B-1 Janet Fraser Chief Regulatory Officer Phone: 604-623-4046 Fax: 604-623-4407 bchydroregulatorygroup@bchydro.com October 24, 2011 Ms. Alanna Gillis Acting Commission Secretary British Columbia Utilities Commission Sixth Floor 900 Howe Street Vancouver, BC V6Z 2N3 Dear Ms. Gillis: RE: British Columbia Utilities Commission (BCUC) British Columbia Hydro and Power Authority (BC Hydro) Application (the Application) On October 12, 2011, BC Hydro submitted the New Westminster Substation Operating Agreement (Agreement) Application. Subsequently, BC Hydro determined that the incorrect tariff supplement number was referenced in the Application. Specifically, the Application refers to Tariff Supplement No. 79 when it should have referred to Tariff Supplement No. 83. As a result, BC Hydro wishes to withdraw the application filed on October 12, 2011. BC Hydro is re-filing, with this letter, an updated application with the correct Tariff Supplement references. The re-filed application also includes two evidentiary updates to section 3.1 of the application. First, the City of New Westminster and BC Hydro have agreed to waive the condition precedent in section 2.4(c) of the Agreement. Second, BC Hydro and the City of New Westminster have agreed to extend the condition precedent date in section 2.4(a) of the Agreement (BCUC approval or acceptance of the Agreement) from December 31, 2011 to January 27, 2012. For further information, please contact Sylvia von Minden at 604-453-9244 or by e-mail at bchydroregulatorygroup@bchydro.com. Yours sincerely, Janet Fraser Chief Regulatory Officer kd/ma Enclosure (1) 2/ British Columbia Hydro and Power Authority, 333 Dunsmuir Street, Vancouver BC V6B 5R3 www.bchydro.com
October 24, 2011 Ms. Alanna Gillis Acting Commission Secretary British Columbia Utilities Commission Application (the Application) Page 2 of 2 Copy to: AMPC Attention: Brian Wallace rbw@bht.com BCOAPO Attention: Leigha Worth lworth@bcpiac.com Attention: BCOAPO support@bcpiac.com BCSEA Attention: William J. Andrews wjandrews@shaw.ca CEC Attention: Christopher P. Weafer cweafer@owenbird.com City of New Westminster Attention: R.E. Carle rcarle@newwestcity.ca COPE Attention: Jim Quail jquail@cope378.ca FortisBC Inc. Attention: Dennis Swanson electricity.regulatory.affairs@fortisbc.com Attention: Diane Roy gas.regulatory.affairs@fortisbc.com
Application October 2011
Table of Contents 1 Introduction... 1 2 Background... 1 3 Overview of Agreement... 3 3.1 Effective Date... 4 3.2 Term... 4 3.3 Operation of NWR Substation... 4 3.4 NWR Substation Upgrades... 5 3.5 System Reinforcement... 5 3.6 Cost Recovery... 5 3.6.1 General Principle... 5 3.6.2 Operating and Maintenance Costs (OMA)... 6 3.6.3 Annual Charges... 6 3.6.4 System Reinforcement Costs (Schedule 3, Clause 3)... 7 3.6.5 Security... 8 3.6.6 The Risk of Stranded Costs... 8 4 Summary... 9 5 Proposed Regulatory Review Process and Communications... 10 5.1 Proposed Regulatory Review Process... 10 5.2 Communications... 10 List of Tables Table 1 Reduction in Security Ledger for Year... 8 List of Appendices Appendix A Draft Order Appendix B September 16, 2011 Application - October 2011 Page i
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 1 Introduction BC Hydro is filing, and requesting the approval of, the New Westminster Substation Operating Agreement between the City of New Westminster (City) and BC Hydro made as of September 16, 2011 (2011 NW Operating Agreement) as Electric Tariff Supplement No. 83 under sections 58 to 61 of the Utilities Commission Act (UCA). The proposed draft form of the BCUC order is attached as Appendix A and a copy of Electric Tariff Supplement No. 83 (the 2011 NW Operating Agreement) is attached as Appendix B. The City is a municipal utility that buys its electricity from BC Hydro as an existing transmission service rate customer on Rate Schedule 1827 - Transmission Service Rate for Exempt Customers (RS 1827). The 2011 NW Operating Agreement arises out of a request by the City to increase the contract demand at BC Hydro s New Westminster Substation (NWR Substation) point of delivery from 55 MVA to 100 MVA in view of anticipated increases in electricity demand in the City. As a result, upgrades are required to the NWR Substation as well as upstream transmission system reinforcement (System Reinforcement). Consistent with past practices, and for the reasons described in section 2 of this application, the City has agreed to pay both the NWR Substation upgrade cost as well as the System Reinforcement cost in accordance with the terms and conditions of the 2011 NW Operating Agreement. The following is a brief summary of the background to the 2011 NW Operating Agreement and a review of the pricing and cost recovery approach in the agreement. Finally, there is a suggested regulatory process for this application. 