Rates, Energy Price Setting Plan
In this decision, the AUC considered an application from ENMAX Energy Corporation (“EEC”) in which the regulated rate option (“RRO”) provider requested approval of its 2019-2022 energy price setting plan (“EPSP”). EEC utilizes a competitive auction methodology for procuring energy and for establishing the energy charge to be paid by its RRO customers. The AUC found that the proposed auction design satisfies the requirements set out in the Regulated Rate Option Regulation (“RRO Regulation”). The AUC did not approve all aspects of the 2019-2022 EPSP, and EEC is required to file a compliance filing by no later than April 30, 2020.
Background
EEC is an RRO provider that is regulated by the AUC. EEC provides RRO service in the ENMAX Power Corporation service area, which is the city of Calgary.
EEC received AUC approval of its 2016-2018 EPSP in Decision 20448-D01-2017. An important feature of that EPSP in the determination of energy rates was the block procurement process that EEC uses to purchase electricity in the forward markets. In its 2019-2022 EPSP application EEC proposed to depart from its block procurement methodology and adopt a descending clock auction process to procure its energy. This new procurement process involves simultaneous auctions for three different types of energy products: peak blocks, flat blocks and full-load strips. EEC maintained that these auctions would produce prices that can be used to determine a just and reasonable market-based value for commodity risk compensation (“CRC”), in addition to providing contracts for the provision of electricity that will ensure that its forecast loads can be met.
Legislative Framework
The AUC noted that it must evaluate the auction process, pricing and the terms of the EPSP subject to the governing provisions of the RRO Regulation.
EEC’s Proposed EPSP
EEC retained an independent energy market expert, NERA Economic Consulting (“NERA”). NERA specializes in energy markets and the design and implementation of competitive auctions. In 2018, it assisted EPCOR Energy Alberta GP Inc.’s (“EPCOR’s”) transition to an auction-based procurement model that was approved by the AUC in Decision 22357-D01-2018.
EEC indicated that its proposed EPSP was substantially similar to EPCOR’s 2018-2021 EPSP but was modified slightly to accommodate for such things as EEC’s different RRO load volume and RRO load characteristics. Compared to EPCOR’s RRO load, EEC’s RRO load volume is one-third the size of EPCOR’s and the shape of its load is different.
The four modifications proposed for EEC’s EPSP that differ from EPCOR’s 2018-2021 EPSP include:
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procuring 40 percent of its RRO obligation as full-load product rather than 50 percent;
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hosting three auctions instead of four auctions;
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having the discretion to purchase one extra peak block in auctions where there would otherwise be fewer than two peak blocks procured; and
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setting monthly targets for peak and full-load products based on the target for flat products instead of the target for peak products.
EEC submitted that an improvement proposed for EEC’s EPSP, when compared to the design of EPCOR’s 2018-2021 EPSP, includes holding a supplemental phase after the closing round to gather exit prices for retained withdrawal units.
EEC also stated that its proposed EPSP would rely on market forces to determine the energy charge through the use of a descending clock auction process. Specifically, EEC submitted that market forces would determine competitive rates through the simultaneous procurement of flat, peak and full-load products in the auction process.
Descending Clock Auction Proposal
Sufficiency of the Pool of Suppliers and EEC’s Volumes
The AUC accepted the submissions of EEC and NERA that there is a pool of suppliers for full-load products in Alberta, noting that EPCOR has been able to procure its load through its competitive auctions, which include a full-load product. It made further note of NERA’s evidence, which concluded that “the Alberta market is reasonably capable of supporting the procurement of a Full-Load product by ENMAX Energy in addition to the procurement of Full-Load products by EPCOR under its current EPSP.”
Size of EEC’s RRO Volumes and Market Interest in Auctions
The AUC acknowledged interveners’ concerns regarding the size of EEC’s RRO volumes and agreed that it could not be assumed that full-load suppliers who participate in EPCOR’s auctions will automatically participate in EEC’s auctions. It would have been preferable for EEC to canvas suppliers to ensure there is interest in EEC’s smaller RRO volumes.
However, the AUC further noted that the degree of participation could not be identified conclusively until an EEC descending clock auction process is implemented. The AUC found that there was sufficient evidence to support the view that EEC’s descending clock auctions are likely to be supported by the Alberta market. The AUC also made note of important safeguards built into EEC’s descending clock auction process, including a competitiveness assessment at the end of each auction, backstop supply, and a reopener provision in the EPSP.
Requirement to Consider Alternative Procurement Methodologies
The Utility Consumer Advocate (“UCA”) submitted that EEC failed to consider alternative procurement options that may result in more competitive and advantageous pricing for EEC’s RRO customers.
