DECISION ESBI ALBERTA LTD. DUPLICATION AVOIDANCE TARIFF APPLICATION SHELL SCOTFORD INDUSTRIAL SITE

Transcription

1 DECISION DUPLICATION AVOIDANCE TARIFF APPLICATION EUB Decision (August 9, 2001)

2

3 ALBERTA ENERGY AND UTILITIES BOARD ESBI Alberta Ltd. CONTENTS DUPLICATION AVOIDANCE TARIFF APPLICATION 1 INTRODUCTION VIE WS OF THE PARTIES Views of EAL Views of FIRM VIE WS OF THE BOARD Eligibility of Bypass Facilities for COT Assessment of Just and Reasonableness of Tariff Necessity for a bypass avoidance rate Bypass avoidance rate vs. the long run incremental cost of service Bypass avoidance rate attractiveness Sharing of bypass rate among other utility customers and the utility shareholders Metering Issues Conclusions SU M M A R Y OF DIRECTIONS...13 APPENDIX 1 - OTHER EXPENSES (NO M INAL DOLLARS)...15 APPENDIX 2 - EAL APPLIED FOR RATE RIDER A...16 APPENDIX 3 - SCHEDULE 1 - EAL APPLIED FO R INC R E M E N T A L L OSS FACT O RS...18 APPENDIX 4 - SCHEDULE 2 -EAL APPLIED FOR OT HER EXPENSES C H A R GED...19 EUB Decision (August 9, 2001) i

4

5 ALBERTA ENERGY AND UTILITIES BOARD Calgary, Alberta DUPLICATION AVOIDANCE TARIFF APPLICATION Decision Application No File No INTRODUCTION On November 24, 2000, ESBI Alberta Ltd. (EAL, Transmission Administrator (TA), or the Applicant) filed an application (the Application) with the Alberta Energy and Utilities Board (EUB) for approval of a Transmission Duplication Avoidance Adjustment Tariff (Duplication Avoidance Tariff) for Shell Canada s (Shell) Scotford Industrial System. The Application was made pursuant to Section 49(2) of the Electric Utilities Act. The Application for the Duplication Avoidance Tariff requested a term of 35 years commencing March 1, Shell was granted an Industrial System Designation ("ISD") for its Scotford Site (AEUB Order No. U ) on March 7, 2000, permitting Shell to produce and consume power within the Scotford Industrial System ( Scotford Site ), allowing Shell at this site to be exempt from the EUA. As a component of the Industrial System, Shell requested that the TA develop a Transmission Duplication Avoidance Adjustment Tariff ( Duplication Avoidance Tariff ) for a portion of the electric power generated and consumed on the Scotford Site. To this end, Shell and the TA developed the proposed Duplication Avoidance Tariff. A notice was served to the parties on December 22, 2000 and a schedule, including provision for information requests and responses, was set out in separate correspondence dated January 17, FIRM was the only party to register an intervention in the Application. Shell Canada and EAL jointly developed the tariff and its terms and conditions for this tariff. In a manner, the jointly submitted tariff could be considered to be like a contested negotiated settlement between EAL and Shell. FIRM submitted information requests on January 11, 2001 and March 29, EAL provided responses to FIRM s information requests on February 26, 2001 and June 15, 2001 respectively. FIRM and EAL submitted final argument on June 15, The Board considers that the final date of evidence and submissions for this proceeding was therefore June 15, EUB Decision (August 9, 2001) 1

6 2 VIEWS OF THE PARTIES 2.1 Views of EAL EAL stated that it was making the Application in response to Shell's request to deliver electricity from the Scotford Cogeneration Facility to the Load Facilities within the Scotford Industrial System. The Scotford Industrial System is currently interconnected with the Alberta Interconnected Electric System (AIES) through the TransAlta Utilities Limited 409S transmission station, also located on the Scotford Site. EAL claimed the Duplication Avoidance Tariff met the criteria established by the EUB to be used in evaluating transmission duplication proposals. These four criteria being: 1. The Bypass Avoidance Tariff is required to respond to a credible threat to construct duplicate facilities to avoid the Transmission Administrator s Tariff; 2. The Bypass Avoidance Tariff must exceed the long run incremental cost of service; 3. The Bypass Avoidance Tariff is no more attractive than is reasonably required to avoid the construction of duplicate transmission facilities; and; 4. The cost of offering the Bypass Avoidance Tariff is appropriately shared between other utility customers and the utility shareholders. Based upon its regulatory, technical and economic review, EAL concluded that the Duplicate Facilities proposal was credible and that a Duplication Avoidance Tariff was required to respond to Shell s proposed Duplicate Facilities alternative. To determine the long-run incremental cost of service, EAL explained it evaluated the Duplicate Facilities alternative (Concept Plan #3) against the Duplication Avoidance Tariff (Concept Plan #2, with metering adjusted to be equivalent to Concept Plan #3). Long-run incremental costs were taken as those costs that the TA would have incurred over the 35-year term, had Shell implemented the Duplicate Facilities alternative. EAL stated it considered the incremental impact of the Duplication Avoidance Tariff on system support services costs and determined it to be zero. With respect to wires costs, EAL stated that under the Duplication Avoidance Tariff, Shell would deliver power from its Cogeneration Facility to its Load Facilities using the 409S transmission station. Under the Duplicate Facilities alternative, Shell would deliver the power through its own transmission station. In both alternatives, EAL stated that the power flows to and from the AIES are the same, with no difference in load or generation requirements between the two alternatives. EAL stated the cost to the TA of providing the Duplication Avoidance Tariff was the continued cost of the transformation at 409S (building the Duplicate Facilities would allow for the removal of these transformers). EAL stated that the removal of the two transformers at 409S is estimated at a capital credit of $1,200,000, less salvage costs of $60,000, for a net credit of $1,140,000. Therefore, EAL stated that the capital cost of continued service, using 409S, is $1,140, EUB Decision (August 9, 2001)

