Audience publique relative à la détermination
du prix unitaire moyen du transport et à la
modification des tarifs de transport
d'électricité
R-3401-98
Rate Design Analysis
Submitted by
Dr. Zak El-Ramly
President of
ZE PowerGroup Inc.
On behalf of
The Industrial Coalition
February 7, 2001
Coalition 5
Table of Contents
1
Overview ______________________________________________________ 4
1.1.
Objective _____________________________________________________ 4
1.2.
Structure of the Testimony _______________________________________ 5
2
TransÉnergie's Relation to Hydro-Québec ___________________________ 6
2.1.
Functional Independence of TransÉnergie From Hydro-Québec __________ 6
2.2.
Commonality of Management and Ownership_________________________ 7
3
TransÉnergie’s Operational Environment ___________________________ 8
3.1.
TransÉnergie as a Regulated Monopoly _____________________________ 8
3.2.
TransÉnergie is an Entity in a Unique Position ________________________ 9
3.3.
Impact of an Evolving Transmission Business Environment _____________ 11
4
The Challenges of TransÉnergie's Rate Application __________________ 14
4.2.
Precedent Setting _____________________________________________ 14
4.3.
Encumberment by Previous Rules and Regulations ___________________ 14
4.4.
Interest in Export Markets _______________________________________ 15
4.5.
Market Perception of Canadian Utilities ____________________________ 16
4.6.
Reasonableness of the Rates ____________________________________ 18
5
Overview and Discussion of the Application ________________________ 20
5.1.
Rate Design Issues ____________________________________________ 20
5.2.
Issues In Perspective __________________________________________ 22
5.3.
Rate Setting Objectives_________________________________________ 24
5.4.
Uniformity of Rates ____________________________________________ 32
5.5.
Network Integration Rates versus Point-To-Point Rates ________________ 40
5.6.
Discounting __________________________________________________ 42
6
Conclusion ___________________________________________________ 46
7
Recommendations to the Régie __________________________________ 50
Appendix 1_________________________________________________________________ 53
Appendix 2_________________________________________________________________ 54
Appendix 3_________________________________________________________________ 55
Appendix 4_________________________________________________________________ 56
Testimony of Dr. Zak El-Ramly
Page 3 of 56
1
2
3
1 Overview
1.1.
Objective
1.1.1
The overall objective of this testimony is to contribute to
4
the regulatory process in defining TransÉnergie’s
5
transmission rate structure and to assist the Régie in
6
reaching a decision that would result in a long-term
7
beneficial outcome for all stakeholders. This objective will be
8
achieved by addressing the collective interests of the
9
Coalition and sharing our experiences and observations
10
11
gained in other jurisdictions.
1.1.2
The immediate objective of this testimony is to ensure
12
that the level and design of TransÉnergie’s transmission
13
rates do not directly or indirectly advantage Hydro-Québec
14
(HQ) over other users of the transmission system and that,
15
ultimately, the rates are reasonable and can contribute to the
16
development of a healthy competitive environment in the
17
future.
18
§
I intend to accomplish this by emphasizing the need
19
to develop a rate design that fosters and encourages
20
competition and entry into the Québec market, and
21
that is effective in meeting the needs of all
22
transmission users, not only those of Hydro-Québec.
23
§
Additionally, this testimony will elaborate on the
24
importance of this hearing at this critical stage of the
25
development of the competitive marketplace in North
26
America. While Québec has been able to trade
27
relatively freely in the US, taking advantage of its
28
abundant hydroelectric resources and benefiting
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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56
1
greatly, many industry participants have been
2
suffering considerably. Given the current heightened
3
focus on investigating potential abuses of open
4
access and deregulation, and the potential for
5
corrective measures, it is also important to discuss
6
the options and means by which the Régie can take a
7
proactive stance in protecting and maintaining
8
Québec’s electric industry interests and position.
9
10
11
12
1.2. Structure of the Testimony
1.2.1
The testimony is divided into sections that will address
the following:
§
Discussion regarding the distinction between
13
TransÉnergie and Hydro-Québec as functionally
14
separate entities.
15
§
Description of the operating environment and the
16
specific and unique challenges facing the Régie and
17
intervenors in dealing with an important application
18
that is likely to be precedent setting.
19
§
20
21
Overview and discussion of the key elements of the
application as submitted by TransÉnergie.
§
Conclusion and overall evaluation of TransÉnergie's
22
proposal to meet its general rate setting objectives,
23
uniqueness of TransÉnergie’s system, and
24
recognition of current market realities.
25
§
Recommendations to the Régie.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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2
3
4
2 TransÉnergie's Relation to Hydro-Québec
2.1. Functional Independence of TransÉnergie From
Hydro-Québec
2.1.1
The Régie should address the transmission rates as they
5
pertain to TransÉnergie independently of Hydro-Québec and
6
it’s export subsidiary, regardless of the fact that Hydro-
7
Québec and its export arm are the majority users of
8
TransÉnergie's transmission system.
9
2.1.2
It is important to emphasize that the two functionally
10
separate entities need to be treated separately at the
11
regulatory level in order to continue the Régie's work in
12
fostering a fair and competitive environment at the
13
generation/wholesale level. The intent of a functional
14
separation is to allow the function of each entity to be
15
addressed and treated independently of the function and
16
influence of other related entities.
17
2.1.3
This rate hearing needs to focus on the transmission
18
function; that is, the needs of the transmission system, the
19
needs of the transmission owning/controlling entity, the
20
needs of all industry stakeholders including Hydro-Québec,
21
but only as a transmission user. It is important that the Régie
22
recognize that the overall interests of Hydro-Québec may not
23
always be congruent with the needs of the transmission
24
system operator or those of other transmission system
25
users.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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2
2.2. Commonality of Management and Ownership
2.2.1
All three entities (TransÉnergie, Hydro-Québec and the
3
export arm of Hydro-Québec) are ultimately governed by the
4
same senior management team and report to the same
5
shareholder (the Québec Government). This shared
6
management and ownership structure runs the risk of a
7
conflict of interest between TransÉnergie, as an independent
8
provider of transmission services, and Hydro-Québec, as the
9
owner and primary user of TransÉnergie’s services, or, at
10
11
the very least, a public perception thereof.
2.2.2
In addressing the potential for conflicts of interest arising
12
between TransÉnergie and Hydro-Québec it is imperative
13
that the Régie pay particular attention to recognizing and
14
protecting the interests of the small and minority third party
15
users of TransÉnergie’s transmission system. Although
16
these third party users are potentially Hydro-Québec's
17
competitors, their incremental use of the system is the
18
source of all additional revenue to TransÉnergie. Without
19
such third party participation in the Québec market, there
20
would effectively be no competition at the wholesale level,
21
and, consequently a loss of all of the intended/desired
22
benefits from competition.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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2
3
3 TransÉnergie’s Operational Environment
3.1. TransÉnergie as a Regulated Monopoly
3.1.1
The operational environment of TransÉnergie is, and will
4
remain in the foreseeable future, a regulated natural
5
monopoly. It is the sole supplier of transmission services in
6
Québec, and is regulated by the Régie, earning a return on
7
its assets on a full cost recovery basis.
8
3.1.2
The transmission business is evolving in the electrical
9
power industry as a separate and independent business that
10
is distinct and potentially separable from the generation and
11
distribution sides of the business. The industry expectation is
12
that the transmission businesses will remain regulated
13
monopolies, earning a return on their assets on a full cost
14
recovery basis.
15
3.1.3
FERC Orders 888 and 889 require the functional
16
separation of transmission businesses from their generation
17
counterparts. FERC Order 888 and 889 have managed to
18
kick-start the industry into developing open access on a
19
jurisdiction-by-jurisdiction basis. Continuing this work, FERC
20
Order 2000 promotes further independence and separation
21
of these transmission businesses; where the control,
22
operation and even ownership of transmission systems
23
would be delegated to an independent agency. It is expected
24
that FERC will be moving to affirm the spirit, intent and
25
objectives of open access, as opposed to enforcing or
26
observing the rules strictly as written. Industry experience is
27
that vertically integrated entities are able to appear to be
28
strictly abiding by FERC Orders while managing to exploit
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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these rules to the benefit of their subsidiaries. An example is
2
where the entity or its subsidiary reserves all available long-
3
term firm transmission then releasing it later to the short-
4
term market thus denying competitors the ability to secure
5
long-term access.
6
3.1.4
Irrespective of the manner in which the transmission
7
system is controlled and operated or the rate structure put in
8
place, the expectation is that the owners of the physical
9
assets will always recover the full cost of operating the
10
system including a fair return on their investment in the
11
transmission assets.
12
3.1.5
It is expected that a competitive environment will tend to
13
increase the virtual use of the transmission system (number
14
and volume of transactions) by third parties, thus increasing
15
the potential revenue collected by the transmission business.
