Introduction:

In an October 29, 2008 Notice of Proposal to amend the Transmission System Code (the "TSC"), the Ontario Energy Board (the "OEB") has circulated a series of proposed amendments to the TSC that would provide for the establishment and funding of "enabler" lines or facilities – described in the Ontario Power Authority’s Integrated Power System Plan (the "IPSP") as dedicated radial transmission lines designed to connect clusters of renewable generation facilities. The IPSP is currently before the OEB, although the IPSP proceeding has been adjourned pending revisions arising out of a September, 2008 directive from the Minister of Energy and Infrastructure. The OEB notes that ten renewable resource clusters are identified in the IPSP, and that for three of these, the IPSP also describes the associated enabler lines.

As discussed below, the OEB is proposing a "Hybrid option", under which enabler facilities would be developed, built, operated and owned by a licensed transmitter. The costs associated with the enabler facilities would be pooled temporarily, and each generator would make a pro-rata capital contribution towards the cost of an enabler facility as and when it became ready to connect. Outstanding costs for any "unsubscribed" portions of an enabler facility would be included in the transmitter's rate base and be recovered from transmission ratepayers.

The OEB’s consideration of enabler lines arose as part of the OEB’s Transmission Connection Cost Responsibility Review. That process will address both load- and generation-related issues, but OEB staff, in a July 8, 2008 discussion paper, suggested that it would be appropriate to focus attention on enabler facilities. OEB staff suggested that re-examination and modification of the Board’s connection cost responsibility policies appears to be warranted only in relation to the connection of clusters of renewable resources that are (a) identified in an approved IPSP and (b) expected to be exploited by multiple proponents.

The connection provisions of the TSC are based in part on the principle that generators should be responsible for the costs of their connections to the transmission system. The issue being addressed by the OEB is one of co-ordination. In its Notice, the OEB discusses the staff findings that:

"…coordination among proponents within a renewable resource cluster will be difficult to achieve if left to the proponents themselves. To paraphrase and extend the Discussion Paper analysis: coordinated action would be required in advance of having secured the necessary agreements with the OPA for supply of the commodity if the transmission facilities are to be developed and built on a timely basis. This is because the lead times for transmission design, development, and construction are considerably longer than they are for generation investments. Multiple proponents who are otherwise unrelated would have to jointly carry out these activities as well as pursue all of the required regulatory approvals well in advance of having secured OPA supply contracts. This would present significant commercial uncertainties for the proponents as any of them that failed to gain an OPA supply contract would find their past investments in transmission development stranded.

On the other hand, if proponents obtained supply contracts before commencing transmission development, they would face significant transmission cost risk as their output price would be determined long before their transmission costs are known. While this risk might be mitigated by means of the OPA building greater flexibility into its supply contracts (for example by having a variable transmission cost component), the Board does not believe that this solution would be optimal as it would result in the transfer (and perhaps magnification) of the risk to the electricity customer."

Put simply, without some means of co-ordination among the proponents in a cluster, transmission connections may not be built in a timely manner because the commercial risk of constructing transmission infrastructure without contracts for the purchase of the generators’ output would be too high; if the infrastructure were built in advance but a proponent failed to receive a contract, its investment would be lost; or if the proponents waited until contracts were in place, those contracts may not adequately account for the cost of building the infrastructure.

The Options before the OEB:

The OEB considered four options presented by staff for dealing with the co-ordination issues:

  • The "status quo" option: Generators would remain responsible for the construction and cost of their own connections to the transmission system, including enabler facilities. The OEB noted that while this approach would involve the fewest regulatory steps, there were risks involved including the potential for a consolidated proponent to exercise market power by undersizing the enabler facility.
  • The "pooling" option: Enabler facilities would be developed, built, operated and owned by a licensed transmitter, and all costs associated with the enabler facilities would be included in the transmitter’s rate base and be recovered from transmission ratepayers. Generators would pay for their individual connections to an enabler facility. The OEB noted that having the transmitter construct the facilities would address the coordination problem, and allowing the facilities to be placed into the transmitter’s rate base would create strong incentives for the transmitter to proceed with the development of enabler facilities. However, the OEB observed that there was a risk of creating an uneven playing field between single generation proponents (who would still be responsible for 100% of their connection costs and would build those into procurement bids to the OPA) and clusters of proponents, who would not be responsible for those costs, and who could price their bids accordingly. The OEB also anticipated additional regulatory proceedings including leave to construct applications and rate applications that would have to take the enabler facilities into account when determining the transmitter’s rate base.
  • The "hybrid" option: "Under this option, enabler facilities would be developed, built, operated and owned by a licensed transmitter. The costs associated with the enabler facilities would be pooled temporarily. Each generator would make a pro-rata capital contribution towards the cost of an enabler facility as and when it became ready to connect, calculated as a share of the cost of the enabler facility equal to a generator’s capacity (defined as the generator’s nameplate capacity) as a share of the capacity of the enabler facility. Outstanding costs for any "unsubscribed" portions of an enabler facility would be included in the transmitter’s rate base and be recovered from transmission ratepayers." The OEB observed that this option would allow for a level playing field between single and multiple developers, as each would pay only its share of the connection costs. The OEB contemplated more regulatory steps than under the pooling option, as each developer would be subject to calculations of its proportionate share of the connection costs.
  • The "shared" option: "Under this option, enabler facilities would be developed, built, operated and owned by a licensed transmitter. However, unlike the "hybrid" option, generators that initially connect to the enabler facility would pay capital contributions representing the full cost of the enabler facility. Additional generators that subsequently connect to the enabler facility would also make a capital contribution, which would then be paid as a refund to the generators that connected earlier." The OEB observed that this option would not create the same rate base incentive for transmitters to build the enabler facilities (presumably because the full cost of the facilities would be paid back to the transmitter sooner). The OEB also contemplated additional complexities due to potential windfalls to the generators receiving refunds, where those generators incorporated the full connection costs into their contracts with the OPA. Recovering the windfall could require the renegotiation of OPA contracts.

The OEB recommends the Hybrid Option:

After reviewing the four options, the OEB confirmed its selection of the Hybrid option as the basis for its proposed amendments to the TSC. While transmitters will have the initial responsibility for constructing the enabler facilities, transmission customers will not ultimately bear their costs. When a generator connects its project to the enabler facilities, it will assume its share of the costs of those facilities and they will be taken out of the transmitter’s rate base. The OEB "believes that the hybrid option holds the greatest promise in terms of economic efficiency, regulatory predictability and administrative efficiency, and is accordingly the preferred approach." The OEB also reiterated its belief that "maintaining generator cost responsibility is appropriate for all generation connections, including enabler facilities associated with renewable resource clusters."

The proposed amendments to the TSC define enabler facilities and renewable resource clusters, and establish the requirements related to cost recovery by transmitters with respect to the construction of the enabler facilities, including the timing of contributions by generators whose projects form part of renewable resource clusters and the posting of security deposits by those generators.

Opportunity to comment on proposed amendments:

The OEB’s Notice is available on the OEB’s web site, at:

http://www.oeb.gov.on.ca/OEB/_Documents/EB-2008-0003/Notice_of_Proposed_Amendments_APPX_20081029.pdf

The Notice invites interested parties to comment on the proposed amendments to the TSC by December 1, 2008.