7 EAL noted that under the Duplicate Facilities alternative, Shell would be responsible to operate and maintain the 138/25 kv transformers. By offering the Duplication Avoidance Tariff, the TA would be required to continue to provide transformation and would subsequently incur incremental O&M costs, capital improvements, and property taxes associated with maintaining 409S in service. EAL stated that it had conducted a detailed 35-year estimate of the operating, maintenance and capital improvements costs of the Duplicate Facilities. The cost estimate was converted from real 2000 dollars to nominal dollars using a 2% per year escalator. Details of the costs are in Appendix A of the Application. EAL assumed that the Other Expenses Charge estimated for the Duplicate Facilities would be similar to the estimated O&M, capital improvements and property tax costs losses associated with maintaining 409S in service. Since Shell would pay Duplication Avoidance Tariff revenues equivalent to the Other Expenses Charge, EAL submitted that this left a net incremental cost for O&M and property taxes of zero. The Other Expenses Charges were estimated to be $40,000 per year. With respect to losses, EAL stated that as part of the Duplication Avoidance Tariff, the incremental cost of transmission losses would be transferred to Shell through a metering balancing calculation, as described in Section and in Appendix D of the Application. The losses charges were estimated to be $62,000 per year. With the metering compensation in place, EAL submitted that the net incremental cost of losses to the TA would be reduced to zero. EAL also explained that under the Duplicate Facilities alternative, Shell would provide all transformation from 138 kv for the Load Facilities and would be entitled to the Customer- Owned Transmission Station (COT) credit, pending EUB approval of this part of the TA s 2001 general tariff application. EAL proposed to provide the same credit to Shell for the Duplication Avoidance Tariff, provided that the EUB approved the COT as part of the TA s tariff. EAL also included an exit provision in the tariff. If either the TA or Shell Canada were to terminate the Duplication Avoidance Tariff at a future date, under EAL s Application, Shell Canada would receive a partial refund of the lump sum Capital Charge payment. The amount of the partial refund would be the deemed remaining undepreciated dollar amount of the avoided Duplicate Facilities, in the year that the TA or Shell Canada gives notice to terminate the Duplication Avoidance Tariff. The undepreciated dollar value would be calculated based on the lump sum Capital Charge payment using straight-line depreciation over the first 24 years of the Term of the Duplication Avoidance Tariff. At the end of 24 years, the undepreciated value would be zero. This approach is similar to the exit provisions in the Dow Chemicals Inc. and the Nova Chemicals duplication avoidance rates that were approved by the AEUB. The termination notice period, for both the TA and Shell Canada, will be 24 months. In conclusion, EAL maintained the net incremental cost of providing the Duplication Avoidance Tariff was an estimated up-front cost of approximately $1.1 million for the opportunity cost of not salvaging the 409S transformers. EAL submitted that the cost was more than offset by the Capital Charge of $2.9 million in the Duplication Avoidance Tariff as described in Section of the Application. Therefore, EAL stated the revenues that the TA would receive from the EUB Decision (August 9, 2001) 3