16
17
3.2. TransÉnergie is an Entity in a Unique Position
3.2.1
TransÉnergie is a division of Hydro-Québec which is
18
owned by the Québec Provincial Government. This is
19
evidenced by the fact that the Provincial Government
20
guarantees Hydro-Québec's debt which necessarily includes
21
TransÉnergie’s debt. In the past, Hydro-Québec has met all
22
it’s financial obligations through it’s own cash flow without
23
relying on the Provincial Government (HQT – 8, Document
24
3.1, p. 1). Naturally, the Government, as the shareholder,
25
will ensure its interest in Hydro-Québec will be preserved
26
using whatever means available to a Government.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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3.2.2
Almost 99.6% of TransÉnergie's system usage/revenue
2
collection is received from Hydro-Québec. 88.8% of
3
TransÉnergie's revenue is generated directly by Hydro-
4
Québec through the Network Integration Rate and a further
5
10.8% from Hydro-Québec through the long-term Point-to-
6
Point rate. This leaves only a fraction of the approximately
7
0.4% of TransÉnergie's revenues being generated through
8
short-term Point-to-Point service, collected from third parties
9
(HQT – 13, Document 13, p. 25)
10
§
The result is that there is no material financial risk
11
resulting from third party system usage as additional
12
revenue from third party users is minimal, comprising
13
less than 0.4% of TransÉnergie's total revenues.
14
§
This fraction of the roughly 0.4% of TransÉnergie's
15
system usage does, however, represent competition
16
to Hydro-Québec in its exporting efforts.
17
§
The third party users that make up this 0.4% are
18
exposed to high rates that impair competition in the
19
Québec market and are likely to discourage the entry
20
of new participants.
21
§
While some rate discounting is offered, it is only done
22
so on an inconsistent and short-term basis. Such
23
discounting practices create the artificial appearance
24
that low rates are available, when in reality their
25
inconsistent application and calculation prevent third
26
party system users from long-term planning outside of
27
the regularly posted long-term rates and non-
28
discounted short-term rates.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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2
3
3.3. Impact of an Evolving Transmission Business
Environment
3.3.1
The directives in FERC Order 2000 have resulted in
4
considerable activity by transmission owners over the past
5
two years. If TransÉnergie were to adopt these directives,
6
then TransÉnergie would evolve into one of three basic
7
structures. None of these structures would reduce
8
TransÉnergie's ability to collect its revenue requirements and
9
earn a reasonable rate of return on its assets.
10
§
Become an Independent System Operator (ISO). This
11
would entail more or less maintaining the same size
12
and operating under a materially similar mandate with
13
increased independence from Hydro-Québec. This
14
would appear to be the minimum requirement
15
necessary to satisfy the industry’s concerns regarding
16
the independence of TransÉnergie.
17
§
Join a larger ISO or Transco. While this option is
18
unlikely, TransÉnergie's involvement would of course
19
be subject to its ability to earn its required rate of
20
return.
21
§
Become part of a larger Regional Transmission
22
Organization (RTO). While this option may result in
23
some loss of operating control, the structure of the
24
RTO should not impact on the owner’s revenue
25
requirements. This option would remove many of the
26
concerns of the industry regarding TransÉnergie’s
27
independence.
28
Any of the above options could enhance TransÉnergie’s
29
ability to provide a true independence in the operation of
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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the system, better foster competition, and ultimately,
2
increase the utilization of the transmission system.
3
3.3.2
There is already a demand by industry participants that
4
TransÉnergie recognize the directives in FERC Order 2000
5
and join or otherwise align itself with neighboring
6
transmission operators. These sentiments are echoed in the
7
submission to FERC by Enron Power Marketing Inc and
8
Coral Power, (Docket No. ER97-851-012 attached as
9
Appendix 1) in stating their preference for the means by
10
which transmission and generation market power could be
11
mitigated, as a condition to allowing Hydro-Québec
12
continued participation in the U.S. deregulated marketplace:
§
13
“HQ turns it’s facilities over to the operational control
14
of either of the RTOs being formed in the NYISO or
15
ISO-NE regions or at least a requirement that HQ
16
implement a market structure that meets the open-
17
access principles required by the Commission in the
18
U.S. Only through RTO participation will HQES and
19
HQ be subject to real open-access, market
20
monitoring, and stakeholder review.” (p. 3)
21
3.3.3
The design of the rate structure for TransÉnergie should
22
be proactive, reflecting the trend towards the formation of
23
RTOs and the likely requirements (rate structures) for
24
becoming, or aligning with, a FERC approved RTO.
25
3.3.4
In British Columbia, BC Hydro has recognized the
26
importance of establishing rates and rate structures that
27
support FERC Order 2000, and facilitate regional efforts to
28
form RTOs. While RTO formation is flexible and innovation is
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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encouraged by FERC, filing transmission owners and their
2
Canadian counterparts need to work towards developing
3
natural transmission regions and address seams issues
4
between independent operators within those natural regions.
5
BC Hydro’s and West Kootenay Power’s efforts to align
6
themselves with RTO West are included in full as Appendix
7
2 (Attachment H To Supplemental Compliance Filing And
8
Request For Declaratory Order Pursuant To Order 2000 of
9
the RTO West Stage 1 Filing).
10
11
3.3.5
In the event that the Régie approves a rate structure that
12
would inhibit or otherwise confound the formation of an RTO
13
or alignment with neighboring RTOs, the rates and their
14
structure would need to be revisited in the future. As the
15
transmission side of the industry collectively moves toward
16
RTO formation, TransÉnergie must make an effort to
17
recognize and respond to the directives in FERC Order 2000
18
in order to strengthen transmission integration in the region
19
and to ensure that the benefits enjoyed by Hydro-Québec
20
and the Provincial Government continue. A narrow
21
interpretation of FERC’s intentions may be seen by potential
22
collaborating counter parties in the region as anti-competitive
23
and may result in TransÉnergie being in a less favourable
24
position in future negotiations. The Régie should be mindful
25
of this and should insist on a rate structure that would
26
facilitate the process and approval of RTO development.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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2
4 The Challenges of TransÉnergie's Rate Application
4.1.1
There are a number of key challenges that need to be
3
emphasized in hearing this rate application. These issues
4
and challenges present the backdrop and the drivers of the
5
regulatory process. Bringing these issues to the forefront of
6
the discussion is a necessary first step in addressing the full
7
set of ramifications of TransÉnergie’s rate application. The
8
issues have major implications for the electrical power
9
industry in Québec and require creativity and innovation
10
rather than the standard, historical treatment in order to
11
produce long-term viable results.
12
13
4.2. Precedent Setting
4.2.1
The decisions of this hearing will have a major impact on
14
the future of the electric industry in Québec. The final
15
decision will set a precedent and drastically affect any future
16
decisions made by the Régie. Mr. Priddle stressed this
17
challenge in his report, stating that the “Régie’s decision(s)
18
in the present case will have an enduring impact on Hydro-
19
Québec's rate design. It would not be an exaggeration to
20
assert that it will profoundly affect the development of
21
Québec’s electricity industry, its energy sector and, through
22
that, the economy of the province at large.” (Evidence of
23
Roland Priddle, p. 5, lines 19-25).
24
25
4.3. Encumberment by Previous Rules and Regulations
4.3.1
Hydro-Québec’s assets have already been allocated
26
between generation, transmission and distribution. Based on
27
these allocations, there seems to be a large disparity
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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between the generation costs and transmission rates, and
2
between TransÉnergie’s transmission rates and those in
3
other jurisdictions. Hydro-Québec is blessed with one of the
4
lowest generation costs in North America, while the
5
transmission rates proposed rank among the highest in
6
North America.
7
8
9
4.4. Interest in Export Markets
4.4.1
Protecting Hydro-Québec’s ability to sell at market based
rates in the US may make it necessary that the Régie
10
accepts/abides by certain FERC requirements. The
11
challenge is to define those mandatory requirements, as
12
most entities tend to follow the FERC-ordered pro forma
13
tariff almost blindly, in order to avoid any issues with FERC,
14
or else they use FERC as an excuse when it is in that
15
entity’s interest to follow the pro forma tariff. The British
16
Columbia Utilities Commission (BCUC) had to deal with
17
similar boundaries in its dealing with BC Hydro’s Wholesale
18
Transmission Services Application. The following
19
correspondence is an excerpt from a letter sent by the
20
BCUC to registered intervenors and interested parties dated
21
July 18, 1997, and defines the extent of FERC’s interests in
22
this area (a copy of the entire letter is attached as Appendix
23
3):
24
§
FERC staff stressed that “they [FERC] have no
25
interests in local transmission pricing issues –
26
including incremental pricing. Instead, FERC seeks
27
only to ensure that a local utility cannot control
28
transmission pricing in a manner which would allow
29
them to manipulate market prices into the United
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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States.” and FERC’s staff also stressed that “it is
2
Powerex’s decision to file a pro forma tariff, and that
3
this is not a requirement of FERC … their [FERC]
4
interest lie in the area of open access, comparability,
5
and reciprocity, and do not extend to the issues of
6
incremental rolled-in pricing, unless those pricing
7
issues convey market power inappropriately to any
8
party.” (p. 2)
9
4.4.2
Strict compliance with the wording of FERC Order 888
10
and 889 alone is no longer a guarantee that the Power
11
Marketing Certificate is secure as exemplified in the
12
submission to FERC (as stated above) by Enron Power
13
Marketing Inc and Coral Power (Docket No. ER97-851-012
14
attached as Appendix 1).
