CAMPUT2015 Energy Regulation CourseTransmission Issues

M. Dale McMasterEVP, Transmission and Distribution Services

Donald Gordon Conference Centre Queen’s University, Kingston, Ontario

June 24, 2014

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Transmission is difficult

It can be bigIt can be expensiveIt is viewed as intrusiveIt can be viewed by some as a health threatIt can have an environmental impactIt doesn’t produce energy -- it just delivers itIt is complex and difficult to understandBottom-line – it’s controversial

…..and it is in need of reinforcement/rebuilding across Canada

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Overview

New TransmissionDrivers of “need”Regulatory approval processRights of WayConsultationCost Prudency

Utility financial performancePerformance Based (Incentive) Regulation

Merchant TransmissionCompetition for Transmission

Project Process

Fundamental process:Identify that something “needs” to be builtDetermine what the best solution is to meet that “need”

Technically bestEconomically bestAcceptable to society

Engineer/design how to best to implement the best solutionAchieve regulatory approvalBuild it

The challenges along the way include:Convincing the public, rate payer and regulator of the needLandownersSpecial interest groupsPolitical challenges

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What drives the “need” for new transmission?

Customer needsCentrally planned (backbone) system needsCompetitive market needsSystem performance: reliability and efficiency

NERC Reliability Standards (or facsimile)

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Customer Needs

Typically driven by local load growthLoad growth on the distribution system

Focuses on substation reinforcement/capacity increases

Service to customers at transmission system voltage Can involve new transmission lines

Substations can be controversial – even existing substationsConstruction noise – disruptions to residentsOperating noise (60 Hz hum)Not a thing a beauty

Transmission linesTend to be shorter and in areas that are less contentious

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System Needs: Centrally Planned Jurisdictions

The “least cost” PlanTransmission and generation planning are coordinatedThe combined cost of generation and transmission are “optimized”

These plans have historically been driven by generationLocated close to the energy source and/or source of cooling (thermal)Need transmission to reliably and economically deliver generator output

Timing is driven by system load growth and performance needsGeneration can be used to solve a transmission system problemThe challenge for the Regulator is to ensure the correct integrated option(s) is selected, the timing is correct, the costs are appropriate and “in the public interest”

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Market Needs: Competitive Energy Market Jurisdictions

There is no centralized planning for generation but……generation and transmission development still need to be coordinated Several big questions:

Which comes first generation or transmission?How do you deal with the uncertainty of investment in generation?

A complex problem in that it takes much longer to build transmission than it does to build generationIn Alberta legislation directs transmission to be built in advance of generation

Build transmission to the fuel source because that’s where the generating station will beWorks for coal and hydro, and to a certain extent for windStill faced with the question of how much transmission and when

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Market Needs: Competitive Market Jurisdictions (2)

The cost and locational flexibility of gas fired generation has introduced some added complexity

Generation can be built closer to load centresIt is easier to move the fuel via pipeline than it is to build transmission linesAdvanced technologies in combined cycle and/or cogeneration make it more competitiveCooling water needs are less demanding

Decentralizing generation development may result in reduced investment in transmission

Dependent on the location/size of the generating station and the strength of the transmission system

Locational signals can be used to encourage generation to locate strategicallylocational market prices and/or loss factorshaving generation contribute to the cost of building transmission

This can be driven by government policy or it may be left to the Regulator to decide or some combination thereof

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System Reliability and Performance

Notwithstanding the preceding drivers, the transmission system must be reliable and efficientTo ensure reliability and efficiency additional investment in new transmission may be necessaryHow much is enough when it comes to transmission?

How do you measure reliability and efficiency?

NERC Reliability standards or a derivative thereof sets the minimum level of reliability

All jurisdictions in Canada have adopted some form of compliance with these standards

MeasurandsActual system performanceExtensive technical studies required to prove compliance

Efficiency – typically determined by technical losses (I2R losses)Cost benefit analysis to evaluate need for new investment

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Transmission Project Approvals

Projects fundamentally need two approvals Approval of the need and the recommended option to meet the needApproval of the proposed facilities (including the line routing) of the option to be implemented

The “need” application demonstrates the need to reinforce the systemUsually identifies several options that will meet the needIdentifies one of those options as a preferred optionFundamentally defines “what” needs to be done/built

The application will include Extensive technical analysis in the form of system studies Financial and economic analysisEnvironmental analysisPreliminary line routing and cost estimates -- If done separately from a facility application Details of the public consultation undertaken

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Facility Application

The “need” application defines the “what”The facility application defines the “how”Detailed design/engineering of the facilities, including

Tower designsSubstation layoutsTechnical specifications

Line routingTypically several options are identifiedOne of the options is recommended as preferredDetailed line routing on the preferred option

Details of the public consultation carried outMany challenges but two of the biggest are:

Right of WayCost control/prudency

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Right of Way

Land owner rights and compensationObjective -- settle as many issues and access agreements as possible Land owner interface – transparency, trust, historical relationship, consultationCompensation

Public concerns/objectionsPreviously reserved utility corridor vs. “my green space”Health issues – emf, schools, health facilities, etc.

Environmental GroupsFirst Nations

Access to First Nation landTraditional use of the land

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Public Consultation

Regulator sets the rules for consultation Objective – to address/resolve as many of the issues that can be dealt with before a hearing – ultimate objective is no interventionsWho has to be consulted?

