Newfoundland Power Inc. Energy Plan Submission February 28, 2006

Transcription

1 Newfoundland Power Inc. Energy Plan Submission February 28, 2006

2 Energy Plan Submission Table of Contents Executive Summary...1 Introduction...2 Provincial Electricity Industry...2 Overview of Newfoundland Power...3 Commitment to Customers...4 Strategic Considerations...6 Industry Structure and Efficiencies...7 Generation...8 Alternative Energy Sources...9 Conservation and Demand Management (CDM)...10 Response to CDM...11 Rate Design...13 Regulation...14 Human Resource Challenges...15 Recommendations...16 List of Appendices Appendix A Current Generation by Source Appendix B Electric Space Heating Market Share Appendix C Comparison of Electricity Rates Appendix D Newfoundland Power Capital Investments Appendix E Newfoundland Power s Awards Appendix F Island Electricity System Costs Appendix G Hydroelectric Development and the Environment Appendix H Canadian Wind Energy Capacity Appendix I Conservation and Demand Management Appendix J Wholesale Rate Structure Appendix K Conservation and Demand Management Initiatives and Customer Response Appendix L Electricity Utility Rate Design Appendix M Performance Based Regulation Appendix N Human Resource Challenges Appendix O Glossary of Terms

3 Energy Plan Submission Executive Summary The electricity industry in the Province of Newfoundland and Labrador is in reasonably good shape compared to some other jurisdictions, and the performance of the electricity system is efficient and reliable. However, the opportunity for greater efficiencies in the structure of the electricity industry exists. There is currently duplication and overlap in the delivery of electricity and the provision of customer service, both of which have an impact on customer electricity rates in the province. Eliminating this duplication could reduce operating costs to benefit customers over the long term. System planning should be open and transparent to ensure that proposals for system additions are competitive and least cost. All types of generation should be considered but should only proceed if they effectively meet system demand needs. Current regulation has served the province well and customers have benefited from stable electricity rates that are the lowest in Atlantic Canada. There are many forms of regulation and rate options in use today in various jurisdictions that are worth considering but are only desirable if they provide the intended benefits for the people of this province. Both regulation and rate design must be jurisdiction specific to ensure that customers needs are appropriately met. Customers are interested in learning more about energy efficiency and the wise use of electricity. Conservation and Demand Management (CDM) programs have been available to customers in this province for a number of years and should continue to be promoted. Appropriate assessments of further CDM initiatives are required to determine whether the desired outcomes can be achieved. Safe, reliable and competitively priced electricity is an important component for economic development. The electricity industry also plays an important role in contributing to the creation of income and employment opportunities. Newfoundland Power s goal is to operate efficiently, reduce operating costs and keep electricity rates as low as reasonably possible for the benefit of its customers while improving reliability, safety, customer service and the environment, thereby helping attract economic development. The Company will continue to look for ways to improve overall system efficiency for the benefit of customers while earning a reasonable rate of return for its shareholders. Page 1

4 Energy Plan Submission Introduction Newfoundland Power supports the development of a long-term Energy Plan that will maximize benefits for the people of Newfoundland and Labrador. The Government of Newfoundland and Labrador (Government) is to be commended on its extensive review of the province s energy sector and the comprehensive Energy Plan Discussion Paper that has been developed. Newfoundland Power looks forward to working with Government to provide feedback and recommendations relating to the province s energy future throughout this process. Newfoundland Power s submission focuses on the electricity industry of the province s energy sector. The major objectives of the Energy Plan in relation to the electricity industry as outlined in the Discussion Paper in section 4.1 have been considered in Newfoundland Power s response. These are the key factors that are impacting and will continue to impact the electricity industry in the province. They are: securing future electricity supply; reviewing our regulatory regime and industry structure; balancing electricity costs and reliability; supporting economic development; and, protecting the environment. Provincial Electricity Industry The province is served by two electric utilities, Newfoundland and Labrador Hydro (Hydro) and Newfoundland Power. Hydro is a crown corporation primarily responsible for generation and transmission of electricity, in addition to serving approximately 35,000 residential and commercial customers in rural areas on the island and throughout Labrador. Newfoundland Power is an investor-owned utility which operates an integrated distribution system throughout the island portion of the province along with related transmission and generation facilities, and serves more than 227,000 customers. The province has 7,427 megawatts (MW) of electricity generating capacity, with 2,524 MW available to meet demand in the province. Of this available capacity, 1,917 MW (excluding isolated systems) is located on the island portion of the province 1 (see Appendix A). The electricity system in the province is unique with the following characteristics that present significant challenges: it is an isolated, stand-alone electricity system that is not connected to the North American electricity grid and must therefore be self-sufficient; the small size of the system means that what works in larger systems elsewhere may not apply in this province; 1 Developing an Energy Plan for Newfoundland and Labrador, Public Discussion Paper, November 2005 Page 2