15
4.4.3
While TransÉnergie's rate application appears to meet
16
the requirements of FERC Orders 888 and 889, specifically
17
regarding the creation of a pro forma tariff, it is done in a way
18
that appears to simply conform with the Orders as written,
19
exploiting the flexibility of the Order to discourage use of the
20
transmission and not reflecting the spirit of the order for open
21
access. As mentioned before, FERC is becoming
22
increasingly aware of these activities and is paying more
23
attention to uncovering such abuses.
24
25
4.5. Market Perception of Canadian Utilities
4.5.1
Our own market intelligence indicates that Canadian
26
entities (i.e., BC Hydro and Hydro-Québec) are sharply
27
scrutinized by industry players with suspicion and negative
28
regard. Their Government sponsorship and control and their
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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heavy-handed tactics of capitalizing on US export markets
2
have raised concerns and perceptions that their practices
3
are monopolizing and anti-competitive. Consequently,
4
addressing industry perceptions of Hydro-Québec’s
5
performance and ensuring the Régie’s commitment to the
6
reality and the appearance of a level playing field in Québec
7
becomes paramount.
8
§
Complaints, like the one from Enron Power Marketing
9
Inc and Coral Power, are a manifestation of the
10
industry’s sentiment and would result in focusing
11
unwelcome attention on Hydro-Québec’s and
12
TransÉnergie’s behaviour. This attention could
13
ultimately jeopardize Hydro-Québec’s ability to retain
14
its authority to sell into the US at market-based prices.
15
§
In the submission to FERC by Enron Power
16
Marketing Inc and Coral Power (Docket No.
17
ER97-851-012 attached as Appendix 1), they
18
present the following arguments:
19
§
“[T]he Commission cannot find that HQES and
20
its parent do not have or have mitigated
21
generation and transmission market power.” (p
22
3)
23
§
“If a liquid forward market does not develop in
24
New York, there will be greater reliance on the
25
spot market, which could lead to problems
26
similar to those that occurred in California, in
27
New York next summer.” (p. 4)
28
29
§
“Market participants are well aware of HQ's
manipulation power and are thus reluctant to
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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trade in the market when Hydro-Québec is an
2
active participant.” (p. 7)
§
3
”TransÉnergie, HQ’s transmission system,
4
possesses unmitigated market power in
5
transmission that should preclude its eligibility
6
for market pricing authority. [C]onsequently,
7
open access to the TransÉnergie transmission
8
system, for service within or into the HQ
9
system is a meaningless concept” (p. 7)
§
10
Since it appears that Hydro-Québec’s authority to sell
11
power into the US at market based prices is already
12
threatened by US marketers complaining to FERC
13
about Hydro-Québec’s market conditions and
14
performance, the Régie must take a clearly positive
15
stance in creating a competitive environment in
16
Québec. Hydro-Québec cannot be permitted to
17
appear to enjoy a preference over access to
18
transmission if the Régie is interested in preserving
19
Hydro-Québec’s ability to trade in the US market.
20
21
4.6. Reasonableness of the Rates
4.6.1
TransÉnergie has the highest transmission rates but
22
lowest generation costs in North America. One issue that
23
must be dealt with is the “reasonableness” of the
24
transmission rate. The high rate is primarily the result of the
25
classification of generation assets. The Régie should ensure
26
that the rates are not additionally higher than absolutely
27
necessary and that the rate design does not further
28
encumber users of the transmission system more than they
29
are already encumbered by the current rate.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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4.6.2
The Régie needs to be cognizant of the degree of
2
unreasonableness of the transmission rates applied for by
3
TransÉnergie. The argument made by Enron Power
4
Marketing Inc and Coral Power (Docket No. ER97-851-012
5
attached as Appendix 1) only highlights the extent and
6
fullness of the industry’s concern and frustration with the
7
rates and their impact.
8
§
“So long as HQ used this import capability to make
9
long-term sales into New York and New England, its
10
ability to exercise market power to influence prices in
11
the U.S. markets was confined. Since 1997,
12
however, HQ has substantially replaced its traditional
13
pattern of making long-term sales in U.S. markets
14
with an aggressive strategy of making shorter-term
15
sales into the U.S. during period when prices are
16
most easily influenced.” (p. 5)
17
§
“Such through service is technically possible under
18
TransÉnergie’s tariff, but it is economically infeasible
19
because of TransÉnergie’s exorbitant charges for this
20
service.” (p. 7)
21
§
“Not only is there no economical access to
22
TransÉnergie, the uneconomical service that
23
TransÉnergie does offer is grounded in a highly
24
discriminatory rate structure.” (p. 8)
25
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2
3
5 Overview and Discussion of the Application
5.1. Rate Design Issues
5.1.1
TransÉnergie's proposed transmission rate and tariff
4
structure will not promote the efficient use of the system,
5
enhance economic efficiency, or advance competition and
6
open access.
7
5.1.2
TransÉnergie's rates, as proposed, are exorbitantly high
8
compared to other utilities, and several factors contribute to
9
the rates being “unreasonable”.
10
5.1.3
TransÉnergie's rates can be brought down to reasonable
11
levels if the transmission rate can be divided into
12
components/parts (multi-part rates) to reflect the use of the
13
system. Three components can be easily envisioned:
14
§
15
A remote generation related component (similar to
gathering rates in gas transmission)
16
§
A network component; and
17
§
An intertie component (for facilities connecting the
18
network to neighboring jurisdictions). Again the
19
intertie component could be included in the network
20
component.
21
§
As an alternative to multi-part rates, TransÉnergie's
22
Point-to-Point rates could be restructured to reflect
23
the degree of utilization of the system based on points
24
of receipt and points of delivery.
25
§
A third alternative would be to structure the Point-to-
26
Point rate to be a function of the delivery voltage.
27
Transmission rates would reflect the utilization level of
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 20 of 56
1
the system, meaning that the lower the delivery
2
voltage the higher the rate and the higher the system
3
losses.
§
4
Irrespective of how the Point-to-Point rates are
5
ultimately structured, the nature of the Network
6
Integration Rate, which is used primarily to serve
7
native loads, would allow the Régie, in future retail
8
rate hearings, to ensure that Hydro-Québec
9
consumers receive uniform tariffs as stipulated in the
10
11
Act.
5.1.4
TransÉnergie's short-term Point-to-Point service should
12
be based on the same principles as the long-term Point-to-
13
Point rate. TransÉnergie should adopt the approach used by
14
most utilities of apportioning the short-term rates from the
15
equivalent long-term (annual) rates.
16
5.1.5
TransÉnergie's proposal to use discounting to enhance
17
the use of the system should be expanded to include long-
18
term transactions and should be structured and applied in a
19
predefined, transparent and consistent manner.
20
TransÉnergie should develop a discount policy and have it
21
approved by the Régie.
22
5.1.6
Irrespective of how the Point-to-Point rates are ultimately
23
structured, the nature of the Network Integration Rate, which
24
is used primarily to serve native loads, would allow the
25
Régie, in future retail rate hearings, to ensure that Hydro-
26
Québec consumers receive uniform tariffs as stipulated in
27
the Act.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 21 of 56
1
2
5.2. Issues In Perspective
5.2.1
Given that the assets to be allocated to the transmission
3
business have been mandated by the Government order in
4
the Act, the typical industry process of the proper allocation
5
of the assets is largely eliminated (as the rate structure could
6
capture elements of fair allocation through their design).
7
5.2.2
The task left up to TransÉnergie is to design and gain
8
approval from the Régie for a rate structure that will
9
determine how the revenue requirements are collected.
10
5.2.3
There are three distinct rate classes for the Québec
11
system:
12
§
The Network Integration Rate used to serve native
13
load customers – contributing approximately 88.8% of
14
transmission system revenues (HQT-13, Document 8,
15
Question 12a, page 18).
§
16
Long-term Point-to-Point firm use by Hydro-Québec
17
for its out of province exports – contributing
18
approximately 10.8% of system revenues.
§
19
Short-term Point-to-Point usage by third parties and
20
Hydro-Québec – contributing approximately 0.4% of
21
system revenues (Approximately $11 million) (HQT-
22
13, Document 13, Question 3, page 25).
23
5.2.4
The three classes invariably need, and receive, a
24
different quality of service, and impose different stresses on
25
the system.
26
27
5.2.5
Québec has comparatively low generation costs and high
transmission rates relative to other North American
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 22 of 56
1
jurisdictions, for example TransÉnergie’s Point-to-Point
2
service rates are roughly 150% to 250% of the
3
corresponding BC Hydro rates which are, themselves,
4
considered extreme by industry standards (HQ-10,
5
Document 1.1, P. 2).
6
5.2.6
One reason for the high transmission costs resulted from
7
a substantial contribution to the rate base through the
8
inclusion of high voltage transmission 750 kV lines that
9
would in all likelihood, in the absence of the Act, have been
10
declared generation related transmission assets. Third party
11
users of the system (mostly short term Point-to-Point use to
12
date) have not contributed (or benefited) from the radial high
13
voltage transmission system connecting remote generation
14
to the load centers.
15
5.2.7
Hydro-Québec is the primary, dominant user of a system
16
that was built to serve its needs and continues to benefit
17
from the use of this system not only in meeting its obligation
18
to serve native load but also in taking advantage of
19
financially lucrative export opportunities outside the province.
20
5.2.8
Irrespective of the allocation of the high voltage
21
transmission to the generation or transmission side of the
22
business, an effective rate design should not encumber the
23
other users with a cost that is attributable to a specific
24
function or single user.
