British Columbia Hydro and Power Authority (BC Hydro) Application for Approval of New Power Purchase Agreement (PPA) with FortisBC Inc.

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1 C1-24 Reply Attention of: Ludmila B. Herbst Direct Dial Number: (604) Address: Our File No.: January 20, 2014 BY British Columbia Utilities Commission 6 th Floor, 900 Howe Street Vancouver, BC V6Z 2N3 Attention: Erica M. Hamilton, Commission Secretary Dear Sirs/Mesdames: Re: British Columbia Hydro and Power Authority (BC Hydro) Application for Approval of New Power Purchase Agreement (PPA) with FortisBC Inc. Enclosed please find the Supplemental Submissions of FortisBC Inc. dated January 20, 2014 with respect to the above-noted matter. Twenty hard copies will follow by courier. Yours truly, FARRIS, VAUGHAN, WILLS & MURPHY LLP Per: LBH/ls Enclosure c.c.: Registered Interveners Paul Miller, Boughton Law Corporation Ian Webb, Lawson Lundell LLP FortisBC Inc. Ludmila B. Herbst _1 LBH

2 BRITISH COLUMBIA UTILITIES COMMISSION IN THE MATTER OF THE UTILITIES COMMISSION ACT, R.S.B.C. 1996, c. 473 AND THE BRITISH COLUMBIA HYDRO AND POWER AUTHORITY APPLICATION FOR APPROVAL OF RATES BETWEEN BC HYDRO AND FORTISBC INC. WITH REGARDS TO RATE SCHEDULE 3808, TARIFF SUPPLEMENT NO. 3 POWER PURCHASE AND ASSOCIATED AGREEMENTS AND TARIFF SUPPLEMENT NO. 2 TO RATE SCHEDULE 3817 FORTISBC INC. S SUPPLEMENTAL SUBMISSIONS January 20, FortisBC Inc. (FortisBC or FBC) sets out below its response to the questions (1-4) posed in the Commission s December 13, 2013 correspondence (Exhibit A-17) and to the concerns underlying those questions. Question 1: Why are the restrictions relating to FortisBC s self-generator customers still necessary in the New PPA under the current environment? Overview 2. FortisBC supports the principle that self-generator customers of a utility should not be permitted to arbitrage between embedded cost utility rates and market prices to the detriment of the utility s other ratepayers. 3. BC Hydro has described the rationale for this principle at paragraphs 8-18 and 99 of its Supplemental Submissions dated January 13, 2014 (the BCH Supplemental Submissions). 4. Self-generators in FortisBC s service territory are customers of FortisBC. Application of the above principle to FortisBC s service territory would mean that selfgenerator customers should not be permitted to arbitrage between embedded cost FBC rates and market prices to the detriment of FBC s other ratepayers. 5. In its decision of May 6, 2009 (amending s. 2.1 of the 1993 PPA), the Commission determined that the principle also applies as between service territories, such that self-generator customers of FortisBC would be prevented from engaging in arbitrage activities that might increase the supply of embedded cost power by BC Hydro to FortisBC. 6. The remainder of this section addresses whether the restrictions on selfgenerator customers in the New PPA are necessary to advance the principle described above. FortisBC acknowledges that under the current regulatory environment, BC Hydro continues to require the restrictions in order to ensure that this principle is

