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 -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 RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 4 of 9

TransCanada Mainline 100% Load Factor Eastern Zone Toll ($/GJ) $2.50

$2.00

Increase

$1.50 %

127

$1.00

$0.50

$‐ 08 07 07 07 06 05 06 03 02 02 02 01 00 01 98 97 97 97 96 12 11 95 96 10 11 08 04 05 04 03 04 99 00 99 98 99 95 09 10 09 09 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jan Jan Jan Jan Jun Jun Jun Oct Oct Oct Oct Apr Apr Apr Sep Feb Sep Feb Sep Feb Dec Dec Dec Aug Aug Aug Aug Nov Nov Nov Mar Mar Mar Mar May May May May

Figure 1 Mainline Eastern Zone 100% LF Tolls6

5. Financial Impact to Generators

When examining annual toll changes, it is helpful to understand the year to year percentage change in tolls. However this analysis does not quantify the annual cost burden that a generator or any end use customer is exposed to from rising tolls. In order to demonstrate this financial impact from higher Mainline tolls, two individual generators have been selected as illustrative examples for a more detailed analysis.

6 TransCanada Toll Archive 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.

Annual Cost of the Mainline Demand Charge Component of FT Service to Cardinal Power (156 MW) Demand Annual Cost Increase from 2006 Year Charge Only per MW Change % Change 2006 $ 10,789,077 $ 69,161 $ - 0 2007 $ 11,624,416 $ 74,515 $ 835,339 7.7% 2008 $ 14,683,348 $ 94,124 $ 3,894,272 36.1% 2009 $ 13,442,267 $ 86,168 $ 2,653,191 24.6% 2010 $ 19,240,033 $ 123,334 $ 8,450,956 78.3% 2011 $ 24,636,117 $ 157,924 $ 13,847,041 128.3%

Figure 2 Cardinal Power Annual Demand Charge Costs

Goreway was selected as the illustrative CES generator to look at the impact of recent changes to the Mainline tolls. Goreway is an 839 MW9 combined cycle power plant situated in the City of Brampton. Goreway entered into one of the first CES contracts with the OPA. It commenced commercial operation in June of 2009. As noted earlier this plant, like all CES plants, operates at lower capacity factors than NUG plants.

As shown in Schedule 1, Goreway has contracts 36992 and 36993 with the Mainline. Because of the dispatchable nature of the plant, Goreway contracted for two FT-SN contracts with the Mainline from Parkway to Goreway CDA. The CD of the two contracts totals 160,000 GJ/d. One FT-SN contract was for 140,000 GJ/d and is renewable year to year. Goreway has a second 20 year FT-SN contract for 20,000 GJ/d that commenced in January 2009 and extends to October 2028. For the renewable contract, Goreway only renewed 120,000 GJ/d of the total 140,000 GJ/d of capacity in 2011. The aggregate CD for the two contracts was 160,000 GJ/d in 2009 and 2010 and 140,000 GJ/d from 2011 onwards. The financial analysis

9 A Progress Report on Electricity Supply Third Quarter 2011; Ontario Power Authority, page 25 RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 7 of 9

prepared below assumes an aggregate CD of 140,000 GJ/d for the two contracts for the entire period and also excludes the commodity costs.

Figure 3 illustrates the annual cost of the demand charges paid by Goreway since the FT-SN contracts commenced in 2009. It can be seen that the annual cost of the demand charges has increased from $2.16 million in 2009 to $3.82 million in 2011, and increase of $1.65 million or 76%.

Annual Cost of the Mainline Demand Charge Component of FT-SN Service to Goreway (839 MW) Demand Annual Cost Increase from 2009 Year Charge Only per MW Change % Change 2006 $ - $ - 0.0% 2007 $ - $ - 0.0% 2008 $ - $ - 0.0% 2009 $ 2,164,999 $ 2,580 $ - 0.0% 2010 $ 2,785,238 $ 3,320 $ 620,239 28.6% 2011 $ 3,817,304 $ 4,550 $ 1,652,305 76.3%

Figure 3 Goreway Station FT-SN Contract Demand Charges

6. Summary  Gas-fired generators have added significant contracted FT and FT-SN capacity to the Mainline and are a significant group of end use shippers on the Mainline.  Generators have often signed up for long term contracts for as long as 20 years.  Generators have seen a dramatic increase in their demand charges payable to the Mainline since 2006.  The annual costs payable by an individual generator or customer from these higher transportation demand charges have been very significant. When these higher toll increases are applied to all generators it results in a very material increase in costs being borne by Ontario gas-fired generators. RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 8 of 9

7. Qualifications of John Wolnik

I earned a Master of Business Administration degree from McMaster University in 1984 and a Bachelor of Engineering degree from McMaster University in 1974.

I held various positions of increasing responsibility for Union Gas from 1974 to 1993 in various departments including engineering, operations, business development and gas supply. During the time in gas supply, I held the role of, Manager Gas Purchasing. This role was responsible for acquisition of over 250 PJ of gas supply and related transportation to deliver gas from the point of purchase to Union’s franchise. This included supply sources from the WCSB as well as US supply sources from the Gulf Coast, Mid-continent region, and the Midwest. During this time, existing supply arrangements were renegotiated, new long term supply and transportation agreements were entered into, as well as developed a flexible gas purchasing strategy to acquire gas and transportation that reflect the utility requirements.

