OEB Cap and Trade Framework for Natural
Gas Utilities
Staff Presentation – April 2016
Outline of Presentation
• Purpose of Today
• Background
− Context for draft Framework
− Purpose of Framework
− Objectives of Framework
• Draft Regulatory Framework
Elements
− Issues and Options
• Timing
April 2016
2
Purpose of Today
• Seek stakeholder views on:
− Key Elements of the Framework - Issues and
Options
− Any other issues?
• Views will support the development of Staff
Discussion Paper on the Regulatory
Framework
April 2016
3
Background: Context for draft Framework
• Draft framework is based on provincial
government’s Proposed Climate Change
Mitigation and Low-Carbon Economy Act,
2016 (Bill 172), The Cap and Trade Program
dated February 25, 2016
April 2016
4
Background: Purpose of Framework
The purpose of the framework is:
• To support the successful implementation of the
government’s cap and trade program and utility
compliance plans
• To ensure clear and consistent expectations are held
by natural gas utilities, ratepayers and other
stakeholders
• To provide OEB’s approach to assessing the cost
consequences of natural gas utility compliance plans
and establishing a mechanism for recovery of these
costs in rates
April 2016
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Background: Objectives of Framework
The framework will be guided by the following
objectives:
• Cost-effectiveness: compliance plans are optimized for
economic efficiency and risk management, and investment
decisions are prioritized and paced to ensure just and
reasonable rates consistent with the government’s cap and
trade program
• Rate predictability: consumers should have reasonable,
predictable rates regarding the impact of the utilities’ cap and
trade activities
• Cost Recovery: prudently incurred costs related to cap and
trade would be recoverable as a cost pass-through (similar to
natural gas supply procurement)
April 2016
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Background: Objectives of Framework (cont’d)
• Transparency: investment/procurement strategies, and
optimization processes are transparent and well documented
to facilitate the OEB’s assessment of the plans and costs,
while ensuring market integrity
• Flexibility: plans are flexible and can adapt to changing
market conditions and utility-specific characteristics; potential
for framework to evolve as market matures and experience is
gained
• Continuous Improvement: plans demonstrate continuous
improvement of processes and practices, including the use of
existing systems
April 2016
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Draft Regulatory Framework Elements
1. Compliance Plans
2. Modeling and Forecasting
3. Cost Allocation and Rate Design
4. Monitoring and Reporting
5. Customer Outreach and Education
April 2016
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1. Compliance Plans
• Utility-specific plans developed and attributed
to the utility based on guidance from the OEB
• These plans will meet:
− Customer-related obligations, which include compliance
and procurement for residential, commercial and industrial
customers (excluding Large Final Emitters [LFEs]), and
natural gas-fired generators
− Facility-related obligations, which include compliance
and procurement obligations for utility’s owned or
operated facilities
April 2016
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1. Compliance Plans
• Plans could include provisions for:
− Compliance Instruments (see slide 11)
− Investments for customer-related obligations:
o Customer abatement programs
o Renewable energy, new technology, building retrofits, etc.
− Investments for facility-related obligations:
o Measures to mitigate and reduce fugitive emissions
o Investments in new technology
o Renewable energy, building retrofits, etc.
April 2016
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1. Compliance Plans – Compliance Instruments
Instrument
Market
Risk
Level
Definition
Auction Allowances
Primary
M
Real and verifiable allowances available during government
administered auctions. Clearing price risk in competitive auction with
some predictability
Allowance Bi-laterals
Secondary
L
Negotiated price for government sourced allowances between
counterparties, improves price certainty, higher availability risk
Allowance Futures
Primary
M
Standardized futures contract traded on an exchange by a broker with
delivery dates, volume and spec. terms and margin call requirements
Allowance Forwards
Secondary
M
Customized contract traded over the counter (OTC) that includes both
market and credit risk
Offsets
Secondary
L
Compliance-grade instrument generated by emission reduction activities
outside of covered emissions scope. Must be quantified and verified,
leading to performance, credit and market risks
Offsets Futures
Primary
H
Exchange traded futures contracts for verified offsets
Allowance Derivatives
Tertiary
H
Allowance derivative products offering the right to buy or sell an
allowance for a set price during a future period (options) and swaps
April 2016
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1. Compliance Plans – Issues and Options
Issues
Options
•
•
•
•
Assessment of
Plans
Compliance
Strategy
Prescription/
Guidance Level
•
A systematic approach to pacing and prioritization in the short and long term
A buying strategy that demonstrates a balanced portfolio of compliance instruments
Forecasts (of load, greenhouse gas (GHG) and carbon prices)
Risk assessment (identification of key risks [e.g., forecasting risks, market risks] and how these
risks will be mitigated)
Cost assessment
o Marginal abatement cost curve (MACC)
o Costs per tonne (CAD $/tonne) per compliance activity
o ICE (carbon price benchmark)
o Compare costs of investing in GHG abatement activities with cost of allowances and
offsets
o Financing costs over the compliance period
OEB requires that the utility have a portfolio of compliance instruments to ensure cost-effective plans
and rate predictability. Utility decides on how best to develop its portfolio and participate in the market
OEB sets minimum auction purchases (e.g., a certain percentage per year)
OEB sets limitations on certain compliance instruments (e.g., offset futures) – see slide 11
April 2016
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1. Compliance Plans – Issues and Options (cont’d)
Issues
Plan Term
(duration of plans)
Options
4-year plan to align with first compliance period; followed by 3-year plans to
align with subsequent compliance periods. Recognizes the multi-year
compliance approach Ontario is taking for cap and trade and the effect that may
have on strategies for utilities.
