VIA COURIER

June 16,2011

Hon Walter S Owen, OC, QC, LLD (1981)John I B;rd, QC (2005)

PO Box 49130Three Bentall Centre2900-595 Burrard StreetVancouver, BCCanada V7X IJ5

Telephone 604688-0401Fax 604688-2827Website www.owenbird.com

+ Law CorporationAlso of the Yukon BBr

J David Dunn+Alan A Frydlenlymd+

JamesMichael P VaughanHeather E MaconachieMichael F Robson"

Zachary JAnsleyPamela E Sheppard

Robin C Macfarlane+

Duncan JManson+

Harvey S Delaney+

Patrick JHaberl+Gary M Yaffe+

Jonathan L WiUiams+Scott H StephensJames W Zaitsoff

D Barry Kirkham, QC+James D Burns+

Daniel W Bumett+Paul J Brown+

Karen S Thompson+Harley J Harris+Paul A Brackstone+

Edith A Ryan

William E Ireland, QCDouglas R Johnson+Allison R KlKhta+

Christopher P Weafer+Gregory JTucker+Terence W Yu+

James H McBeath+Susan C Gilchrist

George JRoper

Carl J Pille5,AssociateCounsel+R Keith Thompson, Associate Counsel+Rose-Mary L Basham, QC, Associate Counsel+

British Columbia Utilities CommissionSixth Floor, 900 Howe StreetVancouver, B.C. V6Z 2N3

Direct Line: 604 69] -7557Direct Fax: 604 632-4482E-mail: cweafer@owenbird.comOur File: 2384110065

Attention: Alanna Gillis, Acting Commission Secretary

Dear SirslMesdames:

Re: British Columbia Hydro and Power Authority (BC Hydro) Fiscal 2011 RevenueRequirements Application - Request for Reconsideration of Order F-13-11

We are counsel to the Commercial Energy Consumers Association of British Columbia (CEC).As requested in the Commission's Letter No. L-50-11 dated June 14, 2011, we enclose thefollowing documents with respect to the above-noted matter:

1. the CEC's letter of explanation about the preparation of the evidence and the costs claimed inthe PACA application;

2. the CEC's unfiled evidence in the state it was when the NSP was being re-instated; and

3. a CD-ROM disc containing files consisting of copies of the models the CEC would havebeen using.Li

If you have any questions regarding the foregoing, please do not hesitate to contact theundersigned.

Yours truly,

OWEN BIRD LAW CORPORATION

rlifperCPW/jlblEnclosurescc: CEC (without disc identified in paragraph 3 above)cc: BC Hydro (without disc identified in paragraph 3 above)cc: Registered Interveners (without disc identified in paragraph 3 above)

INTERLAWCPW20684

B-2

June 16,2011

Alanna GillisActing Commission SecretarySixth Floor, Box 250900 Howe StreetVancouver, BC, V6Z 2N3

Dear Ms. Gillis

In regard to the June 14th, 20111etter L-50-11 from the Commission to the Commercial Energy

Consumers Association of BC and the Panel's request that the CEC submit unfiled materialwhich was being prepared for filing in an oral hearing in regard to the BC Hydro RRA 2011,please find attached a copy of the evidence with respect to the DARR account and its operationand copies of models prepared in order to understand the DARR account and the proposedalternative.

The Commission concern and some intervener concerns going into the negotiated settlementprocess was with the substantial deferral account balances building up in relation to the DARRand the customer intervener concerns have been about customer rate levels and potential ratevolatility.

The purpose of the evidence was going to be related to the appropriate design criteria for thedeferral account and the amortization of the balances into revenue requirements.

The CEC confirmed in IRs that BC Hydro did not have a model of the account and or anyanalysis of how it might operate under different conditions.

The CEC has been raising this issue along with AMPC through at least 2 regulatory RRA cyclesand has been building up concepts for a basis to understand the issues driving the rate riderimpacts on customers model concepts have been under development for a few years. Preliminarymodels were developed during the review of the application and through the IR process andsome early results were available for the NSP. During that process the CEC was able todemonstrate that there would be an analytical support available for the concept that amortizationof the DARR balances over 10 years would be provide significant customer rate stability and thatthe current BC Hydro DARR design was flawed and getting worse over time. The CECinvestment in this activity over a number of years has been on the order of $15,000 to $20,000.None of this investment or development cost is included in the fees for expert evidence requestedin the CEC PACA request.