25
5.2.9
Proper cost allocation is particularly important when
26
minority system users may be burdened with supporting
27
majority system users. Small, marginal system users (IPPs
28
and other generators) should not be expected to support or
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 23 of 56
1
otherwise subsidize the activities of the larger users (Hydro-
2
Québec and its export subsidiary).
3
5.2.10
As demonstrated by TransÉnergie’s response to the
4
Régie Information Request (HQT-10, Document 1.4, pp. 2-
5
5), TransÉnergie discounted its short-term rate by between
6
61% and 92% on an average annual basis. Despite this
7
considerable discount, third party use of the system was
8
minimal. This is a direct reflection of the lack of
9
reasonableness of the transmission rate and its impact on
10
11
discouraging use by marginal users.
5.2.11
While the assets to be included in the rate base have
12
already been defined by the Act, the allocation of the costs
13
related to these assets to various classes of users or rate
14
designs have not been finalized. For example, certain high
15
voltage transmission lines that connect remote generating
16
stations to load centers (gathering assets) could viably be
17
allocated to the entity that uses those specific gathering
18
assets or to transactions that rely directly on these assets.
19
20
5.3. Rate Setting Objectives
5.3.1
According to Hydro-Québec’s expert, Dr. Ren Orans’
21
testimony (HQT – 10, Document 4, p. 3, Lines 3 – 11),
22
“Transmission tariff design should:
23
A) meet the goals of transmission rate design,
24
25
1) to collect the transmission revenue
requirement;
26
2) to be simple to implement and use;
27
3) to offer open and comparable access;
28
4) to be equitable, and
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 24 of 56
1
5) to promote efficiency;
2
B) be consistent with the industry standard; and
3
C) be appropriate for the market environment in which it is
4
applied.”
5
6
5.3.2
Although Dr. Ren Orans identifies some of the typical
7
rate design criteria, he did not, however, correctly identify the
8
stakeholders, or users of the specific rate against which the
9
objective of the rate design would be tested. The direct
10
stakeholders of the transmission system include the
11
incumbent utility (Hydro-Québec) and others who use the
12
transmission services/system (i.e., Marketers, Hydro-
13
Québec Energy Services, etc.). Dr. Orans classified the
14
stakeholders as the native load customers; stating that, “...
15
the tariff is equitable because it minimizes the rates of native
16
load customers, for whom the system was primarily built to
17
serve” (HQT-10, Document 4, p.15, lines 19-21). The
18
transmission tariff is equitable if, and only if, it treats all the
19
direct users of the tariff equitably.
20
5.3.3
From an independent transmission operator perspective
21
the retail customers are not, at this stage, direct customers
22
of the transmission rate. Rate design should reflect the fact
23
that transmission rates are not designed for retail access by
24
native load customers, rather they are designed for access
25
by Hydro-Québec and other users at the wholesale level.
26
The interests of the native load customers are addressed
27
indirectly through the transmission rates charged to Hydro-
28
Québec (Network Integration Rate). Hydro-Québec is
29
ultimately responsible for ensuring that the
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 25 of 56
1
transmission/distribution needs of native load customers are
2
met.
3
5.3.4
With respect to Dr. Orans’ tariff design objective A) 1)
4
above, achieving the revenue requirements does not
5
represent any challenge/risk because of the fact that the
6
majority of revenue is generated from one client (Hydro-
7
Québec) – as such virtually any rate design would be able to
8
satisfy this requirement. Given that TransÉnergie will recover
9
its costs under any rate design, the Régie should focus on
10
the proper allocation of costs among other rate setting
11
objectives.
12
5.3.5
With respect to the ease of implementation, objective A)
13
2) above, given the wholesale nature of the rate, ease of
14
implementation should be of secondary concern and should
15
not drive the rate design process. Users of the wholesale
16
transmission system are sophisticated and are assisted by
17
the conventions of OASIS.
18
5.3.6
With respect to open and comparable access, objective
19
A) 3) above, although the rate design and the application is
20
portrayed as offering open and comparable access, in
21
practical terms the proposed rates will not encourage, and in
22
fact will likely discourage, any new entrants into the Québec
23
market at the wholesale level, resulting in open access by
24
design, but not in reality.
25
5.3.7
With respect to the equity of the rate, objective A) 4)
26
above, equity is difficult to define/measure and achieve – the
27
system was built to serve Hydro-Québec, in particular to
28
integrate remotely located generation with load centers, and
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 26 of 56
1
continues to serve Hydro-Québec in this capacity. The small,
2
marginal use of the system by third parties has a limited
3
impact on the actual generation of system costs – thus it is
4
difficult to measure what is equitable given that third party
5
users did not cause much of the system to be built (the part
6
of the system responsible for most of the costs). Equity can
7
only be achieved through a rate design that incorporates the
8
proper allocation of costs to the appropriate classes of users,
9
namely those that are responsible for causing the costs to be
10
11
incurred (cost causation principal).
5.3.8
With respect to objective A) 5), the promotion of
12
efficiency, Dr. Orans, in his answer to question 19 of his
13
testimony, responded that the “The tariff promotes economic
14
efficiency under Québec’s market environment and system
15
condition by encouraging efficient use of the transmission
16
system. Because the grid is primarily used by an integrated
17
utility, Hydro-Québec can operate the grid efficiently and
18
reliably, without relying on a more complicated tariff that
19
prices congestion by location. To improve capacity
20
utilization, the tariff permits discounting to promote efficient
21
use the capacity of the system.” (HQT-10, Document 4, p.16,
22
lines 2-7). Dr. Orans’ justification is refuted. First, the
23
discounting applies only to short-term Point-to-Point
24
services, without the users being given any assurance of its
25
availability in advance. Such discounting applies to only
26
0.4% of transmission revenues. Second, the short-term
27
Point-to-Point rate itself has been inflated, as TransÉnergie
28
indicated in its response to questions from Ontario Power
29
Generation, to discourage the use of the rate. Specifically:
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 27 of 56
1
§
“De plus, en optant pour cette méthode (12-CP), il en
2
résulte un tarif mensuel qui, multiplié par douze mois,
3
donne un prix supérieur au tarif annuel. Cela a
4
notamment pour effet d'inciter les clients à opter pour
5
le tarif annuel, permettant ainsi aux planificateurs du
6
réseau de mieux tenir compte de leur présence et de
7
faire assumer par ces derniers une part raisonnable
8
des coûts du transport.” [Also, opting for this method
9
(12-CP), results in a monthly tariff, which when
10
multiplied by 12 months results in a price higher than
11
the yearly tariff. Therefore, clients will be enticed to
12
opt for the yearly tariff. This allows network planners
13
to better account for their clients’ presence and to
14
make them pay a reasonable portion of the cost of
15
transportation.] (HQT – 13, Document 13, p. 27)
16
§
Finally, the long-term Point-to-Point rate and the
17
Network Integration Rate have nothing in their design
18
that would change the use, by the primary user
19
Hydro-Québec, or send a price signal to the industry.
20
For example, the BCUC instructed BC Hydro to
21
develop Point-to-Point rates based on marginal costs
22
and to implement a long-term discounting policy that
23
would promote the location of new generators. The
24
BCUC stated:
25
§
“Nonetheless, the Commission believes that if the
26
concerns discussed above can be resolved,
27
discounting may provide benefits which would accrue
28
to all customer classes. Accordingly, the Commission
29
directs B.C.Hydro to consult with its customers, both
30
those who may use the WTS rates directly and those
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 28 of 56
1
who will be affected by its use, in an effort to establish
2
a discount policy, or some other policy, which will
3
encourage the efficient present and future use of the
4
transmission system and respond to the
5
Commission's concerns as outlined above. This policy
6
should distinguish between the benefits to be gained
7
from discounts from those to be gained from site
8
credits.” (BC Hydro and Power Authority WTS
9
Decision, April 23, 1998, p 39 which is available at the
10
following link:
11
ftp://ftp.bcuc.com/Web%20Folder/PUB/Decisions/199
12
8Dec/BCH_WTS.pdf
13
5.3.9
Additionally, in the “Commission Determinations in its
14
previous WTS Decision, the Commission stated that there is
15
a need to develop more efficient pricing signals than those
16
which are contained in the proposed B.C. Hydro rates and
17
explicitly rejected B.C. Hydro's argument that locationally
18
efficient price signals are not needed until such time as
19
transmission constraints occur. Accordingly, the Commission
20
directed B.C. Hydro to apply for new rates for wholesale
21
transmission service which reflect long-run marginal costs
22
and locational considerations.” (BC Hydro and Power
23
Authority WTS Decision, April 23, 1998, p 37 which is
24
available at the following link:
25
ftp://ftp.bcuc.com/Web%20Folder/PUB/Decisions/1998Dec/B
26
CH_WTS.pdf
27
TransÉnergie’s rate design includes nothing that could practically be
28
considered to promote economic efficiency.
