Canada: Energy @ Gowlings – April 2006

Edited by Paul Harricks

Contents

• BC Hydro Open Call for Power Successful - By Henry Ellis

• Ontario Budget and the Electricity Sector - By Tim Wach

• Ontario IESO Releases 18-Month Outlook - By Michael Morrison

• National Energy Board Releases Report on Emerging Electricity Generation Technologies - By Peter Murphy

• OEB Proposes Methodology for Calculating Payments to OPG - By Michael Morrison

• Ontario's Forward Electricity Auction - Phase 2 - By Michael Morrison

• Many EU Member States not in Compliance With Community Legislation - By Michael Morrison

BC Hydro Open Call for Power Successful

BC Hydro announced on April 11, 2006 that it received bids for 53 separate projects from 37 independent power producers in response to its 2006 Open Call for Power.

The F2006 Open Call for Power was issued in December, 2005 with a tender closing date of April 7, 2006. The call was for 2,500 GWh per year of firm energy, which is the largest request for electricity procurement to date. The large size of the call is attributable to the fact that in each of the past five years, British Columbia has been a net importer of electricity. Based on current demand forecasts, BC Hydro has estimated that BC could be importing as much as 45% of its electricity within 20 years.

The projects submitted covered the gamut of run-of-river hydro, hydro with storage, biomass, wind, coal and waste heat, representing approximately 6,500 GWh. Tender criteria included a preference for BC clean power, price and other factors. Notice of awarded electricity purchase agreements is scheduled for August 4, 2006.

A successful conclusion of this call for power is essential for the credibility of BC Hydro. In June, 2005, BC Hydro cancelled the Vancouver Island Call for Tenders and abandoned the proposed Duke Point Power Project due to continuing legal appeals, which BC Hydro stated created a risk that the plant would not be built in time.

Ontario Budget and the Electricity Sector

Before the release of the Ontario Budget of March 23, 2006 indications had been that the Ontario Government would include policy proposals aimed at resolving, at least in part, the significant impediment that the so-called transfer tax and payments in lieu of taxes (or PILs) impose to transactions in the municipal electricity utility (MEU) sector. Unfortunately, although not completely surprisingly, the Budget did not include any policy proposals in this regard. Rather, all that was included were two very technical changes to the transfer tax and PILs regimes that address narrow technical issues, but do not represent a change or development of policy.

The two proposals included in the Budget are the following.

Transfer tax is a 33 per cent tax paid by a municipality or MEU that sells or transfers electricity assets. Transfer tax is intended to be a one-time tax on the sale of such assets. However, transfer tax can be payable repeatedly, or in a "cascading manner", in some circumstances. For example, if a municipality or MEU sells electricity assets and pays transfer tax on that sale, and then deploys its after-tax proceeds from the sale to acquire other electricity assets, transfer tax may be payable again on the subsequent sale of the second set of assets. The effect is a "cascading" of tax on the proceeds of the first sale.

The Electricity Act, 1998 authorizes the Minister of Finance to set rules to relieve this "cascading" of transfer tax. The Budget indicates that the Government has developed rules that would allow for the refund of transfer tax where the proceeds of a transfer are reinvested in other eligible electricity assets. A draft regulation setting out the proposed rules will be posted on the Ministry of Finance website for industry comment with a view to finalizing the proposals in the summer of 2006.

The Electricity Act, 1998 requires an MEU that is exempt from federal or Ontario corporate income tax to make payments-in-lieu equal to the amount of tax it would be liable to pay if it were not exempt. The computation of PILs is done, essentially, pursuant to the rules for the computation of federal and Ontario corporate income taxes. Under both the federal and Ontario corporate income tax regimes, corporations are allowed to deduct donations made to a municipality. The Government apparently has identified a concern where MEUs could make a donation to its municipal shareholder, which donation would be deductible in computing PILs liability for the MEU, rather than pay an after-PIL dividend to the municipality.

The Budget proposes that MEUs not be allowed to deduct the value of gifts made to an Ontario municipality on or after March 23, 2006.

In summary, no changes to the policy behind, or general application of, the transfer tax and PILs regimes were announced in the Budget. Accordingly, these taxes will continue to act as deterrents to transactions in the MEU sector.

Ontario IESO Releases 18-Month Outlook

Ontario's Independent Electricity System Operator (IESO) has released its 18-month Outlook for the period from April 2006 to September 2007. Compared to the summer of 2005, the Outlook shows an improvement in reliability due to additions to the generation and transmission capacity and planned market enhancements during the first half of 2006.

Since the summer of 2005, there has been more then 600 MW of new supply come on stream (515 MW at the Pickering Nuclear Generation Station and 117 MW at the Greater Toronto Airport Authority gas fired co-generation unit). The government has also decided to proceed with the 550 MW Portlands Energy Centre (PEC), located on the east side of downtown Toronto of which 330 MW is anticipated to be in service no later then the summer of 2008.