8 Duplication Avoidance Tariff exceed the TA s long-run incremental cost of providing the Duplication Avoidance Tariff by an estimated $1.8 million. With respect to criteria number 3, the overall reasonableness of the tariff, EAL stated that its evaluation had determined that the Duplication Avoidance Tariff was no more attractive than was reasonably required to avoid construction of the Duplicate Facilities. If the Duplication Avoidance Tariff was any higher, EAL maintained Shell would have an incentive to construct the Duplicate Facilities. EAL explained Shell would make the following payments to the TA as part of the proposed Duplication Avoidance Tariff: 1. Capital Charge a payment of $2,907,800, to be made immediately upon implementation of this Duplication Avoidance Tariff; 2. Incremental Losses Charge incorporated in the metering balancing calculation for the 409S transmission station for the Term of the Duplication Avoidance Tariff, as described in Section 5.0.3; and; 3. Other Expenses Charge - monthly payments for the Term of the Duplication Avoidance Tariff, according to Schedule 2 in Appendix D. These payments are set out in the Rate Rider attached in Appendix D of the Application, which EAL stated would form part of the TA's tariff upon EUB approval of the application. EAL stated it would flow through the lump-sum payment to the applicable Transmission Facility Owner, who would reduce its revenue requirement accordingly in a similar manner as with customer contributions. Attached as Appendix B to the Application was a financial analysis, which evaluated the economic impacts on both Shell and the Duplicate Facilities alternative, compared to continuing with standard transmission rates. In summary, EAL maintained that the Duplication Avoidance Tariff would minimize revenue losses to the TA's customers from the Duplicate Facilities through providing an incremental benefit of $286,000 per year for 35 years, on a levelized basis. This is based on using a 10% discount rate. With a 5% discount rate, the benefits are $220,000 per year, and with a 15% discount rate, the annual benefits are $364,000. In their argument filed on June 15, 2001, EAL stated that it was their understanding from conversations with FIRM that there remained only one outstanding issue in this application, that being the applicability of the COT credits to the Scotford Industrial System. EAL stated the logic of the COT credit 1 was straightforward. EAL submitted that any customer that owned transmission facilities and was taking DTS service should be eligible. Otherwise, in EAL s view, that customer would effectively pay twice for its transmission facilities, once via the DTS charge and once via its own facilities cost. EAL maintained this situation existed whether the customer was an industrial system or not. 1 In Alberta Energy and Utilities Board, Decision : ESBI Alberta Ltd General Rate Application, Part H: Phase II, Rate Design, Terms and Conditions of Service, May 2, 2001, the Board supported the COT credit in principle, and proposed a transition to COT credits from the existing COS credits. 4 EUB Decision (August 9, 2001)

9 With respect to the Scotford Industrial System in particular, EAL noted that were Shell to construct duplicate facilities, it would be eligible for the COT credit. EAL submitted that to ignore that credit in the evaluation of the duplicate facilities alternative would violate the concept that Shell should be economically indifferent between that alternative and taking service from the Transmission Administrator. EAL submitted that Shell would be left with an incentive equal in size to the COT credit to build the duplicate facilities. EAL argued that this would ultimately be to the detriment of all other transmission customers. 2.2 Views of FIRM In their argument, FIRM stated that as a general matter they were concerned with both the number and the frequency of industrial bypass applications. FIRM stated it understood that EAL had another bypass application pending and was in discussions with other potential bypass customers. FIRM submitted that each bypass situation caused existing and future demand customers to shoulder an increasing share of the TA revenue requirement. With respect to the Shell Scotford Application in particular, FIRM noted that EAL had proposed there be an upfront capital contribution of $2.9 million. However, FIRM also noted EAL has proposed that Shell be eligible for the COT or Customer-Owned Substation (COS) credit. FIRM was concerned with this approach for several reasons: 1. With the availability of this credit, Shell essentially pays a capital contribution upfront but then Shell is repaid this amount with carrying costs through the application of the COT or COS credit; 2. The COT or COS credit should not be available for a non-existent station; and; 3. The capital contribution is in lieu of building duplicate facilities and should not be returned to the applicant in the form of a credit. FIRM explained that the TA provided a COT or COS credit where the customer owns his own station. FIRM noted that this approach recognized that embedded in the DTS rates are system costs for transmission stations. However, FIRM maintained that in this application there would be no customer owned station. The existing station 409S will still be utilized. FIRM submitted there was no basis to permit a COT or COS credit for a non-existent station. FIRM stated that in FIRM-EAL-2 the proposed COT credit of $27,167 per month or $326,000 per year (at a 10% discount rate) is based on the Shell payment of $2.9 million. FIRM submitted that this credit essentially returned Shell s capital contribution with a 10% return. Furthermore, FIRM noted that EAL indicated the COT credit was not included in the incremental analysis of the application (Table B), which is supposed to justify the case, since the credit would be applicable to both the duplicate facilities scenario and the proposed duplication tariff scenario. EUB Decision (August 9, 2001) 5

10 However, FIRM questioned why Shell should be entitled to a COT credit if Shell built the duplication facilities. Since the facilities would not be in lieu of required Company transformation, but in addition to existing Company transformation FIRM submitted that redundant facilities would result and there was no logical nor fair basis for such facilities to be eligible for a COT credit. FIRM also pointed out that FIRM-EAL-6 indicated a Shell contract for 35 years for 4 MW of STS and 83 MW of DTS. FIRM submitted that if a COT credit were available (which FIRM did not recommend) such annual credit should be conditional on the billing demands so that any changes in the relationship between supply and demand would be reflected. With respect to metering and totalizing, FIRM stated it was unclear how many meters were to be totalized pursuant to the proposal. It appeared there were 4 meters, namely 409ST1 and 409ST2 at the refinery load and ALCO1L and ALCO2L at the Air Liquide substation. FIRM submitted that each meter should be separately identified and listed in the proposed Duplication Rider A and that all the 4 meters should be synchronized for purposes of totalizing. In conclusion, FIRM recommended that any approval of the Duplication Avoidance Tariff be conditional upon: 1. No COT or COS credit available to the Shell for the Scotford site during the 35-year term. 2. Identifying and specifying the four meters that are to be totalized at the site and that the readings should be synchronized. 3 VIEWS OF THE BOARD 3.1 Eligibility of Bypass Facilities for COT Before dealing with the general evaluation of the proposed tariff, the Board will deal with the issue of Shell s eligibility for the COT credit, an issue raised by FIRM. At section of the Application, EAL stated the following: With the Duplicate Facilities alternative, Shell Canada would provide all transformation from 138 kv for the Load Facilities and would be entitled to the Customer-Owned Transmission Station (COT) credit, pending AEUB approval of this part of the TA s 2001 general tariff application. The TA will provide the same credit to Shell Canada for the Duplication Avoidance Tariff, provided that the AEUB approves the COT as part of the TA s tariff. Therefore, pending approval of AEUB, there is no difference in the COT rate between the two scenarios. Clearly, when the Application was filed, it appears that EAL was working under the assumption that the Board would approve the proposed COT rate and that the COT rate would apply in the circumstances of bypass. However, the Board notes that the COT, including eligibility criteria, was not finally approved in EAL s 2001 Phase II Decision, Decision The Board further 6 EUB Decision (August 9, 2001)