- 2-

The CEC was aware that the NSP process was going to fail because BC Hydro the parties hadreached bottom lines. This occurred before the formal notice of failure of the NSP process in anOctober 13,2010 letter to the Commission. The CEC recognized that if the issues were going toan oral hearing the questions around the DARR would be of considerable interest to theCommission. The CEC therefore determined to prepare expert evidence on the DARR based onits analysis to date and extension of its analysis to answer more questions. During the NSPprocess the CEC was able to discuss its DARR analysis and alternative approach analysis withthe IPPBC's consultant principally and with some other interveners. The critiques spurredconsiderable thought, additional analysis and presentation requirements. The CEC then set out toprepare new model versions with greater analytical capability. Also as the model analysis waseffectively running simulations of the DARR account operations under different design criteriathe run times were increasing significantly and manual steps in preparing data were gettingnumerous. The evidence preparation began based on these new model versions and representsthe stage of evidence that was prepared over a couple of weeks. It is this unfiled evidence whichhas been provided. During the preparation of the evidence numerous additional questions arose,while thinking about the kind of IRs which would have to be answered. The CEC then involvedan associate to prepare another version level of the model with more capability to answerquestions on more variables and to do so with sorter run times. These models would have let toupdates to the evidence and would have been used to answer IRs. Copies of these models are theones provided with the unfiled evidence. These additional models were not complete at the timethat the Commission re-established the NSP. The CEC made the decision to complete thesemodels following the re-establishment of the NSP in order not to lose the intellectual investment.

The CEC has well over 2 to 3 times the investment in this issue beyond what has been claimed inby the CEC as PACA costs for this evidence.

Before re-entering the NSP process the CEC was called over to BC Hydro to discuss BC Hydro'sunderstandings of the requirements for re-entering the NSP. At that time the CEC advised BCHydro that it would make the decision to re-enter the NSP without regard to the risk it wouldthen be taking that the Commission might not accept a PACA for the costs of preparingevidence, which the CEC had been engaged in preparing. The CEC made this decision to respectthe public interest of the commercial sector in getting the best results for the customers. Mr.Charles Reid at this meeting, generously, was clear that his views were that the CEC should notbe penalized for re-entering the NSP and that he thought the costs should be covered.

The fees for which the CEC made claim in the PACA were only for the work of Mr. Craig anddid not include anything for the costs of his associate who had taken on the task of improving themodel capability. The fees, for which the CEC claimed, covered only hours between the point atwhich the CEC recognized that the NSP was going to fail and the time the NSP was reinstatedand covered modelling, analysis and evidence preparation. Work Mr. Craig put in after the NSPwas reinstated to assist, supervise and complete the revised models was not included in the feesfor which the CEC made a claim for PACA funding.

Of necessity, to get the work done in the timelines left available, including the time extensiongranted by the Commission the work load needed to fill the days and the weekends. The workwas needed to be able to advance a credible critique of the existing DARR, credible alternatives,

- 3 -

and credible analysis and evidence, which could stand up to an expected and serious crossexamination and from which all manner of IRs could be credibly answered.

If there are any questions with regard to the work and or the cost claims we would be pleased toanswer them.

Yours truly,

COMMERCIAL ENERGY CONSUMERSASSOCIATION OF BRITISH COLUMBIA

'DavidCraig

David Craig,on behalf of the CECEnclosures

The Commercial Energy Consumers Association of BC

Evidence of David W. Craig for

BC Hydro's Revenue Requirements Application F20ll

Analysis of the Deferral Account Rate Rider Mechanism

And A Proposed Alternative

October 21,2010

1. DARR

1.1. BC Hydro's Request for the DARR Rate Rider

BC Hydro has requested a rate rider increase of 3% in one year moving the rate riderfrom 1% to 4%.

Under cover of this letter BC Hydro submits its F11 RRA. In this application BC Hydroseeks, among other things, approval of an across-the-board rate increase of6.11 per cent effective April 1, 2010 and approval to increase the Deferral Account RateRider (DARR) from 1.0 per cent to 4.0 per cent effective April 1, 2010. BC Hydro seeksthis reHef both on an interim and final basis ..

Exhibit B-1, BC Hydro Cover Letter

BC Hydro has declined to apply the DARR mechanism as it was previously proposed byBC Hydro and approved by the Commission because the resultant rate increase appearedto BC Hydro to be too much.