29
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 29 of 56
1
5.3.10
Additionally, a key test that all rate designs must meet,
2
and one that is ignored by Hydro-Québec’s expert Dr. Ren
3
Orans, is the “reasonableness test”. As discussed earlier in
4
this testimony, TransÉnergie’s rates are unreasonably high
5
and are much higher than the rates of other comparable
6
Canadian utilities. The degree to which the rates were
7
unreasonable is reflected in the level of utilization by third
8
parties and the degree of discount offered. TransEnergie’s
9
response to the Régie’s IR #41.1 (HQT-10, Document 1.1,
10
pages 2-5) indicates how unreasonable the proposed rates
11
are. The transmission rates are between 150% and 250%
12
higher than those of BC Hydro’s corresponding Point-to-
13
Point rates and 2 to 3 times that of Manitoba Hydro’s
14
corresponding Point-to-Point rates. BC Hydro’s rates are
15
considered high by industry standards.
16
17
5.3.11
With respect to objective B), referring to consistency with
18
industry standards, at this point in the evolution of the
19
electrical power industry, defining an industry standard is
20
very difficult. Different jurisdictions are at varying stages of
21
market evolution and, by necessity, are in the process of
22
implementing different approaches. TransÉnergie’s rates do
23
not reflect the structures of, and are not consistent with,
24
comparable Canadian transmission utilities. For example,
25
the rates, as proposed, do not include marginal pricing, such
26
as those implemented by BC Hydro, and do not include
27
special provisions for exports and wheel through such as
28
those developed by HydroOne Networks. The combined use
29
of 1-CP and 12-CP for the determination of long and short-
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 30 of 56
1
term Point-to-Point rates is probably, in fact, an exception to
2
common industry practices.
3
5.3.12
With respect to objective C), the appropriateness for the
4
market environment in which the rate is applied, Dr. Orans
5
limits his focus to the types of centralized and decentralized
6
markets. When taking such a major step as unbundling the
7
transmission rates and services, the Régie, TransÉnergie,
8
Hydro-Québec and all of the stakeholders involved must look
9
as far into the future as possible. The manner in which the
10
electrical power industry in Québec, and surrounding
11
jurisdictions, is evolving, requires that a clear effort be made
12
to attract new entrants to the market. Otherwise, the whole
13
exercise becomes a matter of accounting, rather than
14
structuring the operations transmission system and
15
encouraging a new way of doing business in the province.
16
BC Hydro, which according to Dr. Orans’ classification is a
17
centralized system, is already involved heavily in supporting
18
RTO formation within its natural transmission region. BC
19
Hydro may be required, and has demonstrated a willingness,
20
to adopt many of the rate structures/designs that are typical
21
of decentralized systems in order to form, align itself with, or
22
otherwise join an RTO in its region. The Régie should not
23
limit itself to focusing on the immediate transmission
24
environment within Québec, but should expand the horizons
25
of its focus to include those issues which may be required in
26
the future, particularly those that may be necessary in order
27
to maintain/preserve the position and benefits enjoyed by
28
Hydro-Québec and the Province.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 31 of 56
1
2
5.4. Uniformity of Rates
5.4.1
3
In the Régie Act, Section 49, subsection 11, the Régie is
directed as follows;
§
4
“When fixing or modifying rates for the transmission of
5
electric power or for the transmission, delivery or
6
storage of natural gas, the Régie shall, in particular
7
…(6) consider the cost of service, the varying risks
8
according to classes of consumers and, as concerns
9
natural gas rates, the competition between the
10
various forms of energy and the maintenance of
11
equity between rate classes; (7) ensure that the rates
12
and other conditions for the provision of the service
13
are fair and reasonable:… (11) maintain, subject to
14
any Government order to the contrary, uniform rates
15
throughout the territory served by the electric power
16
transmission system… The Regie may also also use
17
any other method it considers appropriate” [emphasis
18
added in all cases].”
19
5.4.2
TransÉnergie has chosen to interpret this subsection of
20
the Act in the narrowest sense exclusive of the other
21
subsections of Section 49. Within Section 49 Subsection 6
22
indicates that rates can be different for different classes of
23
users. Subsection 7 requires that the Regie ensure
24
reasonableness and the final sentence of Section 49 allows
25
the Regie to use any other method it considers appropriate.
26
In order to strictly abide by subsection 11, it would be
27
necessary to come into conflict with other subsections of
28
Section 49 of the Act. The narrow interpretation of this
29
subsection by TransÉnergie does not necessarily reflect the
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 32 of 56
1
overall intent of the Act or the desire to improve the
2
efficiency of the system or achieve reasonable rates. The
3
Act specifically allows the Regie to “use any other method it
4
considers appropriate.” – presumably to give the Regie
5
sufficient latitude to reconcile differences in objectives or
6
interpretations.
7
5.4.3
Postage stamp (uniform) rates to retail customers is the
8
common practice in the industry for regulated tariffs,
9
however, postage stamp retail rates do not necessarily imply
10
or require postage stamp wholesale rates. Wholesale rates,
11
by their nature, apply to a smaller number of users and are
12
structured to enhance and induce trade, thereby improving
13
the efficiency of the system. Wholesale use of the system is
14
normally elective, therefore, increased wholesale use of the
15
system effectively reduces costs to all users. For example,
16
BC Hydro offers uniform, postage stamp rates to all
17
customers in a certain class over its entire integrated
18
system. BC Hydro, however, also implemented Point-to-
19
Point rates that do vary according to the point of receipt and
20
point of delivery (See BC Hydro Rate Schedule 3001 which
21
is available at the following link:
22
http://eww.bchydro.bc.ca/customerservice/rates/electric_tarif
23
f.pdfThis was done as a result of the instruction by the
24
BCUC to do so and after receiving a declaratory Order from
25
FERC accepting the non-postage stamp Point-to-Point rates
26
(refer to Appendix 4 for reference/details).
27
5.4.4
Mr. Priddle, in his testimony, attempted to demonstrate
28
that uniform rates for gas transmission companies is the
29
norm for the industry. He stated that the NEB rejected the
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 33 of 56
1
segregation of rates as the rule for the gas industry,
2
specifically that the “…the purpose and character of the
3
TransCanada system implies, and reasonably requires,
4
sharing by all customers of system costs as well as benefits.
5
The Board therefore rejects the Applicant’s separation of its
6
system into eastern and western segments for the purpose
7
of cost classification.” (HQT-10, Document 5, p. 6, lines 26-
8
30).
9
5.4.5
However, Mr. Priddle noted an important exception to the
10
practice of uniform rate application, based on “separate rate
11
bases for mainline transmission on the one hand and for
12
gathering and gas processing on the other.” (HQT – 13,
13
Document 5, p. 7, lines 15-17). The exception presented by
14
Mr. Priddle, in fact, very closely appears to resemble
15
TransÉnergie’s system and operational environment more
16
than the general rule does. It is important here to distinguish
17
between ‘gathering’ and other ‘transmission’ or ‘distribution’
18
assets. The Hydro-Québec/TransÉnergie system is
19
characterized by a large portion of high voltage transmission
20
lines that are used specifically to connect to several remote
21
northern hydroelectric facilities (gathering assets). The
22
electric industry deals with this issue typically by allocating
23
the part of a transmission system built to connect to the load
24
centers, a concept referred to as generation related
25
transmission assets (or GRTAs). For example, in British
26
Columbia, a jurisdiction that is very similar (in terms of
27
system characteristics and asset mix) to that of Québec, a
28
portion of the system used to connect remote generators to
29
the network are allocated to the generator as ‘gathering’
30
assets
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 34 of 56
1
ftp://ftp.bcuc.com/Web%20Folder/PUB/Decisions/1998Dec/B
2
CH_WTS.pdf
3
5.4.6
Mr. Priddle also states that, “The new rate design
4
provides these tools by yielding rates for ‘short haul’ gas
5
exports that will be sufficiently low to compete successfully
6
against what was described as ‘inefficient bypass of the
7
NGTL system’.” (HQT – 10, Document 5, p. 26, lines 17-20).
8
Québec, and TransÉnergie need similar tools to allow
9
potential independent producers and marketers, who would
10
be using comparatively short hauls of the system and would
11
not be able to compete/trade given the high TransÉnergie
12
rates, an opportunity to economically use the system, evolve
13
and develop. The same for neighboring utilities or
14
transporters who offer reciprocal service at much lower rates
15
who may, in the future challenge Hydro-Québec access to
16
their wholesale or retail customers.
17
5.4.7
Mr. Priddle in describing the reasons for the “collapse of
18
the NGTL comprehensive postage stamp rate design”
19
indicated that NGTL submitted that, “in a new market reality
20
of pipeline competition, it [the transmission provider] should
21
have the tools needed to compete against new pipelines.”
22
(HQT – 10, Document 5, p. 26, lines 25-26, 13-15). In the
23
new market reality of electricity, a transmission only utility
24
would be seeking the flexibility to allow it to enhance its
25
revenues. Uniformity of rates would not help that cause. In
26
the absence of reasonable rates, TransÉnergie would be
27
losing business, although not directly, to competition in its
28
region. High transmission cost in Canada makes the United
29
States East-West paths cheaper than the Canadian path. A
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 35 of 56
1
loss in revenue is a loss irrespective of whether it is due to a
2
competitor or lack of business. The Régie should be looking
3
for innovative ways to open the system and enhance its
4
utilization in advance of a competitive market in Québec.
5
5.4.8
In the case of Québec, although all generation related
6
transmission assets have been assigned to the transmission
7
entity by the Act, there is nothing to preclude the Régie from
8
structuring the transmission rates to reflect the unique use of
9
the system and to allocate costs accordingly, similar to how
10
11
the NEB treats gas-gathering facilities.