11 notes that certain directions, respecting COT, were given to EAL in that Decision and will be addressed in the 2002 GRA filing. As mentioned above, the final form of the COT has not been addressed. In particular, the issue has not been addressed whether bypass facilities would be eligible for any approved COT. The Board considers that there are a number of issues related to the qualification of bypass facilities for COT and the Board is not convinced at this time, that bypass facilities such as Shell Scotford should qualify for the COT. The Board considers that a final determination on this matter should be made at the time of hearing the 2002 GTA and all of the remaining COT issues. Accordingly, the Board directs EAL, at the time of the next GTA, to address the matter and circumstances of whether bypass facilities would qualify for any COT and if so, what terms and conditions would apply. In particular, the Board asks EAL to address the following issues: The extent that stranded system costs or facilities would affect the amount recommended to be eligible for COT. The process that EAL would use to verify that the requested COT amounts are truly a substitute for facilities that the system would invest in and do not include other costs that would be incurred for operational purposes, in any event, by the customer. The impact on transmission costs of removing older depreciated costs from the system and replacing them with newer more expensive costs (through the COT credit) that the system did not require. If EAL proposes that bypass facilities should be eligible for COT, provide a method to determine a maximum eligible ceiling. Include an evaluation, as one option to limit any COT credit to a maximum of the net salvage value of the system facilities made redundant. If this Application was otherwise going to be approved, the Board believes that the relative economics or indifference point of Shell s decision making would not be affected by the Board s decision to deny the Scotford site as eligible for COT, at this time. The Board notes that neither Table B-1 nor Table B-2 in Appendix B of the Application appear to incorporate any COT benefits. Should it be determined as part of a future proceeding that facilities such as Shell s should be eligible for the COT or a COT like credit, the Board would consider an application for an appropriate amendment to the Duplication Avoidance Tariff, should the tariff be approved. 3.2 Assessment of Just and Reasonableness of Tariff The Board will now evaluate and assess whether the proposed Duplicate Avoidance Tariff is just and reasonable by considering the following general criteria along with any other considerations appropriate in the circumstances of this Application: The bypass avoidance rate is required to respond to a credible bypass threat, The bypass avoidance rate must exceed the long run incremental cost of service, The bypass avoidance rate is no more attractive than is reasonably required to avoid duplicate facilities, and EUB Decision (August 9, 2001) 7

12 The cost of offering the bypass avoidance rate is appropriately shared among other utility customers and the utility shareholders Necessity for a bypass avoidance rate The Board has reviewed the evidence and agrees with EAL that the proposed duplicate facilities form the basis for a credible bypass threat. In particular, the Board notes that the Scotford facility has been granted ISD status and the alternative transmission station design would form the basis for a valid facilities application to the Board. The Board also notes, however, that all the above noted criteria must be satisfied before approval is granted to the tariff. These criteria are examined below Bypass avoidance rate vs. the long run incremental cost of service The Board has reviewed Appendices B & E of the Application regarding the financial evaluation and technical summary of the bypass threat. If only the provided numbers are considered, the Board notes that the incremental annual revenues of $403,500 (estimated by levelizing the customer contribution of $2.908 million using a 10% discount rate and including the annual losses of $62,000 and annual other charges of $40,000) appear to exceed the annual incremental costs of $118,300 which consists of the levelized value of the opportunity cost of not salvaging the transformers in the 409S (removal of the two transformers at 409S is estimated at a capital credit of $1,200,000, less salvage costs of $60,000, for a net credit of $1,140,000) resulting in an annualized net benefit to TA customers of $285,000. The Board notes that EAL has included the deemed ongoing costs of maintaining 409S in service as a benefit and savings. The initial one-time benefit reduces to approximately $183,000 per year (i.e. $285,000-$40,000-$62,000) if the deemed ongoing costs of maintaining 409S in service are excluded. The Board understands that the TA proposed to flow through the lump-sum payment to the applicable Transmission Facility Owner, who will reduce its revenue requirement accordingly in a similar manner as with customer contributions. Based on the above evidence, the Board acknowledges that the forecast Duplicate Avoidance Tariff revenue appears to exceed the long run incremental cost of service and appears to provide a benefit to the TA s other customers. The Board notes, however, that the benefit to customers is really only an effective one-time payment of $1.768 million ($2.908 contribution less foregone salvage of $1.14 million) converted to an estimated reduction of the TFO s revenue requirement of about $183,000 per year. This calculation excludes the deemed ongoing costs of the 409S substation as a benefit since these ongoing costs would not be incurred (because 409S would be removed from service) if Shell were to build the duplicate facilities. This is based upon EAL s assumptions, which as discussed below, may not be sufficiently encompassing of all factors. The benefit to Shell is projected to be in excess of $3.3 million per year. 8 EUB Decision (August 9, 2001)