BC Hydro is requesting approval to increase the DARR from 1.0 percent to 4.0 per centAs of September 30, 2009 the balance in the Deferral Accounts was $540 million, aspresented in Appendix G of the Application. BC Hydro is proposing a 4.0 per centDARR, which is at variance with the 5.0 per cent that would result from the DARRmechanism approved by the BCUe in the F2009/F2010 (F09IF10) RRA Decision. Thisproposal is in recognition of the overall level of rate increase F2011, while also beingcognizant of large balances in the Accounts and the need to balance shortterm rate increase mitigation against higher deferred costs to be recovered futureyears.

Exhibit B-1, BC Hydro Cover Letter

BC Hydro has essentially admitted that its DARR mechanism is not working or at leastis not providing acceptable results. BC Hydro, however, has not analyzed why thisfailure has occurred, what can or should be done about it and whether or not there is abetter mechanism than the DARR.

This paper conducts the required analysis to (1) identify the failures of the DARR, (2)identify a better mechanism than the DARR, (3) conduct analysis of the two mechanismsto show how they differ, (4) explain why the proposed 'percent of deferral accountbalance' PODAB mechanism is better, and (5) run tests of the proposed mechanism todemonstrate its robustness in the face of the nature of issues which affect the deferralaccount balances.

This paper identifies a potential improvement to the DARR that would save BC Hydro'sratepayers approximately $ X million over the next Y years. The net result ofimplementing the proposed PODAB would be to deliver at least a present value benefitto rate payers of $Z.

1.2. Current Mechanism - Rate % tied to Account Balance

The current mechanism for clearing the Heritage Deferral Account (HAD), Non­Heritage Deferral Account (NHDA) and Trade Income Deferral Account (TIDA) hasbeen the application of the Deferral Account Rate Rider (DARR) to amortize thebalances in the deferral accounts.

The method used in the establishing the DARR is to determine a 'rate rider' percentageto be applied to amortizing the deferral accounts by selecting the percentage of ratesfrom the following table from BC Hydro's evidence.

Table 7-3 Deferral Account Rate Rider

Net Balance as of September 30th> $ million <= $ million

-500

°/0 Rate Rider EffectiveFollowing April 1st

(5.0-500-450-400-:350-300-250-200-150-100-50o50100150200250300350400450500

Exhibit B-1, Page 7-6

-450-400-350-300-250-200-150-100-50o

100150200250300350400450500

(4.5(4.0)(3.5(3.0(2.5(2.0(1.5(1.0{0.50.00.00.51.01.52.0

3.54.0.d.55.0

It is important to understand what this table does and does not do well and the realimpact of using the table.

The following analysis shows the average effective % of deferral account balance beingamortized based on the evidence in the BC Hydro F20 11 application that a 1% increasein rates delivers approximately $33 million in revenue.

TABLE-}DARR Rate Formula

1% of Rates =$33 millionRate % ofRider Balance

Ace.Balance

500

450

400

350

300

250

200

150

100

50

o-50

-100

-150

-200

-250

-300

-350

-400

-450

-500

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

-3.5%

-4.0%

-4.5%

-5.0%

%31.26%

31.06%

30.80%

30.46%

30.00%

29.33%

28.29%

26.40%

22.00%

0.00%

22.00%

26.40%

28.29%

29.33%

30.00%

30.46%

30.80%

31.06%

31.26%

%

Once the table reaches the $500 million account balance level Be Hydro has decided notto suggest rate riders higher than the 5% of rates level in the future but it remains openas to what would actually be done. If the rate rider is frozen at 5% then the % of balanceeffect declines from an effective 33% at $500 million to 16.5% at $1000 million and11 % at $1500 million.

These amortization rates are effectively 3 to 4 year amortization rates for balances in therange of the table.

One of the worst features of the DARR mechanism is that it has been declining ineffectiveness since it was first put in place and it will decline in effectiveness year byyear into the future. This is caused by the link of account balances to % of rates riders.

While in the current year 1% on rates raised $33 million, 5 years from now 1% on ratesis projected to give rise to over $50 million. If the DARR table remained in its current

form the same analysis run above shows how the amortization periods resulting willdecrease.