3 - 2 - preserved with respect to power supply it provides to FortisBC under the New PPA, for the following reasons: (a) (b) (c) In relation to FortisBC s service territory, Commission decisions appear to have qualified the general principle outlined in paragraph 2 above by reference to FBC obligations under the Access Principles Application (APA), and to have given rise to the possibility that FortisBC will be required to source additional power to supply the increased self-generator demand with which arbitrage is associated. While current market conditions make it unlikely that FBC self-generator customers will use at present any opportunity they have to engage in arbitrage, those conditions may well change over the term of the New PPA such that they are incented to do so in the future. Without the restrictions found in s. 2.5 of the New PPA, FortisBC would be at liberty to use PPA power to supply the additional demand of arbitraging self-generator customers. While even if the s. 2.5 restrictions were not in place FortisBC does not presently anticipate (in particular given the cap on Tranche 1 energy in the New PPA) making use of additional New PPA power if faced with increased self-generator demand, the factors which underpin this constraint may change. Each of these considerations is examined in more detail below. Particular Considerations (a) Commission decisions appear to have left open the potential for arbitrage in FBC service territory 7. If self-generator customers were clearly prohibited from arbitraging between embedded cost FBC rates and market prices in FortisBC s service territory, the restrictions on self-generator customers in the New PPA would be redundant. The arbitrage that s. 2.5 seeks to prevent would not be occurring. 8. In its service territory, BC Hydro enforces the principle against arbitrage between embedded cost utility rates and market prices by setting a generator baseline (GBL) and supplying self-generator customers with embedded cost power only in excess of that GBL. This GBL is set with reference to the amount of load historically served by the self-generation, allowing for truly incremental generation to be disposed of at the discretion of the self-generator customer. FortisBC agrees that this is appropriate. 9. If the same principle clearly applied in FortisBC s service territory and FortisBC could enforce the principle against its self-generator customers in the same manner as does BCH (FBC can presently establish GBLs with self-generator customers, but their basis and effect are not clear in light of the considerations in paragraph 10), it would not be necessary for the New PPA to contain restrictions relating to self-generator customers. There would already be no occasion on which self-generator customers

4 - 3 - could purchase additional power from FortisBC for the purpose of arbitrage. As such there would be no occasion on which FortisBC would need to consider purchasing additional power from BC Hydro to make up any shortfall. If prevented within the confines of the FortisBC-customer relationship, the conduct of self-generator customers would therefore not need to be addressed in the New PPA. If the Commission were to clarify the application of this principle in FortisBC s service territory, not only would it eliminate the need for the s. 2.5 restriction, but it would also provide provincial consistency. 10. However, in reality the situation in FBC s service territory has been complicated by various determinations since 2010 which seem to permit limited arbitrage by FBC self-generator customers by virtue of the APA. FBC has argued that it is wrong to interpret the APA as having this effect: the APA agreement did not contemplate the situation of self-generation exports; it was arrived at to deal with situations where an Eligible Customer had chosen an alternate supplier that was, as described by the Commission, a third party ; and at the time, the Commission determined in relation to the APA that it was not to be seen as a precedent for other utilities or circumstances (emphasis added). However, Commission determinations since 2010 seem to suggest that by virtue of the APA, FortisBC may have an obligation to supply embedded cost power to those self-generator customers who also qualify as Eligible Customers under the APA. On this APA-oriented approach, with which FortisBC continues to disagree, the extent of FortisBC s obligation may exceed what would be its obligation pursuant to a GBL determined analogously to the process followed in BC Hydro s service territory. Correspondingly, the Commission appears to have set an obligation for FortisBC with respect to serving customers that is higher than the obligations of BC Hydro in serving BC Hydro s customers. While FortisBC s transmission stepped rate (TSR) application may address certain of the associated potential detriment to FBC customers, the potential outcome of that application is difficult to factor into the present submissions, including because to do so is somewhat circular: the TSR application presupposes the sort of restrictions found in s. 2.5 of the New PPA and a concomitant distinction between FBC s access to PPA power and its access to non-ppa power. In any event, as matters stand, there is some potential for self-generator Eligible Customers in FortisBC s service territory to access some amount of FBC embedded cost power for the purpose of arbitrage. 11. The restrictions on self-generator customers in s. 2.5 of the New PPA carve out the portion of FBC s resource stack that it derives from BCH from the sources with which it can supply arbitraging self-generator customers. As such, if the restrictions in s. 2.5 are in place, even if market conditions were such as to incent FBC s self-generator customers to engage in arbitrage, BCH would not need to increase its supply of embedded cost power to FBC. 12. The restrictions in s. 2.5 of the New PPA do not prevent FBC from supplying arbitraging self-generator customers by using other sources at embedded costs (BCUC IR , BCPSO IR1 1.1). The existing Commission decisions referencing the APA suggest that FortisBC must to some extent do so, even if (subject in part to the outcome of the TSR application) other FBC customers suffer detriment as a result. FortisBC s

