National Energy Board Cost Recovery Regulations for the Electricity Industry - Overview of Electricity Program

Overview of Electricity Program

Hotel Queen Elizabeth, Montréal

2 June 2005

Electricity Program

• What do we do?
• Why do we do it?
• How?
• Context for cost recovery options

Electricity Mandate

• National Energy Board Act (NEB Act)
  • Construction and operation of international power lines
  • Electricity exports
  • Advisory Function
• Canadian Environmental Assessment Act (CEA Act)

Electricity Mandate (cont’d)

• Canadian Security Act
  • outcome of 9/11
  • recent changes to NEB Act

Electricity Regulation - Some History

• Canadian Electricity Policy (1988)
  • In response to industry restructuring
• NEB Act revised in 1990
  • removed prescriptive tests to demonstrate that exports are surplus to domestic needs
  • main criteria for applicant to demonstrate:
    • effect on other provinces
    • impact on the environment
    • fair market access for Canadian consumers
  • no export hearings since 1990

Electricity Regulation - Some History (cont’d)

• With some exceptions ... “the Board shall, on application to it and without holding a public hearing, issue a permit authorizing the exportation of electricity.” (s. 119.03)
• With some exceptions ... “ The Board shall, on application to it and without holding a public hearing, issue a permit authorizing the construction and operation of an international power line.” (s. 58.11)

Electricity Regulatory Duties

• International Power Lines
  • Authorization - may involve a public hearing Project monitoring post approval
  • Project monitoring post approval
    • monitoring is more extensive in the event of “election”
• Electricity Exports
  • Authorization - permits / licences
  • Monthly returns
  • Compliance with permits / licences
• Ongoing regulatory work
  • Pre-application meetings; regulatory issues

Electricity Regulatory Duties (cont’d)

• Evolving responsibilities for IPLs
  • Ongoing operations and safety
  • Reliability
    • including implementation of Canada-U.S. Blackout Task force recommendations
    • federal/provincial/territorial reliability subcommittee
  • Security

Processing Applications

• Electricity Exports
  • 45 days after posting in Canada Gazette
  • plus ... internal processing
  • typically 60-75 days total, if no interventions
  • 10-12 applications per year
• International Power Lines (IPLs)
  • timing is nominally similar to exports
  • however, typically take longer
  • 4 applications over past 4 years (3 hearings)

Market Monitoring

• Restructuring of energy markets, and less prescriptive regulation has led to increased need for monitoring
• In deciding energy exports, the NEB needs to consider ... Are markets working?
  • Electricity ... Do Canadians have fair market access?
  • Similar criteria for natural gas and oil exports

Market Monitoring (cont’d)

• An important aspect of Goal 3: Canadians derive the benefits of economic efficiency
  • Strategy: Promote understanding of energy markets
  • Measure: Evidence that Canadian energy and transportation markets are working well.
• A near-term objective: inform policy makers

Market Monitoring (cont’d)

• Monitoring provides information to stakeholders, including the general public, and allows Canadians to benefit from economic efficiency
• Market monitoring ensures the Board has the necessary information to make effective decisions in the public interest
• Multi-commodity/convergence issues
  • E.g., oil sands implications for natural gas and electric transmission

Energy Market Assessments

• The Board has undertaken 4 electricity market assessments since early 2001
• 2 more over the next nine months ... based in part on a website survey last fall
• Analyses include broad consultation with stakeholders

Cost Recovery

• Historically the electricity industry consisted primarily of vertically-integrated utilities (VIUs), usually Crown corporations
• Costs were (and still are) recovered on the basis of export volumes

Changes to Electricity Industry

• Restructuring
  • FERC Order 888 (1996)
  • VIUs have been “unbundled,” based on functions
  • More players, such as marketers
• International trade has increased since 1996 (see chart)
  • Exports have decreased; imports have increased

Canadian International Trade in Electricity (Exports + Imports)

Observations

• Cost recovery has been reallocated from VIUs to their exporting entities, and to new marketers
• The cost recovery base (exports) has been declining in recent years
• Imports have been increasing, but are not included in the cost recovery base
• IPLs are not included in the cost recovery base

Observations (cont’d)

• Some application costs are not recoverable or cannot be recovered from those who caused them (e.g., IPL facilities applications)
• Parties that derive “reliability benefits” from IPLs are not included in the cost recovery base ... should they be?
• Implication
• Change to cost allocation mechanism may be warranted ... options to be addressed this afternoon.