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Milner Power Inc. & ATCO Power Ltd. – Complaints Regarding the ISO Transmission Loss Factor Rule and Loss Factor Methodology (AUC Decision 790-D06-2017)

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Line Loss Rule – Module C

In this decision, the AUC approved a methodology for the calculation of final loss factors for the period between January 1, 2006 and December 31, 2016 (the “Historical Period”). The AUC also determined to whom revised invoices for line loss charges or credits for the historical period were to be issued.

Line Losses and Calculating Loss Factors

With respect to line losses, the AUC explained:

  • When electricity is transmitted across a transmission line, not all of the electricity generated from a power plant will reach load consumers. Some of it will be lost as heat along the way. The difference between the amount of energy put onto the system and the amount of energy ultimately received for consumption is referred to as transmission line losses.

  • In Alberta, the owner of the generating unit that produced the electricity, or the owner of the output of that generating unit through a Power Purchase Arrangement (“PPA”), pays the cost of this lost energy.

  • While the AESO can accurately measure system-wide losses sustained over time, attributing those losses to individual generating units is more complex because line losses for each generating unit are influenced by a number of related factors. Such factors include: the amount of electricity produced by all other generating units, their locations relative to load and to each other, the amount of load on the system at any time, and the capacity of the transmission line(s) linking generating units to the rest of the system.

  • The AESO employs a model to estimate line losses for each generating unit, rather than attempting to physically measure each unit’s line losses. The methodology generates a loss factor for each unit, which, in turn, is used to determine whether a generating unit adds to or reduces system-wide losses on a net basis.

  • Generating units that cause losses on a net basis are issued an invoice whereas generating units that reduce (i.e., save or avoid) losses are given credits.

The Unlawful Line Loss Rule and AUC Proceeding 790

Original Milner Line Loss Rule Complaint

The genesis of this proceeding dates to 2005 when the AESO proposed a new methodology for calculating line losses (the “Line Loss Rule”).

Milner filed a complaint about the Line Loss Rule on the basis that it did not comply with certain sections of the Transmission Regulation. The Alberta Energy and Utilities Board (“EUB”), the AUC’s predecessor, dismissed Milner’s complaint, but that decision was successfully appealed to the Alberta Court of Appeal (“ABCA”). The ABCA directed the Commission to reconsider whether the Line Loss Rule contravened section 19 (now section 31) of the Transmission Regulation, as alleged by Milner.

Proceeding 790: Phase 1

The Commission set up a two-phase process to re-hear Milner’s complaint: Phase 1 to consider if the Line Loss Rule contravened the Transmission Regulation, and Phase 2 (if necessary) to determine the remedy if a contravention was found. In the Phase 1 decision (Decision 2012-104), a majority of the AUC panel found that the Line Loss Rule contravened section 19 of the Transmission Regulation and upheld Milner’s initial complaint as valid.

Proceeding 790 – Phase 2: Module A and Module B

The AUC considered Phase 2 of Proceeding 790 in three modules. In Module A (Decision 790-D02-2015), the AUC considered whether it could order a remedy to address unlawful payments made pursuant to the Line Loss Rule and concluded that it had the jurisdiction to make such an order. The AUC also determined that the unlawful rates were interim.

In Module B, the Commission heard proposals for a new line loss methodology to replace the Line Loss Rule, and in Decision 790-D03-2015 approved a methodology for determining loss factors on a go forward basis starting on January 1, 2017, known as the Module B methodology.

Module C – Subject of this Decision

In this decision regarding the final module (Module C) of Proceeding 790, the AUC had to determine what methodology should be used for the Historical Period and to whom the AESO must re-issue invoices (for charges or credits) for that period.

The AUC set out, with respect to the Historical Period, the following questions it was tasked with determining in this decision:

(a)     Which methodology to apply to the historical period;

(b)     Which parties should, at first instance, receive invoices for the final line loss rates; and

(c)     What should the process be for collection and payment of the amounts resulting from those final rates.

Question 1: Methodology to Apply to the Historical Period

Modified Module B Methodology

In Decision 790-D03-2015 (regarding the replacement Line Loss Rule), the Commission directed changes to the Line Loss Rule (ISO rules Section 501.10) on a prospective basis. The changes included:

(a)     replacing the previous rule with an incremental loss factor (“ILF”) methodology for calculating raw loss factors;

(b)     specifying that the location of a generation facility will be the location of each metering point identifier (MPID) for a generating unit or group of generating units;

(c)     allowing generators that own or control generating facilities to aggregate or disaggregate their generating facilities at the same location;

(d)     keeping load constant when a generation facility is notionally removed from the system and scaling up other specific generation facilities to rebalance the system; and

(e)     instead of using 12 base cases, the 8,760 energy market merit orders would be used during the process of calculating forecast loss factors.

