RÉGIE DE L ÉNERGIE HYDRO-QUÉBEC DISTRIBUTION S APPLICATON FOR APPROVAL OF THE PROPOSED SUPPLY PLAN FILE R

Transcription

1 RÉGIE DE L ÉNERGIE HYDRO-QUÉBEC DISTRIBUTION S APPLICATON FOR APPROVAL OF THE PROPOSED 00-0 SUPPLY PLAN FILE R-0-00 EVIDENCE OF WILLIAM HARPER ECONALYSIS CONSULTING SERVICES ON BEHALF OF: OPTION CONSOMMATEURS MAY, 00

2 Table of Contents Background... Purpose of Evidence... HQD s Load Forecast.... HQD s Expected Sales Forecast.... HQD s Expected Energy Requirements.... HQD s Expected Power Requirements.... Load Forecast Sensitivity.... Conclusions... HQD s Supply Requirements...0. Total Supply Requirements Energy Requirements Capacity Requirements.... Heritage Pool Supply..... Total Supply Available..... Heritage Pool Dispatch.... Needs in Excess of the Heritage Pool.... Post Heritage Pool Supplies Currently Under Contract/Planned..... Existing Contracts..... Planned Contracts.... Additional Supplies Required Energy and Capacity Types of Capacity Required.... Conclusions... HQD s 00-0 Supply Strategy and Plans.... Near Term (00-00)..... Inter-Tie Capability..... Mix of Market Purchases..... Conclusions.... Longer Term (00-0)...

3 .. Available Supply Options..... HQD s Long Term Supply Strategy..... Conclusions... Issues From Previous Régie Decisions.... Evaluation of Transmission Costs for Small Scale Plants.... Evaluation of Transmission Costs.... Contract Term... Appendix A: CV for ECS Consultant..

4 Régie File R Background On November, 00, (HQD) filed an application with the Régie de l énergie (the Régie) requesting approval of its 00-0 Electricity Supply Plan. This is the second such plan HQD has submitted to the Régie since the restructuring of Hydro-Québec, the establishment of the Heritage Pool and the amendments to the Loi sur la Régie de l énergie. As a result of these changes, HQD is required to submit a Supply Plan every three years for full review by the Régie and an annual update in each of the intervening years. HQD s first supply plan (the 00 Plan) was submitted to the Régie in October 00. Following a two-phased hearing process, the Régie eventually approved HQD s plan which called for the acquisition of 00 MW/. TWh of baseload capacity and 00 MW of modulable supply commencing in In addition, the Régie approved the acquisition of an additional 00 MW of supply to meet the loads of the Alouette aluminium plant expansion with deliveries commencing in 00. HQD s 00 Plan also called for: a) the use of short-term contracts to address any supply shortfalls prior to the in-service of the new capacity and to address fluctuations in load due to normal weather variations and b) an agreement with Hydro-Québec Production (HQP) to manage extreme, short-term load variations due to abnormal weather conditions or supply failure and involuntary overages due to the dispatch of the Heritage Pool without going through a formal tendering process. Following the development of the 00-0 Supply Plan and its approval by the Régie, HQD received further advice and direction from both the Régie and the Québec government concerning the acquisition of future supplies: In March 00, the government directed HQD to solicit 000 MW of new supplies from wind power and an additional 00 MW of new supply from biomass. In December 00, the government directed HQD to acquire 00 MW of supply via cogeneration. D-00-, Phase and D-00-, Phase R-0-00, HQD-, Document, page HQD-, Document, page

5 Régie File R Following the Régie s June 00 report to Québec government regarding Québec s Electricity Energy Security and the Suroît project, HQD cancelled, at the direction on the provincial government, its plans to construct the Suroît project (an MW gas-fired combined cycle plant). Consistent with its 00-0 Supply Plan and subsequent approvals/directions, HQD has initiated the following supply-related activities over the past three years: In February 00, HQD initiated a call for tender (A/O 00-0) for 00 MW of supply for delivery starting in 00. This eventually led to HQD entering into three contracts for a total of 0 MW and. TWh per annum, with deliveries starting in 00 and 00. In April 00, HQD initiated a call for tender (A/O 00-0) for 00 MW of supply from biomass. This eventually led to HQD entering into two contracts for a total of. MW of supply with deliveries starting in 00. In May 00, HQD initiated a call for tender (A/O 00-0) for,000 MW of supply from wind energy. This eventually led to HQD entering into contracts for a total of 0 MW of wind power supply with deliveries starting in 00. In April 00, HQD initiated a call for tender (A/O 00-0) for 0 MW for the period January to December, 00. The successful contractor the Constellation Group was announced in May In October 00, HQD initiated a call for tender (A/O 00-0) for 0 MW of supply from cogeneration. The associated energy supply would be. TWh per annum and deliveries are assumed to start in 00. In October 00, HQD initiated a call for tender (A/O 00-0) for MW of short-term supply for 00. In November 00, HQD entered into contracts for the supply of 00 GWh over the period January to April 00. HQD-, Document, page A-00-0 Press Release, Ministère des Ressources naturelles, Québec, November, 00 HQD-, Document, page HQD-, Document, pages - HQD-, Document, pages -0 0 HQD-, Document, page, Response. HQD-, Document, page 0 HQD-, Document, page

6 Régie File R In November 00, HQD initiated another call for tender (A/O 00-0) for 00 GWh of short term firm supply for 00. The current 00-0 Supply Plan proposed by HQD foresees the need for additional energy supplies over and above those currently contracted for or being acquired for the years 00-0 inclusive and, similarly, additional power supply requirements for and beyond. The Plan calls for the needs through 00 to be met primarily by short-term purchases. For the period 00-0, the Plan calls for the additional supplies to come from a second call for tender (CFT) for wind energy; a CFT for modulable supply; followed by a another CFT for supply from cogeneration; with any remaining balance to be made up through short-term purchases. On November, 00 the Régie issued a procedural order (D-00-0/R-0-00) to initiate a public review of HQD s Application for approval of the 00-0 Supply Plan. HQD-, Document, page 0 and HQD-, Document, page, Response. R--00, HQD-, Document, page HQD-, Document, pages -. HQD-, Document, pages -.