5 Energy Plan Submission according to Environment Canada, the province experiences some of the harshest weather conditions in North America, and a significant amount of infrastructure is located along the coastline and is subject to high winds, salt spray and ice; customers are widely dispersed across the province; and, many customers heat their homes electrically (see Appendix B) which makes system management challenging due to the seasonal variations with this type of usage. Electricity sales on the island are expected to grow, on average, at 1.4% per year through 2010 and the number of customers is expected to grow at just under 1% per year over the same period. This may be further reduced by the impact of CDM initiatives. Cost management is critical given this low-growth environment. In the absence of a new industrial customer of significant size entering the market, generating capacity on the island is expected to continue to meet demand until at least 2011, when adjusted to reflect the recent closure of the Abitibi Consolidated mill in Stephenville. Since 2002, electricity rates for customers have risen over 20%. These rate increases have been driven by increases in generation costs, including rising fuel costs, and can be expected to continue to rise. Hydro generates between 30% and 40% of its annual energy requirements at its large oil-fired generating facility at Holyrood. The price of oil has been rising steadily over the past number of years, which has impacted Hydro s cost of producing electricity. It is worthy to note that the Newfoundland and Labrador market is not different from the rest of Canada in terms of upward pressures on rates resulting from generation costs. Rising fuel costs are affecting most utilities. Overview of Newfoundland Power Newfoundland Power has a long history of serving the people of this province with safe, reliable electricity in the most cost-efficient manner possible, and has contributed significantly to the social and economic well-being of the province. The Company serves approximately 85% of all electricity customers in the province and currently employs about 600 skilled women and men. Newfoundland Power has more than 120 years experience in the electricity industry in the province and has more than 100 years experience with the planning, design, construction and operation of small hydroelectric developments which commenced with the construction of the Petty Harbour Hydroelectric Generating Plant in The most recent hydroelectric development was the 6 MW hydroelectric generating plant at Rose Blanche which was commissioned in Newfoundland Power: operates 23 hydroelectric generating plants, 3 diesel plants and 3 gas turbine facilities; operates 136 substations; Page 3

6 Energy Plan Submission maintains over 10,000 km of transmission (2,100 km) and distribution (8,300 km) lines; operates a state-of-the-art system control centre to monitor and control the electricity system; and, operates an innovative, multi-channel customer contact centre that responds to more than a half million customer calls a year. Newfoundland Power currently operates under traditional cost of service regulation and has a proven track record of being a low cost operator. As a result, residential electricity rates in the province are very competitive and are currently the lowest in Atlantic Canada (see Appendix C). Newfoundland Power s contribution to the price customers pay for electricity has decreased by approximately 1.5% over the past 10 years, without accounting for the impact of inflation. Commitment to Customers Newfoundland Power is committed to meeting customers expectations and delivering customer service excellence. Customers are surveyed on a quarterly basis and consistently say that reliability and price are the two most important considerations when it comes to their electricity service, with the relative importance of both changing depending on the prevailing circumstances at the time of the survey. Newfoundland Power s annual customer satisfaction rating is among the highest in the country. Customers have given the Company an annual customer satisfaction rating of at least 88% since 1999, achieving an annual rating of 89% in Such a high rating demonstrates that customer service expectations are being met. CUSTOMER SATISFACTION RATING 95% 90% 85% 80% 75% 70% 65% Page 4

7 Energy Plan Submission By seeking every opportunity to improve the efficiency of its business, Newfoundland Power has reduced operating cost per customer by approximately 30% in the past 10 years, on an inflation adjusted basis. OPERATING COST PER CUSTOMER $315 $300 $285 $270 $255 $240 $225 $ $ adjusted for inflation. Capital investment in the electricity system directly benefits Newfoundland Power s customers through enhanced reliability and reduced operating costs. Since 1997, capital expenditures of more than $460 million have been made to provide a high-quality electricity system (see Appendix D). The Company remains committed to investing in rural Newfoundland, even though the province is experiencing significant out-migration from these areas. Reliability performance continues to improve for customers despite harsh weather conditions. RELIABILITY (Number of Outages per Customer) * * Severe winter storm impacted results. Page 5