The AUC did not agree that EEC was obligated to provide alternative procurement options. It noted that the RRO Regulation defines the obligations required by an applicant proposing an EPSP to have its application be successful. How an applicant dispenses its obligation to demonstrate that the requirements of the RRO Regulation have been met is up to the applicant.
Commodity Risk Compensation
Higher RRO Rates
The UCA submitted that setting monthly RRO rates based on the price of the full-load product will not result in just and reasonable rates. It compared the prices of competitive retailers offering energy on a load-following, fixed price basis to the price for EPCOR’s full-load product obtained in the descending clock auctions from April 2019 to December 2019. It determined that EPCOR’s full-load product was consistently higher than competitive retailer products such as ENCOR by EPCOR and EEC’s EasyMax.
The AUC found that the UCA’s comparison of EPCOR’s rates to the rates of competitive retailers did not demonstrate that EPCOR’s risk compensation is too high. It made note of EEC submissions that competitive retailers do not face the same restrictions as RRO providers and may employ strategies to mitigate risks that are not available to RRO providers because competitive retailers can contract for longer-term products.
The AUC acknowledged that EPCOR’s risk compensation under its current EPSP has been larger than the risk compensation under EEC’s and Direct Energy Regulated Services’ administrative method over the initial months of operation. However, this does not mean that EPCOR’s risk margin is too high or that the calculation of EPCOR’s market-based risk margin does not result in just and reasonable rates under EPCOR’s EPSP.
Profit and Loss Neutrality
EEC’s proposed CRC was calculated in the same way as that which was approved for EPCOR. In the decision on EPCOR’s 2018-2021 EPSP, the AUC stated with respect to EPCOR’s CRC methodology:
… the Commission considers that the resulting prices for the full-load product and the fixed block products obtained through competitive descending clock auctions will reflect current expectations for the forward market conditions, including the risk associated with those expected forward market conditions. The resulting CRC will be transparent, and it will reflect the level of risk aversion of the successful auction participants. The Commission considers that this approach is reasonable in calculating a CRC for the 2018-2021 because of the expectation that this will set a CRC based on the competitive market prices
For the same reasons, the AUC accepted EEC’s proposed market-based CRC, finding that the calculation of it using the difference between the weighted average price of the full-load product and the weighted average price of fixed block products procured through the auctions is in accordance with the RRO Regulation.
Overcompensation for Risk
The AUC noted that in assessing whether the difference between full-load strip prices and the weighted average price of peak and flat blocks is a reasonable estimation of the risk compensation for EEC, two pieces of information are required: first, whether full-load suppliers face the same risks as EEC; and second, whether full-load suppliers and EEC have the same or similar levels of risk aversion.
The AUC noted that there was an absence of evidence to inform a determination of the relative risk preferences of EEC and full-load suppliers.
It also found that there was insufficient evidence to determine conclusively that full-load suppliers face less risk than EEC. The AUC placed more weight on the opinion evidence of EEC’s expert witness, NERA, that full-load suppliers will face less risk than EEC, and found that, as long as EEC’s auctions are competitive, the resulting auction prices can be used to determine a reasonable, market-based CRC for EEC.
Return and Risk Compensation
The CCA submitted that it is possible that a CRC inferred from full-load products may include a return margin in addition to compensation for assuming commodity risk.
The AUC stated that competitive forces within EEC’s auctions would lead to the removal of any excess return contained within the bids of full-load strip suppliers. The AUC found that there was insufficient evidence before the AUC to conclude that the return will be inflated as posited by the CCA.
Load Forecasting Methodology
The AUC approved EEC’s load forecasting methodology, noting that it is the same methodology that EEC uses in its current EPSP.
Descending Clock Auction Parameters and Auction Format
Auction Parameters and RRO Load Procurement Split
The AUC found that EEC’s proposal to acquire flat volume blocks, peak volume blocks and a full-load product as part of its 2019-2022 EPSP was well supported.
The AUC noted that the success of EPCOR’s auctions has demonstrated that the concept of procuring electricity through descending clock auctions is practicable in Alberta.
The AUC also accepted NERA’s recommendation of three auctions per delivery month with 40 percent of the RRO load to be procured through the full-load product and 60 percent through fixed block products. Based on NERA’s evidence that procuring 40 percent of the RRO load through the full-load product will lead to fewer auctions where the quantity of any one product falls below a threshold of two units, the AUC agreed that supplier interest would be improved under this arrangement when compared to having 50 percent RRO load being procured through the full-load product.