7 Régie File R Purpose of Evidence After reviewing HQD s Application and the Procedural Order issued by the Régie, Option consommateurs (OC) retained Econalysis Consulting Services (ECS), a Canadian consulting firm offering regulatory services to clients on the electricity and natural gas matters, to provide evidence that would assist the Régie in evaluating the issues associated with HQD s new Supply Plan. The Evidence was prepared by Bill Harper who, prior to joining ECS in July 000, worked for over years in the energy sector in Ontario, first with the Ontario Ministry of Energy and then, with Ontario Hydro and its successor company Hydro One. Since joining ECS, he has assisted various clients participating in regulatory proceedings on issues related to electricity and natural gas utility revenue requirements, cost allocation/rate design and supply planning. Mr. Harper has served as an expert witness in public hearings before the Manitoba Public Utilities Board, the Manitoba Clean Environment Commission, the Régie, the Ontario Energy Board, the Ontario Environmental Assessment Board and a Select Committee of the Ontario Legislature on matters dealing with electricity regulation, rates and supply planning. His most recent experience with supply planning matters includes: The preparation of comments/evidence and appearance as an expert witness on behalf of OC in the Régie proceeding (R-0-00) dealing with HQD s 00-0 Supply Plan. The preparation of evidence and appearance as an expert witness before the Manitoba Clean Environment Commission with respect to its review of the Need for and Alternatives to the Wuskwatim Hydro Generation/Transmission project proposed by Manitoba Hydro. Mr. Harper s responsibilities included review and comment on: a) Manitoba Hydro s supply/demand outlook and the need for the additional supply, b) Manitoba Hydro s levelized costing methodology used for screening alternatives to Wuskwatim, c) the methodology used by Manitoba The evidence was jointly prepared by Mr. Harper and Dr. Higgin.

8 Régie File R Hydro to evaluate the economics and benefits of the Wuskwatim project and d) the economic, financial and operational risks associated with the project.; Providing expert advice and support to clients in British Columbia participating in the BCUC proceedings dealing with: o The electricity demand/supply outlook for Vancouver Island and the proposed Electricity Purchase Agreement between BC Hydro and Duke Point Power, o The natural gas demand/supply outlook for Vancouver Island and the Terasen Gas (Vancouver Island) application for Liquified Natural Gas Storage Facilities to increase peak supply capability to the Island, and o BC Hydro s proposed 00 Resource Expenditure and Acquisition Plan (i.e., BC Hydro s proposed 00 Electricity Supply Plan). A full copy of Mr. Harper s CV is attached in Appendix A. The evidence generally follows the structure of HQD s Application and, in turn, considers HQD s load forecast; overall needs (allowing for reliability and reserve considerations); existing (and currently planned) supplies; the strategy for acquisition of additional supply requirements and issues arising from previous Régie decisions. In doing so the evidence attempts to build on the findings of previous Régie proceedings by looking at changes from both: The 00-0 Supply Plan and the resulting Régie decision (D-00- and D- 00-) and The 00 Plan Update which was the basis for the Régie s report (A-00-0) to the Minister of Natural Resources on Québec s energy security and the Suroît project.

9 Régie File R-0-00 HQD s Load Forecast 0. HQD s Expected Sales Forecast Based on the most likely economic and demographic outlook and currently planned energy efficiency initiatives, HQD s load forecast calls for electricity energy sales to customers to increase from. TWh in 00 to. TWh in 0. In its Decision regarding HQD s first Supply Plan, the Régie indicated that it generally accepted HQD s medium (or expected) load forecast for planning purposes 0. However, in its 00 report to the Minister of Natural Resources (A-00-0), the Régie recommended that a medium-high growth scenario be used for planning purposes. Table contrasts HQD s current load forecast with the load forecasts underpinning its 00-0 Supply Plan, its 00 Supply Plan Update and the medium-high growth scenario recommended by the Régie in A Table Comparison of Load Forecasts (Sales to Customers in TWh) Source: Plan Plan n/a n/a n/a Difference Plan Update n/a n/a n/a Difference A-00-0 n/a HQD's Medium Scenario n/a n/a Difference A-00-0 Regie's Medium-High Scenario n/a n/a n/a Difference Source: HQD-, Document, pages 0, and A-00-0, pages and Reflects HQD s medium load forecast scenario based on the most probable values for the various underlying economic and demographic factors (HQD-, Document, page ) HQD-, Document, pages 0 and Tables. and. 0 D-00-, page

10 Régie File R Comments re: Variances from the 00-0 Plan The current load forecast is considerably higher than that underpinning the 00-0 Supply Plan. There are a number of reasons for this: First, actual sales through to 00 have been significantly higher than projected in 00 when the first Supply Plan was prepared particularly when allowance is made for the strike in 00 at the ABI aluminium facility. This is primarily due to exceptional electricity sales growth in both the Residential and Agriculture sector as well as in the General and Institutional sector. Table contrasts the previously forecast values with the actual values for the main economic and demographic factors underlying the electricity sales in these two sectors and substantiates HQD s comments attributing the growth to residential construction and strong commercial growth. HQD-, Document., page, Response. The factors shown are those identified in HQD-, Document., page, Response. HQD-, Document., page, Response.