8 Energy Plan Submission Newfoundland Power s safety performance continues to be among the best in the Canadian electricity industry. In 2004, the Company was named as one of the best performing companies in Canada by the Canadian Electricity Association (CEA) for its commitment to employee safety. INJURY FREQUENCY RATE As responsible stewards of the environment, Newfoundland Power employs rigorous programs and processes to ensure that its employees act in an environmentally responsible manner in the delivery of service to its customers. The Company continues to meet ISO Environmental Management System standards for its Generation, Transmission and Distribution systems. Newfoundland Power also takes a leadership role in promoting environmental awareness and education in the community, and has received 6 environmental awards since 2000 (see Appendix E for a list of Newfoundland Power s recent awards). Strategic Considerations In Newfoundland Power s view, there are a number of strategic considerations regarding the electricity industry that require careful review and evaluation in the development of a sound Energy Plan. They include: the opportunity for greater efficiencies in the structure of the electricity industry; the establishment of an appropriate evaluation and selection process for new generation projects based on least cost, and the removal of the permanent moratorium on new, small hydroelectric generating projects; the utilization of sustainable, renewable resources in meeting future energy needs; the role of CDM over the long term; the opportunity to improve regulation to reflect a more efficient and cost-effective approach; and, the impact human resource challenges may have on the electricity industry. Page 6

9 Energy Plan Submission Industry Structure and Efficiencies In the simplest terms, there are essentially two aspects to the electricity industry supply and delivery. It is common for the electricity industry to be divided along functional lines generation (supply) and transmission and distribution (delivery). In the current structure, Hydro is the largest generator of electricity in the province, while Newfoundland Power is the largest provider of delivery services in the poles and wires business. The delivery of electricity is a natural monopoly and as such should be regulated, while the supply is not a natural monopoly and the need for regulation may not be the same. Currently, Newfoundland Power maintains and operates approximately 80% of all distribution support structures (poles and wires) and serves 85% of all customers in the province. The current industry structure contains duplication between Hydro and Newfoundland Power. Overlap exists in the delivery of energy over transmission and distribution lines, and the provision of customer service, both of which have an impact on customer electricity rates. The resources necessary to perform these functions are, to a significant degree, duplicated by Hydro for a much smaller group of assets and customers. A structure in which Hydro has responsibility for large generation, system planning, dispatch and control, and Newfoundland Power has responsibility for transmission and retail distribution service, would be more efficient. It would eliminate the inefficiencies inherent in the current structure and reduce the impact these costs have on electricity rates for customers. The construction and maintenance of transmission systems require much the same resources as the construction and maintenance of distribution systems. Material depots, technical and line staff, and transportation assets are required in constructing and maintaining poles and wires whether they are moving electricity at transmission or distribution voltage. The interaction with customers through a call centre and associated systems such as meter reading and customer billing are also duplicated for a smaller group of customers (Newfoundland Power 227,000 customers; Hydro 35,000 customers). By eliminating this duplication, operating costs could be reduced to benefit customers over the long term. In 2001, Newfoundland Power agreed to acquire most of the poles owned by Aliant Telecom Inc. in the province. The underlying rationale for this transaction was that Newfoundland Power could achieve lower costs, primarily through economies of scale available to a single owner. Newfoundland Power s customers have seen the direct benefit of this transaction through increased pole rental revenue which helps to offset electricity rates. The impact is approximately $4 million in lower costs over the 10 years of this agreement. Newfoundland Power also performs engineering services for Aliant and cable companies on a mutually cost-effective basis. Similar economies of scale are available with the remaining poles and wires in the province, particularly on the island portion of the province. Page 7

10 Energy Plan Submission Ownership of the assets does not have to be linked to system control, which would allow Hydro to maintain control of system planning and dispatch functions. For example, in Ontario, the Independent Electricity System Operator (IESO) is the system controller, forecasting how much electricity will be needed and advising generators how much power they can send into the province's interconnected grid of transmission lines. In New Brunswick, the Independent System Operator (ISO) is the system and market operator with no ownership interests in generation facilities. Removing the duplication in the delivery of electricity to customers that currently exists will provide operational efficiencies, reduce future regulatory costs and have a positive impact on keeping electricity rates as low as possible for customers. The sale of Hydro s transmission and distribution assets would also provide Government with capital to finance other priorities. Generation Generation costs account for approximately 60% of customers bills in Newfoundland and Labrador (see Appendix F). This is consistent with the Canadian experience. Given that price is one of customers most important considerations, future generation projects must be selected and managed prudently. Furthermore, new generation can be expected to cost more than existing generation. The large proportion of electricity costs related to generation and the high cost of new generation underscore the need to ensure that generation additions are least cost. If any generation project can satisfy the requirements of environmental acceptability, reliability and public safety, and is selected as being the most desirable project from a least cost perspective, then it should be considered. However, developments should proceed only if they effectively meet the system s demand needs. The generation selection process should be open to any proponent and to any generation technology. Generation diversity within the electricity grid minimizes the impact of variability in pricing, and is both technically and economically beneficial. The provincial Energy Plan should not prohibit any type of generation from being considered. In particular, a permanent moratorium on small hydroelectric developments is not warranted at this time and could result in increased future costs to electricity customers. The Energy Plan should include changes to current regulations that prohibit the development of renewable energy such as small hydroelectric generation. Newfoundland Power s 23 hydroelectric generating facilities are small; however, production costs are very low. These plants are located throughout Newfoundland Power s service territory, do not require full-time operators and assist in providing emergency energy supply. Hydro routinely calls on Newfoundland Power s hydroelectric production as part of its current system dispatch protocol. Page 8

