Docket UE21005
Order UE94-3IN THE MATTER of an Application by Maritime Electric Company, Limited for approval to purchase capacity and energy produced at the Point Lepreau plant and for approval to amortize generation planning costs.
BEFORE THE COMMISSION
on Friday, the 4th day of March, 1994.
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
Reasons for Order
Contents
Appearances & Witnesses
Reasons for Order
Part One
The Application
1.1 Introduction
Part Two
Assessment of the Point Lepreau Purchase
2.1 Introduction
2.2 The Need for Capacity
2.3 Generating Planning Analysis
2.4 Risk Analysis
2.5 The Contract
2.6 Generation Planning Costs
Appearances & Witnesses
1. For Maritime Electric Company, Limited
Counsel:
William G. LeaWitnesses:
J. A. Lea, Vice-President, Corporate Planning
E. G. Price, Atomic Energy of Canada, Limited
V. G. Snell, Atomic Energy of Canada, Limited2. For the Minister of Economic Development and Tourism, Government of Prince Edward Island
Counsel:
Shauna Sullivan-Curley3. For the Prince Edward Island Energy Corporation
John te Raa, Operations Manager
4. For the Town of Summerside
Robert Hughes
5. For the Environmental Coalition of Prince Edward Island:
Jeremy Stiles
David Daughton6. For Himself:
Dr. Peter Meincke
7. For The Island Regulatory and Appeals Commission
Counsel:
Thomas A. MathesonStaff Witness:
D. G. Brown, ConsultantStaff:
Donald G. Sutherland, Director, Utilities Division
George W. Mason, Senior Analyst, Utilities Division
Heather Walker, Recording Secretary
Part One
The Application
1.1 Introduction
This is an application under the Electric Power and Telephone Act, R.S.P.E.I. 1988, Cap. E-4 (the "Act") by Maritime Electric Company, Limited (the "Applicant", "Maritime Electric", the "Company") seeking approval of The Island Regulatory and Appeals Commission (the "Commission") for:
1. the purchase of capacity and energy under the terms of a 1994 Point Lepreau Participation Agreement for the period November 1, 1994 to October 1, 2000; and,
2. approval of the amortization of generation planning costs incurred during the past five years over the same period;
The application was filed on October 21, 1993 and the Notice of Hearing was published on November 18 and November 22, 1993. A News Release was issued on January 8, 1994 followed by a further notice on January 11, 1994. Public hearings followed on January 11, 12 and 13, 1994.
Interventions in this case were filed by the Minister of Economic Development and Tourism, the Prince Edward Island Energy Corporation, the Town of Summerside, the Environmental Coalition of Prince Edward Island and Dr. Peter Meincke. Mr. Dan Brown also appeared as a witness for Commission Staff. As in all proceedings of this nature, the Commission benefits from the efforts of the interveners. We acknowledge their contributions.
Part Two
Assessment of the Point Lepreau Purchase
2.1 Introduction
In this proceeding, the assessment of the Point Lepreau application focused largely on Maritime Electric’s need for capacity, the support for the purchase as a least cost option and an assessment of the risks associated with generation in general and nuclear power specifically.
2.2 The Need for Capacity
Maritime Electric currently has two electricity contracts that expire on October 31, 1994. The first is a 5 megawatt (MW) contract for capacity and energy originating from Hydro Quebec and the second is a 20 MW entitlement in the Point Lepreau plant. The contract which is the subject of this application is largely an extension of the latter contract with the entitlement increased to 25 MW and a number of other modifications. Since the Company is effectively applying for replacement capacity, the need for new capacity was not raised as a major issue in this hearing.
Some discussion took place about the size of the purchase and specifically whether a larger or smaller purchase would be optimal. Since the Company was anticipating a need for additional capacity as early as 1995, a larger purchase might be justified. On the other hand, the Town of Summerside currently has an application before the Commission which, if approved, might reduce the Company’s requirement for firm capacity. Opportunities for non-utility generation or an increase in interruptible capacity are also possible which might offset the anticipated growth in capacity requirements. Finally, according to Company witness Mr. Lea, the operating reserve requirements of Maritime Electric place a practical constraint on the amount of capacity that can be purchased from one plant. On balance, the Commission is satisfied that the Company has demonstrated that the size of the purchase is reasonable.
2.3 Generation Planning Analysis
Maritime Electric’s long term planning was last reviewed during the Advance Plan hearing in 1992/93. At that time, the Company evaluated a number of generating alternatives and its preferred option appeared to be an equity interest in the Point Aconi coal plant in Nova Scotia. When, according to the Company, it appeared that they could not finalize an agreement without significant delays, the Company reevaluated the options available. In the interim, the Company’s concerns with respect to the need for retubing at the Point Lepreau plant over the next few years were alleviated by the results of trials with the Spacer Location and Repositioning (SLAR) program. The Point Lepreau option was therefore added and a number of other options dropped for the purposes of the 1993 generation planning analysis.