11 Régie File R-0-00 Table Demographic and Economic Factors - Forecast vs. Actual Results Population (millions) Plan,,, - Actual,,,0 Tertiary GDP (Annual Growth Rate) Plan.0%.0%.0% - Actual.0%.0%.0% Household Formation (Thousands) Plan Actual Disposable Income (Annual Growth) Plan.0%.0%.0% - Actual.0% 0.0%.0% Natural Gas Prices ($/m ) Plan... - Actual...0 Notes: ) 00/0 Plan Values as per R-0-0, HQD-, Doc, page ) Actual values are as per HQD-, Document., page 0 Acutal values shown for 00 are the current forecast values per HQD-, Document, page. ) Actual household formation values are calculated from above referenced sources Second, the growth rates for the demographic and economic factors underpinning the forecast beyond 00 are higher in the 00-0 Plan than they were in the 00-0 Plan, as demonstrated in Table below. While differing from that used in the previous plan, HQD s current economic forecast is in line with those recently prepared by other parties. HQD-, Document., pages -

12 Régie File R-0-00 Table Comparison of Economic and Demographic Forecast Assumptions Population ('000's) - 00/ Plan / Plan n/a n/a n/a Difference 0.% 0.% 0.0%.0%.%.%.%.0% GDP (% Cumulative growth) - 00/ / n/a n/a n/a Difference 0.00%.%.%.%.0%.%.%.% Natural Gas Prices ($/m ) - 00/ / n/a n/a n/a Difference.%.0%.0%.%.%.%.% -0.% Notes: ) Source for 00/0 data: HQD-, Document, page ) Source for 00/0 data: R-0-00, HQD-, Document, page Third, the expansion of the Alouette plant leading to increased sales of. TWh by 00. However, offsetting these factors are the higher energy efficiency reductions incorporated in the current 00-0 Plan. These reductions are the result of including the anticipated impacts of HQD s PGEÉ and allowances for natural energy efficiency improvements in the industrial sector. The difference in energy efficiency savings assumed for the two plans are summarized in Table. HQD-, Document., page. HQD-, Document, pages 0-, Response.

13 Régie File R-0-00 Table Energy Efficiency Assumptions (TWh) Domestic & Agriculture 00-0 Plan Plan n/a n/a n/a Difference -.%.% 0.%.%.%.%.0%.% G&I 00-0 Plan Plan n/a n/a n/a Difference -.% -.% 0.0%.%.% 0.0%.%.% Industrial 00-0 Plan Plan n/a n/a n/a Difference.%.%.%.% 00.0%.%.% 00.0% Other 00-0 Plan Plan n/a n/a n/a Difference 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Unallocated 00-0 Plan Plan n/a n/a n/a Difference -00.0% -00.0% -00.0% -00.0% -00.0% -00.0% -00.0% -00.0% Total 00-0 Plan Plan n/a n/a n/a Difference Source: HQD-, Document, pages 0-, Response.. Totals may differ from reference due to rounding. Comments re: Variances from the 00 Update Over the period 00-0, the electricity sales forecast underpinning the current Plan is less than that associated with the 00 Plan Update. HQD suggests that the reasons for this are both the lower economic and demographic assumptions and greater energy efficiency savings associated with the 00-0 Plan. Table compares the basic demographic and economic assumptions underlying the two sale forecasts and does not appear to substantiate HQD s claim that the lower sales forecast in the 00-0 Plan is, in part, due to changes in the demographic and HQD-, Document, page, Response. 0

14 Régie File R-0-00 economic assumptions. Indeed, the current assumptions for core variables such as GDP growth, population growth and household formation all appear to be the same or higher than those used in the 00 Plan Update. Table Comparison of Economic and Demographic Forecast Assumptions Population ('000's) 00-0 Plan,0,,,,,,, 00 Plan Update,,,,,,,, Difference 0.% 0.% 0.% 0.% 0.% 0.% 0.% 0.% Household Formation (#) 00-0 Plan Plan Update Difference.%.%.%.%.%.%.%.% GDP (% Cumulative growth) 00-0 Plan Plan Update Difference -.% -.% 0.0% 0.0% 0.0% 0.%.0%.% Natural Gas Prices ($/m ) 00-0 Plan Plan Update Difference.0%.%.%.%.%.%.%.% 0 Notes: ) Source for 00-0 Plan data: HQD-, Document, page ) Source for 00 Plan Update data: A-00-0, page 0 However, there a couple of other key reasons why the current sales forecast is likely lower: First, HQD has captured in the current load forecast the impact of the Régie s recent decision to abrogate the BT rate and the resulting loss of load is expected to be about. TWh by 0. Second, the current forecast captures the recent cancellation of various expansion projects in the aluminium sector, notably the Alcoa plant at Baie-Comeau. HQD-, Document, page