All persons whose rights may be directly and adversely affected by the proposed developmentUrban – all occupants, residents and landowners within the first row of houses facing the developmentRural – all occupants, residents and landowners within 800 meters of the proposed right of wayApplicant needs to decide if more than the minimum need to be consulted

How is the public to be consulted?Information packagesOpen housesRespond to questions and concernsDiscuss options, alternatives and mitigating measures

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Public Consultation (2)

What are the challenges/issues?Increasing number of parties that feel their rights are directly and adversely affected by the proposed developmentIncreasing sophistication/organization of affected partiesIncreasing expectations of affected parties/the public at largeDifficulties in tracking down landownersScheduling of open housesNotifications of open houses

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Cost Prudency

Project costs are evaluated during the Facility Application; however, there is considerable cost risk during construction

Material and labour escalationUnexpected challenges and the associated change orders

Project Costs are reviewed for prudency by the Regulator at completion of the projectSome stakeholders claim this is too late and that only rarely are costs denied

They want greater cost transparency and a role in cost control as the project progresses – difficult to achieve

In Alberta at the direction of the Government, a stakeholder Transmission Cost Review Committee has been established

Given greater access to project costs during constructionAbility to meet with the transmission developerNo authority

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Regulatory Framework

Provincial RegulatorsGenerally stated transmission and distribution development falls under the purview of provincial regulatorsIncluding but not limited to approvals for new transmission and tariffs

National Energy BoardRarely get involved in transmission approvals unless they involve international borders – in particular if there is a merchant transmission developmentNEB approvals are required for the export of energy; hence, they are particularly interested in merchant transmission linesIf they do get involved they tend to focus on socio economic impacts, economic justification, financial viability, environment, heritage issues, engineering and line routing issues

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Other Challenges

Utility financial performanceGeneric Cost of Capital/Return on EquityDebt/Equity for new investmentPerformance Based Regulation

Rate Impacts of transmission buildMerchant TransmissionCompetition versus service territory Government policy

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Utility Financial Performance/Performance Based Regulation

Cost of Service RegulationOperating cost flow through – return on equity portion - no real incentive for efficiencyPerceived sandbagging of the cost of serviceToo frequent hearingsGeneric Cost of Capital (permitted return on Equity)Equity limitations

Performance Based Regulation“Going-in” ratesThere is an incentive for operational efficiency

Increased emphasis on safetyGrowing footprint

Earnings sharing – in AB this has been eliminated – a good thing Regulatory burden has not been reduced – has increasedCapital investment over the PBR period – “capital tracker”Volatility of transmission investment difficult to accommodateRisk/reward balance still to be found

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Merchant Transmission

A new issue – currently only 1 in CanadaMontana – Alberta Transmission Line (MATL) – now operational

Issues/Challenges“need” issues are for the most part mute as the construction cost will be paid for by the developers and/or users of the line unless there is a significant impact on the system that requires new transmission investment“facility” issues remain including but not limited to:

EnvironmentalLandowner rights and Public Interest issuesInterconnection to and impact on the gridImport/export licenses for an international transmission lineFinancial viability of the project

“market” issues can be significant and may have to be addressed by the Regulator(s)

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Transmission Competition

Most jurisdictions assign the right to build new transmission based on service territoryCompetition for new development

Tried and abandoned in Alberta in the early 2000sRe-initiated in 2011/12 in response to stakeholder concerns regarding the cost of very large investment in new transmission infrastructure

500-kV transmission between Edmonton and Fort McMurray

AESO charged with developing the competitive process (rules for competition)AUC charged with reviewing and approving the competitive processComplexity is significant

Risk/reward balanceBarriers to new entrants

That said, there was considerable interest from Alberta and international companies

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Competitive Process:

Edmonton – Ft. McMurrayThe first of two 500 kV ac transmission lines and associated substations$1.8 billion (2013$) project – preliminary estimate

AESO filed the Competitive Process with the AUC – September 2011AUC approved the Competitive Process – May 2013AESO issued Request for Expressions of Interest – May 2013

20 companies/consortiums expressed interest5 were shortlisted by the AESO – 2 ultimately withdrew3 of the 4 incumbent transmission companies participated as part of a consortium

Competitors submitted proposals based on capital costs, O&M costs and project financing

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Competitive Process (2):

AESO evaluated the proposals and declared the winner – December 2014

Evaluation based on technical, financial and environmental criteria

Contract execution is underwayATCO/Valard Consortium will file a Facility Application with AUC

Targeted filing by year-end 2015Targeted decision year-end 2016

Pending P&L approval there will be a debt funding competitionProjected in-service 2020After 35 years the transmission line will be turned over to a Transmission Facility Owner – to be determined

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Emerging Issues

The need for infrastructure development – a massive build is ongoing and there is more to come

Expected to drive significant increases in rates

Move to “off the grid”We tend to think of this a distribution problem but the distribution customer also pays for the transmission system so if the distribution system is losing customers do is the transmission systemCo-generation development to avoid transmission costs

Energy EfficiencyFinancial implications for wire ownersRate design is very important

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Summary

Transmission is difficult and controversial Transmission regulation is complex and evolvingThere are significant challenges for

transmission owners, system planners,consumers,landowners, the public, and Regulators!