2011 Contribution Policy
AESO Tariff Applications
October 17th, 2011
Terms of Reference
• Terms of Reference
– Working group members
– Any other topics?
2
Guidelines
• Mechanisms used to determine the balance between averaged and MP
specific costs
– “80 / 20 Rule”
• % of customers or % of costs?
• Possible variations
– The “multiplier”
• How to determine the basis
– Revenue “test”
• Incremental revenue an MP would contribute to AESO fixed costs over
contract length
– Line length
• MP pays for costs over and above a prescribed line length
– % of costs covered for every customer
• Each MP gets % of costs covered, every MP pays a contribution
3
Guidelines
• Are there any other options not identified here?
• Can we identify the essential characteristics of a guideline
• Assessment criteria – how do we compare and evaluate
– Strength of price signal
– Robustness, sustainability, administrative ease
– Addresses intergenerational equity
– Others?
4
Contribution Policy Considerations –
AESO 1
•
Construction contributions should relate only to the local
connection costs for system access service. Deeper system
costs are properly the responsibility of all market
participants receiving system access service and should be
recovered from all market participants through rates for
system access service. (Decision 2005-096, page 43)
5
Contribution Policy Considerations –
AESO 2
•
The underlying purpose of the contribution policy is to send
price signals (reflective of the AESO’s economics) to market
participants when they are considering siting alternatives for
their facilities. (Decision 2005-096, page 43)
6
Contribution Policy Considerations –
AESO 3
•
An excessive local investment allowance could provide
incentives for market participants to pursue higher
standards of connection facilities than required and justify
doing so on the basis that the cost of the higher standard
facilities would not exceed the permitted investment
allowance. (Decision 2005-096, page 44)
7
Contribution Policy Considerations –
AESO 4
•
Because an incremental revenue approach may place
undue upward pressure on rates, maximum investment
allowances should be below a level representing the
incremental revenues expected to arise from the connection
of a new system access service. (Decision 2005-096, page
44)
8
Contribution Policy Considerations –
AESO 5
•
Investment allowances should be set with regard to the
anticipated costs of connecting a system access service
reflecting acceptable standards of functionality and service
established by the AESO. (Decision 2005-096, page 44)
9
Contribution Policy Considerations –
AESO 6
•
Connection facility service characteristics and standards of
functionality may change over time. (Decision 2005-096,
page 44)
10
Contribution Policy Considerations –
AESO 7
•
Cost, not revenue, is the appropriate starting point for
establishing the contribution policy. (Decision 2005-096,
page 56)
11
Contribution Policy Considerations –
AESO 8
•
Significant economies of scale occur as the size of
connection projects increases, and such economies of
scale should be reflected in the functional form of the
maximum investment curve. (Decision 2005-096, page 57)
12
Contribution Policy Considerations –
AESO 9
•
It is still necessary to maintain the dual-use formula
(implemented through the substation fraction) to ensure that
market participants that are primarily generators are not
able to gain an effective exemption from the requirement in
the Transmission Regulation that generators are to pay for
their local connection costs. (Decision 2005-096, page 61)
13
Contribution Policy Considerations –
AESO 10
•
The POD cost function used as the basis for the Rate DTS
POD charge should be used as the basis for the maximum
investment function. (Decision 2007-106, page 92)
14
Contribution Policy Considerations –
AESO 11
•
Electric distribution system owners and direct-connected
market participants should be treated comparably under the
contribution policy in the AESO’s tariff. (Decision 2007-106,
page 103)
15
Contribution Policy Considerations –
AESO 12
•
The contribution policy needs to consider minimizing
intergenerational inequity
16
Contribution Policy Considerations –
AESO 13
•
The contribution policy needs to consider that most market
participants should not pay a contribution for standard
facilities, such that utilities are compensated for the assets
they own, operate, and use to provide service (Decision
2010-606, page 80)
17
Contribution Policy Considerations –
AltaLink 1
•
The Customer Contribution Policy needs to consider
economic signals to customers to encourage the best long
term economic solution.
– The maximum investment level and the required customer
contribution will send economic signals to customers. These
signals should financially encourage customers to make
interconnection decisions that are the most economical (for
themselves and the system), while considering the long term
transmission plan.
18
Contribution Policy Considerations –
AltaLink 2
•
The Customer Contribution Policy needs to consider the
best long term economic and technical solution to meet
standard customer and system requirements.
– An interconnection Proposal should consider both the
economics of the interconnection proposal (investment and
customer contribution) as well as the best technical solution.
This should be based on the needs of standard customer and
system requirements. This all must be considered in the
context of concerns around the environmental and other
community issues.
19
Contribution Policy Considerations –
AltaLink 3
•
The Customer Contribution Policy needs to consider that
technical interconnection solutions and current
interconnection costs drive the investment levels, not vice
versa.
– Costs to interconnect customers will fluctuate as the market
for materials and labour varies. Depending on the technical
details of the interconnection and the fluctuating costs the
investment level should vary correspondingly. In addition, the
contribution formula should not lead to sub-optimal technical
solutions.
