OEB Releases Discussion Paper on Transmission Facilities Filing Guidelines

November 14, 2005

Earlier this year, when the Ontario Energy Board (the OEB) considered Hydro One Networks' application for approval of transmission facility upgrades in the Niagara Peninsula, a debate emerged about the basis upon which the Board should evaluate the costs and benefits of transmission infrastructure investments. Subsequently, the OEB commenced a process to develop filing requirements for transmission infrastructure investments, and on October 14, 2005 Board staff issued a discussion paper presenting a potential test for evaluating transmission investments.

Cost/Benefit Analysis

In its discussion paper, Board staff puts forward a cost/benefit analysis framework that would be used to evaluate and rank transmission investment proposals compared to alternatives, in order to ensure that applicants offer "the most efficient transmission upgrade." Such a framework would include the principle of maximizing prospective total benefits over total costs.

The proposed test distinguishes between transmission investments connecting generation or load facilities (radial lines) and "deeper" grid (network) investments. For a radial connection proposal, the test would first ask whether the facility investment would have a "significant impact on system efficiency and/or reliability." If it would not, the Board would evaluate the leave-to-construct application in accordance with the Transmission System Code. If, however, a radial connection would have a significant impact, the discussion paper proposes that a cost/benefit test be required.

The discussion paper also distinguishes network investments required to meet minimum reliability standards from other kinds of network investments. In the case of the former, a least-cost test might be acceptable. Other network upgrades would require analysis under a cost/benefit test.

Quantifying Reliability Benefits

In large part, the discussion paper attempts to create a cost/benefit approach that would quantify the reliability benefits offered by an investment. Board staff regard traditional reliability standards as too deterministic to evaluate transmission upgrades, potentially giving undue weight to large, but low probability, events and resulting in uneconomic overbuilding of the transmission network. As an alternative, Board staff propose a "probabilistic" standard so that only transmission investments that have a positive net benefit would be approved. Under a probabilistic approach, the Board would review data regarding the amount of unserved energy (i.e. lost load) arising from a specified contingency event, the value of unserved energy to the consumers experiencing loss of service, and the probability/frequency of contingency events. By explicitly valuing unserved energy, a probabilistic approach would allow reliability investments to be evaluated just as economic investments are evaluated.

Market Benefit

Where a proposed investment is necessitated solely by the inability to meet the minimum network performance requirements set out in the Transmission System Code or other relevant documents, Board staff considers that the investment would satisfy the cost/benefit test if it maximizes the expected net present value of the market benefit (the present value of the market benefit less the present value of cost) or minimizes the present value of costs, compared with a number of alternative options in a majority of reasonable scenarios. In all other cases, the proposed investment would have to maximize the expected net present value of the market benefit compared with a number of alternative options and the expected net present value of the proposed investment would need to be greater than zero. Market benefit would mean the total benefits of a proposed investment (or alternative option) to all those who produce, distribute and consume electricity in the Ontario electricity market. An assessment of the market benefit would include considering a number of possible benefits, including reductions in fuel consumption arising through different generation dispatch, reductions in the cost of demand site management, reductions in the value of involuntary load shedding and competition benefits.

Alternative Projects

Board staff acknowledges that some limit should be placed on the number of alternative projects considered as part of the cost/benefit analysis for any proposed investment. Only proposed investments that are technically and-for projects not required to meet reliability standards-commercially feasible should be considered alternatives to a proposed investment. They should also represent true alternatives, in the sense of being projects that would not be developed if the proposed investment or another alternative proceeded. Alternative projects would not have to be transmission projects, but could include distributed generation, distribution network enhancement and demand-side management.

Future System Conditions

Board staff also rejects assessing transmission investments based only on assumptions of average future system conditions. Since this could significantly underestimate or overestimate the net benefit of a project, Board staff proposes that the value of a transmission investment should be evaluated over a range of possible future system conditions or scenarios, to ensure the investment maximizes the public benefit. Scenarios would range from those likely to occur to those that have only an extremely remote likelihood of occurring. Board staff proposes that such modeling should take into account a range of reasonable market-development scenarios, including committed projects, anticipated projects and modeled projects.

Next Steps

The Board has now selected members of the technical advisory team. After considering the input of the team on the conceptual and practical merits of the potential cost/benefit test, the Board plans to develop a draft test and draft filing requirements for public comment, after which the Board will finalize the filing requirements.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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