The AUC further directed in Decision 790-D04-2016 (regarding the compliance filing directed in Decision 790-D03-2016) that any methodology to be used for the Historical Period must exclude aggregation and use actual data rather than forecast data when calculating loss factors. The modified Module B methodology (the “Modified Module B Methodology”) gave effect to this direction.

Which Methodology to Apply to the Historical Period

The AUC issued a summary in January 2017 of the views expressed by attendees at the December 20, 2016 round table meeting regarding potential methodologies. The AUC confirmed that only the following three methodologies that were
discussed at the round table meeting would be considered further:

(a)     the Milner methodology;

(b)     the old AESO methodology; and

(c)     the Module B Methodology.

The AUC noted that the AESO stated that it did not directly support or oppose any of the three methodologies. It added, however, that it could implement any of these methodologies subject to certain qualifications.

The AUC considered and did not accept the AESO’s proposed methodology on a forward-looking basis in Decision 790-D03-2015 (the “Old AESO Methodology”). It stated in that decision that “scaling down load to rebalance the system introduces a conceptual problem in terms of what is being measured in that it does not reflect what actually occurs on the system when a generating facility is, in fact, removed.” The AUC further stated that while scaling down load does not in itself violate the Transmission Regulation, because the curtailment of load is hypothetical, the modelling results would be improved by better representing actual system conditions.

Legislative Requirements for Line Loss Rule

To be compliant, a line loss methodology must be consistent with the relevant provisions of the EUA and satisfy the requirements set out in section 31 (formerly Section 19) of the Transmission Regulation.

The following provisions of the EUA apply:

  • Section 17(e) sets out the AESO’s duty to manage and recover line losses;

  • Section 30(4) of that EUA provides that the AESO may recover the costs of line losses from market participants by including those costs in its tariff or by establishing and charging fees for those costs;

  • Section 121(2) of the EUA requires the Commission to ensure that the ISO tariff is consistent with the statutory scheme, just and reasonable and not unduly preferential, and is not arbitrary nor unjustly discriminatory; and

  • A further underlying requirement arising from Section 5 of the EUA is that the approved ISO tariff must be consistent with the fair, efficient and openly competitive operation of the market.

Section 31 of the Transmission Regulation provides express direction regarding the criteria a line loss rule must satisfy, including that:

(a)     the rule reasonably recovers the cost of transmission line losses;

(b)     the rule is determined for each location on the transmission system as if no abnormal operating conditions exist; and

(c)     the rule is representative of the impact on average system losses by each respective generating unit or group of generating units relative to load.

Determining the Preferred Methodology

The AUC determined that all three methodologies complied or may be capable of complying with the statutory scheme. Therefore, the AUC had to determine which methodology it should direct the AESO to implement for the Historical Period. The AUC found that three criteria were relevant to making this determination, namely:

(a)     consistency;

(b)     expediency (i.e., timeliness); and

(c)     verifiability (i.e., replicability).

The AUC explained that, in this context, consistency meant the degree to which each methodology is able to reasonably represent (or emulate) what would happen on the AIES when a generating unit unexpectedly comes off line. Expediency related to the time necessary to successfully implement each methodology. Regarding the need for verifiability, market participants must be able to reasonably verify (i.e., replicate) the AESO’s loss factor calculations.

AUC directs AESO to calculate loss factors for the Historical Period using the Modified Module B Methodology

The AUC directed the AESO to calculate loss factors for the historical period using the Modified Module B Methodology.

Of the three major criteria considered and relied upon, the AUC stated that most important proved to be the first criterion: consistency. The AUC found that:

(a)     compared to the other two methodologies, the Modified Module B Methodology best produces loss factors that reasonably represent (or emulate) what would happen on the AIES when a generating unit unexpectedly comes off line;

(b)     with respect to the second criterion, expediency, there was no material or substantive difference in the estimated implementation time for each of the three methodologies; and

(c)     With respect to the third criterion (verifiability or replicability), that criterion provided an insufficient basis to distinguish between the merits of the three methodologies.

With respect to the consistency criterion, the AUC found that whenever a generating unit is notionally removed from the system, the Modified Module B Methodology:

(a)     holds load constant and rebalances the system by re-dispatching generation using the actual merit order for each hour in the Historical Period; and

(b)     measures the resultant change in losses to determine a loss factor for each location that is representative of the impact of the generating unit on average system losses relative to load.

Hence, the Modified Module B Methodology was the preferred methodology for producing loss factors for the Historical Period, because it was best able to reasonably represent (or emulate) what would actually happen on the AIES. This is important because the purpose of an incremental load factor line loss factor methodology is to calculate system-wide line losses with and without the presence of each generating unit on the system and, thus, the contribution of each generating unit to average system losses.