24 25 26 2 Background The City has for many years owned and operated its own municipal electricity utility, providing electricity services to customers within the City boundaries. Since 1904 the Application - October 2011 Page 1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 City has purchased electricity for resale to its electricity customers, first from B.C. Electric Railway Company Ltd and subsequently from BC Hydro. Under the terms of a five-year agreement dated January 1, 1985, BC Hydro and the City agreed that the City would purchase electricity from BC Hydro under RS 1821 Transmission Service (RS 1821). It was also agreed that BC Hydro would continue to own and operate two substations substantially for the benefit of the City the Royal Substation and the NWR Substation - and that the City would reimburse BC Hydro for substation costs in addition to paying the RS 1821 rates. The underlying rationale for the City paying the substation costs is that RS 1821 customers owned and operated, at their own cost, the substation facilities downstream of a transmission voltage point of delivery. Since the City did not own the substations, it was agreed that the City would pay the costs associated with the substations, in addition to the RS 1821 rates, so that the financial impact on BC Hydro and other ratepayers of serving the City as a RS 1821 customer would be approximately the same as if the City owned the substations. The 1985 agreement was approved by the BCUC. 1 In 1988, a new substation was constructed to replace BC Hydro s Royal Substation. The new substation is owned by the City and is known as Royal No. 2 Substation (R2 Substation). BC Hydro and the City entered into a new five-year agreement made as of January 1, 1990 under which the point of delivery for electricity supplied by BC Hydro to the BC Hydro-owned Royal Substation was changed to the City-owned R2 Substation. The 1990 arrangement did not change BC Hydro s delivery of electricity to the NWR Substation or the City s responsibility for the costs of the NWR Substation. Under a separate agreement, BC Hydro agreed to operate 1 BCUC Order No. G-43-85. By Order No. G-60-90, the BCUC subsequently approved an amended agreement as Tariff Supplement No. 1 and Order No. G-116-95 approved the renewal of Tariff Supplement No. 1. BCUC Order No. G-53-03 cancelled Tariff Supplement No. 1 and the City has since been supplied electricity under Tariff Supplement No. 5. Application - October 2011 Page 2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 and maintain the R2 Substation on a cost-recovery basis. These arrangements were subsequently renewed or extended. As of 2002, BC Hydro continued to own the NWR Substation and the City owned the R2 Substation. There were two operating agreements between the City and BC Hydro related to the substations: Royal No. 2 Substation Operating Agreement (R2 Operating Agreement) and the New Westminster Substation Operating Agreement (2002 NW Operating Agreement), both made as of December 23, 2002. In 2006 the City became a RS 1827 customer when RS 1821 was cancelled and replaced with the new transmission services stepped rates. As noted above, the City has requested an increase in contract demand from 55 MVA to 100 MVA at the NWR Substation point of delivery and, as a result, the City and BC Hydro entered into the 2011 NW Operating Agreement. The purpose of the 2011 NW Operating Agreement is to, among other things, clarify responsibility for the NWR Substation upgrade costs and the costs of related up-stream transmission system reinforcements. The 2011 NW Operating Agreement replaces the 2002 NW Operating Agreement. 18 19 20 21 22 23 24 25 26 3 Overview of Agreement The 2011 NW Operating Agreement incorporates a number of the principles from BC Hydro s Electric Tariff Supplement No. 6 - Agreement for New Transmission Service Customers (Facilities Agreement) (TS No. 6), particularly with respect to the treatment of upgrade costs, but also includes unique provisions for the on-going costs related to the NWR Substation. This section of the application provides a brief overview of the substantive terms and conditions of the 2011 NW Operating Agreement (referred to as the agreement) as well as a discussion of cost recovery and the risk of stranded costs: Application - October 2011 Page 3
