Application by Transcanada Pipelines for Approval of Restructuring and Mainline Final Tolls for 2012 and 2013 Before National Energy Board
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Application by TransCanada Pipelines for Approval of Restructuring and Mainline Final Tolls for 2012 and 2013 before National Energy Board RH-3-2011 Evidence of John Wolnik P. Eng. MBA on behalf of the Association of Power Producers of Ontario (“APPrO”) March 9, 2012 Elenchus Research Associates Suite 610 34 King St. East Toronto, ON, M5C 2X8 RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 1 of 9 1. Purpose of This Evidence This evidence is being submitted by John Wolnik on behalf of APPrO in the TransCanada Mainline 2012 and 2013 NEB RH-3-2011 application. The purpose of this evidence is to provide information illustrating the financial impact of higher Mainline tolls on gas-fired generators over the last several years. 2. Natural Gas Fired Generation in Ontario A number of APPrO's gas-fired generator members are non-utility generators (“NUG”s). These plants were developed in the late 1980s and early 1990s. This group of NUG generators represents approximately 1,260 MW of gas-fired generating capacity, located in Southern, Eastern and Northern Ontario. Most of these NUGs have or had long term, long-haul, firm transportation (“FT”) contracts on the Mainline to supply their facilities either directly or indirectly. More recently the Province of Ontario embarked on a program to close its coal-fired generating facilities. Some of this coal-fired generation capacity has been replaced with gas-fired generation. A total of 4,154 MW1 of Clean Energy Supply (“CES”) simple and combined cycle gas-fired generation capacity has been developed. A further 966 MW2 of gas-fired combined heat and power generation has been developed. A further 393 MW of gas-fired generation is in the commissioning process at this time and is expected to be in commercial operation in the spring of 20123. These CES generators include simple and combined cycle plants as well as combined heat and power plants. For all intents and purposes, these NUG and CES gas-fired generators situated outside the Union South franchise area are captive to the Mainline for delivering natural gas supply to their plants. Gas-fired generators rely heavily on both long-haul 1 A Progress Report on Electricity Supply Third Quarter 2011; Ontario Power Authority, page 23. (Excludes OPG’s Lennox Generation Station which is an additional 2,140 MW of dual fuel (gas/oil) capability.) 2 Ibid, page 24 3 http://www.vereseninc.com/upload/presentation/93/01/veresen-presentation---january-2012.pdf RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 2 of 9 and short-haul transportation on the Mainline system. Some of the generators have been willing to enter into long-term contractual arrangements for their Mainline transportation requirements, in some cases for primary terms up to 20 years. The OPA also has 7,928 MW4 of renewable energy under contract from wind, solar and bioenergy sources as of the end of the third quarter 2011. Some of these renewable sources of generation are intermittent and gas-fired generation provides alternate generation for the Province when this renewable power is not fully available. 3. Mainline Transportation Contracts held by Generators Most of the NUGs have or had long term, long-haul FT contracts on the Mainline to supply their respective facilities and source supply from the Western Canadian Sedimentary Basin (WCSB). In most cases these plants are self-dispatching and operate at relatively high capacity factors resulting in high load factor utilization of their respective FT Mainline contracts. Most of the CES generators on the other hand are fully dispatchable and are generally dispatched after the provincial demand exceeds the combination of baseload generation, renewable generation or other forms of non-dispatchable power generation. As a result, natural gas loads at these plants are much more variable and operate at lower capacity factors than the NUGs. Their load factor utilization of the upstream FT or FT-SN contracts reflects the dispatchability of the plants. The power purchase arrangements in these cases are with the Ontario Power Authority (“OPA”). In these cases the fuel costs were required to be based on a Dawn index price. These generators naturally contracted for transportation capacity for their plants from Dawn. Their plants are dispatchable and are required to start up on short notice and they may also be required to shut down on short notice. These operating parameters require them to have balancing arrangements to manage the 4 A Progress Report on Electricity Supply Third Quarter 2011; Ontario Power Authority, page 6 RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 3 of 9 variability in natural gas supply throughout the day, and day-to-day, and Dawn is the only point in Ontario where physical natural gas