Accordingly, the AUC found that the Modified Module B methodology should be adopted by the AESO for the Historical Period in place of the marginal loss factor (“MLF”) methodology underpinning the unlawful Line Loss Rule.

Question 2: Who should receive revised invoices, current or original STS contract holders?

Invoices must be issued to the STS contract holder at the time when the losses occurred

The AUC noted:

  • In Decision 2012-104, the AUC found that the previous unlawful Line Loss Rule did not comply with the Transmi
    ssion Regulation
    because it employed a methodology that disadvantaged loss savers and did not properly charge loss creators.

  • As also found in Decision 2012-104, in rate design, the principle of cost-causation requires that there be no undue discrimination between ratepayers in the same class. Those who cause high costs should pay for the high costs and those whose costs are lower should pay less. Translated into the line loss rule, this would mean that, at the very least, loss causers should pay while loss savers should receive a credit. When those who lower line losses are actually charged while those causing losses are charged much less than their contribution, this not only is unduly discriminatory, but unjust.

With respect to who should receive the invoices, the AUC found that:

(a)     but for the unlawful Line Loss Rule, the predecessor STS holders associated with historical line losses would have been responsible for the costs of those line losses;

(b)     it would be contrary to the principle of cost causation and unjust and unreasonable, to allow predecessor STS contract holders to avoid responsibility for the losses they caused by not invoicing them for lawful final rates; and

(c)     requiring that current STS contract holders be initially invoiced in these circumstances could be perceived as creating an incentive for undesirable opportunistic behavior.

The AUC stated that the re-distribution of historical line losses cannot be permitted to become a high-stakes game of “hot potato” in which the party holding the STS Contract when the music stops is liable to the AESO for eleven years of line loss charges.

The AUC clarified it was only determining which market participants the AESO must invoice, and that the ultimate responsibility for payment may rest with others pursuant to separate commercial agreements.

The AUC concluded that it was just and reasonable to issue final invoices to the same party that received the original (currently interim) invoices for line losses during the historical period.

Method and Timing of Collection and Reimbursement

The AUC agreed with the AESO that the most straightforward and efficient approach for the collection and reimbursement of funds for the Historical Period would be by way of retroactive adjustments to charges assessed under the ISO tariff. The AUC found that settlement under Module C would involve the AESO recalculating the bills for the historical period using the Modified Module B Methodology and issuing new statements of account.

Compliance Filing

The AUC determined that a new rule was not required to implement the necessary rate adjustments for the Historical Period. Rather, finalizing the previously interim line loss charges required direction from the AUC, and not a new rule to take effect.

The AUC found that a reasonable and efficient approach is for the AESO to submit a compliance filing for approval which documents the methodology and procedures that will be implemented to produce final line loss charges for the historical period, pursuant to the directions in this decision.


Based on the above, the AUC ordered as follows:

(a)     the AESO shall produce final loss factors for the Historical Period (from January 1, 2006 to December 31, 2016) using the Modified Module B Methodology.

(b)     following such consultation with market participants as the AESO considers necessary in the public interest, the AESO shall submit a compliance filing for approval that specifies and describes how it will implement the Modified Module B methodology and related procedures.

(c)     the AESO shall issue final invoices to the same parties that received the original (currently interim) invoices for line losses during the historical period.

(d)     the AESO shall implement the single settlement approach for the historical period with simultaneous collection and reimbursement pursuant to the ISO tariff. [The singe settlement approach means a single, net settlement approach with one net charge collected or reimbursed to market participants only after all loss factors have been calculated for the historical period.]

(e)     the AESO shall assign the necessary resources to implement the accelerated single settlement approach and recover the incremental cost through the energy market trading fee.

(f)      the AESO shall provide updated statements of account for the final line loss charges to market participants setting out the recalculated line losses charges for the historical period on a year by year basis as they become available, before a final true-up takes place.

(g)     the AESO shall charge/award interest, equal to the Bank of Canada rate plus one and one half per cent; the AESO shall set out the interest attributed to the monthly amounts for each market participant as it calculates and makes available the updated statements of account for the final line loss charges.

(h)     the AESO shall develop the structure, terms and eligibility criteria for its proposed payment plan and file it with the compliance filing to this decision.

(i)      the AESO shall recover through the energy market trading fee any incremental administration costs and any interest costs incurred by the AESO associated with credit facilities specific to the settlement process.

(j)      the AESO shall collect any payment default shortfall from all market participants paying charges or receiving refunds for the historical period through the Module C settlement process by way of an adjustment of loss factors using Rider E, where any default shortfalls are recovered as a cost of losses. The AESO shall collect by way of Rider E on a going forward basis, any subsequent payment default shortfalls, as they become known, from all market participants, regardless of whether the market participant received a charge or refund for the historical period.

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