1 2 3 4 5 3.1 Effective Date The agreement is effective when the following three condition precedents in section 2.4 of the agreement are satisfied or waived: (i) acceptance and approval by the BCUC on or before January 27, 2012 (section 2.4(a) of the agreement); 6 7 (ii) approval by the City of New Westminster Electric Utility Commission on or before September 22, 2011 (section 2.4(b) of the agreement); and 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 (iii) the City has provided notice, on or before October 17, 2011, that various local government legislative approvals have been obtained by the City (section 2.4(c) of the agreement). If all the conditions are not satisfied or waived BC Hydro and the City will not be bound by the obligations in the agreement. On September 20, 2011, the City s Electric Utility Commission approved the agreement. On October 20, 2011, the City provided notice in the form required by section 2.4(c) of the agreement and BC Hydro and the City subsequently waived the condition precedent in section 2.4(c). Conditions (ii) and (iii) have therefore been satisfied or waived. 3.2 Term The term of the agreement is five years, commencing on the Effective Date. The City has the option of extending the term for additional five year periods or, if neither party elects to terminate the agreement on one year s notice, the agreement is deemed to be renewed for an additional five year term. BC Hydro or the City may terminate the agreement, effective at the end of the applicable five-year term, on at least one years notice. 3.3 Operation of NWR Substation BC Hydro agrees to plan, operate, manage and maintain the NWR Substation, at the City s cost, for the sole benefit of the City. BC Hydro agrees to supply the NWR Application - October 2011 Page 4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Substation in accordance with the City s contracted demand which is currently 55 MVA and would increase to 100 MVA after the upgrades are installed. 3.4 NWR Substation Upgrades The agreement contemplates BC Hydro undertaking the upgrades to the NWR Substation and related facilities to be able to meet the City s increase in contracted demand at the NWR Substation point of delivery. The agreement describes how the City will pay Annual Investment Related Costs, or Annual Charges, for the NWR Substation upgrades (discussed in section 3.6.3 of this application). The estimated cost of the upgrades is $23,458,260 as set out in Schedule 4 of the agreement. 3.5 System Reinforcement The agreement contemplates BC Hydro undertaking consequential transmission reinforcements upstream of the NWR Substation, at an estimated cost of $12,494,200. The City s contribution to these costs is discussed in section 3.6.4 of this application. 3.6 Cost Recovery In general, the City will make two types of payments to BC Hydro: Monthly Charges (OMA) and Annual Investment Related Cost. The Monthly Charges are described in section 3.6.2 and the Annual Investment Related Cost is described in section 3.6.3. 3.6.1 General Principle Section 5.3 of the agreement describes the underlying principle regarding the recovery of costs: reimbursing BC Hydro for all actual costs incurred by BC Hydro, which would otherwise not be incurred by BC Hydro if the City owned its own substation for the NWR Point of Delivery, for owning, planning, operating, managing and maintaining the NWR Substation Application - October 2011 Page 5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 The NWR Point of Delivery is defined in the agreement as where the City effectively receives transmission service from BC Hydro at 69 kv at the NWR Substation. As with previous agreements related to the NWR Substation, the intent of the agreement is that the City will pay the costs associated with the NWR Substation so that the financial impact on BC Hydro and other ratepayers would be approximately the same if the City owned the NWR Substation itself. 3.6.2 Operating and Maintenance Costs (OMA) At the beginning of each fiscal year, BC Hydro will provide to the City an OMA cost estimate for that year. The City will pay one twelfth of the estimated costs each month (Monthly Charges, as described in section 5.1 of the agreement). At the end of the fiscal year, BC Hydro will true-up the total estimated charges paid in that fiscal year against the actual OMA costs incurred for that year and will either credit, or invoice, the City for the difference. 3.6.3 Annual Charges At the end of each fiscal year, the City must pay to BC Hydro the annual charge for all Investment Related Costs as defined and determined in accordance with Part II of Schedule 2. Investment Related Costs means capital-related costs for the NWR Substation and includes the cost of facility upgrades and additions, equipment replacement, and property. The actual cost of upgrading the NWR Substation from 55 MVA to 100 MVA would form part of the Investment Related Costs under the agreement. The City will pay the costs of the NWR Substation upgrade over time via the Annual Investment Related Costs which is an annual payment made at the end of the fiscal year and is determined based on the formula set out in Part II of Schedule 2. The Annual Investment Related Costs payment is comprised of the following: (i) annual depreciation; (ii) annual finance charges based on BC Hydro s weighted average cost of capital and the average net book value of the NWR Substation, as defined in Application - October 2011 Page 6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the agreement; (iii) grants and taxes; and (iv) other BC Hydro costs. The City has the option of pre-paying part or all of the Investment Related Costs. 