13 3.2.3 Bypass avoidance rate attractiveness The Board notes from Appendix B of the Application that if Shell were to build the Duplicate Facilities, Shell would incur estimated annual costs of $2.549 million. If Shell were to remain on standard TA tariffs, Shell would incur annual costs of $5.857 million. The Board considers that the savings to Shell of $3.308 million (i.e. $5.857 million less $2.549 million) provide Shell with an economic incentive to build the Duplicate Facilities. The Board also notes that EAL submitted that the charges to Shell under the Duplication Avoidance Tariff are equal to the costs that Shell would have incurred to build the duplicate facilities. If Shell were to construct the Duplicate Facilities, EAL advised that totalization would be achieved in a physical sense as the facilities would combine the four current connection points into one, with the resulting combination of billing determinants and revenues. With the Duplication Avoidance Tariff, totalization is achieved by adding the four connections together. Accordingly, the resulting billing determinants and revenues under the Duplication Avoidance Tariff are the same as the billing determinants and the revenues that Shell would have incurred if it had built the duplicate facilities. Given that Shell Canada and EAL jointly developed the tariff and its terms and conditions for this tariff, the Board acknowledges that the proposed rate would overcome the incentive to Shell to construct the duplicate facilities. However, before approving the proposal, the Board must also be satisfied, however, that the avoidance tariff offers a reasonable sharing of benefits and costs between all customers. This concern is dealt with below Sharing of bypass rate among other utility customers and the utility shareholders The Board considers that the criterion of sharing between utility customers and utility shareholders does not apply in the circumstances of this Application since EAL does not have an opportunity to earn a return on the investment in transmission facilities. With respect to appropriate sharing between Shell and other TA customers, the Board notes that while FIRM has not raised this as an issue directly, it is central to their submissions. Further, the level of sharing of benefits between Shell and other TA customers is a primary concern to the Board. The Board has a number of concerns with the tariff as filed. As noted earlier in this Decision, the Board is not convinced that bypass customers, such as Shell, should be eligible to receive a COT credit or any other similar credit. The eligibility of bypass customers for COT and the further defining of the COT proposal will be the subject of a separate future proceeding. The Board is also concerned with the level of the inflation escalator, for O&M expenses, capital projects, and taxes. The inflation escalator was set at 2% for the entire term of the tariff. The Board considers that actual inflation could easily exceed the inflation escalator over the 35-year term of the contract. In particular, the Board considers that inflation for the capital improvements anticipated in Appendix A of the tariff could easily exceed 2% in Alberta for the foreseeable EUB Decision (August 9, 2001) 9

14 future. An inflation escalator that is too low and not adjusted for changing circumstances during the term of the tariff effectively transfers costs to the other customers of EAL for up to 35 years. The transfer of costs occurs, in these circumstances, because the revenues fixed in the Duplication Avoidance Tariff, using the 2% escalator would be insufficient to cover the actual costs incurred by EAL to maintain the existing 409S facilities. The Board also observes that, if anything, the simulated O&M charges and capital improvements associated with the new Duplicate Facilities would likely be less than the ongoing O&M charges and capital improvements associated with the older existing 409S facilities. This would further erode EAL s calculated benefit. The Board also notes that the term of the proposed tariff is for 35 years. There is an exit fee provision that provides an opportunity for either Shell or EAL to provide notice with 24 months notice. This exit provision is another provision in the Application that could erode the benefits to customers significantly. In spite of very substantial immediate annual benefits to Shell resulting in a payout of less than one year, the exit provisions provide for a partial refund of the lump sum Capital Charge to Shell for a 24-year period. The Board does not consider this to be a reasonable commercial term given the benefits to Shell and as such is unfair to other ratepayers. Finally, as noted above, the forecast benefits to Shell exceed $3.3 million per year and could easily be more given the above deficiencies noted by the Board. On the other hand, benefits to other customers are forecast to be only $183,000 per year. Should actual inflation exceed the forecast of 2% contained in the application actual benefits could be lower than forecast. The Board notes that Shell submitted the following in Appendix E: It is requested that the Rate Rider come into effect at Shell s request after 01 March 2001 when the bypass, had it been constructed, would have been completed. The Scotford industrial system will then become a direct customer of the TA. In the meantime, the Refinery load will continue to be served through 409S and the Air Liquide cogeneration facility will be served directly by EAL. The Board is concerned with the proposed effective date of March 1, 2001 as shown on EAL s proposed Duplication Rate Rider A. The Board understands from the above Shell submission, that this effective date will have to be adjusted, at Shell s request, to the date when the bypass, had it been constructed, would have been completed. The benefits, as previously stated, are a net effective one-time cash payment of $1.768 million ($2.908 contribution less foregone salvage of $1.14 million), which translates to a reduced TFO revenue requirement. From the customer s perspective, this net effective one-time cash payment is the equivalent of approximately 6 months of foregone incremental revenue comparing revenues from standard tariffs with revenues from the duplication avoidance tariff. The Board considers that the Application does not adequately provide a real time assessment of when the bypass facilities could be in operation given the approval process, permitting, ordering, construction period or the losses in revenue from production that Shell would experience to implement its bypass scheme. The Board, 10 EUB Decision (August 9, 2001)