11 Energy Plan Submission The island electricity system is isolated and therefore must be self-sufficient. Both demand and/or energy can drive additional generation requirements. The appropriate mix of generation technologies is dependent on circumstances that may change with the passage of time. Current forecasts of energy and demand requirements in the province suggest that growth will be slow for the foreseeable future. This fact, combined with the high cost of new generation sources relative to existing sources on the Island of Newfoundland, indicate that smaller projects may more economically match provincial energy growth. Smaller developments also carry less risk. Very large capital intensive projects relative to the size and future growth could impose significant upward pressures on electricity rates for customers. Smaller generation facilities can be strategically located, geographically, across the province to enhance reliability and also may provide greater opportunity for local engineering firms, contractors and suppliers to participate and develop expertise as opposed to projects of much larger size. Any electricity generation development will have environmental impacts. However, hydroelectric development, the environment and fish can co-exist. This has been demonstrated with the Rose Blanche and Granite Canal hydroelectric development projects (see Appendix G). Hydro has significant experience in system planning and should continue to perform this role. However, system planning guidelines that have the benefit of input from all significant stakeholders would be desirable to ensure both fair competition and appropriate system development. To attract the most competitive proposals for system additions, the system plan should be available publicly. The status of the plan and any material change in circumstances should be available through the publication of periodic reports (e.g., annually or biannually), as necessary. As part of the Energy Plan, the future of the aging, thermal generating plant at Holyrood needs to be considered. Increasing environmental standards may make Holyrood more expensive to operate and maintain which will make small hydroelectric and other renewable energy sources more attractive in the future. Alternative Energy Sources Alternative energy sources such as wind are likely to become more cost-effective with rising oil prices and technological advances. There is significant interest worldwide in increasing wind generating capacity. In 2006, the installed capacity of wind generation in Canada represented less than 1% of Canada s gross generation capacity (see Appendix H). The same Page 9

12 Energy Plan Submission is true in the United States. Denmark is the nation that generates the highest portion of its power from wind, with approximately 20% of its electricity coming from wind sources 2. Wind generation is becoming more viable compared to traditional generation methods as its economics become more competitive. Increased development of wind generation depends on a number of technical challenges. The most significant of these challenges is the fact that wind cannot be turned on at will. Wind must be blowing at appropriate speeds to produce electricity. As a result, wind cannot be fully relied upon to provide generation when a system requires it. While this situation can be aided by diversity of generation locations, the intermittent nature of wind presents particular challenges to our isolated island electricity system that need to be adequately considered. Newfoundland Power supports the exploration of the feasibility of wind energy development. The current expectation that wind has the technical potential to generate 10 to 15% of island energy is a reasonable starting point for this exploration. Using wind to replace thermal generation requires a careful, planned, phased-in approach. Newfoundland Power is engaged in this process and working with Hydro since many of the proposed sites are within Newfoundland Power s service territory and require connection to the Company s electricity system. All alternative sources of energy require detailed economic assessments to ensure they meet appropriate environmental, reliability and safety considerations, and to ensure that they are least cost. Appropriate regulatory regimes are also required to promote sustainable, least cost development. There are many other alternative energy sources and technologies that can be considered in the development of a comprehensive Energy Plan such as natural gas, tidal and other ocean related technologies, solar, hydrogen and biomass. However, given that Newfoundland and Labrador is a relatively small market with a low electricity sales growth rate, scale is a very important factor to consider when evaluating alternative energy sources and it is best to limit the number of alternative energy sources explored. Conservation and Demand Management (CDM) CDM has gained much interest both nationally and internationally. CDM refers to different means of influencing customers to change their use of electricity, thereby reducing demand or energy consumption that would otherwise have to be met through increased supply (see Appendix I). This interest is being driven by increasing consumption, rising fuel prices, increasing consideration of impacts on the environment and shortage of electricity supply. 2 The American Wind Energy Association, Global Wind Energy Market Report, March Page 10