15 Régie File R-0-00 In the case of energy efficiency savings, Table does support the premise that the savings in the current 00-0 Supply Plan exceed those underpinning the 00 Plan Update. Table Comparison of Energy Efficiency Savings (TWh) Plan Plan Update Difference Source: 00-0 Plan: HQD-, Document, page 00 Plan Update: A-00-0, page Furthermore, the difference in energy efficiency savings accounts for a substantial portion of the overall variance between the two sales forecasts.. HQD s Expected Energy Requirements A number of adjustments are required in order to translate HQD s electricity sales forecast into a forecast of electricity energy needs for supply planning purposes including: The exclusion of sales to non-grid connected communities (i.e., remote communities), The inclusion of consumption for internal use, and An allowance for losses. Table sets out the calculation of the electricity needs for supply planning purposes associated with the 00-0 Supply Plan and contrasts each of the adjustments with the values used in the 00-0 Supply Plan. HQD-, Document, page

16 Régie File R-0-00 Table Determination of Energy Requirements for Supply Planning (TWh) Customer Sales Forecast Plan Plan n/a n/a n/a Difference Less Sales to Remote Communities Plan Plan n/a n/a n/a Difference Plus Internal Use Plan Plan n/a n/a n/a Difference Plus Losses Plan Plan n/a n/a n/a Difference Plannning Energy Needs Plan Plan n/a n/a n/a Difference Source: 00-0 Plan: HQD-, Document, page Plan: R-0-00, HQD-, Document,page and HQD-, Document, page Comments From a materiality perspective, the only major change is the allowance for transmission and distribution losses. For the current plan a loss factor of.% was assumed for the entire 00-0 period, in contrast to the 00-0 Supply Plan which assumed loss factors in excess of %. HQD indicates 0 that the.% is based on the experience of the last three years. HQD has indicated in its response to OC s information requests that internal use now captures construction site consumptions whereas formerly it did not. However, the impact of this change is only in the order of 0. TWh per annum. 0 HQD-, Document, page HQD-, Document, pages -, Response.

17 Régie File R Overall total expected energy requirements are projected to increase from. TWh in 00 to. TWh in 0 which represents an average annual growth rate of just under.0%.. HQD s Expected Power Requirements In terms of power requirements, HQD s peak demand is projected to increase from,0 MW in to, MW in 0-0 which represents an average annual growth rate of just over 0.%. The power requirements forecast is derived from the expected energy requirements forecast and assumptions regarding the characteristics of the energy use (e.g., space heating, water heating, etc.). Shifts in energy by sector or end use application can lead to differences in growth rates as between energy and power requirements. Comments Table contrasts the expected power and energy requirements for 00-0 under the current plan with those associated with the 00-0 Supply Plan and the 00 Plan Update. The currently anticipated power requirements for 00-0 exceed those of the original 00-0 Plan but are slightly less than those of the 00 Plan Update, thereby maintaining the same relative relationships as discussed previously regarding the energy requirements for 0. HQD-, Document., page, Table R.d 00 was used as the base year for the calculation due to the impact the strike at ABI has on 00 usage HQD-, Document, pages and HQD-, Document, pages 0-

18 Régie File R-0-00 Table Comparison of Power and Energy Requirements Energy (TWh) Plan Plan 00 Update 0 Req.... Var from 0 -.%.0% 00-0 Plan Power (MW) 00-0 Req.,00,0,0 Var. from 0 -.%.% 00-0 Plan Source: HQD-, Document, Tables.,.,. and.0 0. Load Forecast Sensitivity Similar to the 00-0 Plan, HQD has described the potential sensitivity of the expected energy and power requirements to both the underlying economic and demographic assumptions as well as to variations in weather. For the future energy requirements, the sensitivity (based on one standard deviation ) to annual variations in weather is approximately. TWh and this value is virtually constant throughout the forecast period such that it actually declines as a percentage of total energy requirements. However, the sensitivity (again at one standard deviation) of future requirement to economic and demographic factors increases from. TWh in 00 to. TWh in 0 which represents an increase both in absolute terms and Assuming a Normal probability distribution, there is roughly a % probability that the expected value will be exceeded by more than one standard deviation. HQD-, Document, page and HQD-, Document, page, Response.

19 Régie File R-0-00 as a percentage of total energy requirements. Since the two sources of variation are independent of each other, their combined impact on the sensitivity of future energy requirements is less than the sum of two factors and, based on one standard deviation, ranges from TWh in 00 to. TWh in 0. This can be seen from Table which summarizes the sensitivity of the two sources of variation both independently and together. Table Sensitivity Range - One Standard Deviation Factor Econ&Demographic - TWh % Weather - TWh % Total - TWh % Source: HQD-, Document, pages, and 0 For future power requirements, the sensitivity to economic and demographic factors is roughly the same/perhaps slightly less (in % terms) than for energy. However, as one would expect, the sensitivity of power requirements to variations in weather is greater (in percentage terms) than for energy requirements. Overall the sensitivity (based on one standard deviation) of both factors increases from.% of expected power requirements in 00-0 to.% of power requirements in 0-. HQD-, Document, page HQD-, Document, page 0