In the scenario where EEC needs to procure an additional peak product block for a delivery month, the AUC directed EEC to exclude the procurement cost of the additional block in the base energy charge and convey this in its monthly filings. The AUC stated this additional peak block should not be used in the calculation of the monthly energy charge because the monthly energy charge should be based on the price of the full-load product. The AUC also stated that the additional peak product block will be treated the same as the other peak blocks and will be used to calculate the CRC.
Auction Format and Monitoring
The AUC found that EEC’s proposed use of a descending clock auction format was sufficiently supported, and approved EEC’s proposed use of a descending clock auction format for its 2019-2022 EPSP.
The AUC found some merit in the CCA’s and the UCA’s concerns relating to EEC’s smaller RRO volumes and potential for market dominance. The AUC directed EEC to submit a proposal for an auction monitoring report and process in its compliance filing.
Recurring Cost Items
The AUC considered that Natural Gas Exchanged (“NGX”) collateral costs, NGX trading charges and transaction fees and AESO trading charges, AESO collateral costs, and retailer adjustment to market costs are legitimate expenses associated with the provision of RRO service by EEC. The AUC approved the inclusion of these charges and fees, expressed in $/MWh, as part of the monthly energy charge under EEC’s 2019-2022 EPSP.
The AUC also considered that uplift charges are a legitimate expense associated with the provision of RRO service, and accepted EEC’s proposed methodology for calculating uplift charges.
The AUC found that external EPSP development and regulatory costs should be part of the energy charge, including costs associated with the development and deployment of the auction software and platform. The AUC noted that EEC had not received an estimate from NGX regarding the time and cost associated with developing and deploying the auction software, and directed EEC to provide an estimate of these costs and lead time in a compliance filing.
Monthly Energy Charge Calculation
The AUC noted the monthly energy charge, expressed in $/MWh and billed to residential and commercial customers on a cents/kWh basis, will consist of the base energy charge (which includes CRC), the backstop charge (when applicable), the reasonable return compensation, and each of the recurring cost items. The AUC found EEC’s proposed methodology and calculations to determine the base energy charge reflects the components of the monthly energy charge, and are acceptable.
Distribution Line Losses and Unaccounted-for Energy
The AUC found EEC’s incorporation of distribution line losses and unaccounted-for energy in the monthly energy rate calculations were acceptable.
Information to Be Included in Monthly Filings
The AUC agreed with EEC’s proposal to remove the percentage of EEC’s customers who are enrolled in the RRO from its monthly filings. This information is unnecessary, and this will eliminate the need for confidential filing of the rate calculation workbook. The AUC found other items that EEC proposes to include in its monthly filings to be substantially similar to what EEC files under its current EPSP.
Backstop Mechanism
The AUC found EEC’s proposal to have URICA Energy Management Corporation (“URICA”) administer a request for quotation (“RFQ”) process for EEC’s backstop mechanism was reasonable.
The AUC found that the ongoing maintenance of the confirmed backstop supplier list is necessary to ensure the timely operation of the backstop mechanism. The AUC noted that $2,500 is an acceptable amount to be paid to URICA to provide that ongoing service. The AUC also found a $5,000 backstop fee reasonable for URICA in EEC’s energy charges, for those rare months in which the backstop mechanism is likely to be triggered.
The AUC noted that in the event that the backstop mechanism is triggered, EEC and URICA must provide a summary report to the AUC providing details relevant to the backstop supply of energy as part of the monthly filing for RRO rates. It directed EEC to amend its EPSP, as part of its compliance filing, to reflect this finding.
The AUC shared the UCA’s concern with the discretion that EEC proposes to provide to URICA in determining those confirmed backstop suppliers who will receive the backstop RFQ if backstop supply is required. The AUC found that the RFQ should be sent to all confirmed backstop suppliers to obtain as many supplier responses as possible, and directed EEC to amend its EPSP, as part of its compliance filing, to reflect this finding.
Reasonable Return
EEC applied to update its reasonable return based on 2018 revenue information, resulting in a new reasonable return of $2.63/MWh, from $2.44/MWh. EEC also proposed to update this number in July of each year for the term of the proposed EPSP, based on its annual Rule 005 filings to the AUC.
The AUC approved the formula included in EEC’s illustrative energy charge model to calculate EEC’s reasonable return amount. It found that the proposal to update the reasonable return each year and reflect the updated reasonable return figure starting with the energy rates for July of that year is reasonable because this ensures that the calculated reasonable return will be based on the most up-to-date information that is available each year.
The AUC directed EEC to include the applicable pre-tax reasonable return rates in $/MWh in future Rule 005 filings and to also provide the corresponding energy figures in those filings.