20
Contribution Policy Considerations –
AltaLink 4
•
The Customer Contribution Policy needs to consider current
utility standards of service, and that standards may change
over time.
– Utility standards vary over time and the investment level, and
therefore the customer contribution, should vary to match
those varying standards.
21
Contribution Policy Considerations –
AltaLink 5
•
The Customer Contribution Policy needs to consider
minimizing intergenerational inequity.
– Recognizing cost inflation, the maximum investment and
therefore the customer contribution, should strive to be fair
between customers of different vintages. To the extent
possible, new customers, or customers increasing their
service level, should not proportionately pay any more, or
less, then customers who have been on the system for a
period of time.
22
Contribution Policy Considerations –
AltaLink 6
•
The Customer Contribution Policy needs to consider
harmonization among utilities (including the AESO) to
ensure a consistent approach and treatment for all
customers.
– In order to maintain equity, customers in different jurisdictions,
or served at the transmission or distribution levels, should be
treated fairly. Given that the tariffs may be different, the
maximum investment calculation may not be identical. As
well, aligning utility investment levels with the AESO’s
investment level will help to minimize customer confusion and
sub‐optimal system development.
23
Contribution Policy Considerations –
AltaLink 7
•
The Customer Contribution Policy needs to consider
incremental revenue from interconnection of new customers
compared to the cost to serve them.
– As new customers interconnect to the AIES they will provide
incremental revenue to the utility serving them. This revenue
should be compared to the costs to interconnect them.
24
Contribution Policy Considerations –
AltaLink 8
•
The Customer Contribution Policy needs to consider most
customers should not pay a contribution for standard
facilities. In this way, utilities would be compensated for the
assets that they own, operate, and use to provide service.
– Historically, policy in Alberta has supported postage stamp
rates wherein transmission load customers with reasonable
interconnection costs do not pay up‐front costs to
interconnect to the AIES. Reasonable interconnection costs
are recovered from customers, via tariffs, over the life of their
connection to the system. This results in utilities being
compensated for owning and operating assets that they utilize
to serve customers. This principle has been largely met in
some tariffs by applying the “80/20 rule.”
25
Contribution Policy Considerations –
AltaLink 9
•
The Customer Contribution Policy needs to consider that
the methodology should be simple to administer and
applied in a consistent and transparent manner. The more
simple, consistent and transparent the investment policy is,
the easier it will be for
26
Contribution Policy Considerations –
Fortis 1
•
MILs should be set to achieve a reasonable balance of
what an individual customer pays upfront through a
customer contribution versus what all customers in a
particular rate class pay through ongoing rates. In other
words, new customers should receive a fair and sufficient
level of investment such that the majority of customers do
not pay contributions for connecting, while still ensuring that
existing customers are not unduly burdened by the cost of
such new services
27
Contribution Policy Considerations –
Fortis 2
•
MILs should provide economic discipline and price
signals to new customers as they are connected to the
interconnected transmission and distribution system, and
these levels should be aligned with encouraging the best
long term economic and technical solution to meet
standard service requirements
28
Contribution Policy Considerations –
Fortis 3
•
The maximum amounts that the company invests in a new
extension on behalf of all customers should consider the
expected longevity or any other risks associated with the
new service
29
Contribution Policy Considerations –
Fortis 4
•
The current cost to connect new customers is the
appropriate starting point for establishing MILs
30
Contribution Policy Considerations –
Fortis 5
•
Setting of MILs needs to respect each utility’s standards
of service, while recognizing that these standards and the
associated costs will change over time
31
Contribution Policy Considerations –
Fortis 6
•
Changes to MILs should balance the need to attain the
target MILs over a reasonable timeframe, while ensuring
there is not undue upward pressure on tariff rates
32
Contribution Policy Considerations –
Fortis 7
•
Adjustments to MILs should consider minimizing
intergenerational inequity and cross-subsidy, whereby
the portion of the cost of an extension that the company
invests in should be in similar proportion with previously
established investment levels. Both new and existing
customers should be treated similarly to the extent possible
and should see a similar price signal when the system is or
was extended to provide service
33
Contribution Policy Considerations –
Fortis 8
•
To the extent practical, the structure of MILs (ex. fixed dollar
amount, or $/unit) should generally align with cost
causation and the rate structure which is applied to the
customer
34
Contribution Policy Considerations –
Fortis 9
•
MILs should be simple to administer and applied in a
consistent and transparent manner
35
Contribution Policy Considerations –
Fortis 10
•
Utilities should take into consideration the approaches of
neighbouring utilities when developing MILs. In a
reasonable timeframe, individual company’s MILs should
move towards an AUC-adopted, common approach to
setting investment levels for Alberta utilities
36
Next steps
• Contribution Data
– What kind of data do we need to see
– Discuss the value of the “extra 18” data points
• Consultant?
• Next meeting
– Thursday, November 17th
37
Schedule
Working Group meeting #2
November 17 2011
Working Group meeting #3
December 12 2011
Working Group meeting #4
January 5 2012
Working Group meeting #5
January 30 2012
Working Group meeting #6
February 20 2012
Working Group meeting #7
If required
38
Thank you