Alberta Coalition Presentation. BCUC Workshop - August 23, BCTC Network Economy and Open Access Transmission Tariff

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1 C8-7 Alberta Coalition Presentation BCUC Workshop - August 23, 2006 BCTC Network Economy and Open Access Transmission Tariff August 23, 2006 Alberta Coalition 1

2 Overview of AC Evidence August 23, 2006 Alberta Coalition 2

3 AC General Approach 1. Examine Appropriate Uses 2. Examine Inappropriate Uses 3. Identify Distinguishing Tests which are: clear, transparent, enforceable, and facilitate a more competitive and open energy market. August 23, 2006 Alberta Coalition 3

4 General Approach Step 1 1. Examine Appropriate Uses 2. Examine Inappropriate Uses 1. Appropriate Uses General Principle: Serve Network Load with least cost supplies. Types of Appropriate Import Transactions: A. Emergency & Deficiency Generation insufficient to meet Network Load. B. Economy Energy Imports which are lower cost than generation which would be otherwise used to meet Network Load. August 23, 2006 Alberta Coalition 4

5 General Approach - Step 2 Examine Appropriate Uses 2. Examine Inappropriate Uses 2. Inappropriate Uses General Principle: Imports for trade purposes, not needed for Network Load. Types of Inappropriate Import Transactions: A. For Export Imports to be exported. B. Other Trade Imports which are not needed for Network Load. August 23, 2006 Alberta Coalition 5

6 General Approach Step 3 Examine Appropriate Uses Examine Inappropriate Uses 3. Distinguishing Tests & Key Elements Enhanced Economic Test Capacity Test Utilization Test Enforcement (Penalties) Monitoring August 23, 2006 Alberta Coalition 6

7 Proposed Network Economy Model Types of Transactions Emergency Deficiency Economy Energy Trade Network Economy Use Permitted Permitted Permitted Not Permitted Identification of Transaction Conditions Forward Purchases Identification BC Hydro declarations of emergency. Not applicable TPA 5.2 for Offers to Purchase and Mid-C or AB indicator to deem fulfillment of offer. Set Network Economy volume = fulfilled offer to purchase amounts. TPA 11.1 for Network Economy volumes. BC Hydro Surplus Condition. Inadequate Capacity without Network Economy. August 23, 2006 Alberta Coalition 7

8 Economic Test Needed to identify between imports providing service to Network Load and other imports being used for Trade. Transfer Pricing Agreement appears to provide an opportunity to identify imports used for Network Loads. Base on known prices to increase certainty. August 23, 2006 Alberta Coalition 8

9 Page 1 - Illustration of Purchases by BC Hydro from Powerex under the Transfer Pricing Agreement BC Hydro is presumed to develop a view of average forward market price Price $/MWh BCH sets Threshold Purchase Price (1) Transfer Price (DJMC) (3) BCH Benefit vs. Threshold (4) Powerex Margin (5) Powerex Actual Purchase Price (2) Notes 1. It is presumed that BC Hydro sets the Threshold Purchase Price (TPA 5.2) considering its energy needs for native load (not exports), its view of forward prices and its view of costs of thermal generation. BC Hydro may also establish a maximum purchase quantity. 2. Powerex will attempt to purchase energy at prices lower than the Threshold Purchase Price. Powerex is incented under the TPA to only purchase if its actual purchase price is lower than the Transfer Price. 3. Energy purchased by Powerex is sold to BC Hydro at the Transfer Price which is the DowJones Mid-Columbia index (DJMC as per TPA Appendix A 1.3). 4. BC Hydro benefits by purchasing the energy at the DJMC. If the DJMC is greater than the Threshold Purchase Price, BC Hydro would not purchase the energy. 5. Powerex retains a positive margin provided its actual purchase price is below the DJMC reference. If Powerex cannot purchase at prices below the DJMC, it is incented to forego purchases as that would result in a negative margin. August 23, 2006 Alberta Coalition 9