13 Energy Plan Submission At the national level, public policy interest in CDM has increased markedly. Newfoundland Power is engaged, through its membership in the CEA, with other Canadian electric utilities and the federal government in sharing CDM experiences, determining the achievable potential for energy efficiency, and influencing national energy efficiency campaigns and programs. The direct impact of CDM initiatives on reducing generation needs has not yet been fully ascertained. CDM is a tool that can be utilized to impact electricity consumption, but it must be part of a broader approach that includes all stakeholders to effectively deal with electricity supply issues. Appropriate assessment of various CDM programs needs to be conducted to ensure desired outcomes are achievable before large amounts of money are invested. The utility should have a reasonable opportunity to recover the costs of delivering such programs either through direct recovery or incentives. Newfoundland Power has offered CDM programs for a number of years and has responded to customers interest in this area by offering information as well as rebate and financing programs to assist customers in managing their electricity consumption. In 2005, Newfoundland Power spent approximately $1 million on CDM activities. Customers place a high value on electricity, and behavior regarding the wise use of electricity can be difficult to influence as it often requires customers to change habits. Customer participation in energy efficiency practices is also impacted by the amount of customer investment required. Customers are more interested in simple, low cost initiatives such as buying compact fluorescent light bulbs. Customers require more information before they participate in initiatives that require a higher investment such as buying an ENERGY STAR appliance or insulating their basement. The higher the customer investment, and the higher the value placed on electricity by the customer, the more specific and tangible the benefits must be, and the more information customers require up front in making the decision. Response to CDM An incentive already exists for Newfoundland Power to reduce demand and energy usage in the form of a demand and energy wholesale rate structure. Purchased power is Newfoundland Power s largest single expense, representing over 60% of total revenue. In December 2004, the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB) ordered changes to the rate structure for Newfoundland Power s purchases of power from Hydro to be implemented in The new wholesale rate structure contains both an energy and a demand component. The new rate structure incents Newfoundland Power to reduce both demand and energy usage (see Appendix J). Page 11

14 Energy Plan Submission Although implementation is in its early phase, this wholesale rate structure is producing the desired results. On January 23, 2006, Newfoundland Power successfully implemented its demand management strategy when monitoring of the system indicated that a system peak would occur on that day. Newfoundland Power has taken a three-pronged approach to its demand management strategy. Demand reduction/curtailment in Newfoundland Power s buildings: the Company s 15 office and maintenance buildings across the province can be managed in order to reduce demand during peak times 4 of these 15 buildings have standby diesel generation available. By utilizing these generators during peak conditions, demand is reduced. Customer curtailable rates: the Company has successfully signed up 15 additional commercial customers by offering them an incentive if they reduce their demand during peak times. There are 22 customers currently taking advantage of curtailable rates, with a combined demand reduction of approximately10 MW. Optimizing voltage on the system: studying the relationship between electricity system voltages and peak demand through voltage optimization (controlling voltages can lower demand) has begun. Although this is new for Newfoundland and Labrador, it is a common practice across the country. Newfoundland Power s energy requirement is primarily that of its customers and to reduce energy usage requires influencing the actions of customers. Newfoundland Power has implemented a strategy that is aimed at informing, educating and assisting customers to get the most out of their energy dollar by using energy wisely (see Appendix K). Newfoundland Power has expanded its customer surveys to keep abreast of customer attitudes and usage of electricity. Many customers have already adopted energy efficiency actions. In June 2005, a customer survey indicated that 80% of those surveyed set back their thermostats and washed clothes in cold water, while 70% indicated that they line dry clothes. These actions, as well as many others that Newfoundland Power is actively promoting, provide tangible energy savings. Going forward, Newfoundland Power s focus regarding CDM will be on: continuing its existing programs that have supported customer conservation efforts; expanding programs if appropriate assessment indicate they would be beneficial; expanding its peak load management efforts; expanding its customer education awareness programs; and, establishing communications and support for other agencies involved in promoting conservation efforts. Page 12

15 Energy Plan Submission Rate Design Newfoundland Power provides service to its customers utilizing rate structures which are the most common form of rate design used in North America (see Appendix L). These rate structures contain prices that generally do not vary by season or time of day. Some utilities provide rate options to customers as part of their demand management efforts. The objective of these rate options is to either lower peak demand, or shift it from peak to off-peak times. The associated savings are realized from deferring the requirement to build additional electricity generation plants, and transmission and distribution lines to serve peak demand. Time of use (time of day and/or seasonal) and curtailable rates are the most common rate options. However, what works in other jurisdictions may not work here. The National Energy Board said in a review released February 23, 2006, that Across Canada, no two provinces or territories have equivalent rate-making structures or tariff regimes in place. On the island portion of the province, the cost of supplying additional demand does not vary throughout the day as the cost is generally equal to the cost of production at the Holyrood thermal generating station. On larger interconnected systems, the use of different generation sources as demand varies result in the cost of supply varying throughout the day. This creates a case for time of day rates in many jurisdictions that does not exist here. One of the objectives of alternative rates is to provide customers with realistic and practical options. In many jurisdictions where time of day rates are available, only a small percentage of customers have taken advantage of these rates. The basis for establishing pricing for alternative rate options is the marginal cost of the next kilowatt of generation on the system. The potential for offering time of use rates in this province was first evaluated in 1984 at which time it was concluded that mandatory time of day rates would not be expected to provide material overall benefits to the system. The high cost of implementation due to the required replacement of existing metering systems played a role in the conclusions of the study. Newfoundland Power currently has a curtailable rate option available to large general service customers that was implemented in The curtailable rate option provides an annual payment to customers who reduce their demand requirements from the system during peak periods, at the Company s request. There are currently 22 customers who avail of the curtailable rate option providing approximately 10 MW of on-peak demand reductions. In 1997 Newfoundland Power conducted a study of potential alternative rate designs. The marginal cost estimates used to design the potential rates was developed without the benefit of Hydro s participation. As discussed in Appendix L, this process is proceeding with Hydro currently conducting a marginal cost study which will be submitted to the PUB by June 30, Upon Hydro s completion of its 2006 Marginal Cost Study, Newfoundland Power expects to conduct a further review of alternative rate options and the potential benefits to Page 13