5 - 4 - position is that this continued potential for arbitrage in its service territory should be remedied by Commission order, leaving FBC in the same situation as BCH and, as such, able to enforce the general principle against arbitrage set out in paragraph 2 of these submissions by virtue of an analogous GBL. (b) While current market conditions make it unlikely that FBC selfgenerator customers will presently use an opportunity at law to engage in arbitrage, those conditions may well change over the term of the New PPA 13. If the Commission were to make clear that arbitrage between FortisBC embedded cost rates and market prices is not permitted, the restrictions on selfgenerator customers in s. 2.5 of the New PPA would not be required either in the current market environment or in any market environment. Even if market conditions were such as to incent arbitrage, it would not be possible for a self-generator customer to take advantage of them. FortisBC would supply embedded cost power to a selfgenerator customer only above a GBL established with that customer and set at a level which avoids the potential for arbitrage. 14. But for so long as self-generator customers are permitted to arbitrage to some extent between FortisBC rates and market prices, occasions may arise on which they wish to use their opportunity to do so, giving rise to the potential for FortisBC to source additional power from BC Hydro (subject to restrictions in s. 2.5 of the New PPA or otherwise) or elsewhere. 15. While occasions on which self-generator customers wish to engage in arbitrage are unlikely to arise in the current market environment, given that prices in the market to which self-generator customers would sell are generally lower than the FBC rates at which they buy, it is possible that such occasions may arise. It is possible that even now, by virtue of the environmental characteristics of the power they produce, there is a specialized market (including BC Hydro calls) which remains profitable for selfgenerator customers to sell into. In addition, there are already limited windows where arbitrage in response to market price spikes on an hour by hour basis could be profitable for a self-generator customer. FBC notes that the ability to do this is not currently contemplated by the proposed TSR structure, but acknowledges BC Hydro s concern that this could change in the future. 16. In any event, over time, the market environment may change, and self-generator customers may gain additional incentives to arbitrage between embedded cost power and market prices. That change may occur within the 20-year term of the New PPA. (c) Without the s. 2.5 restrictions, FortisBC could use PPA power to supply the additional self-generator demand associated with arbitrage, though as a practical matter it is unlikely to do so 17. If self-generator customers in FortisBC s service territory do take advantage of an opportunity to arbitrage between FortisBC rates and market prices, this does not affect

6 - 5 - BC Hydro unless FortisBC has the opportunity and chooses to purchase additional power from BC Hydro to make up the difference. 18. If the s. 2.5 restrictions on self-generator customers were not in place, and absent specific Commission direction that forbids the practice, FortisBC would legally be at liberty to choose to make that purchase. 19. As a practical matter, in the current market environment, FortisBC does not anticipate taking that step and using BC Hydro power to supply the additional selfgenerator demand associated with arbitrage even if the s. 2.5 restrictions did not exist. Even apart from s. 2.5, the structure of the New PPA (specifically the 200 MW capacity limit, the cap on power available at embedded costs [Tranche 1] and the Annual Energy Nomination restrictions), itself strongly mitigates the risk to BC Hydro of FortisBC increasing its purchases of BC Hydro power to meet incremental load from selfgenerator customers to enable power sales by those customers. FortisBC anticipates that as an operational matter, on a forecast basis, nothing would change even if the restrictions in s. 2.5 of the New PPA were removed. 20. In its Supplemental Submissions, BC Hydro suggests that FortisBC does have significant room and potential incentive to increase its purchases from BC Hydro. However: (a) The cap on Tranche 1 energy was based on FortisBC s load forecast presented in its 2012 Resource Plan. The 1041 GWh amount represented the expected purchases from BC Hydro to meet annual normal load requirements (i.e., before considering any incremental load associated with self-generator customers) on a long-term planning basis. FortisBC has the ability to offset PPA purchases when more economical short term supply options are available. In the current market environment, FortisBC has been able and expects to continue to create savings for customers by reducing PPA purchases in favour of market purchases. However, if market conditions were to change and FortisBC were incented to increase its PPA purchases, the 1041 GWh Tranche 1 energy cap would be reached to meet normal utility load requirements before any consideration of the potential of additional load associated with self-generator customers. In addition, FortisBC is already limited by the 200 MW capacity limit during winter periods, and therefore any growth in PPA usage to serve incremental loads could only occur during freshet or summer periods when generally more supply options are available. As a result, BC Hydro s suggestion that FBC has approximately 500 GWh of Tranche 1 energy available to meet incremental loads of self-generator customers is inaccurate. The reason the expected PPA nominations to meet normal utility load are low is due to the current low market price environment. At such low market prices any additional load would likely be met with additional market purchases, not PPA purchases. If the market prices were to rise above PPA prices on a longer-term basis, then