TABLE-2DARR Rate Formula

1% of Rates =$50 millionRate % ofRider Balance

Ace.Balance

500

450

400

350

300

250

200

150

100

50

o-50

-100-150

-200

-250

-300

-350

-400

-450

-500

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

-3.5%

-4.0%

-4.5%

-5.0%

47.37%

47.06%

46.67%

46.15%

45.45%

44.44%

42.86%

40.00%

33.33%

0.00%

33.33%

40.00%

42.86%

44.44%

45.45%

46.15%

46.67%

47.06%

47.37%

It can be seen from this table that the effective amortization rates increase toward 50% ora 2 to 3 year amortization for balance in the range of the table.

As will be seen later this is a catastrophic failure for the DARR and will lead to nochoice but to completely abandon it.

As it is currently the DARR produces unfair, unjust and unreasonable results for ratepayers and will continue to do so, getting worse year by year.

When analyzing the DARR or any proposed mechanism for clearing the deferralaccounts it is critical to recognize that the essential variability in deferral accounts is

driven by the variability in the water inflows to the BC Hydro electric system and theprices for energy to be purchased to compensate for low inflows or the value ofelectricity to be received for high inflows. The variability of these inputs overwhelms allother inputs to the deferral accounts.

The following figure shows the variability of the deferral account balance amountsderived from using BC Hydro's probability of exceedence information on the waterinflow variability in BC Hydro's hydroelectric system and a value for energy of$45IMWh.

FIGURE 1

Deferral Account BalancesFor Water Inflow Variability Simulation Trials

<II

~E 1000 -~---~---~~--~~~----

.5~

<II

~ 500EIIIiiico1: 0Suu«~ -500Ql

~Q

-1000 ---~-~--------~~~~----~

-Deferral Account Balances

The account balance while frequently within the $500 million range of the DARR table alsofrequently range beyond the outside limits of the DARR table. The DARR mechanismleaves the range beyond the table uncertain.

The absolute average balance of the deferral account balances in this case is about $160million. So the DARR mechanism covers the majority of situations but does not cover asignificant number of situations.

More importantly the DARR mechanism because of its fixed increment % rate impactmethodology creates significant step changes in rate impacts on rate payers.

The following figures show the % Rate Riders and the % Rate Rider Change from yearto year which devolve from the impacts of the water inflow variability in the BC Hydrohydroelectric system. The change in % Rate Rider is the key result which impacts ratepayers from year to year as rate volatility.

FIGURE 2

Change in Rate Rider %For Water Inflow Variability Simulation Trials

.. 6.0%III

~2.. 4.0%IIIQI>j 2.0%

".!ii. 0.0%

1

1_-~c; -2.0%

-4.0%

IQI

~a -6.0% .----..--- -- -- -- -----.-.--- -- --- ---..

L__....... ._.. __~Ch~~ge in ~ate Rid~r % ...__.

The average change in rate rider % applied from year to year is about plus or minus 1.5%.However, from the figure above it is readily evident that that the rate swing volatility canbe significant on the high side of the average.

The DARR mechanism is not particularly robust in the event of a change in the price orvalue of energy, to the extent that this value increases. As a consequence of starting with arelatively high volatility for rate change swings, a higher value of energy environment willresult in significantly higher rate change swings.

In addition to the rate rider % there is a cost of carrying the deferral account balanceswhich devolve from the application of the DARR mechanism.

The combined effect on rates of both the rate rider and the cost of carrying the deferralaccount balances is shown in the figure below, as the combined rate %.

The year to year change in the combined effect on rates provides the ratepayer impact fromyear to year and is shown in the figure below, as the combined rate % change from year toyear.

8.00%

6.00%

4.00%

'$.QI 2.00%...IIIex:"tI 0.00%QIc:E~ -2.00%u

-4.00%

-6.00%

-8.00%

FIGURE-3

For_~a_ter_lnf_I~_~_:_~~ea_:~~_~_t~_~_~_lat_ion_Tri_a_IS~_ I-.~-,-"--1i~ I

I

-Combined Rate %

FIGURE-4

Combined Rate % Change Year to YearFor Water Inflow Variability Simulation Trials

4.00%

2.00%

0.00%

..III

~ 6.00%]a..IIIQI>~......~III

5'#. -2.00%QI

'iii~ -4.00% -QIC:c~ -6.00% --- -- --..-- -.----.--..- ----.-----..-.-.-..- - -

I u -8.00% ----.. - -- --..-.- - -- -----..- - --- __..- I

I - Combined Rate % Change Year to Year jlL _ _ _ ..__ .._ .._.._ _ _ _ __._._ _ _ __.._ _ _ _ .