20 Régie File R-0-00 Comments re: Changes from the 00-0 Supply Plan HQD s 00-0 Supply Plan also included sensitivity analyses with respect to economic and demographic assumptions as well as weather. Table 0 sets out the coefficients of variation associated with one-standard deviation attributable to economic and demographic factors in both Plans. Table 0 Energy Coefficient of Variation for Economic and Demographic Factors Horizon Years Years Years Years Years Years Years 0 Years 00-0Plan.%.%.%.%.%.%.%.% 00-0 Plan.%.0%.%.0%.%.%.%.% 0 0 Source: HQD-, Document, page R-0-00 Phase II, HQD-, Document, page The sensitivity of the current (00-0) Plan is deemed to be slightly less than that of the 00/ Plan with respect to these factors. In the case of weather, the sensitivity of the 00-0 Plan is roughly the same as the previous plan. The 00-0 Plan s sensitivity to weather was. TWh 0 based on one standard deviation (as compared to. TWh in the current 00-0 Plan). Comments re: Régie A-00-0 Findings In its June 00 Report to the Minister, the Régie concluded that sales growth was most likely to fall between the results of sales forecasts based on the medium and the strong economic/demographic growth scenarios. The reasons for this included: 0 R-0-00, HQD-, Document, page A-00-0, pages -.

21 Régie File R The recently observed strong growth in the residential due to significant increases in construction starts. A competitive position of electricity better than forecast for Forecast increases in consumption for the industrial sector over the period, coupled with uncertainty regarding the future industrial expansion, particularly in the aluminium sector. Many of these same factors are still present and creating uncertainty with respect to the current sales/requirements forecast: Continued strong growth through 00, this time in the General and Institutional sectors. The Régie just recently approved a distribution rate increase of.% for 00, as opposed to the.% originally requested. The inclusion of fairly conservative assumptions about future industrial expansions in the 00-0 Plan. As a result, the circumstances continue to exist to support the logic used by the Régie when it adopted a higher than medium sales forecast for planning purposes.. Conclusions Current Load Forecast Overall, HQD s load forecast appears to be reasonable when considered in terms of the changes observed from both the 00-0 Plan and the 00 Update. However, the same issues the Régie raised in its A-00-0 Report to the Minister regarding the (upside) uncertainty associated with the load forecast still exist. Therefore, it would be prudent for HQD to either: HQD-, Document., page, Response. D-00- HQD-, Document., pages 0-, Response.

22 Régie File R Adopt a higher load forecast (e.g., a medium-high forecast such as adopted by the Régie in A-00-0) for planning purposes, or Ensure that the supply plan developed based on the medium load forecast is sufficiently flexible to meet higher growth scenarios. Load Forecast Uncertainty Relative to the first (00-0) Plan, HQD s evidence regarding load forecast uncertainty is much better presented, particularly in that it clearly demonstrates the combined effects of both weather and demographic/economic factors. This serves to address the related issues raised in the Comments/Evidence prepared by ECS with respect to the 00-0 Plan. R-0-00 ECS Comments, December, 00, page 0 and ECS Evidence, March, 00, page.

23 Régie File R-0-00 HQD s Supply Requirements. Total Supply Requirements Energy Requirements Total energy requirements for purposes of supply planning are based on the energy requirements discussed earlier (see Table ) plus an allowance to manage the Heritage Pool supplies in real time. These later requirements are discussed in more detail in Section. below. HQD has also established a longer term energy reliability criterion which calls for HQD to have sufficient energy supply capability in place such that its dependence on shortterm markets beyond a four year horizon is less than TWh per annum under a higher load growth scenario. For purposes of this long-term criterion, high load growth is defined as the medium growth scenario plus. TWh, which is based on one standard deviation for four years forward (currently 00). The TWh is based on the current interconnection capacity that HQD expects to be able to rely on after allowing for both technical and market constraints and also allowing for HQP s potential need to access the interconnected markets to guarantee the Heritage Pool supplies 0. HQD-, Document, page HQD-, Document, page HQD-, Document, page, lines -0 HQD-, Document, page, Response. 0 HQD-, Document, page. See also Section.. below. 0

24 Régie File R Comments In its decision regarding HQD s first Supply Plan, the Régie accepted the energy reliability criteria proposed by HQD which was that HQD demonstrate the ability to meet a strong growth scenario over the entire planning horizon. At the same time, the Régie also directed HQD to propose alternative criteria in conjunction with its next Supply Plan. The now proposed energy reliability criteria call for HQD to be able to meet with four years notice - the expected load forecast plus one standard deviation. Furthermore, the standard deviation used is that associated with the fourth year of the forecast on the basis that greater uncertainty beyond that year can be addressed in future plans. HQD s currently proposed approach of fixing the standard deviation used in the analysis, based on the timeframe required to place new resources in service, appears reasonable. However, it is questionable as to whether the four-year time horizon used in the current Plan is sufficient. First, the four-year time horizon includes the current year (in this case 00) during which the plan is under review and approval for the request for additional CFTs still subject to approval by the Régie. Since the to ½ year time horizon for new supply contracts starts with the issuing of CFTs, the current year should not be counted as one of the four lead years. Assuming the a new CFT was issued in the second half of 00, shortly after a decision by the Régie on the currently proposed plan; the four-year lead time would suggest an in-service date of late 00. Indeed, HQD has acknowledged this additional time requirement and noted that additional modulable capacity required to reduce dependence on short-term markets would not be available until the end of 00. Also, the criterion needs to recognize the lag that will exist if commitments are not made based on the current plan. For example, if the need for new supply is not identified until D-00-, pages - HQD-, Document, pages and HQD-, Document, page, Response 0.. and pages -, Responses. and 0.