7 - 6 - FBC market mitigation purchases to displace PPA purchases would be substantially cut back or even cease altogether. In such a case, FBC load requirements would necessitate a nomination of 1041 GWh to meet normal utility load. (b) BC Hydro suggests that FortisBC would benefit financially if it purchases Tranche 1 energy to serve self-generator customers by approximately $10. FortisBC must make an Annual Energy Nomination prior to the beginning of each contract year. At the time FortisBC makes the nomination it will ensure it has other firm resources in place to meet expected load requirements. If market or load conditions change such that FortisBC requires additional resources and wishes to purchase additional PPA energy above the annual nomination (but still below the Tranche 1 cap), there is a 50% premium on the Tranche 1 price. This 50% premium more than offsets the potential for any financial incentive between costs and revenues. In addition, there could be impact on capacity demand charges if the incremental purchases occur during high demand periods. (FBC also notes that BC Hydro has omitted the 5% rate rider that applies to the RS3808 rates when making the comparison between current Tranche 1 energy rate and RS31 rates.) 21. All this being said, even if as a practical matter FortisBC would not seek to access additional BCH power in the current environment to serve self-generator customers, FortisBC acknowledges that it would theoretically be able to do so in the absence of the restrictions in s. 2.5 of the New PPA. FortisBC acknowledges that BC Hydro desires the certainty provided by the restrictions in s. 2.5 of the New PPA and that, without that certainty, BC Hydro may engage in certain conduct which results in additional time and cost being incurred at a later stage, to deal with an issue that the parties have already addressed in s. 2.5 of the New PPA as it presently stands. This is not intended to be critical of BC Hydro, but clearly, if the restrictions in s. 2.5 were not included in the New PPA now, it is reasonable to assume that BC Hydro would: (a) (b) seek to revisit the New PPA in order to include them if economic or other circumstances changed such that increased purchases of New PPA power from BC Hydro were likely to occur; and be more inclined to continue to intervene in FortisBC regulatory proceedings in order to ensure its perceived interests were safeguarded. 22. If (a) and (b) occur, unnecessary time and cost would be incurred not only by the utilities but also by the Commission and interveners in potential future proceedings. Question 2: What risks, if any, is BC Hydro still exposed to under the New PPA, and do those risks result in any significant negative impacts to BC Hydro or its ratepayers? 23. See the answers to Questions 1 and 3.