1.3. Proposed Mechanism - % Account Balance

The proposed alternative to the DARR mechanism is to use a % of Deferral AccountBalance (PODAB) mechanism to determine the amortization of the deferral accountbalances.

The advantage of the PODAB mechanism is that it (1) is simple and easy to understandas a mechanism for clearing the deferral account balances (2) is independent of the valueof a 1% change in rates (3) covers the entire range of account balances (4) has muchlower rate swing volatility (5) is robust in the event of different value of energyenvironments (6) is robust in the event of complex energy system issues (7) costs theratepayers on average less than the DARR mechanism.

The following analysis shows the results for the proposed PODAB mechanism relativeto managing the water inflow variability in the Be Hydro hydroelectric system. Thefollowing is an analysis using a value of energy of $45 and an amortization rate of 12%.

FIGURE-5

Water Variability Deferral Account BalanceSimulation Trials

2000<II

~1500

:E 1000.5'II\.Ql 500uCIIIiii 0co...c5 -500uu«

-1000iiit:Ql... -1500QlQ

-2000

-Account Balances

The PODAB mechanism has average absolute deferral account balances of about $330million and account balances which can frequently be in the $500 to $1000 millionrange, while at very low probability frequencies occasionally reaching in the $1500million range. These fluctuations are a natural consequence of the water inflowvariability.

-1.00%

-1.50%

FIGURE-6

:0 1.50%Ql>S 1.00%..III

~ 0.50%Ql

~III 0.00%isCfi? -0.50%..Ql

"tIa:~a:

-2.00%

- Rate Rider % Change Year to Year

The above figure demonstrates the relatively low rate swing volatility achieved with thePODAB mechanism. The average year to year rate swing is about plus or minus .45%meaning that ratepayers would not experience much in the way of rate impacts fromchanges in the applicable rate rider percentages.

The actual rate rider applicable in any given year could range up to a bit over 5%. Inaddition the rate rider impact Be Hydro's rate payers would experience a cost impact ofcarrying the deferral accounts. The maximum cost of carrying the deferral accountscould range up to a bit over 1.7%.

The combined cost to rate payers of the rate rider for the deferral account amortizationand the cost of carrying the deferral account balances would be approximately plus orminus 1.7%.

The net cost to rate payers of the rate rider and the cost of carrying deferral accountsapproaches zero because the water inflow variability and consequent rate impacts have adegree of symmetry around the expected normal water inflows.

The figure below shows the combined rate impacts for the rate rider % and the rate %required to carrying the deferral account balances. As can be seen there is considerablevolatility but the PODAB mechanism moderates this to minimal year to year rate changeimpacts.

FIGURE-7

i----------------------------- ---------~--------------- --------- ------------------,

I Combined Rate Impact %I For Water Variability Simulation Trials

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00% +------------------------1

-8.00% +-------~----------------------------------------------------~------------------------

-10.00% --'-----------------------------------------------------------~------------------------

-Combined Rate %

The average combined rate % change from year to year is approximately .7%. Thismoderation is not only reduces impact on rate payers but also lowers the overall cost.

FIGURE-8

Combine Rate %Change from Year to YearFor Water Variability Simulation Trials

2.50% ----------------------------~------------------------- -------

0.50%

0.00%

1.00%

-Combine Rate % Change from Year to Year

1.50%

-2.50%

-1.50% -

-0.50%

-2.00%

..III

:. 2.00%

13..III:.j~CIIIoQl -1.00%...IIIex:"CQlC:s~u

'*

1.4. Metrics for Assessment

The primary purpose of the deferral accounts is to smooth the potential rate impacts ofthe volatile changes in cost impacts arising from the operation of the BC Hydrohydroelectric system and the electrical energy markets.

To track these volatile effects it is useful to adopt the metrics of measuring the deferralaccount balances, the capitalization of the weighted average cost of debt into theaccounts and the amortization amounts being used to clear the deferral accounts. Oncethese metrics have been adopted it is possible to model the effects arising out of the BCHydro system.

It is important to calculate for these metrics; (a) the maximum size (b) the average size(c) the absolute size, and (d) the year to year change in the size. These metrics can bedetermined in terms of their absolute dollar magnitude or their relative % of ratesmagnitude.

In addition it is useful to examine the frequency distribution of specific results, so as todetermine where to place tolerance limits.