5.4.9
The way in which Hydro-Québec will be charged its
12
network rate by TransÉnergie would allow for the creation of
13
uniform rates. This can be done when Hydro-Québec
14
subsequently sets the rates for its customers, appropriately
15
charging them for the transmission portion of their service.
16
Virtually all network integration charges on the TransÉnergie
17
system are attributable to Hydro-Québec, thus it would be
18
able to set rates that reflect the costs and use of the system
19
in a uniform manner.
20
5.4.10
If the Act is interpreted as strictly requiring uniform
21
wholesale transmission rates throughout the system the
22
TransÉnergie rate proposal, as submitted violates the Act in
23
two ways.
24
5.4.11
25
26
The use of the 1CP for setting long-term Point-to-Point
rates and 12CP to determine short-term Point-to-Point rates.
5.4.12
The discounting procedure which produces periodic and
27
inconsistent short-term rate reductions that potentially could
28
vary from Point-to-Point (HQT-10, Document 4, p. 13).
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 36 of 56
1
5.4.13
A rate design consisting of three components could be
2
implemented to address the uniqueness of the TransÉnergie
3
system. The rate components would include:
§
4
Remote system (gathering) charge, including
5
segments of the interties that connect remote
6
generation to the network or export market –
7
chargeable to those who use this part of the system.
§
8
9
Common system or a networking component that is
common and chargeable to all users of the system
10
(equitably and uniformly).
§
11
Export/Wheeling-across/intertie component
12
chargeable to those who use these facilities for transit
13
– many jurisdictions have similar intertie facility
14
charges that are not part of the network and are only
15
chargeable to those who use it (for example –
16
BC/Alberta Tie, Hydro One, BPA/California DC and
17
AC ties). The intertie component could viably be
18
included in the network component as the interties
19
provide essential system support services.
20
5.4.14
These components could be collected as either energy or
21
capacity charges depending on the time frame and quality of
22
service.
23
5.4.15
Another option is to develop a Point-to-Point rate that
24
recognizes the characteristics of point-of-delivery and point-
25
of-receipt (and corresponding losses) and factor that into the
26
rate design in order to optimize the system. The charges for
27
the various Point-to-Point rates, if allocated based on the
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 37 of 56
1
concepts above, would be consistent with traditional cost of
2
service regulation.
3
5.4.16
A third alternative would be to structure the Point-to-Point
4
rate to be a function of the delivery voltage. This alternative
5
would require a typical cost-of-service study to differentiate
6
and segregate the transmission system facilities required to
7
serve different delivery voltage levels. The lower the
8
delivery voltage the more the transformation/transmission
9
facilities are utilized, hence the greater the cost. One
10
attribute of this approach is that it will produce rates that are
11
uniform for each voltage category. The rates would be
12
reasonable because the third party users of the system
13
(wholesalers) would not be paying for the lower voltage
14
distribution system that is not used by them. This approach
15
could be used by the Régie should it wish to interpret
16
“uniformity of the rate” in its narrowest possible definition.
17
Hydro-Québec’s current rates indirectly reflect this principle
18
in its differentiation between industrial rates and commercial
19
and residential rates. An extension of this approach would
20
be to calculate the system losses based on delivery voltage
21
level. This will help bring the overall TransÉnergie rate to a
22
more reasonable level.
23
5.4.17
In BC, West Kootenay Power’s wholesale transmission
24
rates are differentiated by delivered voltage level while BC
25
Hydro differentiates its wholesale Point-to-Point rates by the
26
location of the point of receipt and the point of delivery. This
27
indicates that even in the same regulatory jurisdiction
28
different approaches can be used to accommodate different
29
system requirements. Both approaches are considered to be
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 38 of 56
1
in compliance with the FERC order 888 and 889 pro forma
2
tariff.
3
5.4.18
Mr. Priddle stated, “The postage stamp toll design has
4
been replaced since April 2000 by Receipt Point Specific
5
Rates. This means that there is a separate rate for gas from
6
every one of the hundreds of receipt points on the NGTL
7
system. The rate design is such that, on average, the charge
8
for intra-Alberta deliveries is about half that for export
9
deliveries. The EUB approved this rate design because it
10
‘best meets accepted rate making principles and is in the
11
public interest’.” (HQT – 13, Document 5, p. 25, lines 1-10).
12
This demonstrates that a Point-to-Point rate design that is
13
Point-of-Receipt specific is compatible with recent trends in
14
the natural gas transportation industry.
15
5.4.19
More recently the BCUC has instructed BC Hydro to
16
develop a Point-to-Point transmission service locational
17
specific rate (BCUC Decision WTS Decision, April 23, 1998)
18
in a non-discriminatory manner, to serve a user located
19
close to the BC/US border that would be using a short
20
portion of the BC Hydro system. As mentioned earlier, the
21
transmission rates BC Hydro has already adopted are based
22
on Point-to-Point rates that are a function of the Point-of-
23
Receipt and Point-of-Delivery. This resulted from a directive
24
from the BCUC and with clear and explicit approval from
25
FERC. To reiterate, BC Hydro offers domestic users
26
“uniform” postage stamp rates, while the wholesale point-to-
27
point rates are differentiated, not postage stamps or uniform.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 39 of 56
1
2
3
5.5. Network Integration Rates versus Point-To-Point
Rates
5.5.1
Hydro-Québec has generated two classes of rates –
4
Network Integration Rates and Point-to-Point rates. The
5
Network Integration Rates mostly represent and collect the
6
cost of serving native load customers. Its structure, as a
7
single payment by Hydro Québec, allows Hydro Québec,
8
with the approval of the Régie, to subsequently apply this
9
cost to the distributors in a manner that produces “uniform”
10
11
rates.
5.5.2
The Point-to-Point rates are intended to apply to
12
transactions that have a defined path and a specific purpose,
13
for example exporting from a facility to an out of province
14
market. Point-to-Point rates should optimally reflect the
15
cost/impact/value to the system and should be structured to
16
enhance the efficiencies of the system, now and in the
17
future. For example, Point-to-Point rates could be:
18
§
Designed to reflect the marginal costs of the system
19
§
Discounted to encourage preferential resource or load
20
locations
21
§
Discounted to increase the utilization of the system
22
§
Adjusted to reflect the true costs of transmission
23
usage over short distances in order to avoid system
24
by-pass or to encourage beneficial resource
25
development.
26
A uniform and inflexible application of Point-to-Point rates would
27
deny the benefits that would likely accrue to the system, or even
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 40 of 56
1
deny the innovation that would likely result if the flexibility were
2
available.
3
4
5.5.3
Hydro-Québec applies a 1CP approach to developing the
5
long-term Point-to-Point rates while applying a 12CP
6
approach to setting the short-term rate. Using a 12CP
7
approach for short-term results in a 28% increase over the
8
long-term Point-to-Point rate. This approach, while
9
positioned by TransÉnergie as reflecting the costs of the
10
system, will not in any way result in increased efficiencies;
11
because the rates are uniform from month to month, so the
12
rates do not reflect system conditions or loading on the
13
system on a truly short-term basis.
14
5.5.4
The short-term Point-to-Point rate will likely further
15
discourage competition in the short term as acknowledged
16
by Hydro-Québec as one of the their objectives (HQT – 13,
17
Document 13, p. 27). It’s not typical in the industry for rate
18
design to use the 12CP/1CP selectively. Utilities typically
19
use one approach or the other, and, in this manner, produce
20
consistent long-term and short-term rates. Even though
21
FERC allows either method to be used, the intent is to use
22
the appropriate approach for the particular system, not both
23
of them selectively. The use of a rate design approach that
24
has the intention of discouraging the use of the rate is not a
25
proper rate design objective. Ironically, TransÉnergie is
26
proposing a higher, inflated, short-term, Point-to-Point rate
27
that past experience indicated had to be discounted to
28
attract use (see the collective responses to OPG from
29
Hydro-Québec (HQT – 13, Document 13)). This is the same
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 41 of 56
1
type of activity as when retailers inflate their prices prior to
2
discounting them for sales, in order to create the illusion of
3
higher discounts and lower prices.
4
5
If Hydro-Québec truly wants to reflect the seasonality of use
6
of the system, they should produce a rate that varies from
7
month to month, rather than a flat rate for all months that is
8
higher than the corresponding long-term rates.
9
10
5.6. Discounting
5.6.1
Discounting is a mechanism that allows the utility to
11
change the pricing occasionally without changing the basic
12
pricing level or structure. It is useful whenever the “normal”
13
price is considered reasonable/appropriate to generate
14
enough use of the system (sales) some of the time but may
15
require discounting to optimize system usage (generate
16
additional sales) at times when the normal price is not
17
effective. TransÉnergie’s response to the Régie, Question
18
#60.1 (HQT – 10, Document 1.4, pp. 2-5) indicates that deep
19
discounting has been required to attract short-term Point-to-
20
Point use. The level and frequency of discounting is a
21
reflection of the unreasonableness of the rate.
22
5.6.2
Although there is no reported use of the long-term Point-
23
to-Point rate other than by Hydro-Québec, TransÉnergie is
24
not proposing to discount the long-term Point-to-Point rate
25
(HQT-13, Document 13, p.20). If discounting is to be used
26
effectively, it has to be applied to both long and short-term
27
rates in order to be effective in attracting additional use of
28
the system (sales), and to improve system efficiencies.