A second auto-transformer came into service during the fall of 2005 at the Parkway Transformer Station as well as enhancements to the transmission grid at the Essa, Cherrywood and Trafalgar Transformer Stations. These enhancements will help to reduce the transmission load levels, which are at or near capacity in many areas, in the western Greater Toronto Area (GTA). An additional 485 MW of generation capacity, from the first phase of the Goreway generation station, is expected to be placed into service by the summer of 2007 bringing much needed supply to the western GTA.

Improvements, both completed and ongoing, have been made to the transmission system between the Niagara and Hamilton-Burlington regions. These improvements, along with improvements in eastern Ontario, will help to improve reliability in the GTA during the summer of 2006.

As a result of the many challenges that were faced in maintaining system reliability during the summer of 2005, the IESO has undertaken a number of initiatives including:

• a Day Ahead Commitment Process which is expected to reduce the failure of import transactions in real time and increase commitment certainty for both domestic and out of province generators; and
• an Emergency Load Reduction Program which will reduce consumption when required for reliability by providing incentives to loads to reduce their energy usage under stressed system conditions.

The IESO has also adjusted its methods for projecting peak demand and hydroelectric capability to "more accurately forecast expected circumstances, particularly over peak periods, allowing participants to better develop their operational plans."

The IESO is forecasting demand similar to previous forecasts with the summer demand exhibiting a growth of about 300 MW per year. Energy demand for 2006 is expect to be about 156.4 TWH which is an increase of 1.1 percent over the weather corrected demand for 2005. The following chart summarizes the forecast peak demands.

National Energy Board Releases Report on Emerging Electricity Generation Technologies

The National Energy Board (NEB) has released "Emerging Technologies in Electricity Generation", a detailed report assessing renewable and other emerging electricity generation technologies that are of increasing importance to Canada. The report contains a discussion of the status and prospects for these emerging technologies and sets out regional perspectives on renewable generation from across Canada.

Specifically, the report deals with windpower, biomass, small hydro, geothermal energy, fuel cells, solar cells, ocean energy and clean coal generation technologies. The report also addresses demand side management as an additional "source" of electrical energy through savings.

In preparing the report, the NEB consulted a broad group of about 50 organizations involved in the electricity industry. The report sets out the following key observations:

• Governments have a tendency to support the traditional sources of generation.

• There is relatively low utilization of emerging technologies in the generation of electricity in Canada.

• A number of mechanisms currently promote the development of emerging generation technologies including request for proposals and expressions of interest, renewable portfolio standards, standard offer contracts, net metering, power production incentives and tax incentives.

• Barriers constrain the development of these emerging technologies, in particular access to the transmission grid can be a significant problem.

• Demand management has the potential to make immediate and substantial savings for Canadians.

The report concludes with the following recommendations:

1. Clear and consistent rules for access to the power transmission grid should be adopted such that emerging technologies can connect to transmission.
2. Timelines for regulatory approvals should be clear and application requirements should be commensurate with the size and scope of the particular proposed renewable generation project.
3. Support of emerging technology research should continue.
4. Interprovincial solutions such as emissions credit trading should be encouraged in order to capture synergies.
5. Financial incentives, such as the Wind Power Production Incentive, should continue and, where possible, should be better focussed to benefit the various stages of technology development.
6. Electricity prices should be allowed to more closely reflect current market conditions.
7. Price guarantees should be given to electricity generated from emerging technologies.

While much of the report will not be new information to regular readers of Energy @ Gowlings, it is impressive in its depth and broad scope. The report serves as a snapshot of the state of emerging power generation technology utilization in Canada and sets out a path for the future.

The NEB's Emerging Technologies in Electricity Generation can be found at:
http://www.neb-one.gc.ca/energy/EnergyReports/EMAEmergingTechnologiesElectricity2006_e.pdf.

OEB Proposes Methodology for Calculating Payments to OPG

Under Section 78.1 of the Ontario Energy Board Act, the Ontario Energy Board (OEB) will determine the amount of the payments that are to be made to Ontario Power Generation Inc. (OPG) for the generation of electricity for certain prescribed facilities. April 1, 2008 is the date on which the OEB's authority to determine those payments begins. These facilities include:

• Pickering Nuclear Generating Station;

• Darlington Nuclear Generating Station;

• Sir Adam Beck I:

• Sir Adam Beck II;

• Sir Adam Beck Pumped Generating Station;

• De Cew Falls I;

• De Cew Falls II; and

• R. H. Saunders.