Annual plans, with 3-year compliance strategy for reference to be filed in the first
year of each compliance period
Treatment of
Longer-term
Investments
Separate longer-term GHG investment plans (e.g., 5 to 10 years) to be filed with
compliance plans
Included as part of the utility’s existing asset/capital planning process and to be
filed at the time of rebasing
April 2016
13
1. Compliance Plans – Issues and Options (cont’d)
Issues
Review of Plans
and Treatment of
Confidential
Market
Information
Treatment of New
Business
Activities
Options
OEB review of market information through in-camera sessions where
appropriate.
Align with provincial government`s Cap and Trade Regulatory proposal
OEB decides on a case-by-case basis whether utility can undertake new
business activities
Use existing OEB accounting policies for non-utility activities and affiliate
relationships
April 2016
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1. Compliance Plans – California (For Reference)
Issues
California Treatment
Plan Assessment
•
•
Compliance plans reviewed annually through the existing process
Longer term plan elements are used for reference and informational purposes only
Compliance
Strategy
Prescription/
Guidance Level
•
Electric utilities approved to procure allowance futures and forward contracts and offsets forward
contracts, but not options and swaps or offsets futures
California Public Utilities Commission (CPUC) holds the right to limit the use of any other
compliance instrument, including the percentage of offsets available for compliance
CPUC approved electric utilities to purchase allowances through bi-lateral contracts, but must
follow approved procurement procedures and affiliate transactions
•
•
•
Confidentiality of
Market
Information
•
California Air Resource Board (CARB): AB-32 regulation establishes confidentiality requirements
that limit the amount of bidding strategy information that can be publicly shared to protect the
integrity of the carbon market
California Public Utilities Commission:
o Certain components of plans (i.e., bidding strategies) are confidential - protected by
Confidentiality Protocols in D. 14-10-033. If review is required, in-camera protocols apply
o Developed confidentiality protocols listing information that cannot be made public and
options to discover through in-camera sessions.
o Considered both commercial sensitivity of utility strategies and principles of confidentiality
defined by California Air Resource Board (CARB)
April 2016
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1. Compliance Plans – California (For Reference)
Issues
California Treatment
Plan Term
(duration of plans)
• Annual plans
Treatment of
Longer-term
Investments
• Cap and trade procurement and compliance plans incorporated into
California Public Utilities Commission’s long-term (10 year) planning process
(currently only for electric Investor Owned Utilities) but there is no formal link
to rate design/recovery (as this happens annually)
• Updated every 2 years to align with larger, collaborative planning process
Treatment of New
Business
Activities
• New businesses are expected to be treated by existing affiliate and corporate
relationship regulations and approved and managed under this context
April 2016
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1. Compliance Plans – Québec (For Reference)
Issues
Plan Assessment
Québec Treatment
•
•
•
•
Compliance
Strategy
Prescription/
Guidance Level
Confidentiality of
Market
Information
•
•
•
•
Régie approves cap and trade related costs as part of broader rate case procedures
Compliance cost estimates and compliance strategy based on 3 year forecast in the
rate case
Each year end actual costs are reported, and after each auction an administrative
report is filed as well for information purposes
Utilities present a compliance period strategy before the Régie during a rate case and
the Régie discusses and approves or amends the buying strategy
Régie has not yet adjudicated on a formal set of guidelines or procedures for
compliance plans and approves each utility’s plan on a case by case basis
However, Régie has been active in debating the individual utility compliance strategy
and has intervened with adjustments to the plan through the first compliance period
Régie reserves the right to review and inquire about any cost and buying strategy
element within a utility’s compliance plan throughout implementation
Buying strategies and auction strategies have been reviewed and approved by the
Régie through in-camera sessions
April 2016
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1. Compliance Plans – Québec (For Reference)
Issues
Québec Treatment
Plan Term
(duration of plans)
• 3-year compliance period plans (i.e., 2015-2017, 2018-2020)
Treatment of
Longer-term
Investments
• Compliance period plans can include strategies for longer-term investment
(how to incorporate
• Where capital requirements are necessary, the planning links to rates
longer term
proceedings as part of the capital needs filing
investments such
• There is no evidence that a process for discrete long term cap and trade
as new
compliance plans has been contemplated to date
technologies,
renewables, etc.