From 1993 to 2003, I worked for Westcoast Energy, the parent company of Union Gas, in various senior business development roles. This role was responsible for investigating, assessing and developing new gas pipeline and underground storage projects. This included market assessment, development of tolls and tariffs, acquiring regulatory approvals and marketing services.

In 2004 I started consulting and have been an Associate of Elenchus Research Associates since that time. Consulting assignments have included providing regulatory, technical and commercial support to clients. The regulatory support has included representing APPrO in utility rate cases as well as other regulatory proceedings at the Ontario Energy Board (OEB). Commercial support has also been provided to gas-fired generators as well as other large volume customers in contracting for gas supply, transportation and storage services. RH-3-2011 Evidence of John Wolnik On behalf of APPrO Page 9 of 9

I have appeared one other time before the NEB and have on several occasions appeared before the Ontario Energy Board on behalf of Union Gas as well as more recently on behalf of APPrO.

I have also represented APPrO at TransCanada’s Tolls Task Force (TTF) meetings since 2008.

RH-3-2011 Evidence of John Wolnik On behalf of APPrO Schedule

Schedule 1

Summary of Gas-fired Generator TransCanada Mainline FT Transportation Contracts Contract Demand (GJ/D) as of January CDE Report Original Contract Dates (Source:http://www.transcanada.com/customerexpress/888.html) Comments Contract Generator Start Date End Date Type Receipt Delivery 2006 2007 2008 2009 2010 2011 2012 Contracts renewed from 2006 20383 Greater Toronto Airport Authority 1-Nov-2003 31-Oct-2006 FT Union Dawn Enbridge CDA 1,100 1,100 1,100 1,100 1,100 1,100 1,100 28756 Greater Toronto Airport Authority 1-Apr-2006 31-Oct-2018 FT Union Parkway Enbridge CDA 7,500 7,500 7,500 7,500 7,500 7,500 28658 Goreway Station Partnership 1-Nov-2007 31-Oct-2008 FT Union Parkway Enbridge CDA 140,000 36992 Goreway Station Partnership 1-Jan-2009 31-Oct-2028 FT-SN Union Parkway Goreway CDA 20,000 20,000 20,000 20,000 Contracts renewed from 2009, renewed at 36993 Goreway Station Partnership 1-Jan-2009 31-Oct-2009 FT-SN Union Parkway Goreway CDA 140,000 140,000 120,000 120,000lower volume in 2011 5044 Epcor Power LP 1-Nov-1994 31-Oct-2014 FT Empress TransCanada NDA 7,536 7,536 7,536 7,536 7,536 7,536 7,536Name Change to Captial Power in 2010 13753 Epcor Power LP 1-Feb-2000 31-Oct-2011 FT Empress TransCanada WDA 6,502 6,502 6,502 6,502 6,502 6,502 Name Change to Captial Power in 2010 38101 Thorold Cogen LP 1-Sep-2009 31-Aug-2019 FT-SN Kirkwall Thorold CDA 49,500 49,500 49,500 12063 TransAlta Cogeneration 1-Nov-1998 31-Oct-2006 FT Empress Union CDA 11,809 5039 West Windsor Power 1-Sep-1995 31-Dec-2015 FT Empress Union CDA 20,645 20,645 20,645 20,645 20,645 8,145 8,145Volume adjustment in 2011 Husky Energy (on behalf of 5106 Cardinal Power) 1-Jul-1994 31-Oct-2014 FT Empress Union EDA 33,563 33,563 33,563 33,563 33,563 33,563 33,563 12870 1-Nov-1999 31-Oct-2009 FT Empress Union EDA 10,666 10,666 10,666 10,666 4,000 4,000 4,000Contract renewed from 2009 at lower volume 1375 Cochrane Power Corporation 1-Dec-1989 30-Nov-2009 FT Empress Union NDA 6,089 6,089 6,089 6,089 13757 Epcor Power LP 1-Feb-2000 31-Oct-2016 FT Empress Union NDA 8,182 8,182 8,182 8,182 8,182 8,182 8,182Name Change to Captial Power in 2010 13758 Epcor Power LP 1-Feb-2000 31-Oct-2016 FT Empress Union NDA 8,182 8,182 8,182 8,182 8,182 8,182 8,182Name Change to Captial Power in 2010 6498 Iroquois Falls Power Corp 1-Sep-1996 31-Aug-2016 FT Empress Union NDA 20,874 20,874 20,874 20,874 20,874 20,874 20,874 2280 Kirkland Lake Power Corp 1-Dec-1991 31-Oct-2006 FT Empress Union NDA 18,682 18,682 18,682 Contract renewed to 2008/10/31 2990 Lake Superior Power LP 1-Nov-1993 31-Oct-2008 FT Empress Union SSMDA 22,437 22,437 22,437 10,100 10,100 Contracts renewed from 2008, at lower volume 39703 Lake Superior Power LP 1-Jan-2011 31-Dec-2011 FT SS Marie Union SSMDA 10,100 10,100Contract renewed from 2010 37098 22-Jan-2009 30-Nov-2010 FT-SN Union Parkway Victoria Square #2 100,000 100,000 100,000 1-May-2012 30-Apr-2022 FT-SN Union Parkway Schomberg #2 87,654 Contract does not start until May 2012 TOTAL Capacity Under Contract 176,267 171,958 311,958 300,939 437,684 405,184 486,336 Count 13 13 14 14 15 15 15