25 Régie File R the next annual update (the end of 00) and Régie approval for a new CFT is obtained in 00, the earliest additional capacity could be in-service would likely be 00. Given these two considerations, HQD should adopt the one standard deviation value associated with a six year lead time. Based on Table (above) the revised value for the long-term energy reliability criterion would be. TWh. Also, unlike the 00 Plan s criteria, the current energy planning criteria do not address the potential for variations in requirements in the short-term (i.e., the next - years). As demonstrated in Table, energy requirements over the short-term can vary from those forecasted due to weather or economic influences. In its first Supply Plan, HQD s planning criteria also called for it to be able to meet a strong growth scenario during the initial years of plan. In the initial years of the current plan the strong growth scenario is similar to the expected load forecast plus one standard deviation. HQD should also adopt a short-term energy reliability criteria which requires it to demonstrate an ability to meet the medium load forecast plus at least one standard deviation while limiting reliance on the inter-ties to TWh per annum. Table Additional Energy Capability Required (TWh) Probability Usage Exceeded One Standard Deviation (~%) 0% % % Source: ) One standard deviation: HQD-, Document, page ) 0%, % and % calculated assuming a Normal probability distribution

26 Régie File R Finally, the use of one standard deviation to the medium load forecast in setting the energy reliability criteria means that the limit is likely to be exceeded more than % of the time. Based on the current load forecast, one standard deviation represents TWh in 00 increasing to. TWh in 00. Table also sets out both the additional energy usage associated with the one standard deviation requirement and also the additional usage associated with reducing the uncertainty to 0%, % and % respectively... Capacity Requirements For planning purposes, capacity requirements include an allowance for reserves consistent with the NPCC (Northeast Power Coordinating Council) resource adequacy criterion which requires that the probability of disconnecting a non-interruptible customer due to resource inadequacies will be no more than once in ten years or. hours per annum. In the 00-0 Supply Plan, HQD indicated that this translated into an overall reserve margin of -%. Based on more recent studies, Hydro-Québec is now of the view that the reserve requirements to meet the NPCC criteria are somewhat less:.% for the first planning year (i.e., 00-00).% fore the next year (00-00).% for the third year of the Plan (00-00) and 0.% for the fourth and subsequent years of the Plan. However, HQD noted in its Application, that these values would be updated, if necessary. Table sets out the annual capacity requirements for HQD overall based on these reserve margins. HQD-, Document, page. Also, based on a Normal probability distribution, the probability of exceeding the mean by more than one standard deviation is.%. HQD-, Document, page 0, Table. HQD-, Document, page R-0-00, HQD-, Document, Annexe D, page HQD-, Document, page, Table.

27 Régie File R-0-00 Table HQD's Total Capacity Requirements (MWs) Peak Demand,,,,0,,,,0,, Reserve Margin,00,,,,,0,0,,, Total Capacity Req.,,0,0,, 0, 0,0 0, 0,, 0 0 Source: HQD-, Document, page Comments Hydro-Québec s Annual Interim (Reliability) Assessment was recently made public by the NPCC. In it, Hydro-Québec indicates that the required reserves (consistent with the NPCC s planning criteria) are.%,.% and 0.% for 00-00, and respectively. These reserve margin requirements are higher than those presented by HQD in its Application. However, most of the variance appears to be due to the treatment of interruptible power contracts. In the Annual Interim Assessment, interruptible power contracts are treated as a supply resource and included based on their gross value of 00 MW 0. In contrast, the 00 Supply Plan also treats interruptible power contracts as a supply resource but includes the net value of the contracts (0 MW) in its supply/demand balance calculations. The 0 MW difference represents roughly 0.% of the capacity requirements during the three year period concerned and accounts for most of the variance in each year. Also, HQD assumes that the capacity reserve margin is constant beyond at the value. HQD indicates that the rationale for this is the fact that it could The document is titled Québec Control Area Interim Review of Resource Adequacy and dated December HQD-, Document 0 (Revised), pages -0, Response. HQD-, Document, page HQD-, Document, page indicates that the annual peak demand during this period is between, MW and, MW

28 Régie File R make additions to peak capacity at month out. However, this statement is at odds with the balance of HQD s evidence which suggests a timeline of four years or more is required for all resources except wind power. Furthermore, given the annual planning review cycle used by HQD and discussed in the previous Section, once the current Plan has been adopted new supplies will not be available until the winter of As a result, it would be prudent for HQD to project its reserve margin requirements out to the winter of and use the reserve margin as determined for that year to project reserve requirements for subsequent years. There is no information available as to the reserve margins required beyond in order to maintain the NPCC reliability criteria However, given that the load forecast uncertainty increases over the planning horizon, one would expect the reserve margin requirements for the period through 0-0 to be higher. Indeed, simply increasing the reserve requirements in line with the annual increase in load forecast uncertainty would add 0. percentage points for each year. The capacity planning reserve margins used by Manitoba Hydro and BC Hydro, two other provincial utilities with predominantly hydraulic resources, are% and % respectively. The electrical systems for both of these provinces are admittedly different and the reserve requirements will not be the same as those for Hydro-Québec. However, after revising the long-term planning reserve requirements to reflect the reserve requirements for (as opposed to 00-00), HQD s long-term capacity planning reserve requirements are likely to be closer to these values. HQD-, Document, page HQD-, Document, page, Response 0.. and page, Response.. Also, HQD-, Document, pages and HQD-, Document, page Manitoba Hydro s April 00 NFAAT Application, Chapter, pages -. BC Hydro, 00 Integrated Electricity Plan, Section, page

