CLEAN ENERGY Association of BC BC Hydro WANETA 2017 Transaction - - PowerPoint PPT Presentation

CLEAN ENERGY Association of BC

BC Hydro WANETA 2017 Transaction CEABC Oral Argument 2018-04-19

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BC HYDRO WANETA 2017 TRANSACTION

EXHIBIT

The Waneta generation profile

• Waneta generation is dominated by freshet

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The Waneta generation profile

• The stream flow data dictates that Waneta’s

generation is dominated by the freshet season

• There is no storage to mitigate or reshape the

natural freshet bias

• The BCUC has approved a pilot spring freshet rate

in an attempt to reduce the system wide freshet problem

• Waneta does not contribute to system storage

and shaping capabilities

• It is a net consumer of shaping resources

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WANETA 2017 Transaction

• CEABC has two primary concerns

Two key assumptions that need to be challenged: – An excessively low cost of capital that fails to recognize an appropriate rate of return on equity – An excessively high long run marginal cost (“LRMC”) that needs to be realigned with current market prices and price trends for clean energy alternatives

• And a number of secondary issues:

– The basic 40-year structure requires impossible forecasting – The likelihood of significant additional sustaining capital – The likelihood of $200 million to protect against PMF – The presence of toxic sediment in the reservoir – The heavy freshet flows in the absence of any storage

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More detail re the primary issues

• Present Value analysis uses an excessively low

discount rate

– PV analysis assumes 4% interest for 40 years – Blends 4% interest with after-tax equity rate 8.75% – BC Hydro is not taxable – Should be using the pre-tax equity rate 11.84%

• Rate Impact analysis assumes zero return on

equity (i.e. no payments to the shareholder), and 100% debt at 3.4% for 40 years

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From the F17-F19 RRA Decision (Order G-47-18) page 92 and page 100

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From the F17-F19 RRA Exhibit B-15

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From the F17-F19 RRA Exhibit B-15

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From the F17-F19 RRA Exhibit B-15

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Impact of Discount Rate on PV analysis

• Using the proper pre-tax rate for equity yields

a 7% Discount Rate to replace the 6% rate.

• BC Hydro recalculated the PVs in Table 8

– (Exhibit B-18-4, BCH response to CEABC IR 2.28.1)

– LRMC (Clean) PV fell by $464 million – LRMC (Clean+Gas) PV fell by $391 million – PVs of other four scenarios all become negative

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Impact of higher cost of capital on Rate Impact analysis

• Incremental rate impact shifts above zero
• i.e. using the proper pre-tax return on equity,

the Transaction now shows a rate increase in the early years, rather than a rate reduction

• The apparent rate reduction in post-lease

period is entirely due to the excessively high LRMC

1Bloomberg New Energy Finance

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Impact of higher cost of capital on Rate Impact analysis

• Incremental rate impact shifts above zero
• Dramatic decline in F39 entirely due to excessively high LRMC

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Key Assumption #2 excessively high LRMC is out of line with market prices

• BC Hydro recalculated Table 8 Present Values

– (Exhibit B-18-4, BCH response to CEABC IR 2.28.3)

• Using a $45 energy LRMC based on the recent

market prices from Alberta

• LRMC (Clean) and LRMC (Clean + Gas) scenarios

reduced by $503 million and $524 million

• This $500 million reduction combines with the

$400 million reduction from correcting the return

• n equity to a pre-tax rate
• The original $887 and $662 Present Values are

effectively reduced to ZERO or NEGATIVE

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Impact of reducing excessively high energy LRMC to align with market prices

• PV reductions of $503 and $524 million for the

LRMC (Clean) and LRMC (Clean + Gas) scenarios

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More detail re secondary issues

• The basic 40-year structure is requiring us to make

impossible forecasts

– Interest rates, e.g. 3.4% interest for 40 years and ZERO return on equity for 40 years – Load forecasts looking forward 20 or 30 years, when 5 year forecasts already seem impossible – Market prices looking forward 20 and 30 years, in an environment of rapid technological change – We’re being asked to make a huge wager in present dollars, based on notoriously unreliable projections – It’s like pre-building an asset 20-30 years in advance of the need – not a certain need but only the conjecture of a need, based on highly unreliable forecasts

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From Exhibit B-24, response to Panel IR 1.1.1

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More detail re secondary issues

• The likelihood that significant additional

sustaining or life-extending capital will be needed

– Teck is unlikely to agree to pay more than estimates for the first 20 years of “Good Utility Practice” – Yet BC Hydro will want to spend the estimates for “Life-extending Leading Utility Practice” – Any difference will be BC Hydro’s responsibility

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More detail re secondary issues

• The likelihood that an additional $200 million

will be required to protect against dam

• vertopping in the event of the Probable

Maximum Flood

– The dam can potentially be overtopped by 2 m – The upstream dams can pass the PMF – BC Hydro’s estimate is $200 million might be needed in year 21 if safety standards then require it

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More detail re secondary issues

• The possibility that the toxic sediment will have

to be removed from the reservoir

– This would be necessary in order to do work on the dam or spillway – “The Remediation Covenant does not cover contaminated sediment in the reservoir as it cannot be solely attributed to Teck.” (Exhibit B-1-5, p 3)

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More detail re secondary issues

• Waneta generation is heavily biased to the

freshet period and there is no storage to mitigate or reshape the natural stream flows

– BC Hydro is using other system resources to smooth and reshape the natural generation profile – Waneta is not contributing to system storage or shaping capabilities – Instead, Waneta is consuming this capability – There’s a potential unacknowledged cost for this reshaping – e.g. if the CPA expires or becomes redundant

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Freshet dominated generation consumes system shaping capability

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Thank you for your time.

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