10 Page 2 - Illustration of Sales by BC Hydro to Powerex under the Transfer Pricing Agreement Price $/MWh BC Hydro sets Threshold Sale Price (1) BC Hydro is presumed to develop a view of average forward market price Actual Powerex Sale Price (2) Transfer Price (DJMC) (3) Powerex Margin (5) BCH Benefit vs. Threshold (4) Notes 1. It is presumed that BC Hydro sets a Threshold Sale Price (TPA 5.1) if its energy supplies are surplus to native load needs. BC Hydro is expected to consider its view of forward prices. BC Hydro may also establish a maximum sale quantity. 2. Powerex will attempt to sell energy at higher prices than the Threshold Sale Price. Powerex is incented under the TPA to only sell if its actual sale price is higher than the Transfer Price. 3. Energy sold by Powerex is purchased from BC Hydro at the Transfer Price which is the DowJones Mid-Columbia index (DJMC as per TPA Appendix A 1.3). 4. BC Hydro benefits by selling the surplus energy at the DJMC. If the DJMC is less than the Threshold Sale Price, BC Hydro would not sell the energy. 5. Powerex retains a positive margin provided its actual sale price is above the DJMC reference. If Powerex cannot sell at prices above the DJMC, it is incented to forego sales as that would result in a negative margin. August 23, 2006 Alberta Coalition 10

11 Page 3 - Illustration of Trade Transactions by Powerex BCH Threshold Sale Price (1) Price $/MWh BC Hydro View of average Forward Market Price Powerex Sale Price (2, 4) Powerex Margin (3) BCH Threshold Purchase Price (1) Powerex Purchase Price (2, 4) Notes 1. If BC Hydro sets a Threshold Sale Price which is high (TPA 6.1), indicating it is not significantly in surplus and a Threshold Purchase Price which is low (TPA 6.2), indicating it is not significantly short of energy, there will be no activity under Clauses 5.1 and 5.2 of the TPA. 2. Under such circumstances, Powerex is expected to continue to trade (purchase and sell) for Powerex s account. 3. Powerex would retain the margin between purchase prices and sale prices. 4. Trade transactions by Powerex may be back-to-back (a purchase and a sale at the same time) or Powerex may use available capacity of BC Hydro to time shift sales and purchases. If BC Hydro s storage is used, the storage amounts are tracked in a Trade Account (TPA 6.1 and 6.2) August 23, 2006 Alberta Coalition 11

12 Page 4 - Illustration of Potential Trade Transactions by BC Hydro Under the Transfer Pricing Agreement Price $/MWh BCH Threshold Sale Price (1) BC Hydro View of average Forward Market Price BCH Threshold Purchase Price (1) Actual Powerex Sale Price (2) Transfer Price (DJMC) (3) Transfer Price (DJMC) (3) Actual Powerex Purchase Price (2) Powerex Margin (4) BCH Benefit vs. Threshold (5) BCH Potential Trade Margin (5) BCH Benefit vs. Threshold (5) Powerex Margin (4) Notes 1. If BC Hydro establishes a relatively small spread between buy and sell prices by setting a Threshold Sale Price which is relatively low (TPA 5.1), indicating a desire to sell and a Threshold Purchase Price which is relatively high (TPA 5.2) indicating a desire to purchase, there will be activity under both Clauses 5.1 and 5.2 of the TPA. 2. Powerex will attempt to sell energy at higher prices than the Threshold Sale Price and purchase energy at lower cost than the Threshold Purchase Price. The diagram depicts an off-peak purchase at a low price and an on-peak sale at a higher price. 3. Energy bought and sold by Powerex is sold to and purchased from BC Hydro at the Transfer Prices which are the DowJones Mid-Columbia index (DJMC as per TPA Appendix A 1.3). 4. Powerex retains a relatively small margin provided its actual sale/purchase price is above/below the DJMC reference. 5. BC Hydro captures the majority of trade margin, including the increase above or below the Threshold Prices. August 23, 2006 Alberta Coalition 12

13 Capacity Test BCTC Principle: The principle of the capacity test is that Network Customer may not use Network Economy at the same time it is making third party sales, unless it has adequate generation capacity to support exports independently of imports delivered using Network Economy. (BCTC Response to AESO 1.9.1) Note: General agreement on use of capacity test, significant issues remain on details. August 23, 2006 Alberta Coalition 13

14 Utilization Test Needed since there is no incremental charges associated with reserving Network Economy. Provides a consequence for overreserving. August 23, 2006 Alberta Coalition 14

15 Enforcement - Penalties Greater of: 125% of maximum Short-Term PTP rate or; Market differential for the period (AB & Mid C). Penalties doubled for repeated violations within 12 months. Penalty dollars compensate interrupted participants where identifiable. Remaining penalty dollars used to reduce charges of other Non-Firm PTP customers. August 23, 2006 Alberta Coalition 15

16 Monitoring Reporting Usage Parameters used in tariff TPA prices and volumes Officer Attestation Audits Review in 2 years. August 23, 2006 Alberta Coalition 16

17 Alberta Coalition Presentation Part 2 BCUC Workshop - August 23, 2006 BCTC Network Economy and Open Access Transmission Tariff August 23, 2006 Alberta Coalition Part 2 1