16 Energy Plan Submission customers on the Island Interconnected System. At this time, it is premature to anticipate what rate options should be offered to customers. The implementation of alternative rate options on a large scale can have implications for all customers. The potential impact on customers and overall rates must be evaluated properly before appropriate rate design decisions can be made. Regulation Regulation in this province has been stable, has worked well and is currently moving in the right direction. Under the existing system, customers have benefited from improved operating efficiencies, enhanced reliability, customer service excellence and environmental diligence. A continued focus by all stakeholders on more efficient and cost-effective regulatory processes will best reduce the scope and complexity of regulatory hearings and would be beneficial for customers. For example, a recent initiative by the PUB to negotiate settlements rather than litigate resolution has been a very positive development in enhancing the efficiency of the regulatory process. There are other alternatives to the existing traditional cost of service regulation currently used in Newfoundland and Labrador. One alternative is Performance Based Regulation (PBR) (see Appendix M). There is no common definition of PBR and many different variations exist depending on the specific needs of the jurisdiction in which it is being used. Whatever form it takes, the goal of PBR is to incent utilities to become more efficient by allowing them to share in efficiency gains. Goals of PBR include lower costs and improved service, and can also include aspects such as incenting CDM and increasing the time between major regulatory hearings. PBR has had very limited use in Canada. The province s current cost of service regulation provides strong incentives for cost reduction, service improvement and energy efficiency. Some of the characteristics of a PBR system, such as the use of an automatic adjustment formula to set electricity rates and a range of return on rate base, already act as an incentive to improve efficiencies under current regulation in this province. In Newfoundland Power s last General Rate Order No. P.U. 19 (2003), the PUB described the range of return on rate base as follows: In the Board s view the range of return on rate base can act as an incentive device to encourage NP to seek efficiencies between rate hearings, which can then be passed on to customers. This is evidenced in the operational efficiencies and cost savings that have been implemented by NP since the last rate hearing in (page 76) Page 14

17 Energy Plan Submission This incentive environment resulted in Newfoundland Power reducing operating costs per customer by 30% over the past 10 years, on an inflation adjusted basis. In addition, Newfoundland Power s customers received the full benefit of rebates totalling approximately $7.5 million since The fundamental question that must be answered for Newfoundland and Labrador is whether PBR would be a superior regulatory approach when compared to the existing regulatory incentive structure. Under the current system, Newfoundland Power has managed its business in a manner that has provided customers with the benefit of: decreased operating costs per customer; improved reliability; improved safety; improved customer service; improved environmental performance; targeted CDM programs and energy efficiency information; and, electricity rates that are the lowest in Atlantic Canada. PBR may present opportunities for the electricity industry in Newfoundland and Labrador; however it needs to be explored further and completely understood first. It is important to recognize that whatever form PBR takes, it must be jurisdiction specific. Should a move to PBR be contemplated, it would be best considered with a full understanding of all of the aspects associated with rate setting in Newfoundland and Labrador. Any move to change to PBR regulation should be approached with caution. Changes from the current regulatory system need to be assessed to ensure that the change will result in better regulation rather than just a different form of regulation. Human Resource Challenges The skills required by the electricity industry are more challenging than many other industries. In 2004, CEA partnered with Human Resources and Skills Development Canada in a comprehensive study which provided an overview of the human resource challenges for the Canadian electricity industry. Appendix N outlines these key challenges as well as Newfoundland Power s workforce management approach which is focused on mitigating these challenges. In order to minimize the risk that these challenges pose for the electricity industry, collaboration between utilities, governments and educational/training institutions will be advantageous to ensuring the right skills are developed in sufficient supply. Page 15