15 therefore, considers that a Duplication Avoidance Tariff application should provide adequate supporting data to substantiate the proposed effective date. In the restructured electrical industry, parties are able and should be able to exercise their rights to provide their own facilities pursuant to the Transmission Planning Guidelines 2. It is unrealistic to assume that the system will be able to retain all of these customers or prevent them from proceeding with their own investments. From a broad perspective, the Board shares the concern of FIRM that bypass applications should not be a routine approval process. The Board would be concerned if the bypass application process became an easy exercise to make a paper investment to achieve huge savings in tariffs at the expense of other customers. The Board considers that caution should be exercised in committing other customers to special tariffs for lengthy (30-35 years) periods, when the benefit received by customers is relatively minor and no real investment by the proponent is being made. Binding future customers to these terms may not be appropriate, given the uncertain nature of the restructuring process and some associated unpredictability. Processing bypass applications consumes resources for EAL, customer groups, and the Board. In exchange for this consideration, the Board considers that substantial benefits to customers must be realized. Approval of bypass applications should be relatively difficult to receive and only when material benefits for customers are achieved compared to allowing the bypass proponent to invest in bypass facilities. The Board considers that the four criteria outlined earlier in the Decision are valid. However, the Board considers that the concerns of the Board outlined in this Decision need to be addressed in future applications. For the above reasons the Board does not consider the proposed Duplication Avoidance Tariff offers a reasonable balance of risk and reward between the parties Metering Issues The Board also notes that FIRM has recommended that EAL be required to identify and specify the four meters that are to be totalized at the site and that the readings should be synchronized. The Board considers that this would provide a degree of clarity and certainty to the proposed tariff. In future applications, the Board considers that the tariff should identify and specify all meters to be totalized and to require that they be synchronized for purposes of totalizing. 2 Issued June 1999 by the Department of Resource Development (now the Department of Energy) EUB Decision (August 9, 2001) 11

16 3.2.6 Conclusions For all of the above reasons, the Board considers the proposed Duplication Avoidance Tariff has not satisfactorily met the Board s criteria and as a result the Board cannot consider the proposed tariff to be just and reasonable. Accordingly, the Board does not approve EAL s proposed Application. The Board s Decision is without prejudice should the parties wish to submit a revised application reflecting a fairer balance of benefits between the parties and other customers. As such, the Board would consider a further application on its own merits. The Board notes that totalization of metering provides the largest quantum of benefits to Shell under the Duplication Avoidance Tariff. The Board notes that the issue of meter totalization was reviewed by the Board in Decision , dated May 1, 2001 and led to revised Terms and Conditions approved in Decision dated June 1, Article 10.7 of the currently approved Terms and Conditions deals with totalization at Points of Connection (POC) defined as a point at which electric energy is transferred between the Customer s facility and the AIES. A Point of Connection may be a Point of Supply (POS), a Point of Delivery (POD), or both. Article 10.7 reads as follows: Effective January 1, 2002, where a Customer is an industrial site where multiple POCs are required, the Transmission Administrator may totalize the POCs and produce one Statement of Account for the Customer. The Transmission Administrator will base its decision to totalize on a review of the economics of providing more than one POC, reclassification of the site as an AEUB designated industrial system, or the existence of a credible transmission bypass alternative. The Board observes that the above Article 10.7 was approved after the November 24, 2000 Duplication Avoidance Tariff Application was filed with the Board. The provisions of Article 10.7 may also influence whether parties wish to submit a revised application reflecting a fairer balance of benefits between the parties and other customers. Given the Board s determination in this proceeding, the Board considers that it would be useful to parties and to the Board to review the business practices that EAL will use to administer the criteria in Article 10.7, particularly the tests relating to economics and the existence of a credible bypass alternative. Accordingly, the Board directs EAL, at the next GTA, to provide its business practices for administering Article Further, the Board notes that the proposed Rider A does not appear to include all of the terms associated with the Application. For example, the proposed Rider A does not include reference to the exit provisions or the 35-year term. Accordingly, the Board directs EAL, in future applications for Duplication Avoidance Tariffs, to provide the relevant information in the proposed Rider A and to provide any contracts that may be signed between the Applicant and EAL. 12 EUB Decision (August 9, 2001)

