act (the “Act”) as it pertains to annual payments to the
provincial government of an amount specified in this Special Directive.
Return on Public Investment
2. For the purpose of this Directive only, the following definitions shall apply:
‘Commission” means the British Columbia Utilities Commission constituted under the
Utilities Commission Act;
“debt” means the sum of revolving borrowings, bonds, notes and debentures, net of
related sinking funds, temporary investments, term debentures receivable and
repurchased debt, at the end of the financial year;
“distributable surplus” means consolidated net income from all sources including
electricity trade income as computed by B.C. Hydro according to generally accepted
accounting principles and confirmed by B.C. Hydro’s external auditors,
(a)
before any deduction for any amounts paid or payable in accordance with a
directive issued under section 35 of the Hydro Power and Authority Act; and
(b) less interest during construction adjusted for depreciation to prevent double
counting;
“equity” means the sum of retained earnings and deferred credits, at the end of the
financial year;
.. .
“deferred credits” means the sum of the , deferred revenue,
contributions arising from the Columbia River Treaty and contributions in aid of
construction at the end of the financial year.
3.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS PRINCIPLES - AUGUST
REGARDINGHERITAGE
A 20,2003
..
11
5. On or before June 30 of each year, the B.C. Hydro Board of Directors shall confirm a
payment to the provincial government (the “payment”) for the previous financial year as
determined below.
6. The payment shall equal 85 percent of the distributable surplus for the financial year
provided the debtlequity ratio of B.C. Hydro after deducting the payment is not greater
than 80:20. If the payment would result in the debtlequity ratio exceeding 80:20, then
the payment shall be reduced to the extent necessary to maintain the debtlequity ratio at
80:20 after deducting the payment.
7. The payment determined by paragraph 6 shall be paid into the provincial government’s
consolidated revenue fund by no later than June 30 each year.
8. The directive is effective for the financial year ending March 31, 2000, and all
subsequent financial years.
Revocation of Special Directive No. 2
9. The Special Directive revokes and replaces Special Directive No. 2 dated November 13,
1992.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDING CONTRACT, STEPPED RATES AND ACCESS
A HERITAGE 20,2003
PRINCIPLES - AUGUST
APPENDIX C
Special Direction No. 8 to the British Columbia Utilities Commission:
Revised to Effect (in part) BC Hydro's Heritage Contract Proposal
1. In this Special Direction:
"Act" means the Utilities Commission Act;
"B.C. Hydro" means the British Columbia Hydro and Power Authority;
"Commission" means the British Columbia Utilities Commission;
"debt" means the sum of revolving borrowings, bonds, notes and debentures, net of
related sinking funds, temporary investments, term debentures receivable and
repurchased debt, at the end of the financial year;
"deferred credits" means the sum of deferred revenue, contributions arising from the
Columbia River Treaty and contributions in aid of construction at the end of the financial
year;
'*equity"means the sum of retained earnings and deferred credits, at the end of the
financial year;
"government policy directive" means a directive in writing to B.C. Hydro from the minister
charged with the administration of the Hydro and Power Authority Act;
"heritaqe contract'' means the document attached as appendix A to this special direction;
"heritage deferral account" means the accountinq mechanism established pursuant to
section 5.1;
"heritaqe enerqy" means the amount of enerqy defined in the heritage contract;
"heritaqe payment obliqation" means the amount defined in the heritage contract;
"heritaqe resources" means the facilities defined in the heritaqe contract;
"total invested capital" means debt plus equity, at the end of the financial year.
"trade income" means the audited net income of Powerex Corporation. adiusted by:
(a) where audited net income is less than zero, addinq the amount necessary
to make it zero: and
ARGUMENT THE BC HYDRO AND POWER AUTHORITY
FINAL OF
REGARDING
A HERITAGE
CONTRACT, STEPPED RATES PRINCIPLES - AUGUST
AND ACCESS 20,2003
..
11
{b) where audited net income is qreater than $200 million, subtractinq any
amounts in excess of $200 million.
2. This Special Direction is issued to the Commission under section 3 of the Utilities
Commission Act.
3. In designing B.C. Hydro electricity rates, the Commission shall ensure that those rates
contribute to conservation and efficient electricity use by reflecting the total cost of new sources
of electricity supply, and those costs shall be evaluated using a cost of capital consistent with
that earned on a pre-income tax basis by the most comparable investor-owned energy utility
regulated under the Act.
-
3.1 Notwithstandinq paraqraph 3, in desiqninq electricity rates for B.C. Hvdro's industrial and
larqe commercial customers, the Commission shall ensure that those rates are stepped rates
consistent with the recommendations contained in the Commission's report to the Lieutenant
Governor in Council dated October 17, 2003.