into plans)
Treatment of New
Business
Activities
• New businesses are expected to be treated by existing affiliate and corporate
relationship regulations and approved and managed under this context
April 2016
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2. Modeling and Forecasting
• Utility expected to prepare and file forecasts
as key input to support development of
compliance plans
• Forecasts to include:
− Load forecast
− Forecast of greenhouse gas (GHG) emissions
o Utility to report on actual GHG emissions as outlined in Ontario
Regulation 398/15 (and the Ontario’s Guideline for Greenhouse Gas
Emissions Reporting, dated February 2016)
− Forecast of carbon prices
April 2016
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2. Modeling and Forecasting – Issues and Options
Issues
Forecasting
Period (Aligns
with Compliance
Plan Needs)
Options
4-year forecast to align with first compliance period; subsequently 3-year forecasts
Annual forecasts, with longer-term forecasts that align with compliance period for reference
Load Forecast
Utility to use existing OEB approved methodology. However, need to ensure no double counting with
respect to Large Final Emitters (LFEs)
GHG Emissions
Forecast
Utility to use methodology outlined in Ontario Regulation 398/15 (and the Ontario’s Guideline for
Greenhouse Gas Emissions Reporting, dated February 2016) and the load forecast (above) to prepare
emissions forecast. However, need to ensure no double counting with respect to Large Final Emitters
(LFEs)
Carbon Price
Forecast
Annual
Use a large, liquid and public Market Exchange
for carbon price forecast. California uses
Intercontinental Exchange (ICE) carbon price
April 2016
Long-term (for 3-year plans and longer-term
investment planning )
- Utility specific methodology
- Together utilities purchase a forecast from a
single reputable source
- Together utilities purchase a number of
forecasts to calculate consensus forecast
20
2. Modeling and Forecasting –
California (For Reference)
Issues
California Treatment
Forecasting
Period
• Annual forecasts; forecasting period aligns with annual compliance plan
period
Load Forecast
• Utility specific methodology aligned with approved load forecasting approach
GHG Emissions
Forecast
• Prescribed methodologies for calculating forecast GHG emissions based on
load forecast
Carbon Price
Forecast
• Proxy annual carbon price is to be based on the settlement price of a
California Compliance Allowance on the Intercontinental Exchange (ICE) with
a vintage of December of the forecast year
• Compliance cost forecast must be reasonably accurate and explainable,
required for rates and based on the forecast allowance proxy price
• California Public Utilities Commission does not require the utilities to prepare
a long-term carbon price forecast
April 2016
21
2. Modeling and Forecasting –
Québec (For Reference)
Issues
Québec Treatment
Forecasting
Period
• Compliance period based on annual three year rolling forecast approach
Load Forecast
• Three year rolling volume forecasts drive compliance forecasting needs
GHG Emissions
Forecast
• Prescribed methodologies for calculating forecast GHG emissions based on
load forecast
Carbon Price
Forecast
• Utility-specific approach for annual and long-term price forecasts. For initial
compliance planning, relied on price forecast developed by third party
consultants
• Moving forward expected to rely on external studies and data sources (e.g.,
Bloomberg)
April 2016
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3. Cost Allocation and Rate Design
• Costs include:
− Customer-related obligations (which include
compliance and procurement costs for residential,
commercial and industrial customers [excluding Large
Final Emitters], and gas-fired generators)
− Facility-related obligations (which include
compliance and procurement costs for utility’s owned
or operated facilities)
− Administrative to meet compliance obligations, such
as monitoring, reporting and verification of emissions
(MRV), purchasing/trading functions, new IT systems,
etc.