18 Energy Plan Submission Recommendations Newfoundland Power provides the following recommendations for consideration in the development of a long-term Energy Plan for the Province of Newfoundland and Labrador: Industry Structure: The elimination of duplication and overlap will minimize system costs and ultimately keep rates as low as possible for customers. To achieve this objective, the electricity industry should be separated along the functional lines of supply (generation) and delivery (transmission and distribution). System Planning: To ensure that the most competitive proposals for system additions are attracted, system planning guidelines should be established and the system plan should be available publicly. Generation: Generation additions should be based on the least cost principle, open to any proponent and all types of generation should be considered. In particular, changes should be made to current regulations that prohibit the development of renewable energy such as small hydroelectric generation. Alternative Energy Sources: Alternative energy sources and technologies may have merit but must be evaluated using the same least cost approach as any other generation addition. However, due to the isolated system, relatively small market size and low electricity growth rate, these should be approached carefully. CDM: CDM practices are in place and should continue to be promoted. However, CDM alone will not deal with supply issues and therefore should be part of a broader array of system solutions that includes all stakeholders. Before significant financial investments are made, appropriate assessments of various CDM programs need to be conducted to ensure desired outcomes are achievable. The utility should have a reasonable opportunity to recover the costs of delivering these programs. Rate Design: Appropriate rate design is jurisdiction specific. Marginal cost studies that are currently underway will assist in determining appropriate rate design for Newfoundland and Labrador. Rates should provide the right price signals to customers and should appropriately reflect the costs of supplying and delivering electricity to customers. Regulation: Changes from the current regulatory system need to be assessed to ensure that the change will result in better regulation rather than just a different form of regulation. A continued focus on initiatives such as negotiated settlements will result in a more efficient and cost-effective regulatory process. Customers are receiving the benefits of efficiency improvements under the existing regulatory structure. Page 16

19 Energy Plan Submission PBR: There is no common definition of PBR and many different variations exist depending on the specific needs of the jurisdiction in which it is being used. PBR may present opportunities for the electricity industry in Newfoundland and Labrador; however, it needs to be considered with a full understanding of all the aspects associated with rate setting in Newfoundland and Labrador. The small size of this jurisdiction suggests that a practical approach that is simple and easily understood by all stakeholders is warranted. Human Resources: Ensuring an adequate supply of skilled workers is critical to the future of the electricity industry in this province and throughout Canada. Collaboration between utilities, governments and educational/training institutions will be required to ensure an adequate workforce with the right skills is developed for the future. Page 17

20 Appendices

21 Appendix A Current Generation by Source

22 Current Generation by Source Net Generating Capacity (MW) by Facility/Plant Island Interconnected System MW Newfoundland and Labrador Hydro 1 Hydroelectric Bay d Espoir Cat Arm Upper Salmon 84.0 Hinds Lake 75.0 Granite Canal 40.0 Paradise River 8.0 Snook s Arm, Venam s Bight and Roddickton 1.3 Total Newfoundland and Labrador Hydro Hydroelectric Thermal Holyrood (Oil-fired Steam and Gas Turbine) Hardwoods Gas Turbine 54.0 Stephenville Gas Turbine 54.0 Hawkes Bay, St. Anthony and Roddickton Diesels 14.7 Total Newfoundland and Labrador Hydro Thermal Newfoundland Power Hydroelectric Generating Plants 94.6 Thermal Generating Plants 50.9 Total Newfoundland Power Generation Non-utility and Industrial Generators 1 Corner Brook Pulp and Paper Abitibi Consolidated Inc Exploits River 32.3 Star Lake 15.0 Corner Brook 15.0 Rattle Brook 4.0 Total Non-utility and Industrial Generators Total Net Generating Capacity for Island Interconnected System Newfoundland and Labrador Hydro, Schedule II, J. R. Haynes, General Rate Application 2003.

23 Appendix B Electric Space Heating Market Share

24 Electric Space Heating Market Share Electric 55% Non-electric 45%

25 Appendix C Comparison of Electricity Rates

26 Comparison of Electricity Rates Charlottetown $149 Halifax $128 Fredericton $125 St. John's $121 $ Rate survey as of February 1, 2006, based on Newfoundland Power s residential monthly average use of 1,276 kwh, including basic customer charge. Excludes federal and provincial taxes. Note: 1,000 kwh monthly usage in Developing an Energy Plan for Newfoundland and Labrador Public Discussion Paper produces similar results.

27 Appendix D Newfoundland Power Capital Investments

28 Newfoundland Power Capital Investments Year Newfoundland Power Capital Investments * (000s) Investment 1997 $30, , , , , , , , ,980 Total $460,855 *Newfoundland Power s Capital Budgets are approved on an annual basis by the Newfoundland and Labrador Board of Commissioners of Public Utilities.

