CLEAN ENERGY Association of BC BC Hydro WANETA 2017 Transaction - PowerPoint PPT Presentation

BC H YDRO W ANETA 2017 T RANSACTION E XHIBIT C6-8 CLEAN ENERGY Association of BC BC Hydro WANETA 2017 Transaction CEABC Oral Argument 2018-04-19

The Waneta generation profile • Waneta generation is dominated by freshet 2018-04-19 2

The Waneta generation profile • The stream flow data dictates that Waneta’s generation is dominated by the freshet season • There is no storage to mitigate or reshape the natural freshet bias • The BCUC has approved a pilot spring freshet rate in an attempt to reduce the system wide freshet problem • Waneta does not contribute to system storage and shaping capabilities • It is a net consumer of shaping resources 2018-04-19 3

WANETA 2017 Transaction • CEABC has two primary concerns Two key assumptions that need to be challenged: – An excessively low cost of capital that fails to recognize an appropriate rate of return on equity – An excessively high long run marginal cost (“LRMC”) that needs to be realigned with current market prices and price trends for clean energy alternatives • And a number of secondary issues: – The basic 40-year structure requires impossible forecasting – The likelihood of significant additional sustaining capital – The likelihood of $200 million to protect against PMF – The presence of toxic sediment in the reservoir – The heavy freshet flows in the absence of any storage 2018-04-19 4

More detail re the primary issues • Present Value analysis uses an excessively low discount rate – PV analysis assumes 4% interest for 40 years – Blends 4% interest with after-tax equity rate 8.75% – BC Hydro is not taxable – Should be using the pre-tax equity rate 11.84% • Rate Impact analysis assumes zero return on equity (i.e. no payments to the shareholder), and 100% debt at 3.4% for 40 years 2018-04-19 5

From the F17-F19 RRA Decision (Order G-47-18) page 92 and page 100 2018-04-19 6

From the F17-F19 RRA Exhibit B-15 2018-04-19 7

From the F17-F19 RRA Exhibit B-15 2018-04-19 8

From the F17-F19 RRA Exhibit B-15 2018-04-19 9

Impact of Discount Rate on PV analysis • Using the proper pre-tax rate for equity yields a 7% Discount Rate to replace the 6% rate. • BC Hydro recalculated the PVs in Table 8 – (Exhibit B-18-4, BCH response to CEABC IR 2.28.1) – LRMC (Clean) PV fell by $464 million – LRMC (Clean+Gas) PV fell by $391 million – PVs of other four scenarios all become negative 2018-04-19 10

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Impact of higher cost of capital on Rate Impact analysis • Incremental rate impact shifts above zero • i.e. using the proper pre-tax return on equity, the Transaction now shows a rate increase in the early years, rather than a rate reduction • The apparent rate reduction in post-lease period is entirely due to the excessively high LRMC 2018-04-19 12 1 Bloomberg New Energy Finance

Impact of higher cost of capital on Rate Impact analysis • Incremental rate impact shifts above zero • Dramatic decline in F39 entirely due to excessively high LRMC 2018-04-19 13

Key Assumption #2 excessively high LRMC is out of line with market prices • BC Hydro recalculated Table 8 Present Values – (Exhibit B-18-4, BCH response to CEABC IR 2.28.3) • Using a $45 energy LRMC based on the recent market prices from Alberta • LRMC (Clean) and LRMC (Clean + Gas) scenarios reduced by $503 million and $524 million • This $500 million reduction combines with the $400 million reduction from correcting the return on equity to a pre-tax rate • The original $887 and $662 Present Values are effectively reduced to ZERO or NEGATIVE 2018-04-19 14

Impact of reducing excessively high energy LRMC to align with market prices • PV reductions of $503 and $524 million for the LRMC (Clean) and LRMC (Clean + Gas) scenarios 2018-04-19 15

More detail re secondary issues • The basic 40-year structure is requiring us to make impossible forecasts – Interest rates, e.g. 3.4% interest for 40 years and ZERO return on equity for 40 years – Load forecasts looking forward 20 or 30 years, when 5 year forecasts already seem impossible – Market prices looking forward 20 and 30 years, in an environment of rapid technological change – We’re being asked to make a huge wager in present dollars, based on notoriously unreliable projections – It’s like pre-building an asset 20-30 years in advance of the need – not a certain need but only the conjecture of a need, based on highly unreliable forecasts 2018-04-19 16

From Exhibit B-24, response to Panel IR 1.1.1 2018-04-19 17

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More detail re secondary issues • The likelihood that significant additional sustaining or life-extending capital will be needed – Teck is unlikely to agree to pay more than estimates for the first 20 years of “Good Utility Practice” – Yet BC Hydro will want to spend the estimates for “Life-extending Leading Utility Practice” – Any difference will be BC Hydro’s responsibility 2018-04-19 19

More detail re secondary issues • The likelihood that an additional $200 million will be required to protect against dam overtopping in the event of the Probable Maximum Flood – The dam can potentially be overtopped by 2 m – The upstream dams can pass the PMF – BC Hydro’s estimate is $200 million might be needed in year 21 if safety standards then require it 2018-04-19 20

More detail re secondary issues • The possibility that the toxic sediment will have to be removed from the reservoir – This would be necessary in order to do work on the dam or spillway – “The Remediation Covenant does not cover contaminated sediment in the reservoir as it cannot be solely attributed to Teck.” (Exhibit B-1-5, p 3) 2018-04-19 21

More detail re secondary issues • Waneta generation is heavily biased to the freshet period and there is no storage to mitigate or reshape the natural stream flows – BC Hydro is using other system resources to smooth and reshape the natural generation profile – Waneta is not contributing to system storage or shaping capabilities – Instead, Waneta is consuming this capability – There’s a potential unacknowledged cost for this reshaping – e.g. if the CPA expires or becomes redundant 2018-04-19 22

Freshet dominated generation consumes system shaping capability 2018-04-19 23

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Thank you for your time. 2018-04-19 28