18 Issues Differences in approach Economic principles - leads to disagreement in Capacity and Economic Test Need for Utilization test Use of TPA Penalties Monitoring August 23, 2006 Alberta Coalition Part 2 2

19 Difference in Approach 1 AC Examine Appropriate Uses Tests & Financial Penalties Examine Inappropriate Uses BCH Permit all other uses Prohibition on exports Examine uses that cause certain types of harm August 23, 2006 Alberta Coalition Part 2 3

20 Difference in Approach 2: Issues with the Narrow Focus BCH s limited focus on interrupted schedules does not recognize: Interruptions to PTP (non-firm) Reservations for which schedules were not in place as yet. PTP (non-firm) Reservations prohibited from being made due to for Trade Network Economy reservations. PTP (non-firm) Reservations discouraged due to permitting use of Network Economy for Trade. August 23, 2006 Alberta Coalition Part 2 4

21 Difference in Approach 3: Issues with Prohibition on Exports vs. Financial Penalties Financial penalties permit efficient use of transmission but penalize the specific party for it s inappropriate behavior. vs. Prohibitions cause inefficient use of the transmission highest value uses are prohibited. Transmission is used for lower value uses. Collateral impacts occur due to prohibition. August 23, 2006 Alberta Coalition Part 2 5

22 Efficiency Illustration A. Low Priced Energy Market Highest Value Use Most efficiency Lower Value Use Lower efficiency B. High Priced Energy Market C. Mid Price Energy Market August 23, 2006 Alberta Coalition Part 2 6

23 Efficiency Illustration Impact of Prohibition A. Low Priced Energy Market Highest Value Use Most efficiency Lower Value Use Lower efficiency B. High Priced Energy Market C. Mid Price Energy Market August 23, 2006 Alberta Coalition Part 2 7

24 Economic Principles Recognize principle that lowest cost resources are used for service of Network Load and remaining higher cost resources are used for Trade. (AC) Need to establish economic test and need to recognize exports on all interties in capacity test. or Assume all imports serve Network Load and all exports are served by generation resources. (Inferred from BCH response to AC 1.9.1) No need for economic test and only need to recognize exports on the other intertie. August 23, 2006 Alberta Coalition Part 2 8

25 BCH Response to AC G NL BCH interpretation: The 1000 MW import is serving Network Load. The 500 MW export is served by BCH generation. BC USA 500 MW Export 1000 MW Import Network Load pays for the higher cost of the full 1000 MW import, and Trade margins are inflated since the export is assumed to be served by low cost generation. Network Economy permitted for 1000 MW. August 23, 2006 Alberta Coalition Part 2 9

26 Customer Load should be served most economically BC G NL Prudent Interpretation: 500 MW of the import is serving Network Load as well as 500 MW of BCH generation. 500 MW import is serving the export. USA 500 MW Export 1000 MW Import Network Load is served at the lowest cost, and Trade margins are based on the buy-sell transaction. Network Economy permitted for 500 MW. August 23, 2006 Alberta Coalition Part 2 10

27 Need for Utilization Test Needed due to free nature of Network Economy. or Not needed as there is no utilization requirement for PTP. Not needed due to potential interruptions of imports through no fault of Network Customer. August 23, 2006 Alberta Coalition Part 2 11

28 Use of TPA Useful as it is for an independent purpose and behavior is not expected to be materially altered to comply with Network Economy tests. or Not useful. August 23, 2006 Alberta Coalition Part 2 12

29 Penalties Nominal charges Or Material penalties designed to be a deterrent for inappropriate behavior Or Prohibitions on use August 23, 2006 Alberta Coalition Part 2 13

30 Monitoring Transparency through monitoring, reporting and reviews to establish confidence in open non-discriminatory access. Requirements will differ according to specifics of tests adopted. August 23, 2006 Alberta Coalition Part 2 14

31 Questions? August 23, 2006 Alberta Coalition Part 2 15

32 BC Hydro withdrawal Network Load Storage

33 Powerex Import Powerex deposit BC Hydro withdrawal Network Load Storage

BC HYDRO S APPLICATION FOR 2004/05 AND 2005/06 REVENUE REQUIREMENTS BCOAPO et al. INFORMATION REQUESTS

BC HYDRO S APPLICATION FOR 2004/05 AND 2005/06 REVENUE REQUIREMENTS BCOAPO et al. INFORMATION REQUESTS QUESTION 1 Reference: Application, Volume 1, Chapter 1, page 1-7, Tables 1-1 and 1-2 a) Please clarify