Draft 2 – Staff Discussion Paper

“Regulatory Options for Setting Payments for the Output from OPG’s Prescribed Assets”

Presentation to Interested PartiesJune 16, 2006

Background

• OEB responsibility for setting payments for OPG’s “prescribed assets” via section 78.1 of the OEB Act and Regulation 53/05

• Payments for output from prescribed assets to be set by OEB no earlier than April 1, 2008

• Staff Discussion paper posted May 8, 2006

Staff Discussion Paper

Three Basic Options Described

– Cost of Service (and modified cost of service)

– Incentive Regulation (based on cost of service or based on existing payments)

– Regulatory Contracts

Discussion Paper was the basis for consultations with stakeholders.

Stakeholder Discussions

• Five meetings held with stakeholders – Plenary and Small Group

• Participants included:– OPA– Power Workers Union– IESO– Bruce Power– OESC– Direct Energy– Constellation Energy– Schools– LIEN– CME– AMPCO– Energy Probe– HydroOne

Views Expressed at Stakeholder Meetings

• Rate of return (views range from commercial rate to zero, based on “heritage” asset definition)

• Need for transparency in reviewing OPG’s costs and revenues

• Need for regulatory model to facilitate competition• The prescribed assets are not to be paid market

prices• Review of all COS information in one proceeding will

be onerous: needs to be done thoroughly, even if this is over several proceedings

• Efficiency of OPG needs to be addressed• As a crown corporation, incentive regulation may

not be effective for OPG

Staff Recommended Model

• Incentive Regulation is the basic model. Use existing base payments as the starting point

• Increase payments by input cost factor minus productivity factor – TBD in first proceeding

• Examine efficiency benefits of retaining/changing daily threshold for hydraulic production and Beck P.S. receiving different payments

• Board staff to commission study of input cost and productivity factors

Staff Recommended Model

• OPG to file cost and financial information on a quarterly basis,(guidelines TBD), segmented by nuclear and hydraulic assets, to:– Inform analysis of input cost and productivity

factors in first proceeding;– Create accounting structure to be regulated

(allocation, capital structure and level of detail)

• Other issues to be examined in first proceeding: payment structure, “Z” factors and “Off Ramps”, SQIs

• Term to be determined based on annual review of actual financial information

• Future issue to be reviewed: ROE

Benefits of this Approach

• More efficient regulatory proceeding compared to CoS; more transparent than Regulatory Contracts

• Consistent with policy and legislative framework for OPG’s prescribed assets

• Ratepayer benefits – productivity factors• Ongoing information disclosure• Potential for efficiency incentives – IR

formula; threshold and Beck P.S.

Next Steps

• Post Draft 2 on website: week of June 19th

• Final Discussion Paper: June 30th

• Submissions from Interested Parties – July 18th

• Replies from Interested Parties (OPG, others) – July 27th