17 4 SUMMARY OF DIRECTIONS This section is provided for the convenience of readers. In the event of any difference between the Directions in this section and those in the main body of the report, the wording in the main body of the Decision shall prevail. 1. Accordingly, the Board directs EAL, at the time of the next GTA, to address the matter and circumstances of whether bypass facilities would qualify for any COT and if so, what terms and conditions would apply. In particular, the Board asks EAL to address the following issues: (Page 7) The extent that stranded system costs or facilities would affect the amount recommended to be eligible for COT. (Page 7) The process that EAL would use to verify that the requested COT amounts are truly a substitute for facilities that the system would invest in and do not include other costs that would be incurred for operational purposes, in any event, by the customer. (Page 7) The impact on transmission costs of removing older depreciated costs from the system and replacing them with newer more expensive costs (through the COT credit) that the system did not require. (Page 7) If EAL proposes that bypass facilities should be eligible for COT, provide a method to determine a maximum eligible ceiling. Include an evaluation, as one option to limit any COT credit to a maximum of the net salvage value of the system facilities made redundant. (Page 7) 2. Given the Board s determination in this proceeding, the Board considers that it would be useful to parties and to the Board to review the business practices that EAL will use to administer the criteria in Article 10.7, particularly the tests relating to economics and the existence of a credible bypass alternative. Accordingly, the Board directs EAL, at the next GTA, to provide its business practices for administering Article (Page 12) 3. Accordingly, the Board directs EAL, in future applications for Duplication Avoidance Tariffs, to provide the relevant information in the proposed Rider A and to provide any contracts that may be signed between the Applicant and EAL. (Page 12) EUB Decision (August 9, 2001) 13

18 Dated in Calgary, Alberta on August 9, ALBERTA ENERGY AND UTILITIES BOARD <Original signed by> N. W. MacDonald, P. Eng. Presiding Member <Original signed by> A. J. Berg, P. Eng. Member R. G. Lock, P. Eng. Member * * Mr. Lock is in agreement with the findings of the Board but was unavailable to sign at time of issue. 14 EUB Decision (August 9, 2001)

19 ESBI ALBERTA LTD APPENDIX 1 OTHER EXPENSES (NOMINAL DOLLARS) 12 Month Period Operating and Maintenance Mar. 1, Feb. 28, ,690 Mar. 1, Feb. 28, ,635 Mar. 1, Feb. 29, ,418 Mar. 1, Feb. 28, ,984 Mar. 1, Feb. 28, ,986 Mar. 1, Feb. 28, ,995 Mar. 1, Feb. 29, ,534 Mar. 1, Feb. 28, ,020 Mar. 1, Feb. 28, ,606 Mar. 1, Feb. 28, ,359 Mar. 1, Feb. 29, ,320 Mar. 1, Feb. 28, ,256 Mar. 1, Feb. 28, ,737 Mar. 1, Feb. 28, ,952 Mar. 1, Feb. 29, ,165 Mar. 1, Feb. 28, ,547 Mar. 1, Feb. 28, ,622 Mar. 1, Feb. 28, ,676 Mar. 1, Feb. 29, ,092 Mar. 1, Feb. 28, ,723 Mar. 1, Feb. 28, ,452 Mar. 1, Feb. 28, ,832 Mar. 1, Feb. 29, ,088 Mar. 1, Feb. 28, ,119 Mar. 1, Feb. 28, ,324 Mar. 1, Feb. 28, ,889 Mar. 1, Feb. 29, ,149 Mar. 1, Feb. 28, ,451 Mar. 1, Feb. 28, ,740 Mar. 1, Feb. 28, ,865 Mar. 1, Feb. 29, ,335 Mar. 1, Feb. 28, ,153 Mar. 1, Feb. 28, ,060 Mar. 1, Feb. 28, ,274 Mar. 1, Feb. 29, ,899 $ 20,271 $ 26,208 $ 39,315 $ 174,963 $ 13,728 $ 28,565 $ 162,711 $ 54,687 $ 672,921 $ 18,845 Capital Improvements Property Tax Total $ $ 11,802 $ 21,492 $ $ 11,637 $ 20,272 $ $ 11,461 $ 20,879 $ $ 11,272 $ 20,256 $ $ 11,072 $ 22,057 $ $ 10,859 $ 41,125 $ $ 10,633 $ 20,167 $ $ 10,394 $ 48,414 $ $ 10,141 $ 20,747 $ $ 9,873 $ 51,441 $ $ 9,591 $ 19,911 $ $ 9,294 $ 59,865 $ $ 8,981 $ 19,718 $ $ 8,652 $ 19,603 $ $ 8,306 $ 197,434 $ $ 8,472 $ 66,746 $ $ 8,641 $ 20,263 $ $ 8,814 $ 50,055 $ $ 8,990 $ 21,082 $ $ 9,170 $ 190,604 $ $ 9,353 $ 22,805 $ $ 9,540 $ 22,372 $ $ 9,731 $ 22,820 $ $ 9,926 $ 117,731 $ $ 10,124 $ 26,448 $ $ 10,327 $ 24,216 $ $ 10,533 $ 25,682 $ $ 10,744 $ 25,195 $ $ 10,959 $ 25,698 $ $ 11,178 $ 707,964 $ $ 11,402 $ 26,737 $ $ 11,630 $ 91,629 $ $ 11,862 $ 28,922 $ $ 12,100 $ 28,373 $ $ 12,342 $ 32,240 EUB Decision (August 9, 2001) 15