The major options reviewed by the Company in support of this application were:
1. Participation in the Belledune coal plant in New Brunswick;
2. Entitlement in the Point Lepreau plant in New Brunswick;
3. Hydro Quebec contract;
4. Construction of a medium speed diesel plant;
5. Construction of a low speed diesel plant; and
6. Construction of gas turbine/heat recovery steam generator.
After a preliminary screening, in which the Company eliminated the higher cost options and identified Point Lepreau as the most likely least cost option, three scenarios were evaluated for lowest long-term cost:
1. Combined participation in Belledune and Point Lepreau;
2. Participation in Point Lepreau, only; and,
3. Hydro Quebec contract.
Based on this analysis and a sensitivity analysis of the major economic assumptions, the Company continued to identify Point Lepreau as the least cost option.
The results of the economic analysis were summarized by Commission Staff witness, Mr. Brown, as follows:
In summary, my conclusion is that subject to a review of the risks associated with the different options, the Lepreau purchase for the period under consideration, 1994 through 2000, is the best option available to MECL and the analysis supporting this choice as well as the assumptions employed in the analysis are satisfactory.
(Exhibit I-2, Pg. 3)
Considerable discussion of the various risks took place at the hearing as is summarized in the following sections.
2.4 Risk Analysis
For the purposes of this analysis, risks are broadly classified into:
1. Technical Risks associated with plant performance;
2. Economic Risks associated with power costs; and,
3. Other Risks associated with potential liability, etc.
Clearly, these risks are interrelated and the arbitrary classification is intended only for ease of discussion.
2.4.1 Technical Risks
The major technical risks discussed included issues related to:
1. The need for retubing during the contract period;
2. Failure of the steam generator; and,
3. Failure of transmission capability to Prince Edward Island.
Prior to the current application, Maritime Electric had expressed reservations about continued participation in the Point Lepreau plant because of the uncertainty about when retubing, a major plant investment, would be required. The Company’s concerns have apparently been satisfied, at least in part, by recent activities at the plant which were addressed by Company witness Mr. E.G. Price of Atomic Energy Canada, Limited. Mr. Price described in detail the Spacer Location and Repositioning (SLAR) program that had undergone trials at Point Lepreau (and other CANDU plants) and was planned for full implementation in early 1995. In summary, Mr. Price concluded that he was confident that the SLAR program would proceed as planned to restore the reactor tubes to design conditions and that, once completed, the risk of retubing being required during the term of this contract was very low.
The other risks related to the SLAR program are that it would take much longer than expected or that the capital cost would be much higher than expected. In terms of duration, Maritime Electric’s evidence indicates that the total cost for power resulting from the participation agreement during the SLAR outage is expected to be similar to the power cost when the plant is operating. The power cost would therefore be expected to increase significantly only if there was a major change in power markets in the short term or if the program took considerably longer than anticipated. Both of these risks appear to be addressed satisfactorily. The capital cost risk also appears to be limited since the cost of the SLAR program makes up a small, though not insignificant, part of the overall plant cost.
Mr. Price also addressed the potential problems with steam generators which are another area of concern in CANDU plants. According to Mr. Price, the steam generators at Point Lepreau are in good condition and, as long as the regular maintenance now performed at the plant continues, should not result in any significant risk to planned plant performance.
The other major components of the plant, according to Mr. Price, are similar to those in other plants and should not present any unusual risk which is not common to conventional generating plants.
Another risk common to all generation purchases from off-Island sources is the risk of a failure in the capability to transmit the energy to Prince Edward Island. In general terms, this has been of concern for some time and has been addressed, in part, by improvements to the transmission system in New Brunswick and to the interconnection that were completed in recent years. The risk, however, remains that Maritime Electric will have to pay for its entitlement when, due to system failure, it cannot receive the electricity. This risk is reduced, though not eliminated, by the Article XV of the contract by which NB Power agrees to purchase undeliverable power at their avoided cost. In the view of the Commission, the remaining risk is acceptable given the economic benefits projected to result from the contract.
In assessing the risks associated with nuclear plants, it is difficult to avoid consideration of a major plant catastrophe. Company witness Mr. Snell of AECL addressed the problem with the following principle points:
1. The major reactor failure to date at Chernobyl resulted from a design that is much different and from faults that are much less likely to occur in a CANDU designed unit;
2. The major failure in North America at the Three Mile Island plant was fully contained and did not have significant impacts (other than economic ones) beyond the plant site; and,
3. The overall risk of a major failure is very small and has been quantified in the order of one every ten thousand reactor-years.