4. Subiect to section 5.2, in determining whether the rates of B.C. Hydro are sufficient to
yield a fair and reasonable compensation for the services provided by it, or a fair and
reasonable return on the appraised value of its property, the Commission must ensure the rates
permit B.C. Hydro to collect sufficient revenues in each financial year to:
(a) sustain an operating and capital regime that continues to provide a quality and
reliable electricity service;
(b) meet other expenses reasonably incurred in accordance with government policy
directives including, but not limited to,
(i) directives for the construction or operation of a plant or system, or an
extension to either of them, by B.C. Hydro, and
(ii) directives that B.C. Hydro enter into contracts;
(c) meet all debt service, tax and other financial obligations;
(d) achieve an annual rate of return on equity equal to that allowed on a pre-income
tax basis by the most comparable investor-owned energy utility regulated under the
Act,
4.1 In assessing B.C. Hvdro's rates pursuant to section 4 the Commission shall, with respect
to determininq forecast cost of enerqy:
la) treat the heritaqe contract as if it were a leqallv bindinq agreement between two
arms-length parties; and
/b) determine the cost of enerqy required by B.C. Hvdro to meet its domestic service
obliqations in excess of the enerqy supplied under the heritaqe contract on a cost-of-
service basis,
subiect to any mechanism. formula or method emploved by the Commission in setting B.C.
Hvdro's rates pursuant to section 60 (b. 1) of the Act.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
...
111
4.2 On application by B.C. Hydro, the Commission may revise the definition of "Heritaqe
Enerqy" or "Heritaqe Payment Obliqation" in the heritaqe contract, and in accordance with
paraqraph 8 of the heritaqe contract, if it is satisfied that a chanqe in circumstances has
permanently affected the capability of the heritaae resources or of B.C. Hydro's cost of
qeneratinq the heritaqe enerqy.
5. The return on equity in paragraph 4 (d) must be calculated using forecast consolidated
operating income from all sources, includinq a forecast of trade income.
5.1 The Commission shall establish the heritaqe deferral account for the purpose of
recording any differences between forecasts of the heritaqe payment obliqation and the heritaqe
payment obliqation. and any differences between forecasts of trade income and trade income.
5.2 (a) If there is a positive balance in the heritaqe deferral account when the
Commission is assessing B.C. Hydro's rates pursuant to section 4, the Commission mav reduce
the amount otherwise determined pursuant to section 4 by an amount less than or equal to the
balance of the heritaqe deferral account. When it reduces the amount determined pursuant to
section 4 it shall debit the heritaqe deferral account by an equal amount.
{b) If there is a neqative balance in the heritaqe deferral account when the Commission is
assessinq B.C. Hydro's rates pursuant to section 4, the Commission may increase the amount
otherwise determined pursuant to section 4 by an amount no qreater than the absolute value of
the balance of the heritaqe deferral account. When it increases the amount determined
pursuant to section 4 it shall credit the heritaqe deferral account by an equal amount.
6.1. Notwithstanding paragraph 4 (d), in setting B.C. Hydro electricity rates, the Commission
shall ensure that rates are smooth, stable and predictable.
6.2. Smooth, stable and predictable rates for the purpose of setting B.C. Hydro electricity
rates means that, with the exception of pass through items pursuant to section 61 (4) of the Act,
general electricity rate increases shall not exceed 1 percentage point above the rate of inflation
for the remainder of the 1992/93 financial year and shall not exceed 2 percentage points above
the projected rate of inflation on a year over year basis thereafter.
,
I ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
REGARDINGHERITAGE
A PRINCIPLES - AUGUST
CONTRACT, STEPPED RATES AND ACCESS 20,2003
I
iv
6.3 For the purpose of implementing rate design or of closing rates, individual electricity rate
increases may exceed the limits set out in paragraph 6.2.
6.4 The rate of inflation in paragraph 6.2 means the change in the average level of the
British Columbia consumer price index during the most recent three month period for which
published statistics are available prior to B.C. Hydro's rate application filing, compared to the
average level of the British Columbia consumer price index during the same three month period
a year earlier, and published statistics shall mean those published by Statistics Canada.
6.5 The projected rate of inflation in paragraph 6.2 means the provincial Ministry of Finance
and Corporate Relations' latest available forecast published prior to B.C. Hydro's rate
application filing of future year over year changes in the average level of the British Columbia
consumer price index.
7.1 In setting B.C. Hydro electricity rates the Commission shall ensure that rates are fair, just
and reasonable.
7.2 Repealed.
8 Electricity rates set by the Commission in accordance with this Special Direction may
generate annual distributable surpluses for B.C. Hydro. These surpluses shall only be
calculated and allocated in a manner specified by the Lieutenant Governor in Council pursuant
to section 35 of the Hydro and Power Authority Act .
9 Repealed.
ARGUMENT THE BC HYDRO POWER AUTHORITY
FINAL OF AND
CONTRACT, STEPPED RATES AND ACCESS
REGARDINGHERITAGE
A 20,2003
PRINCIPLES - AUGUST
Related docs
