Alberta Coalition Presentation BCUC Workshop - August 23, 2006 BCTC - - PowerPoint PPT Presentation

August 23, 2006 Alberta Coalition 1

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

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BCTC_NETWORK ECONOMY AND OPEN ACCESS TRANSMISSION TARIFF - Exhibit

August 23, 2006 Alberta Coalition 2

Overview of AC Evidence

August 23, 2006 Alberta Coalition 3

AC General Approach

• 1. Examine

Appropriate Uses

• 3. Identify Distinguishing Tests which are:
• clear, transparent, enforceable, and
• facilitate a more competitive and open energy market.
• 2. Examine

Inappropriate Uses

August 23, 2006 Alberta Coalition 4

General Approach – Step 1

• 1. Examine

Appropriate Uses

• 1. Appropriate Uses

General Principle: Serve Network Load with least cost supplies. Types of Appropriate Import Transactions:

• A. Emergency & Deficiency – Generation insufficient to meet Network Load.
• B. Economy Energy – Imports which are lower cost than generation

which would be otherwise used to meet Network Load.

• 2. Examine

Inappropriate Uses

August 23, 2006 Alberta Coalition 5

General Approach - Step 2

Examine Appropriate Uses

• 2. Inappropriate Uses

General Principle: Imports for trade purposes, not needed for Network Load. Types of Inappropriate Import Transactions:

• A. For Export – Imports to be exported.
• B. Other Trade – Imports which are not needed for Network Load.
• 2. Examine

Inappropriate Uses

August 23, 2006 Alberta Coalition 6

General Approach – Step 3

Examine Inappropriate Uses Examine Appropriate Uses

• 3. Distinguishing Tests & Key Elements

Enhanced Economic Test Capacity Test Utilization Test Enforcement (Penalties) Monitoring

August 23, 2006 Alberta Coalition 7

Proposed Network Economy Model

TPA 11.1 for Network Economy volumes. Not applicable Forward Purchases Identification BC Hydro Surplus Condition. Inadequate Capacity without Network Economy. TPA 5.2 for Offers to Purchase and Mid-C or AB indicator to deem fulfillment

• f offer.

Set Network Economy volume = fulfilled offer to purchase amounts. BC Hydro declarations of emergency. Identification

• f

Transaction Conditions Not Permitted Permitted Permitted Permitted Network Economy Use Trade Economy Energy Deficiency Emergency Types of Transactions

August 23, 2006 Alberta Coalition 8

Economic Test

• Needed to identify between imports

providing service to Network Load and

• ther imports being used for Trade.
• Transfer Pricing Agreement appears to

provide an opportunity to identify imports used for Network Loads.

• Base on known prices to increase

certainty.

August 23, 2006 Alberta Coalition 9

BC Hydro is presumed to develop a view of average forward market price BCH sets Threshold Purchase Price (1) Transfer Price (DJMC) (3) Powerex Actual Purchase Price (2)

Page 1 - Illustration of Purchases by BC Hydro from Powerex under the Transfer Pricing Agreement

Powerex Margin (5)

BCH Benefit vs. Threshold (4)

Price $/MWh

Notes 1. It is presumed that BC Hydro sets the Threshold Purchase Price (TPA 5.2) considering its energy needs for native load (not exports), its view of forward prices and its view of costs of thermal

• generation. BC Hydro may also establish a maximum purchase quantity.

2. Powerex will attempt to purchase energy at prices lower than the Threshold Purchase Price. Powerex is incented under the TPA to only purchase if its actual purchase price is lower than the Transfer Price. 3. Energy purchased by Powerex is sold to BC Hydro at the Transfer Price which is the DowJones Mid-Columbia index (DJMC as per TPA Appendix A 1.3). 4. BC Hydro benefits by purchasing the energy at the DJMC. If the DJMC is greater than the Threshold Purchase Price, BC Hydro would not purchase the energy. 5. Powerex retains a positive margin provided its actual purchase price is below the DJMC reference. If Powerex cannot purchase at prices below the DJMC, it is incented to forego purchases as that would result in a negative margin.

August 23, 2006 Alberta Coalition 10

Actual Powerex Sale Price (2) Transfer Price (DJMC) (3)

Page 2 - Illustration of Sales by BC Hydro to Powerex under the Transfer Pricing Agreement

Powerex Margin (5)

BCH Benefit vs. Threshold (4)

Price $/MWh

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

BC Hydro is presumed to develop a view of average forward market price BC Hydro sets Threshold Sale Price (1)

August 23, 2006 Alberta Coalition 11

BC Hydro View of average Forward Market Price BCH Threshold Purchase Price (1) BCH Threshold Sale Price (1) Powerex Sale Price (2, 4) Powerex Purchase Price (2, 4)

Page 3 - Illustration of Trade Transactions by Powerex

Powerex Margin (3)

Price $/MWh

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

August 23, 2006 Alberta Coalition 12

BC Hydro View of average Forward Market Price BCH Threshold Purchase Price (1) BCH Threshold Sale Price (1) Transfer Price (DJMC) (3) Actual Powerex Sale Price (2) Transfer Price (DJMC) (3) Actual Powerex Purchase Price (2) Powerex Margin (4) Powerex Margin (4)

BCH Benefit vs. Threshold (5) BCH Benefit vs. Threshold (5)

BCH Potential Trade Margin (5)

Price $/MWh

Page 4 - Illustration of Potential Trade Transactions by BC Hydro Under the Transfer Pricing Agreement

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

August 23, 2006 Alberta Coalition 13

Capacity Test

• BCTC Principle: “The principle of the capacity

test is that Network Customer may not use Network Economy at the same time it is making third party sales, unless it has adequate generation capacity to support exports independently of imports delivered using Network Economy.” (BCTC Response to AESO 1.9.1)

• Note: General agreement on use of capacity

test, significant issues remain on details.