While none of these points do or can eliminate the possibility that the plant will be shut down during the contract period, they do satisfy us that the risk is low. The plant is already in operation and our physical exposure in this province is similar whether or not we are receiving power from the plant.
Further on the issue of risk, the Commission recognizes that there is a difference between the issues related to participating in an existing plant versus those related to participating in the construction of a new facility. Were we looking at the latter case, our view of the risks discussed above might be different.
2.4.2 Economic Risks
The major economic risks discussed included:
1. Fuel supply and price risk;
2. Financial risks related to inflation, exchange rate fluctuations and interest rates; and,
3. Plant decommissioning and fuel disposal risks;
Fuel risks were addressed principally by the AECL witnesses who assessed them as very low. With respect to supply, Canada was stated to have ample supply from its existing mines as well as significant uranium reserves for potential future development. In terms of price, AECL witness Mr. Price stated that the fuel price makes up a relatively small portion of the total power cost and that even a major change in fuel bundle prices should have a relatively modest impact on overall power costs.
Financial risks were assessed by Company witness Mr. Lea and Commission Staff witness Mr. Brown. Their testimony essentially concluded that many of the risks are common to all of the options—to varying degrees—and that those risks which might be greater for Point Lepreau participation are acceptable when considering the projected benefits of this option over the contract period.
The plant decommissioning and fuel disposal risks were presented as issues related primarily to continued participation beyond the term of the proposed contract. On this basis, it would appear that the major risks are related to New Brunswick Power determining that its decommissioning and irradiated fuel management funding is insufficient and has to be increased significantly. The current estimates appear to indicate that funding is sufficient; however, the Commission notes that according to the Company’s witnesses, acceptable, long-term solutions to these problems have not been reached and the issues may become increasingly important if a contract extension is considered.
2.4.3 Other Risks
The other major risks discussed related to regulatory risk and a current court challenge to the Nuclear Liability Act. Mr. Snell of AECL addressed regulatory risk from the perspective of the Atomic Energy Control Board imposing stricter or new requirements on the operation of the plant which would impact on the cost or even viability of operating the plant. In his view, as long as NB Power continued to operate the plant in a reasonable manner, regulatory risk was very low. The other participants did not challenge his opinion.
Another concern is related to the current challenge of the Nuclear Liability Act which currently limits the liability of the operator of a nuclear plant from third party losses caused by a nuclear accident. On review of the evidence before us, it appears that this issue is not likely to be resolved for many years and will be of greater concern when the contract extension option is considered.
2.4.4 Positions of Interveners
The only party opposing the application was the Environmental Coalition of Prince Edward Island (ECOPEI). They are opposed to nuclear power on economic and environmental grounds. Unfortunately, their participation was limited largely to issues which were insufficiently supported by fact and which were, in our view, addressed satisfactorily by the Company and its witnesses.
ECOPEI did, in our view, raise a valid concern about the process that led up to this application. At the Advance Plan hearing a year earlier, Point Lepreau was not even viewed as a major option, but rather as a possible source of "bridging" capacity. The Company’s preferred option was participation in the Point Aconi plant in Nova Scotia and ECOPEI was prepared to challenge that participation, which they also opposed. Instead, less than a year later, the Company came forward with a totally different option.
The Commission is concerned about whether this is an indication of initial inadequate planning on behalf of the Company followed by a lack of communications with other interested parties. In terms of planning, some discussion took place at the hearing with respect to whether the Company’s planning staff was adequate. In terms of communications, it is possible that there is a need for keeping parties up to date on developments when it is known that they have an interest. We expect the Company to review these matters and ensure that they are appropriately addressed in the future.
Mr. Peter Meincke intervened on his own behalf to discuss what he felt was a broader responsibility of the Company and others for making sound energy choices in the future. He believes that the Commission has no choice but to approve this application; however, he also feels that the province has lost its leadership role in small and more environmentally acceptable alternatives. The Commission believes that Mr. Meincke raised issues which may well be worth pursuing and we look forward to his participation at future hearings.
The Prince Edward Island Energy Corporation’s major interest in this application appeared to be to ensure that there was some capacity "set aside" to allow for their plans as a Non-Utility Generator. We understand that the Energy Corporations objective has, at least in part, been addressed by the expected need for additional capacity in the near term.
The Minister of Economic Development and Tourism supported the proposed contract as being in the best interests of electricity consumers in the province.