29 Appendix E Newfoundland Power s Awards

30 Newfoundland Power s Awards Year Award Presented to Company Recognition 2004 Pinnacle Award for Employee/Internal Communication from the International Association of Business Communicators (IABC) 2004 Canadian Electricity Association s 2004 President s Award of Excellence for Employee Safety 2004 Newfoundland Environmental Industry Association 2004 Environmental Performance Award 2003 Environmental Educators and Communicators Commission Award of Excellence in the category of Outstanding Private Company 2003 Employer of Distinction Award by the Newfoundland and Labrador Employers Council 2002 Mount Pearl Chamber of Commerce Best in Business Environmental Award 2002 International Personnel Management Association (IPMA) Canada Gold Star Agency Award 2002 Atlantic Canada Human Resources Awards (ACHRA) Strategic Partnerships Award 2001 Canadian Information Productivity Award (CIPA) of Excellence for Customer Care An award recognizing Newfoundland Power s efforts and achievements to inform and motivate employees through its Information-Your Source of Power! internal communications campaign. National award recognizing the hard work and commitment of Newfoundland Power s employees towards maintaining the highest standard of safety for the public and employees. Provincial award recognizing Newfoundland Power s efforts to move beyond environmental compliance and demonstrate a commitment to improved environmental performance. National award recognizing Newfoundland Power s Environmental Commitment Program and its range of environmental initiatives including: EnviroFest; Christmas tree mulching; composting; recycling; and, Fish Friends program. Provincial award recognizing Newfoundland Power s innovation, leadership, creativity and fundamental belief in the value of a healthy, safe and motivated workforce. Local award honoring Newfoundland Power s commitment to the environment. National award recognizing innovative human resource management strategy, as well as the aligning of human resources with business objectives and employee success. Atlantic Canadian award recognizing the successful aligning of human resources strategy with business strategy, and the impact of an employee success focus on the Company s results. National award presented to Newfoundland Power for innovatively using technology and employee training to improve customer service.

31 Year Award Presented to Company Recognition 2001 CIPA Best of Category Award National award recognizing Newfoundland Power s customer service solution as being the best in Canada St. John s Board of Trade Business Excellence Award 2001 St. John s Board of Trade Business Achievement Award for Productivity and Quality Improvements 2001 Newfoundland and Labrador Provincial Environment Award 2000 The Association of Professional Engineers and Geoscientists of Newfoundland (APEGN) Environment Award 2000 St. John s Clean and Beautiful Mayor s Award 1998 St. John s Board of Trade Business Achievement Award for Contribution to Community & Community Service Local award recognizing Newfoundland Power for demonstrated outstanding achievements in business and a commitment to excellence and quality in its field. Local award recognizing Newfoundland Power for demonstrated successes in productivity gains and overall service quality improvements. Provincial award recognizing Newfoundland Power for demonstrating an exemplary attitude and concern for the environment. Provincial award recognizing Newfoundland Power for demonstrating its commitment to going the extra mile to reduce the impact of its Rose Blanche Hydroelectric Development on the environment while at the same time pursuing sustainable energy. Local award recognizing Newfoundland Power for its environmental work. Local award recognizing Newfoundland Power for demonstrating its commitment to partnering with various organizations to better our communities.

32 Appendix F Island Electricity System Costs

33 Island Electricity System Costs Generation 59% Distribution 23% Customer Service 5% Transmission 13%

34 Appendix G Hydroelectric Development and the Environment

35 Hydroelectric Development and the Environment Hydroelectric projects can be selected, designed and executed in an environmentally friendly manner. Small hydroelectric developments can co-exist with various fish species on river systems with appropriate environmental planning, public awareness and input from key stakeholders. This has been clearly demonstrated with the Rose Blanche and Granite Canal hydroelectric development projects. These projects show that environmental concerns can be balanced with new hydroelectric power development and that proper planning can and will minimize the negative impacts of all generation developments on the environment. Rose Blanche Hydroelectric Development In developing the Rose Blanche Hydroelectric Plant, Newfoundland Power worked in partnership with various environmental organizations, such as the Department of Fisheries and Oceans, to ensure minimal impact on the environment. Environmental planning accounted for approximately $1 million, or 7%, of the total cost of the Rose Blanche project. A key component of this development project was a compensation plan for fish habitat. This plan included: the creation of a 1 kilometre spawning and rearing habitat channel running parallel to the lower portion of Rose Blanche Brook; the provision of improved access of the main river to anadromous salmonids through the construction and operation of two fishways, as well as improvements to the existing fishway that was located in the Rose Blanche water supply dam; and, the installation of a valve on the hydroelectric plant to allow a minimum flow of water for fish. In 2000, the Association of Professional Engineers and Geoscientists of Newfoundland presented Newfoundland Power with its 2000 Environmental Award for this project after being nominated by the Atlantic Salmon Federation. This small hydroelectric plant, which produced 20.7 gigawatt (GWh) in 2005, displaces approximately 33,000 barrels of oil and eliminates approximately 16,000 tonnes of greenhouse gas emissions annually in the province. Granite Canal Hydroelectric Development 1 Part of Newfoundland and Labrador Hydro s (Hydro) Granite Canal Hydroelectric Development was a comprehensive Environmental Protection Plan that included: onsite Environmental Coordinators; and, 1 Newfoundland and Labrador Hydro s website, 2006.