3.6.4 System Reinforcement Costs (Schedule 3, Clause 3) The City is responsible for System Reinforcement costs, subject to an offset provided by BC Hydro, consistent with the general approach used for other transmission service customers. The formula for calculating the offsets is substantially the same as the formula set out in clause 5 of the Facilities Agreement (TS No. 6). In the usual course, a transmission service customer would enter into a Facilities Agreement with BC Hydro that would require the customer to post security for system reinforcement costs. The amount of security would decline over time as the system reinforcement costs were reimbursed via revenues and other system benefits. In this case, and as discussed below in section 3.6.5, BC Hydro is not requiring the City to post security. Rather, BC Hydro and the City have agreed to establish a security ledger which will account for the remaining cost of the System Reinforcement to be collected from the City (Schedule 3, Clause 6). The balance of the security ledger will decline over time as the offsets are applied against the security ledger. If the agreement is terminated or expires, the City must pay the outstanding balance of the security ledger, less the value of the System Reinforcements that will, in BC Hydro s reasonable opinion, continue to be used and useful. If, at the end of 12 years, there is a balance in the security ledger, the City must pay that balance to BC Hydro. As illustrated in Table 1, BC Hydro estimates that the $12,494,200 security ledger balance will be reduced to zero by 2019. Application - October 2011 Page 7
1 Table 1 Reduction in Security Ledger for Year Period Ended (March 31 st ) Reduction in Security Ledger for Year ($) 2014 735,326 2015 1,365,604 2016 2,048,406 2017 2,704,947 2018 2,967,563 2019 2,672,353 Total Release 12,494,200 2 3 4 5 3.6.5 Security BC Hydro is not requiring the City to post security for the NWR Substation upgrade costs and the System Reinforcement costs. In BC Hydro s view, and for the reasons that follow, the risk of default by the City is low because: 6 7 (i) (ii) the City has a lengthy history with BC Hydro, including a positive credit history; the City is a municipal government with a population of 60,000; and 8 9 10 11 12 13 14 15 16 17 18 (iii) the City has taxation authority to raise revenues. In addition, the risk of a substantial and sustained loss of load is quite low relative to other transmission service customers. This is particularly relevant to the recovery of the System Reinforcement costs since those costs are recovered out of customer revenues. 3.6.6 The Risk of Stranded Costs Section 2.3 of the agreement provides that, upon expiry or termination of the agreement, all amounts outstanding under the agreement are immediately due and must be paid by the City. Such amounts include the remaining balance in the security ledger for the System Reinforcement costs (discussed in section 3.6.4 of this application) and the net book value of the NWR Substation (as defined in Application - October 2011 Page 8
1 2 3 4 5 6 7 Schedule 2, Part II of the agreement), less the value of the NWR Substation and System Reinforcements which, in the reasonable opinion of BC Hydro, will continue to be used and useful in the foreseeable future. In BC Hydro s opinion, the risk of stranded costs is low in view of the City s commitment to pay any such costs if and when the agreement expires or is terminated. As discussed in section 3.6.5 of this application, the risk of default by the City is also considered low. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 4 Summary BC Hydro respectfully submits that the proposed Electric Tariff Supplement No. 83 (2011 NW Operating Agreement) is in the public interest and should be approved by the BCUC because: 1. The agreement is consistent with historical arrangements between BC Hydro and the City; 2. Under the agreement, the City contributes to the actual costs incurred in respect of the NWR Substation and, as a result, other ratepayers are not adversely affected by those costs; and 3. If the agreement expires or is terminated, the City must pay to BC Hydro the net book value of the NWR Substation and the remaining balance in the System Reinforcement security ledger, less the value of the assets that continue to be, in BC Hydro s reasonable opinion, used and useful. This commitment by the City, along with the low likelihood of default, mitigates the risk of stranded costs to BC Hydro and other ratepayers. Application - October 2011 Page 9
