ARCHIVED - Views of Manitoba Hydro on the Impact Assessment of Potential Cost Recovery Changes and Options Discussed at the Workshop

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July 22, 2005

Background

The Summary of Workshop Discussion of the National Energy Board (NEB) Electricity Cost Recovery Workshop requested the following of participants:

"Board staff indicated that as part of the regulation amendment process, it was required to conduct an impact assessment to assess the economic, social, environmental and health impacts of the proposed changes on Canadian society. Board staff requested industry participants (individually as a group) provide their views on any potential impacts of these changes, along with their position on any of the options discussed at the workshop and supporting rationale. A written document should also be formally submitted to the Board Secretary Michel Mantha."

Manitoba Hydro submits the following views of these subjects.

The Impact Assessment of Potential Cost Recovery Changes

Manitoba Hydro is of the opinion that the economic, social, environmental and health impacts of potential electricity cost recovery changes are likely to be very, very small, if any. The driver for the review of the electricity sector cost recovery methodology has been equity - to find a mechanism that better flows the NEB's costs back to all those who benefit - rather than alter the social, environmental and health impacts of the cost recovery regulation.

Without a specific electricity cost recovery proposal on the table, it is difficult to do a detailed analysis. However, it is clear that the amount of costs to be recovered is quite small relative to the size of the industry as a whole from which it is to be recovered. The magnitude of the NEB electricity sector costs to be recovered is about $5 million per year. According to Statistics CanadaFootnote 1, the value of the electric power generation, transmission and distribution industry sector was $21.5 billion in 2002, or about 2.2% of the total Canadian GDP of $992 billion (1997 constant dollars). At a high level, the dollar amounts involved are de minimus to the industry. However, at a lower level, the magnitude of the costs involved is significant, and requires an equitable allocation of those costs.

Different costs recovery options are very unlikely to change the manner in which the electricity sector operates, and hence are not likely to cause any social, environmental and health impacts.

Discussion on Options Discussed at the Workshop

Existing Cost Recovery Option is not Equitable and is Deficient:

Manitoba Hydro is firmly of the position that the current electricity sector cost recovery methodology is not equitable as it only charges exporters, but exporters are not the only ones deriving benefits from the Board's regulation.

The existing electricity sector cost recovery methodology is deficient in that:

  1. Substantial reliability benefits are being enjoyed by the owners of the international transmission lines or their customers. Reliability benefits can and do occur without export flow on the interconnection, especially with respect to stability limits. There can be extremely high reliability value for very minimal flows under emergency conditions.
  2. Substantial economic benefits from imports are being enjoyed by the owners of the international transmission lines or their customers.
  3. Export volume is not a driver of NEB Costs.

The most obvious example of 1) and 2) above is the current Ontario situation, where large amounts of imports are being utilized for economic and / or reliability purposes. Recently, the Ontario import volume has tended to widely exceed the Ontario export volume, and yet the importers/ end use consumers pay no part of NEB costs that regulate the assets (the international power lines (IPLs)) that make the imports possible. As noted by the Ontario IESO "Ontario's ability to import and export energy is an essential element of secure and reliable interconnected system operation, and provides large financial benefit to Ontario market participants and rate payers.Footnote 2"

Given that imports during peak demands periods such as in Ontario may be preventing blackouts due to lack of supply, the value of those peak demand period imports to the end use consumer is very large - likely 10 to 100 times the already high price of the imports. Thus the value of imports such as in Ontario is likely many times the value of exports. Hence the existing cost recovery methodology is seriously deficient by not accounting for the significant value of imports and reliability, particularly with respect to Ontario.

The current electricity sector cost recovery methodology allocates costs based on export volume. However, as noted in 3) above, export volume is not a driver of NEB Costs. This was shown in the following graph originally presented at the Calgary Cost Recovery Workshop in December 2004. The recent rise in NEB electricity sector costs occurred during a period of steep decline in electricity exports.