20 ESBI ALBERTA LTD Effective: March 1, 2001 APPENDIX 2 EAL APPLIED FOR RATE RIDER A Transmission Duplication Avoidance Rate A3 Shell Canada Corporation-Scotford Industrial System Applicable To: Available: Rate: Shell Canada Limited (Shell Canada) To Shell Canada s Scotford Industrial System, as designated by the AEUB Order No. U for System Access Service to Shell Canada at the 409S transmission station Point of Delivery (POD) and Point of Supply (POS). For each metering time interval, the Metered Demand and Energy for each POS and POD at the 409S transmission station will be totalized and adjusted to measure electricity at the 138 kv bus for the purpose of billing under the Transmission Tariff. Charges under the Transmission Tariff will be calculated using the totalized Metered Demand and Energy. Shell Canada will make the following payments to the TA: 1. Capital Charge: A payment of $2,907,800 is due immediately upon implementation of this rate rider. 2. Incremental Losses Charge: Commencing on the effective date of this rate rider, Metered Demand and Metered Energy will be adjusted through the metering balancing calculation for the 409S transmission station, using the loss factors in the attached Schedule 1. If the Metered Demand in a metering interval is between two levels in Schedule 1, the applicable loss factor will be calculated by interpolating between the loss factors for the two levels of Metered Demand. If the Metered Demand in a metering interval is less than 10 MW, including 0 MW, the incremental loss will be deemed to be MW. The meters to be compensated in the metering balancing calculation are on 409ST1, 409ST2, 337S and 746L. 3. Other Expenses Charge: The Other Expenses Charge is shown in the attached Schedule 2. Shell Canada will receive the same Customer-Owned Transmission Station Credit as is provided to other DTS customers of the TA who provide their own Transmission Station. Terms All Terms and Conditions in the Transmission Administrator s Tariff apply in addition to the terms in this Application for a Duplication Avoidance Tariff for Shell Canada s Scotford Industrial System. EUB Decision (August 9, 2001) 16

21 EUB Decision (August 9, 2001) 17

22 ESBI ALBERTA LTD APPENDIX 3 SCHEDULE 1 EAL APPLIED FOR INCREMENTAL LOSS FACTORS Metered Demand of Loss Factor (% of Metered Load Facilities (MW) Demand of Load Facilities) % % % % % % % % % % EUB Decision (August 9, 2001) 18

23 ESBI ALBERTA LTD APPENDIX 4 SCHEDULE 2 EAL APPLIED FOR OTHER EXPENSES CHARGED 12 Month Period Monthly Payment Mar. 1, Feb. 28, 2002 $ 1,791 Mar. 1, Feb. 28, 2003 $ 1,689 Mar. 1, Feb. 29, 2004 $ 1,740 Mar. 1, Feb. 28, 2005 $ 1,688 Mar. 1, Feb. 28, 2006 $ 1,838 Mar. 1, Feb. 28, 2007 $ 3,427 Mar. 1, Feb. 29, 2008 $ 1,681 Mar. 1, Feb. 28, 2009 $ 4,035 Mar. 1, Feb. 28, 2010 $ 1,729 Mar. 1, Feb. 28, 2011 $ 4,287 Mar. 1, Feb. 29, 2012 $ 1,659 Mar. 1, Feb. 28, 2013 $ 4,989 Mar. 1, Feb. 28, 2014 $ 1,643 Mar. 1, Feb. 28, 2015 $ 1,634 Mar. 1, Feb. 29, 2016 $16,453 Mar. 1, Feb. 28, 2017 $ 5,562 Mar. 1, Feb. 28, 2018 $ 1,689 Mar. 1, Feb. 28, 2019 $ 4,171 Mar. 1, Feb. 29, 2020 $ 1,757 Mar. 1, Feb. 28, 2021 $15,884 Mar. 1, Feb. 28, 2022 $ 1,900 Mar. 1, Feb. 28, 2023 $ 1,864 Mar. 1, Feb. 29, 2024 $ 1,902 Mar. 1, Feb. 28, 2025 $ 9,811 Mar. 1, Feb. 28, 2026 $ 2,204 Mar. 1, Feb. 28, 2027 $ 2,018 Mar. 1, Feb. 29, 2028 $ 2,140 Mar. 1, Feb. 28, 2029 $ 2,100 Mar. 1, Feb. 28, 2030 $ 2,142 Mar. 1, Feb. 28, 2031 $58,997 Mar. 1, Feb. 29, 2032 $ 2,228 Mar. 1, Feb. 28, 2033 $ 7,636 Mar. 1, Feb. 28, 2034 $ 2,410 Mar. 1, Feb. 28, 2035 $ 2,364 Mar. 1, Feb. 29, 2036 $ 2,687 EUB Decision (August 9, 2001) 19