The OEB is proposing a two-stage approach. Stage 1 is for research. The OEB will be issuing the first draft of a discussion paper by the end of April 2006. This paper will "discuss various alternative approaches to and recommendations for setting prices for the prescribed facilities." John Zych, OEB Board Secretary notes that, "the Board will post the draft discussion paper on its web site and solicit stakeholder comment on it through informal processes such as one-on-one or small group meetings."

A second draft discussion paper will be issued, again via the OEB's web site, in early June 2006. Informal consultations with stakeholders will continue to be held by the OEB. During late June 2006, the final report will be posted on the OEB's web site with stakeholders being invited to submit written comments. The OEB will also provide the opportunity for stakeholders to "make reply or responding submissions."

The second stage of the process, during the summer of 2006, will determine the methodology to be employed in determine the pricing. "The Board will provide guidance on the methodology by which payment amounts for the output of the prescribed generation facilities will be determined, based on a consideration of Board staff's discussion paper and any written comments received on that document." During August 2006, guidelines will be issued "based on the Board's determination on the regulatory price-setting methodology. Board staff will issue draft filling guidelines to provide direction to OPG in the preparation of a filing."

When the two-stage consultation process has ended, the OEB will hold a hearing on the application that will be filed by OPG based on the filing guidelines.

Ontario's Forward Electricity Auction – Phase 2

On April 19, 2006, the Ontario Power Authority (OPA) held the second forward electricity auction. The first auction was held during February 2006. It was a wholesale auction with participants currently being registered as wholesale market participants with Ontario's Independent Electricity System Operator. Bruce Power and Ontario Power Generation supplied the electricity for phase 2 of the auction.

The following summarizes the activity in the phase 2 auction:

• 2, 754,720 MWhs of Calendar volumes sold (525,960 MWhs sold in phase 1);

• 4,383,000 MWhs of Term volume sold (5,259,600 MWhs sold in phase 1);

• 7,137,720 of Total Volume sold (5,785,560 MWhs sold in phase 1); and

• $523.6 million worth of electricity sold ($425 million sold in phase 1).

There were 17 qualified buyers comprising a mix of marketers and industrial and commercial end users for the phase 2 auction versus 15 qualified buyers for phase 1. The average price of the electricity sold in phase 2 was $73.36 versus $73.71 in phase 1. The following table summarizes the pricing for each product.

Many EU Member States not in Compliance With Community Legislation

The European Union (EU) has enacted legislation that gives natural gas and electricity consumers the ability to shop freely for their energy supply (Gas directive 2003/55/EC, Regulation 1775/2005 and Electricity directive 2003/54/EC and Regulation 1228/2003). Consumers are to have this ability from July 2007, at the latest. To ensure that this ability is consistent in all EU member states, each country is to enact community legislation that would allow the open market for natural gas and electricity to develop. The European Commission (EC) has determined that many EU members have not passed the required community legislation.

Austria, Belgium, the Czech Republic, Germany, Estonia, Spain, Finland, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Sweden, Slovakia and the United Kingdom will receive letters of formal notice from the EC for failure to pass the required legislation. The EC is taking Spain and Luxembourg to the Court of Justice for failure to submit their national implementation measures. The EC continues to review whether the laws passed in Portugal and Hungary are in conformity with the legislation.

The EC plans to monitor the implementation of the legislation on a country-by-country basis. The EC will also carry out detailed examination of the legislation to determine if the basic laws adopted by each country reflect the gas and electricity directives. The EC notes that the EU legislation must properly be reflected in national legislation to enable the natural gas and electricity markets to open effectively by July 2007. The EC notes that touchstones to the legislation will be that consumers have the real opportunity to switch suppliers, new suppliers enter the marketplace with non-discriminatory access, independent regulators and the rights of the consumers must be protected.

In their recent review of the current status of each countries legislation, the EC noted the following concerns:

• The persistence of regulated prices putting obstacles in the path of market entrants;

• The lack of unbundling and insufficient separation between electricity and gas transmission and distribution operators to ensure independence;

• Discriminatory third-party access to networks;

• Insufficiently transparent tariffs;

• The powers of regulators with respect to setting tariffs for network access; and

• The preferential access given to certain long-standing electricity or natural gas contracts.

In a related development, the European Regulator's Group for Electricity and Gas (ERGEG) has announced their Gas Regional Initiative (GRI) made up of four regional energy market projects. The goal of the GRI is to "push forward, at a practical level, the development of regional markets in collaboration with industry, Member States, the European Commission and other stakeholders."

Issues such as improving the way in which gas is traded, at and between hubs, transparency/information provisions and access to networks will be reviewed. The following table listed the initial geographic scope of the regional gas markets.

The issues being tackled under the GRI are similar to the many issues tackled by the Market Design Task Force that the Ontario Energy Board (OEB) initiated. Michael Morrison, Gowlings National Energy and Infrastructure Industry Group Manager, was appointed as a member of the OEB's Market Design Task Force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.