April 2016
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3. Cost Allocation and Rate Design (cont’d)
• Need to address cost causation, cost
allocation, rate design, treatment of
administrative costs and rate setting process
to ensure just and reasonable rates
April 2016
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3. Cost Allocation and Rate Design –
Issues and Options
Issues
Options
All customers excluding Large Final Emitters (LFEs)
Cost Causation
Cost Allocation
Rate Design
All customers in some cases (e.g., all customers including LFEs pay for utility facilityrelated compliance costs) (see slide 26)
•
•
•
Customer-related obligations
Facility-related obligations
Administrative
•
•
Annual Volumetric Charge for customer-related obligations
Annual Volumetric Charge for facility-related obligations
Reflects the relationship between GHG emissions and natural gas usage
Recovery of
Administrative
Costs
Incremental costs included in delivery charges (as a cost of doing business)
April 2016
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3. Cost Allocation and Rate Design –
Cost Causation: An example
Customer
Costs for
Costs for FacilityCustomer-related
related Obligations
Obligations such as
such as venting,
purchasing
fugitive
allowances
Administrative
Costs
Residential
√
√
√
Commercial
√
√
√
Industrial
√
√
√
Gas-fired Generator
√
√
√
√
√
Large Final Emitter
April 2016
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3. Cost Allocation and Rate Design –
Issues and Options (cont’d)
Issues
Options
Annual rate is set based on:
• the annual forecasted volume (and associated annual GHG emissions) and the annual
forecasted weighted average price of the utility’s compliance activities/tools for each
year of the compliance period OR
• the forecasted volume (and associated annual GHG emissions) and forecasted
weighted average price of the utility’s compliance activities/tools for the entire
compliance plan
Rate Setting
Approach
With annual true-ups
Quarterly rate is set based on:
• the annual forecasted volume (and associated annual GHG emissions) and the annual
forecasted weighted average price of the utility’s compliance activities/tools for each
year of the compliance plan OR
• the annual forecasted volume (and associated GHG emissions) and the actual
weighted average price of the utility’s compliance activities/tools using the settlement
price from the previous auction
With quarterly true-ups
April 2016
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3. Cost Allocation and Rate Design –
California (For Reference)
Issues
California Treatment
Cost Causation
•
•
•
Facility obligations – all customers
Customer obligations – all customer except LFEs
Administrative costs – all customers
•
Facility and customer related obligations costs are allocated on a volumetric basis
(based on load forecast)
•
Uniform cents/therm charge for facility and customer related obligations costs. Cost
recovered in base transportation rates
Incremental administrative costs are currently tracked in a deferral account but this
practice will be phased out. The recovery of these costs will be reviewed in upcoming
rates proceeding
Cost Allocation
Rate Design
•
•
True-Up Process,
Frequency and
Timing
•
•
Annual compliance costs are recovered for the following year on a forecast basis in
June and updated in October
Symmetrical variance account captures differences between forecast and actual
compliance costs
Variance account disposed annually. Intervenors can challenge costs that are
inconsistent with the utilities’ procurement authority
April 2016
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3. Cost Allocation and Rate Design –
Québec (For Reference)
Issues
Québec Treatment
Cost Causation
•
•
•
Facility obligations – all customers
Customer obligations – all customer except LFEs
Administrative costs – all customers
•
•
Facility and customer related obligations costs are allocated on a volumetric basis
Administrative costs (including staff costs related to filing compliance report, procure
allowances and other general administrative costs) allocated on a volumetric basis
•
Equal cents/therm charge for facility and customer related obligations costs. Costs
(including administrative costs) recovered in a separate line time on the bill entitled –
“Cap and Trade Emission Allowances”
•
Symmetrical variance account captures differences between forecast and actual
compliance costs (including facility and customer related obligations costs, and
administrative costs)
Quarterly rate adjustment processes for rates and variance account disposition
Cost Allocation
Rate Design
True-Up, Frequency
and Timing
•
April 2016
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4. Monitoring and Reporting
• On-going monitoring of costs and performance
will:
− Support the assessment of actual costs for
purpose of rate recovery
− Provide useful and transparent feedback
− Encourage continuous improvement
• Consistent metrics for each utility to allow
comparison
April 2016
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4. Monitoring and Reporting – Issues and Options
Issues
Options
Monitoring and
Reporting
Provisions
Metrics:
•
Marginal abatement cost curve (MACC)
•
Costs per tonne (CAD $/tonne) per compliance activity
•
ICE (carbon price benchmark)
•
Compare costs of investing in GHG abatement activities with cost of allowances and offsets
•
Compare actuals with forecasts
•
Financing costs
Frequency and
Timing
Annual reporting filed with annual rate application
April 2016
31
4. Monitoring and Reporting – Issues and Options
(cont’d)
Issues
Options
Monitoring reports do not disclose auction-related information; sensitive information is
redacted.