storage is available. Those generators outside of Union Gas Ltd.’s (“Union”) South franchise area contracted long term with the Mainline for short-haul transportation arrangements. Most of the larger CES generators outside the Union South franchise use the Mainline's Firm Transport Short-Notice (FT-SN) transportation service. Schedule 1 illustrates the listing of generators and their respective FT and FT-SN contracts on the Mainline since 2006. As illustrated in Schedule 1, some generators have chosen not to renew all or a part of their long term FT arrangements. While specific reasons as to why individual generators did not renew their FT contracts are not known, high Mainline tolls experienced in the last several years are most certainly a contributing factor. Overall generators as a group have increased the amount of FT and FT-SN capacity under contract to the Mainline since 2006 from 176,267 GJ/d to 486,336 GJ/d in 20125. This represents an increase of 175% of the FT and FT-SN capacity by generators under contract over this period. 4. Mainline Toll Increases The long-haul Eastern Zone toll is often looked at as a benchmark toll for the Mainline. Since other Mainline tolls are set in a similar fashion, the percentage change to the Eastern Zone toll is often used as a proxy for other Mainline toll changes. Figure 1 illustrates how the Eastern Zone toll has changed since 1995. For the period between 1995 and 2006, this toll was relatively stable and averaged approximately $1.02/GJ. Since 2006 to the current period, this toll has increased by 127%. Other long-haul and short-haul tolls would have experienced similar dramatic toll changes over the last 5 years. 5 Schedule 1 6 TransCanadaTollArchive generators havebeenselectedas illustrativeex order todemonstratethis burden thatageneratororanyendusecustom percentage changeintolls.Howeverthis When examiningannualtollchanges,itis 5. Financial ImpacttoGenerators $0.50 $1.00 $1.50 $2.00 $2.50 $ ‐ May‐95 Oct‐95 TransCanada Mar‐96 Aug‐96 Jan‐97 Figure 1 Mainline Eastern Zone 100% LFTolls Figure 1MainlineEasternZone100% Jun‐97 Nov‐97 Apr‐98 Sep‐98 Mainline Feb‐99 financial impactfromhigherMainlinetolls, twoindividual Jul‐99 Dec‐99 May‐00 Oct‐00 Mar‐01 100% Aug‐01 Jan‐02 Load analysisdoes notquantifytheannualcost Jun‐02 helpful tounderstandtheyear Nov‐02 Apr‐03 Sep‐03 Factor er isexposedtofromrisingtolls.In amples foramoredetailedanalysis. Feb‐04 Jul‐04 Dec‐04 Eastern May‐05 Oct‐05 Mar‐06 Aug‐06 127 % Increase Jan‐07 Zone Jun‐07 6 Nov‐07 Evidence ofJohn Wolnik Apr‐08 Toll Sep‐08 On behalf ofAPPrO Feb‐09 ($/GJ) Jul‐09 Dec‐09 Page 4of9 RH-3-2011 RH-3-2011 May‐10 Oct‐10 Mar‐11 Aug‐11 Jan‐12 RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 5 of 9 As described earlier, generators generally fall into NUG and CES categories, Cardinal Power (Cardinal) was selected as the illustrative NUG generator, and Goreway Power Station (Goreway) as the illustrative CES generator. Cardinal operates a 156 MW7 combined cycle cogeneration plant that sells steam to a nearby industrial customer. It is located in Cardinal, Ontario which is situated approximately 100 km east of Kingston on the St. Lawrence River. It commenced commercial operation in November 1994 and continues its operation utilizing a 20 year FT transportation arrangement with the Mainline. Cardinal does not directly hold the long-haul FT contract in its own name but rather the FT contract (# 5106) that Cardinal relies on to transport its fuel supply was originally entered into by Cardinal and was subsequently assigned to Husky Energy (“Husky”). Cardinal continues to be commercially responsible to Husky for the Mainline FT charges thereunder. As shown in Schedule 1, the Contract Demand (“CD”) of this FT contract is 33,563 GJ/d. The annual transportation costs can be determined by multiplying the effective monthly demand charge8 by the number of months the toll was in effect and then by the CD (from Schedule 1). The commodity charge associated with the FT and FT- SN contracts was not included in the annual cost calculations as the actual load factor these plants operate at each year can vary somewhat year to year which could create small distortions in the analysis. Figure 2 illustrates the dramatic increase in Cardinal’s annual demand charge costs for their FT contract since 2006. The annual demand charges have increased from just under $11 million in 2006 to an annual cost of almost $25 million in 2011, an increase of almost $14 million or approximately 128%, over the last several years. 7 http://www.capstoneinfrastructure.com/Assets/FinancialReports/FactSheets/Cardinal%20Power%20Fact%20Sheet% 20Final%202_991068_1%20(ISF_Toronto).PDF 8 http://www.transcanada.com/customerexpress/mainline.html RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 6 of 9 The 2011 toll is currently still in effect on an interim basis for 2012 so Cardinal continues to pay these elevated demand charges on a monthly basis.