29
Given that the additional use of the system, and the
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 42 of 56
1
corresponding additional revenue, reduces the allocation to
2
the Network Integration Rate, discounting would have a
3
favorable impact on third party users of the system, Hydro-
4
Québec, and ultimately, through Hydro-Québec’s reduced
5
cost burden, all retail customers.
6
5.6.3
As it stands right now, discounting provides limited
7
benefits to the system, namely some additional sales.
8
Discounting is applied so late that it is unlikely to benefit, and
9
attract, any of the intended users besides those relying upon
10
short-term spot transactions. As stated by Hydro-Québec,
11
“Dans tous les cas où des rabais étaient applicables, la
12
décision a été prise dans les jours précédant le début du
13
mois où ils s'appliquaient.” [In all cases where discounts
14
were applicable, the decision as to the applicability of the
15
discount was taken in the days preceding the beginning of
16
the month] (HQT-13, Document 14, p. 115). This process
17
impedes long-term planning and places third party users at a
18
disadvantage compared to Hydro-Québec.
19
5.6.4
Since discounting is not offered in a consistent or
20
structured manner, it is impossible for third party users to
21
count on, or plan, their system usage based upon the
22
expectations of discounted rates. There is also no way to
23
gauge the success of discounting in attracting additional
24
system utilization, as its calculation methodologies and
25
application are not consistent.
26
5.6.5
In its response to Régie IR #60.1, Hydro Québec
27
indicated that discounting would be based on market
28
conditions, “Les rabais offerts sur les services de court terme
29
sont établis en tenant compte des conditions de marché.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 43 of 56
1
Dans les périodes de prix élevés sur les marches voisins, il
2
n’est pas nécessaire d’offrir de tels rabais et les prix maxima
3
prévus aux Tarifs et Conditions s’appliquent.” [Discounts
4
offered on short-term services were established by taking
5
into account market conditions. In periods of high prices in
6
neighbouring markets it is not necessary to offer such
7
discounts, and the given maximum prices provided by the
8
Tariffs and Conditions apply.] (HQT-13, Document 1,
9
Question 60.1, p. 100). Discounting should not be based on
10
market condition/prices, rather discounting should be based
11
on the potential for system utilization. The regulated
12
transmission business earns a guaranteed rate of return
13
based on cost, not on market conditions. Discounting should
14
be based on the degree to which the system is utilized,
15
which itself may be a function of market prices. This is
16
particularly true given that the transmission system of Hydro
17
Québec does not suffer from congestion, and marginal
18
system usage represents a minimal portion of operational
19
costs (HQT– 13, Document 13, p. 30).
20
5.6.6
One thing that is certain is that discounting, as proposed,
21
will not encourage anyone to build long term in Québec
22
because the discounting cannot be counted on.
23
5.6.7
BC Hydro’s discounting of Point-to-Point rates envisages
24
discounting of long-term firm Point-to-Point rates. BC
25
Hydro’s discounting is specified in a policy submitted to the
26
British Columbia Utilities Commission as part of the
27
Wholesale Transmission Services. “Specifically, B.C. Hydro
28
proposed that long-term discounts be considered whenever
29
a discount is necessary to encourage new generation or load
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 44 of 56
1
to locate in a manner that would increase the overall
2
efficiency of the system. Accordingly, B.C. Hydro stated that
3
siting generation in areas which yield cost effective
4
reductions of losses, or permit deferral of transmission
5
investment, would be considered for discount.” (BC Hydro
6
WTS Decision from BCUC, p. 33).
7
ftp://ftp.bcuc.com/Web%20Folder/PUB/Decisions/1998Dec/B
8
CH_WTS.pdf
9
10
BC Hydro’s discounting of short-term Point-to-Point rates
11
sets a clear minimal level of the discount, namely $2/MWh
12
for firm rates and $1/MWh for non-firm rates. (BC Hydro
13
Electric Tariff Rate, 3001 and 3002)
14
http://eww.bchydro.bc.ca/customerservice/rates/electric_tarif
15
f.pdf
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 45 of 56
1
6 Conclusion
2
6.1.1
TransÉnergie, Hydro-Québec and other Canadian
3
utilities’ activities will be scrutinized by the industry and
4
FERC due to the perception of abuse of market power and
5
excessive charges for energy and services. The Régie
6
needs to be seen to be trying to create a truly fair, open and
7
viable competitive environment in order to protect Hydro-
8
Québec’s interest and its ability to trade in the US from
9
potential retaliatory actions by US regulators.
10
6.1.2
Public perceptions of the Québec market are an
11
important consideration in setting policy and determining
12
rates. This is evidenced in the Enron Power Marketing Inc.
13
and Coral Power submission to FERC. This action is
14
important, and could potentially impact Hydro-Québec,
15
TransÉnergie and the Régie in the following ways:
16
§
A complaint to FERC brings an issue to the forefront
17
of the industry’s focus, legitimizing it as an issue that
18
warrants attention and investigation
19
§
FERC is obligated to recognize and investigate the
20
complaint. The concerns raised are no longer moot,
21
once the wheels are set in motion. The issues must
22
be addressed in a diligent and prudent manner.
23
§
It focuses attention on the Québec market in
24
particular, making the outcome of this hearing an
25
important signal of the market’s long-term viability and
26
competitiveness.
27
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 46 of 56
1
6.1.3
The rate design proposed by TransÉnergie does not
2
meet the objectives of rate setting when seen from the
3
perspective of all direct users of the transmission system
4
rates.
5
6.1.4
Rate design does primarily meet the Transmission
6
Revenue Requirement, however, any rate design will satisfy
7
this requirement with ease since Hydro-Québec is the
8
primary user of the system. The majority of costs are
9
captured in the Network Integration Rate that is directly
10
11
assignable to Hydro-Québec.
6.1.5
Hydro-Québec elected, unnecessarily, to adopt a very
12
narrow interpretation of uniformity in the rate requirements.
13
Besides, if a narrow definition of the Act is imposed, the
14
rates as proposed, are not uniform, or interpretable as
15
uniform.
16
6.1.6
Rate design seems to address Hydro-Québec’s and its
17
subsidiary’s interests but does not meet the requirements of
18
other third party users. Nor do the rates, as designed and
19
proposed by TransÉnergie, positively enhance the efficiency
20
of the system or encourage competition or entry into the
21
Québec market.
22
6.1.7
It appears that the transmission rates are designed to
23
discourage other users from using the transmission system,
24
and are effective in this. For example, short-term rates are
25
supplemented by a discount policy that has questionable
26
value given the degree of discretionary power that
27
TransÉnergie has in setting the discount rate, and the short
28
time frame when the discounts can be applied.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 47 of 56
1
6.1.8
Ultimately, the rate design will not promote competition in
2
Québec. It is difficult to perceive any other energy
3
developers, marketers, or other third party users, being able
4
to afford these exorbitant transmission rates.
5
6.1.9
The proposed rate design could contribute to a negative
6
perception of the Québec market, where Hydro-Québec will
7
be seen as wanting to participate in out-of-province open
8
markets while exercising its influence to limit participation in
9
its primary market. Such perceptions can have a damaging
10
affect on Hydro-Québec’s long-term interests. The proposed
11
rate structure will increase the industry’s criticism of
12
Canadian utilities and the Québec market at a time when the
13
industry, FERC, and Public Utility Commissions across the
14
US are actively searching for the causes of the ills of the US
15
market.
16
6.1.10
Hydro-Québec’s usage of the transmission system is
17
unique in that it is in a class by itself. Its size, level, and the
18
nature of its use of the system, are unlike those of other third
19
party users. Consequently, having a comparable rate with
20
third parties is not a fair measure of rate equity. The focus of
21
the Régie should be on the reasonableness of the rates.
22
23
6.1.11
There are no practical reasons to focus on the impact of
24
competition on Hydro-Québec as it has such a low cost of
25
generation that its resources should be dispatched ahead of
26
almost all other resources, particularly those of new gas-fired
27
plants and other market entrants. A viable rate design and
28
level may allow other independent users to benefit and
29
contribute to the enhanced use of the Hydro-Québec
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 48 of 56
1
system. Hydro-Québec's storage system and transmission
2
capacity (which is under utilized because it is rarely
3
congested) has room to be optimized and serve a wider
4
base than Hydro-Québec alone. In the end, Hydro-Québec,
5
Québec and the market at large will benefit from a
6
reasonable rate.
7
6.1.12
TransÉnergie’s proposal to apply discounting to its Point-
8
to-Point rate is the only attempt made to enhance the
9
utilization of its transmission system. Almost all other
10
aspects of the application would discourage third parties
11
from using the services of the system. The discounting is,
12
however, offered in a manner that severely limits its
13
usefulness. The discount is only applicable to the short-term
14
Point-to-Point rate. Additionally, the short-term Point-to-Point
15
rate is inflated, in part to discourage its use, and the manner
16
in which it is calculated and applied is inconsistent,
17
unpredictable and unreliable.