Monitoring of
Plans and the
Treatment of
Confidential
Market-sensitive
Information
(e.g., procurement
strategies, etc.)
Align with provincial government’s Cap and Trade Regulatory proposal
Confidential review process conducted by OEB with in-camera sessions where
appropriate
Align with provincial government`s Cap and Trade Regulatory proposal
April 2016
32
4. Monitoring and Reporting –
California (For Reference)
Issues
California Treatment
•
Metrics for
monitoring
Frequency and
Timing
Monitoring of
Plans and
Confidentiality of
market-sensitive
information
•
•
The compliance cost forecast and annual rate adjustment process provides a continuous
monitoring opportunity
No formal incremental monitoring process has been set for natural gas utilities
Changes to submitted compliance plans and use of compliance instruments can be requested
through the Tier 2 Advice Letters, which also provided opportunity for review and adjustment
•
Annually with the compliance review
•
California Air Resource Board`s AB-32 regulation establishes confidentiality requirements that limit
the amount of bidding strategy information that can be publicly shared to protect the integrity of the
carbon market
California Public Utilities Commission developed confidentiality protocols listing information that
cannot be made public and options to discover through in-camera sessions. These procedures
consider both the commercial sensitivity of utility strategies as well as the principles of
confidentiality needs defined by California Air Resource Board
In review of utilities’ compliance strategies, certain confidential info and bid strategy continue to be
protected by the Confidentiality Protocols adopted in D. 14-10-033. Some forecast information
could be included under this protection. If review is required, in-camera protocols apply
•
•
April 2016
33
4. Monitoring and Reporting –
Québec (For Reference)
Issues
Metrics for
monitoring
Québec Treatment
•
•
•
Frequency and
Timing
Monitoring of
Plans and
Confidentiality of
Market-sensitive
Information
•
•
•
No specific metrics for monitoring of cap and trade compliance costs or implementation
appear to have been developed to date
Same tests of prudency and reasonableness applied as to all other rate change
considerations
Process has evolved in relatively ad-hoc manner, no set timelines for monitoring and
assessment
Currently ongoing tracking quarterly (aligned with allowances auctions) and annually
(aligned with rate cases). Included in the annual compliance strategy review, not
discrete or additional monitoring process
In-camera sessions held, certain components of the plan (i.e., bidding strategies) are
confidential
No formal additional confidentiality protocols appear to have been developed relative to
cap and trade compliance strategy consideration between Régie and the utilities
April 2016
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5. Customer Outreach and Education
• Customer outreach and education includes
informing customers about the provincial
government’s cap and trade program and
associated bill impacts, and how customers
could manage their GHG emissions to reduce
their bills
• Need to ensure consistent and coordinated
messaging
• What should be the role of the utility?
April 2016
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5. Customer Outreach and Education –
California (For Reference)
• State-wide outreach programs
• Utilities to leverage existing customer
relationships to deliver targeted messaging
− Activities to include: bill inserts, bill onserts, email notices, newsletters, and information on the
utilities’ websites
− Activities are not to conflict with state-wide
outreach efforts
April 2016
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5. Customer Outreach and Education –
Québec (For Reference)
• Utilities do most of the outreach
− Bill inserts, online materials and other
communications have included information about
cap and trade, the expected government use of
funds and the changes to the bill
April 2016
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Planned Timing
Milestones
Timing
MOECC releases Draft Cap and Trade legislation and
regulation
February 25/26, 2016
OEB staff meetings to inform Discussion paper – Targeted
meetings to include gas utilities, consumer groups,
environmental groups, industry groups
April/May 2016
Discussion Paper for stakeholder comment
April 2016
Potential working group meetings to review major issues
June/July 2016
MOECC releases final Cap and Trade regulation
July 1, 2016 (estimated)
OEB draft framework for stakeholder comment
July/August 2016
OEB approved framework
October 2016
Utilities file Compliance Plans - Interim rates set as of January
1, 2017
January 2017
April 2016
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