Canadian Electricity Import/Export Volumes vs. NEB Electricity Costs

Criteria for New Cost Recovery Methodology:

NEB staff suggested the following criteria for evaluating cost recovery methodology and asked for industry's input. Manitoba Hydro supports the NEB's four proposed criteria and adds the following comments on them:

  • Compliance with legislative and other requirements - Clearly a requirement
  • Operational simplicity - The existing cost recovery methodology is complex and difficult to administer. A simpler methodology is highly desirable.
  • Equity - As noted above, in Manitoba Hydro's view, the existing methodology is not equitable.
  • Predictability/stability of charges - The existing methodology is not predictable or stable due to the impact of droughts on exports, as well as the general decline of exports. Any new cost recovery methodology needs to be more stable than the existing methodology.

An Equitable Cost Recovery Methodology:

Manitoba Hydro supports the following electricity sector cost recovery methodology:

A. For Application costs, and consistent with the CEA position:

  • "The Applicant should pay the directly related costs for the processing of applications for the construction and operation of international power lines and electricity exports."
    • For IPLs, pay actual application costs using staff hours as a proxy.
    • For routine exports, pay a flat fee based on historical estimates of actual costs. Have a category for very small exports recognizing low costs. Have a provision to pay actual costs should public hearings or other non-routine items arise.
  • Further support a Greenfield fee for new international transmission lines like that for natural gas pipelines, if feasible.

B. For all Non-Application Costs:

  • Recognize that ultimately, the benefit of the Board's regulation is to the benefit of Canadian consumers.
  • Recognize that in light of the operational simplicity criteria, it does not make sense to try to minutely dissect the beneficiaries of the non-application costs.
  • Recognize that due to significant amounts of hydro-power in Canada, short term export volume is difficult to predict, and any cost recovery mechanism just based off export volume will tend to not to have stability of charges.
  • Allocate all non-application costs as follows:
    • All non-application cost be allocated the owners of the international power lines on the basis of their share of their installed IPL capacity to that of all installed IPL capacity.

Manitoba Hydro offers the following discussion in support of this cost recovery methodology:

  • Efficient cost recovery can be accomplished through a two step process. First, the NEB allocates its costs down to the owners of the underlying assets - the international power line owners. Then the transmission line owners, in consultation with their provincial regulators develop a cost reallocation mechanism that suits the needs of their particular province - recognizing who actually benefits from the presence and use of the international transmission lines in their particular province.
  • The use of installed international transmission line capacity is the best proxy for the value of the transmission line to the end user. The determination of the installed capacity of IPL is an economic decision based on specific provincial needs. Those needs may be been reliability, import, or export capability, or more likely a combination of all three. The point is the size of the asset is an economic decision based on the benefit the IPL brings to some end user. Therefore, allocate the cost of regulation of that asset based on the size of that asset.
  • Board estimates of beneficiaries as suggested by some are likely to trigger endless debate and bickering before the NEB.
  • It is the presence of the international power lines, whether they are used for import, export, or reliability, that creates the need for the regulation. No IPLs, no activity, no need for the NEB on this issue, and no related costs. Therefore, allocate the costs to the owners of the IPLs.
  • Unlike natural gas, electricity flows are bi-directional, and there is a reliability component. Installed IPL capacity is the only mechanism that captures all three benefits.
  • The installed IPL capacity is a stable number, is likely to grow somewhat over time, is easily auditable, and therefore provides an excellent basis for a cost recovery methodology that is operational simply and has stability of charges.

Additional Comments:

  • The NEB uses the term market monitoring for a significant part of its activities that generate the non-application costs. Manitoba Hydro agrees there is potential for confusion with the types of activities carried out by market surveillance administrators in some provinces, or by market monitors in the U.S.. Manitoba Hydro notes that this activity includes many non-market related NEB activities such as the preparation of the June 2004 report titled A Compendium of Electric Reliability Frameworks Across Canada. Therefore, Manitoba Hydro prefers the term industry monitoring, as it better captures what this item is.
  • Hydro-Québec TransÉnergie suggested that cost shifting should be avoided. As the present cost recovery methodology is not equitable, to try to avoid cost shift is akin to trying to avoid having the new cost recovery methodology be equitable. The two year process of changing the cost recovery methodology provides ample warnings and time to file the necessary cost reallocation methodology with the provincial regulator. Given that the current cost recovery methodology is inequitable, any delay in implementing a new cost recovery methodology only delays an equitable solution.
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