18
6.1.13
The current discount policy/practice restricts the
19
ability/power of the Régie to manage and oversee the
20
discounting process properly. Although, as is clear from the
21
evidence provided, the discount is required to affect any third
22
party use, accepting the discounting as proposed, denies the
23
Regie the ability to determine and judge the appropriateness
24
of the rate. It will be hard to define how TransÉnergie will be
25
setting the rate or to measure the effectiveness of the
26
discount activities as proposed (HQT-13, Document 13, p.
27
22).
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 49 of 56
1
2
7 Recommendations to the Régie
7.1.1
3
The Regie is respectfully advised when making its
decision with respect to this case to:
§
4
Clearly demonstrate to the industry and its
5
participants that the design and structure of the
6
Québec market will be pursued in a manner that
7
promotes competition, encourages fair and open
8
access, and enhances the overall efficiency of the
9
system
§
10
11
and 889
§
12
13
14
Meet both the spirit and the letter of FERC orders 888
Enhance Québec’s ability to join or align itself with an
RTO in the future
7.1.2
To achieve the objective above the Regie should insist
15
on a rate structure that emphasizes the functional separation
16
of Hydro-Québec and TransÉnergie, and reflects allocation
17
of costs based on the use of the system. The Régie still has
18
an opportunity to allocate the costs resulting from the use of
19
the generation related transmission assets (and/or
20
distribution related transmission assets), and it should make
21
an innovative effort to ensure that the cost burden is
22
attributable to the actual users of those specific assets.
23
7.1.3
The Régie is advised to interpret the intent and the
24
definition of uniformity in rate design as being non-
25
preferential (all rates available to all system users equally)
26
rather than as a requirement that there be only a single rate
27
which necessarily must apply to all users. Such
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 50 of 56
1
interpretation would allow a lot of flexibility to achieve
2
efficient rates.
3
7.1.4
Non-preferential rates require that the Régie should
4
direct TransÉnergie to set the short-term Point-to-Point rates
5
on the same basis they set the long-term Point-to-Point
6
rates. This would entail the monthly rates being equal to one
7
twelfth of the annual rates, the weekly rates being 1/52 of the
8
annual rates, and the daily rates being one fifth of the weekly
9
rates.
10
7.1.5
It is recommended that the Régie direct TransÉnergie to
11
develop right away non-discriminatory Point-to-Point long-
12
term rates that represent the true impact/cost to the system,
13
including losses in order to produce more reasonable rates
14
that will encourage the utilization of the system. These rates
15
could be made to reflect the true utilization of the system
16
either by developing:
§
17
18
system by its functional use
§
19
20
Specific Point-to-Point rates, based on point of receipt
and point of delivery
§
21
22
Multi-tiered rates, that separate the transmission
7.1.6
Or rates based on delivery voltage level
The Régie should require TransÉnergie to develop a
23
clear, transparent guideline for its discounting policy, which
24
could be produced through industry consultation. Generally
25
the discount should be applied to both short and long-term
26
service. For long-term service it should reflect the impact of
27
the siting of new resources on system performance and cost.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 51 of 56
1
It should have a minimum target discount level for both firm
2
and non-firm.
3
7.1.7
The Régie should order TransÉnergie to implement a
4
system for monitoring the use of the discounting process in
5
order to facilitate optimized use of the system in the future.
6
7.1.8
Should the Regie decide that a revision of the Hydro
7
Québec submission is required then as an interim measure
8
the Regie should at least ensure that:
9
10
7.1.9
11
12
The short-term rate is pro rata based on the long term
rate as discussed above
7.1.10
An interim discount is applied to the long-term rate as
13
well as the corresponding short-term rate. A conservative
14
level for this would be around 25%
15
7.1.11
TransÉnergie discounts the short-term rates sufficiently
16
to ensure substantial use by third parties. A floor rate of
17
$2/MWh for firm services and $1/MWh for non-firm services
18
could be used as a guide.
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
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Appendix 1
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Appendix 2
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 54 of 56
ATTACHMENT H
DESCRIPTION OF BRITISH COLUMBIA PARTICIPATION
The British Columbia Hydro and Power Authority (“BC Hydro”) and West Kootenay
Power Ltd. (“WKP”) have actively participated in the RTO West negotiations.1 The Filing
Utilities, BC Hydro and WKP have reached consensus on a framework that would provide
consistent RTO transmission service over the RTO West transmission system and the
transmission system in British Columbia, while recognizing Canadian sovereignty and the
differing regulatory structures in Canada and the United States. This framework is a major step
towards achieving a “natural transmission region” in the Pacific Northwest that does not stop at
the U.S.-Canada border.2
The basic elements of this framework, developed as a model by the Adjunct Committee
Technical Work Group,3 are as follows:
(1)
An independent grid operator would be formed in British Columbia (“BC IGO”),
that would meet the independence standards of Order No. 2000. The BC IGO
would be a public utility regulated by the British Columbia Utilities Commission
(“BCUC”);
(2)
RTO West and BC IGO would act in a coordinated fashion to provide RTO
service to the Pacific Northwest region, including British Columbia;
(3)
BC Hydro and WKP would transfer operational control over their transmission
systems to BC IGO, under Transmission Operating Agreements (“TOA”) that
1
EAL (the Alberta Transmission Administrator) and the Alberta Power Pool also participated in these
discussions.
2
The Commission has recognized that its transmission jurisdiction under the Federal Power Act stops at
the international border. See Order No. 2000 at 31,085.
3
This Group included U.S. and Canadian representatives from the Implementation, Ancillary Services and
Congestion Management Work Groups of the RTO West collaboration process.
Page 1 - ATTACHMENT H TO SUPPLEMENTAL COMPLIANCE FILING AND REQUEST
FOR DECLARATORY ORDER PURSUANT TO ORDER 2000
parallel the TOA between RTO West and its U.S. participating transmission
owners;
(4)
The BC IGO, as a regulated utility in British Columbia, would ultimately be
accountable to the BCUC for tariff administration and the reliability of the
transmission grid within British Columbia, consistent with principles of Canadian
sovereignty and Provincial regulatory requirements. The functional relationship
between BC IGO and RTO West would be defined in an Operating Facilities and
Services Agreement (“OFSA”) to be negotiated between the two entities and filed
with the Commission and the BCUC. It is contemplated that the OFSA would
adopt the following principles intended to further seamless wholesale
transmission services in the region:
(A)
RTO West and BC IGO would file for regulatory approvals of a
single, uniform wholesale transmission tariff covering both their
transmission systems;4
(B)
A single set of business practices would be applied on a regional
basis;
(C)
A single regional Ancillary Services market would be developed;
(D)
One Internet web-site for transmission capacity reservations would
be used in the region, to be operated by RTO West;
(E)
There would be one Security Coordinator for the region; and
(F)
A single regional Congestion Management Mechanism would be
employed;
4
RTO West would file the tariff with the Commission, and BC IGO would file the tariff with the BCUC.
Page 2 - ATTACHMENT H TO SUPPLEMENTAL COMPLIANCE FILING AND REQUEST
FOR DECLARATORY ORDER PURSUANT TO ORDER 2000
(5)
RTO West and BC IGO will together perform a control area operator function for
the Pacific Northwest, including British Columbia. BC IGO will provide control
area operator functions within British Columbia.
(This approach will be
described in greater detail in documents to be submitted as part of the filing
utilities’ Stage 2 submission.) Inadvertent power flow with neighboring control
areas and RTOs would be handled by RTO West; and
(6)
Electronic links between RTO West and BC IGO will be established to
communicate the real time status of the RTO West Operating Plan and to deploy
resources through RTO West.
The Filing Utilities, BC Hydro and WKP believe that this framework for coordinating the
functions of RTO West and BC IGO advances the Commission’s concept of a “dotted line
boundary at the international border” for purposes of RTO formation.5
The framework is
designed to further the objective of seamless wholesale transmission services throughout the
Pacific Northwest, and to ensure that the region encompassed by the RTO is of the broadest
possible scope.
BC Hydro has represented to the Filing Utilities that BC IGO will be structured to meet
the Commission’s requirements in Order No. 2000 that such an entity be independent from
control by any market participant, including participating transmission owners. The functions
reserved for BC IGO within the RTO recognize Canadian sovereignty, regulatory and tax
requirements, and are well within the parameters the Commission found acceptable in a U.S.
context in Commonwealth Edison Company, et al., 90 FERC & 61,192, reh’g denied, 91 FERC
& 61,178 (2000).
The Filing Utilities, BC Hydro and WKP intend to work within this framework to
negotiate definitive agreements and tariffs, and to resolve the other open issues between the U.S.
5
Order No. 2000 at 31,085.
Page 3 - ATTACHMENT H TO SUPPLEMENTAL COMPLIANCE FILING AND REQUEST
FOR DECLARATORY ORDER PURSUANT TO ORDER 2000
and British Columbia entities. If closure on these issues can be reached, the Filing Utilities, BC
Hydro and WKP would seek to obtain all necessary approvals for these arrangements from the
appropriate governmental and other authorities in their respective jurisdictions.
Page 4 - ATTACHMENT H TO SUPPLEMENTAL COMPLIANCE FILING AND REQUEST
FOR DECLARATORY ORDER PURSUANT TO ORDER 2000
Appendix 3
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 55 of 56
Appendix 4
Testimony of Dr. Zak El-Ramly: TransEnergie Rate Design
Page 56 of 56