1. The proposed 1994 Point Lepreau Participation Agreement is approved;
2. The Company shall make application to the Commission for approval of any proposed amendments to the Agreement, including any proposal to exercise any option, in sufficient time for such changes to be reviewed by the Commission and by interested parties;
3. The Company shall update the Commission annually, on matters related to the participation in Point Lepreau and the possible exercise of the option;
2.5 The Contract
2.5.1 Introduction
The 1994 Point Lepreau Participation Agreement is, in most ways, similar to the agreement approved by the Commission in 1990. The major differences relate to the SLAR outage, discussed above, and the option to extend the agreement for the life of the plant. The Company also proposes to negotiate changes to address possible future changes in the ownership of the plant.
2.5.2 The Option
The proposed contract includes an option for Maritime Electric to extend its participation to the useful life of the plant at any time during the contract period. In exchange for this option, Maritime Electric effectively pays approximately $1 million per year until such time as the option is exercised (or the contract terminates). This option is argued to give Maritime Electric significant benefits as it provides an opportunity for long term power at reasonable cost at the same time that it allows them to let their obligations lapse at the end of the contract if further participation does not appear to be attractive. While no participant was willing to assign a value to the benefits of the option—its assessment being largely judgmental—there was no strong opposition to it. The Commission is satisfied that this option is reasonable.
The accounting treatment of the option was not discussed at the hearing. At issue might be whether the benefits of the option—either participation in low cost generation or avoidance of high cost power beyond 2000—should be paid by rate payers during the contract period or beyond. Our understanding is that the Company intends to expense the cost of the option as incurred. Due to the uncertainty of future benefits and the practical problems with deferral, we accept this approach.
In terms of a decision to exercise the option, Commission Staff witness, Mr. Brown, made the following comments:
In my opinion the option should be retained and every effort made to determine NBPC’s intent with respect to pressure tube replacement now contemplated for the year 2008. It’s possible that the utility in New Brunswick may decide to retire the unit rather than go ahead with pressure tube replacement in 2008. Although, at least in my opinion, this is unlikely since there are those who believe that the pressure tube and steam generator tube replacement can result in an overall life of 60 years for this unit. Thus it would seem reasonable to expect the utility in New Brunswick to opt for life extension of this unit. However, at this point this is not at all certain and it would be prudent for MECL to wait until after the SLAR program has been completed and further analysis has been done on the condition of the pressure tubes and steam generator tubes has been completed. ...
(Exhibit I-2, Pg. 6)
The Commission tends to agree that the option’s purpose is to avoid risk and that it should not be exercised, if it is exercised at all, until the risks of future participation can be better evaluated. The Company has also committed to make further application before any proposed exercise of the option is executed and we expect it to do so.
2.5.3 Privatization Clause
Commission staff witness, Mr. Dan Brown, raised the issue of the potential impact on the contract if NB Power were to be privatized over the contract period. While it is not known whether any such plan exists, Nova Scotia Power has recently been privatized and plans have been announced to privatize part of Newfoundland and Labrador Hydro. In such an environment, the issue of privatization merits consideration.
Since the contract only allows for capital related costs associated with debt, there is no provision for possible privatization of NB Power. Maritime Electric has requested that the Commission proceed to reach a decision on the application as presented and that approval be granted on condition that the approval is subject to further approval of amendments related to privatization.
Based on the evidence presented we do not believe that the specific condition requested by the Company is necessary. It appears to us that the privatization clause is largely in the interest of fairness to NB Power as it is likely to increase rather than decrease the cost of the contract to Maritime Electric. Therefore, its omission should not necessarily cause us to withhold our approval. We view this like any other amendment which we would expect the Company to bring forward for approval before executing.
2.6 Generation Planning Costs
The past practice of the Company has been to accumulate costs associated with generation planning in a deferred account and then to either capitalize them with the new investment or amortize them over the life of the resulting contract. In this application, the Company proposes to amortize approximately $1.4 million in costs incurred over the last five years over the period November 1, 1994 to October 31, 2000, the term of the contract. Company witness, Mr. J. A. Lea responded, with respect to questioning related to IRACStaff 3.1 (Exhibit M-3), that the Company would have no particular objection to amortizing the costs over a modified period, for example, the period January 1, 1994 to December 31, 2000. In the view of the Commission, this appears to be more consistent with recent practice and also achieves some stability of costs, especially in 1994.
4. The Company shall amortize generation planning costs that have led up to this application on a straight line basis over the revised period January 1, 1994 to December 31, 2000;
5. This Order does not apply to proposed amendments to the agreement related to possible changes in ownership structure for the plant; and
6. The proposed amendments referred to in paragraph 5 herein will be considered by the Commission at a later date.
DATED at Charlottetown, Prince Edward Island, this 4th day of March, 1994.
BY THE COMMISSION:
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