1 2 3 4 5 6 7 5 Proposed Regulatory Review Process and Communications 5.1 Proposed Regulatory Review Process Under the 2011 NW Operating Agreement, approval of the agreement by the BCUC is a condition precedent that must be satisfied or waived by January 27, 2012. BC Hydro is also providing a copy of this filing to the parties identified on the cover letter to this application. BC Hydro proposes the following written regulatory process: Application Filed October 24, 2011 Intervener registration November 4, 2011 BCUC Information Requests (IRs) November 4, 2011 Intervener IRs November 16, 2011 Response to BCUC and Intervener IRs November 25, 2011 Intervener Final Submissions December 2, 2011 BC Hydro Final Submissions December 9, 2011 8 9 5.2 Communications All communications regarding this proceeding are to be addressed to: Janet Fraser Chief Regulatory Officer BC Hydro 1600-333 Dunsmuir Street Vancouver, BC V6B 5R3 Telephone: 604-623-4046 bchydroregulatorygroup@bchydro.com Ken Duke Solicitor and Counsel BC Hydro 1600-333 Dunsmuir Street Vancouver, BC V6B 5R3 Telephone: 604-623-4140 ken.duke@bchydro.com Application - October 2011 Page 10
New Westminster Substation Operating Agreement Application Appendix A Draft Order
BC Hydro Application Appendix A - Draft Order BRITISH COLUMBIA UTILITIES COMMISSION ORDER NUMBER G- SIXTH FLOOR, 900 HOWE STREET, BOX 250 VANCOUVER, BC V6Z 2N3 CANADA web site: http://www.bcuc.com TELEPHONE: (604) 660-4700 BC TOLL FREE: 1-800-663-1385 FACSIMILE: (604) 660-1102 IN THE MATTER OF the Utilities Commission Act, R.S.B.C. 1996, Chapter 473 and Application by British Columbia Hydro and Power Authority (BC Hydro) To Approve the City of New Westminster (City) 2011 NWR Substation Operating Agreement as Electric Tariff Supplement No. 83 BEFORE:, 2011 ORDER WHEREAS: A. The City owns and operates a municipal electricity utility and purchases its electricity from BC Hydro for such purposes as a Rate Schedule 1827 transmission service customer; and B. BC Hydro owns and operates the New Westminster Substation (NWR Substation) which is used primarily to provide electricity service to the City; and C. The City has requested an increase in contract demand at the NWR Substation point of delivery and, to meet that increased contract demand, BC Hydro must undertake upgrades to the NWR Substation and undertake certain upstream transmission system reinforcements; and D. The City and BC Hydro entered into an agreement made as of September 16, 2011 that, among other things, provides that the City will pay the cost of upgrades to the NWR Substation and upstream transmission system reinforcements (2011 NWR Agreement); and E. BC Hydro filed on October 24, 2011, pursuant to sections 58 to 61 of the Utilities Commission Act (Act) an application (Application) in which BC Hydro has applied for approval of the 2011 NWR Agreement as Electric Tariff Supplement No. 83; and F. The BCUC has reviewed the Application and has determined that approval of the 2011 NWR Agreement as set out in the Application is in the public interest. Page 1 of 2
BC Hydro Application Appendix A - Draft Order BRITISH COLUMBIA UTILITIES COMMISSION ORDER NUMBER G- 2 NOW THEREFORE the Commission orders as follows: 1. The 2011 NWR Operating Agreement, attached as Appendix B to the Application, is approved as Electric Tariff Supplement No. 83. DATED at the City of Vancouver, in the Province of British Columbia, this day of, 2011. BY ORDER Page 2 of 2
New Westminster Substation Operating Agreement Application Appendix B September 16, 2011
BC Hydro Electric Tariff Supplement No. 83 Effective: [DATE OF ORDER], 2011 Original Page 1 of 19 ACCEPTED: ORDER NO. ACTING COMMISSION SECRETARY
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BChlldro m FOR GENERATIONS Rod Carle General Manager, Electrical Utility City of New Westminster 511 Royal Avenue New Westminster, BC V3L 1H9 October 19, 2011 Dear Rod, Re: made of 16 September 2011 Agreement) Regulatory Approval Date Extension As you know, BC Hydro has now filed an application with the British Columbia Utilities Commission (BCUC) requesting approval of the Agreement as Tariff Supplement No. 79. The purpose of this letter is to confirm that BC Hydro and the City of New Westminster (City) have agreed to extend the date by which the British Columbia Utilities Commission must accept or approve the Agreement, as described in section 2.4(a) of the Agreement. Specifically, BC Hydro and the City have agreed to amend section 2.4(a) of the Agreement by deleting "December 31, 2011" and replacing that date with "January 27, 2012", Please sign a copy of this leuer below confirming the City's agreement to extend the date and amend the Agreement. Please return a signed copy of this letter to me at your earliest convenience so we may advise the BCUC of the extension and amendment in a timely manner. A PDF signed copy sent by email is satisfactory. Rick Truong Senior Key Account Manager, BC Hydro The City of New Westminster agrees that section 2.4(a) of the Agreement is amended as des~rlbed In thl~ Per ~?L Name: O'll'~?4-.z.-L ', ~ Title: d'm E:./e:;c:..;/--t.IC?-/,J./'/cl 'IY'.-v/~~();J Date: tf/~/. I 2-t?1 C-DII British Columbia Hydro and Power Authority Street Address, City, BC, Postal Code bchydro.com