29 Régie File R Heritage Pool Supply Total Supply Available Under the terms of the Heritage Pool, HQP is required to provide HQD with. TWh (includes transmission and distribution losses as well as internal uses and plant consumption by HQD, HQP and HQT). After allowing for internal use by Hydro- Québec, the Heritage Pool energy resources available to meet forecast customer requirements are. TWh 0. Furthermore the hourly load profile of the Heritage Pool energy has been set by Regulation and ranges from a maximum of, MW to,0 MW. The same Statute and Regulations require that HQP also provide the services and reserves necessary to guarantee the availability of the specified Heritage Pool supplies to HQD. As a result, HQP is required to provide some of the reserves necessary to meet the overall NPCC resource adequacy requirements. Specifically, it is currently estimated that the reserves associated with ensuring sufficient supply is in place to meet the, MW associated with the Heritage Pool are,00 MW (or roughly %). This number is substantially less than the,00 MW used in the 00 Plan Update. Comments There is an inconsistency between the reserve margin requirements associated with total load in the original Application and those associated with the Heritage Pool supply. Total reserve margin requirements are meant to address both load forecast uncertainty As specified in la Loi sur Hydro-Québec and associated Orders in Council HQD-, Document 0, page, Responses.-. 0 HQD-, Document 0, page, Response. HQD-, Document, page and R-0-00, HQD-, Document, Annexe A HQD-, Document, pages and HQD-, Document, page

30 Régie File R as well as uncertainty with respect to availability of generation. In contrast, HQP s responsibility for reserves with respect to the Heritage Pool extends only to generation (supply) availability. HQD is responsible for load forecast uncertainty. As a result, one would expect HQP s reserve margin requirements for the Heritage Pool to be less (in percentage terms) than the total reserve margin requirements for the system overall. For 00-00, when load forecast uncertainty is likely to be fairly small, the two reserve margins should be fairly close but the total reserve margin should still be higher. This is not the case in the 00-0 Plan where, for 00-00, the total reserve margin is.% which is less than the % attributed to the Heritage Pool supply capability. However, with the revised system reserve margin requirements filed by HQD this inconsistency no longer appears to exist as the total system reserve requirements for period through range from.% to 0.%... Heritage Pool Dispatch As indicated in Section.., HQD forecasts that additional energy will be needed in each year due to the need to manage the Heritage Pool in real time. This need arises due to the protocols that have been established between HQD and TransÉnergie, the entity responsible for the management of Québec s electricity system in real time. Essentially, HQD must provide advance notice to TransÉnergie as to how much electricity is to be dispatched from: HQD s long-term supplies acquired through CFTs based on the contract terms and HQD s direction to the suppliers themselves, Heritage Pool supplies based HQD s selection from the remaining hourly supply options available for the year concerned, and Québec Control Area 00 Interim Review of Resource Adequacy, December 00

31 Régie File R Short-term purchases, up to and including real time purchases based on the supply available from short-term contracts and planned real-time spot market purchases. However, to the extent HQD s actual supply requirements in an hour differ from those forecast by HQD and used to determine the resources it has dispatched, the differences will be made up by HQP. If the difference is positive, that is more energy is required than has been dispatched by HQD, then HQP will be deemed to have sold the difference to HQD. The framework agreement which HQD and HQP have negotiated sets the price that will be associated with such purchases. If the difference is negative, that is HQD has dispatched too much energy, then the excess is assumed to be unutilized Heritage Pool supply and there no compensation provided to HQD. In order to minimize the amount of unutilized Heritage Pool supply, a reconciliation is undertaken at year end. Once all the hourly HQD requirements and hourly dispatches of non-heritage Pool supplies are known, the hourly differences are compared and matched with the hourly supplies available from the Heritage Pool. However, there is unlikely to be a perfect match. Indeed, HQD has modelled this process and estimates that the discrepancy will be in the order to 0. TWh in the short-term, decreasing to 0. TWh in the longer term 0. Adjusted for any interruptible power load reductions HQD-, Document., Annexe, Slides -; HQD-, Document., page, Response. and HQD-, Document., page, Response. and page, Response. HQD-, Document., page, Response. and page, Response.. The price associated with involuntary energy is proposed in HQD filing R--00 dealing with the Framework Agreement and currently before the Régie. HQD-, Document 0, page, Response. HQD-, Document., page, Response. HQD-, Document, page, Response 0 HQD-, Document., page, Response. and Document, pages -, Responses 0. and.

32 Régie File R Comments Recognition by HQD that management of the Heritage Pool in real time will be less than optimal is consistent with concerns expressed in the ECS evidence filed for Phase II of R However, there are four issues/concerns with these additional requirements and the determination of involuntary purchases from HQP as specified by HQD in the current Plan. Possibility of Unutilized Heritage Pool Capacity First, HQD claims that, while management of the Heritage Pool in real time increases overall energy requirements, it does not have any impact on capacity requirements. However, if the protocols for real time dispatch of the Heritage Pool can lead to unutilized Heritage Pool energy due to an imperfect matching of Heritage Pool supply with actual loads on an hourly basis, then there is no reason to believe that these same protocols couldn t lead to mismatches in and around either the time of overall HQD system peak or in and around the time of the peak demand associated with post- Heritage Pool requirements. Indeed, as indicated in response to OC information request 0., unutilized energy can arise during all months of the year and during the critical winter months (December-February) averages just over 0 MW per hour. Treatment of Unutilized Heritage Pool Energy The second concern is with respect to the disposition of unutilized Heritage Pool energy. HQD s interpretation of the Regulations governing the Heritage Pool is that it can not make claim to unutilized Heritage Pool energy. HQD notes that this interpretation is consistent with how it has managed Heritage Pool electricity since the introduction of the Regulation. Evidence of, March 00, pages -. HQD-, Document, pages 0-, Responses. and. HQD-, Document, page HQD-, Document, page, Response.