August 23, 2006 Alberta Coalition 14

Utilization Test

• Needed since there is no incremental

charges associated with reserving Network Economy.

• Provides a consequence for over-

reserving.

August 23, 2006 Alberta Coalition 15

Enforcement - Penalties

• Greater of:

– 125% of maximum Short-Term PTP rate or; – Market differential for the period (AB & Mid C).

• Penalties doubled for repeated violations within

12 months.

• Penalty dollars compensate interrupted

participants where identifiable.

• Remaining penalty dollars used to reduce

charges of other Non-Firm PTP customers.

August 23, 2006 Alberta Coalition 16

Monitoring

• Reporting

– Usage – Parameters used in tariff

• TPA prices and volumes
• Officer Attestation
• Audits
• Review in 2 years.

August 23, 2006 Alberta Coalition Part 2 1

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

August 23, 2006 Alberta Coalition Part 2 2

Issues

• Differences in approach
• Economic principles
• leads to disagreement in Capacity and

Economic Test

• Need for Utilization test
• Use of TPA
• Penalties
• Monitoring

August 23, 2006 Alberta Coalition Part 2 3

Difference in Approach 1

Tests & Financial Penalties

BCH

Permit all

• ther uses

Prohibition

• n exports

AC

Examine Inappropriate Uses Examine Appropriate Uses

Examine uses that cause certain types

• f harm

August 23, 2006 Alberta Coalition Part 2 4

Difference in Approach 2: Issues with the Narrow Focus

• BCH’s limited focus on interrupted

schedules does not recognize:

– Interruptions to PTP (non-firm) Reservations for which schedules were not in place as yet. – PTP (non-firm) Reservations prohibited from being made due to “for Trade” Network Economy reservations. – PTP (non-firm) Reservations discouraged due to permitting use of Network Economy for Trade.

August 23, 2006 Alberta Coalition Part 2 5

Difference in Approach 3: Issues with Prohibition

• n Exports vs. Financial Penalties
• Financial penalties permit efficient use of

transmission but penalize the specific party for it’s inappropriate behavior. vs.

• Prohibitions cause inefficient use of the

transmission – highest value uses are

• prohibited. Transmission is used for lower

value uses. Collateral impacts occur due to prohibition.

August 23, 2006 Alberta Coalition Part 2 6

Efficiency Illustration

A. Low Priced Energy Market B. High Priced Energy Market C. Mid Price Energy Market

Lower Value Use Lower efficiency Highest Value Use Most efficiency

August 23, 2006 Alberta Coalition Part 2 7

Efficiency Illustration – Impact of Prohibition

A. Low Priced Energy Market B. High Priced Energy Market C. Mid Price Energy Market

Lower Value Use Lower efficiency Highest Value Use Most efficiency

August 23, 2006 Alberta Coalition Part 2 8

Economic Principles

• Recognize principle that lowest cost resources are used for

service of Network Load and remaining higher cost resources are used for Trade. (AC)

– Need to establish economic test and need to recognize exports on all interties in capacity test.

• r
• Assume all imports serve Network Load and all exports are

served by generation resources. (Inferred from BCH response to AC 1.9.1)

– No need for economic test and only need to recognize exports on “the other intertie”.

August 23, 2006 Alberta Coalition Part 2 9

BCH Response to AC 1.9.1

BC USA 500 MW Export 1000 MW Import

BCH interpretation:

• The 1000 MW import is serving

Network Load.

• The 500 MW export is served by

BCH generation.

• Network Load pays for the higher

cost of the full 1000 MW import, and

• Trade margins are inflated since

the export is assumed to be served by low cost generation.

• Network Economy permitted for

1000 MW.

G NL

August 23, 2006 Alberta Coalition Part 2 10

Customer Load should be served most economically

BC USA 500 MW Export 1000 MW Import

Prudent Interpretation:

• 500 MW of the import is serving

Network Load as well as 500 MW of BCH generation.

• 500 MW import is serving the

export.

• Network Load is served at the

lowest cost, and

• Trade margins are based on the

buy-sell transaction.

• Network Economy permitted for 500

MW.

G NL

August 23, 2006 Alberta Coalition Part 2 11

Need for Utilization Test

• Needed due to “free” nature of Network

Economy.

• r
• Not needed as there is no utilization

requirement for PTP.

• Not needed due to potential interruptions
• f imports through no fault of Network

Customer.

August 23, 2006 Alberta Coalition Part 2 12

Use of TPA

• Useful as it is for an independent purpose

and behavior is not expected to be materially altered to comply with Network Economy tests.

• r
• Not useful.

August 23, 2006 Alberta Coalition Part 2 13

Penalties

• Nominal charges

Or

• Material penalties designed to be a

deterrent for inappropriate behavior Or

• Prohibitions on use

August 23, 2006 Alberta Coalition Part 2 14

Monitoring

• Transparency through monitoring,

reporting and reviews to establish confidence in open non-discriminatory access.

• Requirements will differ according to

specifics of tests adopted.

August 23, 2006 Alberta Coalition Part 2 15

Questions ?

BC Hydro withdrawal Network Load Storage

BC Hydro withdrawal Network Load Storage Powerex deposit Powerex Import