8 - 7 - Question 3: If FortisBC was free to establish GBLs, or other mechanisms, with its self-generator customers without any restrictions to RS 3808 power, what benefits would this provide to FortisBC, and what risk would it pose to BC Hydro and its ratepayers? 24. If self-generator customers were prohibited from arbitraging between FBC embedded cost rates and market prices, as noted earlier FortisBC would propose to enforce that prohibition by means of a GBL. For simplicity this approach would be preferable to the matching methodology which features in FBC s TSR proposal which is now the subject of a separate application. FortisBC is currently free to establish GBLs with its self-generator customers, but as described in paragraphs 9 and 10 above, their basis and effect are somewhat unclear. 25. If, by a clarifying Commission directive, self-generator customers in FortisBC service territory were thereby prevented from increasing their purchases of embedded cost power for the purpose of arbitrage, there would be no need for FortisBC to consider increasing its purchases of BC Hydro embedded cost power, and s. 2.5 would not be required. The establishment of a GBL to set the historical use of self-generation to serve load would presumably make restrictions on the use of PPA power in relation to self-generator customers unnecessary. 26. If self-generator customers in FortisBC s service territory are permitted to arbitrage between FortisBC embedded cost rates and market prices, there may be occasions on which they use their opportunity to do so and on which FortisBC must then consider where to source the additional power that those customers seek to purchase. In the current environment that is unlikely to be additional New PPA power even in the absence of the restrictions in s. 2.5, though in the absence of those restrictions use of that BCH power for this purpose is possible. 27. The s. 2.5 restrictions do impose some administrative and regulatory burden on FortisBC. If FortisBC were required to serve incremental load of customers with selfgeneration facilities below the established customer baseline, it will need to establish a robust set of accounting and other administrative procedures to ensure that it can demonstrate to BC Hydro that the restrictions are being met. In addition, there will be a process to set the customer baseline which could include regulatory review or other dispute mechanisms if the parties, including the customer, cannot agree on the appropriate baseline. If the restrictions were removed, the administrative burden on FortisBC might be lessened; however, it may result BC Hydro being more active in FortisBC proceedings in order to ensure it gets the protection it feels is necessary. 28. In any case, the main cost of the restrictions to FBC relates to resource efficiency (or inefficiency). FBC anticipates that there would be some modest resource efficiencies to be gained though a more efficient dispatch of available resources that could reduce the amount of surplus power FBC purchased to meet self-generator customer needs that ended up not being needed due to changes in the self-generator s requirements.

9 - 8 - Question 4: On the assumption that the Commission finds section 2.5 of the New PPA to be unjust, unreasonable or unduly discriminatory because self-generator customers have no meaningful input in setting their GBL s for service in the FortisBC service territory, how can the Commission Panel approve the Application as just and reasonable under sections of the Utilities Commission Act? 29. The above question refers to GBL s. The concept for which s. 2.5 of the New PPA provides is a customer specific baseline. 30. Self-generator customers would in fact have meaningful input in setting the customer specific baseline for service in FortisBC service territory. Though it is not able to specifically comment on the degree of input that Celgar or Tolko had regarding the setting of the GBLs in their electricity purchase agreements with BC Hydro, FortisBC generally agrees with the points set out in paragraphs of the BCH Supplemental Submissions in this regard. As such, the foundation on which the question is based does not arise. 31. If the Commission were nonetheless to reach the conclusion stated in Question 4, FortisBC endorses the solution which BC Hydro has proposed at paragraphs of its Supplemental Submissions. Conclusion 32. As set out above, FortisBC supports the principle that self-generator customers of a utility should not be permitted to arbitrage between embedded cost utility rates and market prices to the detriment of the utility s other ratepayers. If in fact FBC selfgenerator customers were prohibited from arbitraging between embedded cost FBC rates and market prices in FortisBC s service territory, the restrictions on self-generator customers in the New PPA would be redundant. However, Commission decisions related to the APA have made the status of this principle somewhat unclear in FortisBC service territory. 33. In the absence of FBC s ability to enforce a clear prohibition on arbitrage unqualified by the APA, circumstances may arise in which arbitrage occurs. While the current market environment makes it unlikely to occur at present, as a self-generator customer may not find it profitable to engage in this practice, it is not impossible. Further, market circumstances may change over the term of the New PPA to make its occurrence more likely. 34. Where a self-generator customer of FBC engages in arbitrage and increases its demand for power, FBC will need to source that power. In theory, absent the restrictions in s. 2.5 of the New PPA or specific Commission direction, FortisBC could do so from BC Hydro. As a practical matter, FortisBC is unlikely to take this approach given other provisions found in the New PPA, but FortisBC acknowledges BC Hydro s desire for certainty in this regard. FortisBC also recognizes that the time and cost spent on future regulatory proceedings may increase in the absence of that certainty.

10 In all the circumstances, the retention of the restrictions on self-generator customers in s. 2.5 of the New PPA is appropriate. Further, the existing wording of s. 2.5 is sufficient to give those customers input into the setting of the customer specific baseline relevant to that section. If additional clarification is nonetheless considered to be appropriate, FortisBC supports BC Hydro s alternative approach at paragraphs of its Supplemental Submissions. ALL OF WHICH IS RESPECTFULLY SUBMITTED. Counsel for FortisBC Inc. Dated: January 20, 2014 Ludmila B. Herbst