33 Régie File R It is not the purpose of this evidence to provide a legal interpretation of the Regulation. However, based on simple reading of the Regulation, there is no reference in it to unutilized Heritage Pool energy. The Regulation just lays out what the Heritage Pool supply was to provide for including losses and internal use by HQP. There is no specific reference in the Regulation about real time management of Heritage Pool. Indeed, the existence of unutilized energy is, in itself, simply the result of the protocols established between HQD and TransÉnergie regarding the dispatch of HQD s resources. Over the longer-term, if spot market purchases (and the re-sale of energy acquired from other contracted resources) were used in real time to balance HQD s demand and supply requirements then there would be no unutilized Heritage Pool energy. HQD also contends that practice to-date, whereby HQD only took possession of Heritage Pool energy required to meet its domestic requirements and never claimed rights to Heritage Pool energy in order to sell it on external markets, is consistent with the proposed unutilized energy construct. However, the Regulation appears to make special provision for those years when HQD s total annual requirements did not exceed the Heritage Pool supply. Also, in its most recent rate application, when HQD s supply requirements were forecasted to exceed Heritage Pool supplies for 00, the Heritage Pool energy sold to HQD was determined by comparing HQD s total requirements with the Heritage Pool supply. In fact, no reference was made to either hourly load profiles, additional energy requirements to manage supply in real time or unutilized Heritage Pool energy until the cross-examination phase of the proceeding. In contrast, the 00-0 Supply Plan determines Heritage Pool energy used as the difference between the hourly profile of the supply not provided through HQD-sourced contracts (i.e., Heritage Pool and involuntary sales by HQP) and the hourly profile of the See Article of Decree -00, October, 00 R--00, HQD-, Document., page 0

34 Régie File R Heritage Pool supply as specified by Regulation. This leads to unutilized Heritage Pool energy both in the short-term and even in the longer term after the hourly load profile for HQD s total requirements exceeds the Heritage Pool s specified load profile in each and every hour of the year. However, once total requirements (for all hours of the year) exceed the Heritage Pool load profile then it is not necessarily Heritage Pool energy that is unutilized in serving domestic load in those circumstances where planned supply exceeded actual requirements in real time. One could equally view the excess as being sourced out of the other resources HQD has contracted for, which are available for HQD to resell. Furthermore, to the extent the excess (or unutilized energy) is sold on the export market or allows HQP to replenish its reservoirs, such excess supply has a real value. Such a perspective does not eliminate the fact that the energy contracted for by HQD will need to exceed the forecasted post-heritage Pool requirements, but it does mean that such unutilized energy should not be considered valueless. Indeed, one possible perspective would be to view the involuntary energy provided by HQP as being similar to the Energy Imbalance service provided by Hydro-Québec under its Open Access Transmission Tariff. Under the current Tariff, a Transmission customer compensates the Transmission Provider (TransÉnergie) for additional energy delivered at a rate of 0. cents / kwh and is compensated for additional energy supplied at a rate of. cents / kwh. In other jurisdictions, proposals for pricing energy imbalance services are directly linked to opportunity costs. For example, BC Hydro s recent proposal for Interconnection Operations Services called for the selling price to be based on market prices, differentiated between high load and low load hours. The purchase price was linked to market prices in the low load hours only in order to recognize that, with BC Hydro s available hydro reservoirs, involuntary on-peak HQD-, Document, pages -, Response. See page of Hydro-Québec s Open Access Transmission Tariff. BC Hydro Application to BCUC, August, 00, page

35 Régie File R purchases by BC Hydro were really only displacing off-peak imports. A similar approach could be considered by Hydro-Québec. Quantity of Unutilized Heritage Pool Energy Third, it is not clear why the energy required to manage the Heritage Pool in real time is initially set at 00 GWh per annum but assumed to decline to 00 GWh per annum in the later years of the Plan. HQD suggests that, as the total difference between the Heritage Pool supply and HQD s total requirements increases, the additional energy needed to manage the Heritage Pool in real time will decrease 0. However, unutilized Heritage Pool energy results from negative differences between: a) Total actual hourly requirements less the quantities contracted for by HQD (including real-time purchase directions to TransÉnergie) based on forecasted requirements and b) Heritage Pool energy. Since the amount of supply contracted by HQD will generally be set so as to balance total available supply (including Heritage Pool energy) and total forecasted requirements, unutilized energy is largely the result of errors in short-term load forecasting due to weather variations and other factors that give rise to day to day and hour to hour uncertainty with respect to anticipated loads. Unless these errors and uncertainties are reduced by experience, there is no reason to believe that the absolute quantity of energy required to manage the Heritage Pool in real time will decrease over the time-frame of the Plan. Treatment of Interruptible Power Finally, it is not clear from the material provided when and how interruptible power is incorporated into the system dispatch. Materials provided during the January, 00 Technical Conference suggest that interruptible power is called upon last after consideration of involuntary purchases from HQP. However, responses to various 0 HQD-, Document., Response. HQD-, Document., Annexe, Slides and.