When assessing the merits of one amortization system versus another the cost to theratepayer is critical. This cost is composed of two components, the amortization cost tothe rate payer directly and the cost of carrying the deferral account. These can beexpressed in the absolute dollar cost or in the relative percentage of rates.

Having adopted the key metrics then it becomes possible to set objectives for theamortization system.

The objectives adopted in this study are;(l) To optimize the cost to the ratepayer for the amortization system parameters(2) To minimize the rate volatility (the ratepayer impacts or changes from year to year)(3) To manage the deferral account balances to levels appropriate for the system variability

The objectives can then be modeled, tracked, measured, and compared to determinewhich system or system parameters may be the best.

In addition once the metrics have been adopted then the amortization systems can betested for their sensitivity to different key parameter environments to test the robustnessof the amortization system to changes.

For the purposes of this study these metrics have been adopted and examined. Theobjectives to be pursued have been set and measured. The robustness tests have beenconducted to determine the sustainability of the amortization system for differentconditions which may be expected to occur.

1.5. Simulation Methodology for Assessment

The methodology adopted for the study has been to take BC Hydro's evidence withregard to the water inflow variability in its hydroelectric system, in the form of theprobabilities of exceedence and to model the probable annual effects.

The model has then been repeated 5000 times to simulate the possible results which maybe expected. This level of simulation, when averaged out, tends to stabilize the resultsinto quantitative measures that give reasonably clear expected outcomes. To furtherstabilize the quantitative analysis for the optimization studies 30 runs of 5000 simulationtrials have been aggregated. This produces highly stable characteristics defining theamortization systems and enabling clear and unambiguous comparisons.

The potential water level outcomes for the BC Hydro hydroelectric system have beenbroken down into 31 discrete possible outcomes with 15 outcomes above the 31 st normaloutcome and 15 outcomes below the normal outcome.

Each outcome has been assigned its relevant probability of exceedence. The probabilitiesof less than 2% and greater than 98% have been left out of the model because the dataprovided by BC Hydro did not include data for these outcomes. Nevertheless these trialsare not expected to influence the outcome of the modeling because they represent such asmall portion of the total system being modeled.

Each of the outcomes has been matched to the quantity of energy generated in thehydroelectric system when the water inflow outcome occurs. The difference in energygenerated between the possible outcomes is assigned to each of the possible outcomes.

Then each outcome is assigned an energy value by calculating the quantity of energydifference times a selected input value of energy. For the base case analysis a value ofenergy of $45/MWh has been used.

Each probability of exceedence has been assigned a range of random numbers between 1and 960 in order to proportion out the possible random numbers to reflect theprobabilities of the hydroelectric system outcomes.

The next step is to define a trial simulation run for the model which starts with theselection of a random number between 1 and 960. This is used to select a given outcomefor the model for the specific trial. The model is then repeated 5000 times to generate astatistically stable characteristic set of outcomes to define the model.

The model results are recorded with a 1 or 0 against one of the particular outcomes inorder to enable a calculation of the amount of energy cost related to that particular trial.

The model for simulation of the Be Hydro hydroelectric system is shown in the tablebelow.

ANALYSIS OF BC HYDRO SYSTEM FOR ENERGY DEFERRAL ACCOUNTING1000 Water Value of

Random Level System Cumulative Energy Probaility Value ofat of

# Range Outcome Normal Energy Probability Inflow Inflow $/MWh outcome EnergyRandom %of Inflow % Difference Difference 45 between DifferenceNumber Normal GWh Exceedance GWh GWh $ millions 98% & 2% to normalSelected $ millions

447001 10 1 85 45200 98% 500 45200 2034 1% 360

10 20 2 86 45800 97% 600 45800 2061 1% 33320 40 3 87 46300 96% 500 46300 2084 2% 31140 50 4 88 46800 94% 500 46800 2106 1% 28850 70 5 89 47300 93% 500 47300 2129 2% 26670 100 6 90 47900 91% 600 47900 2156 3% 239

100 120 7 91 48400 88% 500 48400 2178 2% 216120 160 8 92 48900 86% 500 48900 2201 4% 194160 190 9 93 49500 82% 600 49500 2228 3% 167190 230 10 94 50000 79% 500 50000 2250 4% 144230 280 11 95 50500 75% 500 50500 2273 5% 122280 320 12 96 51100 70% 600 51100 2300 4% 95320 380 13 97 51600 66% 500 51600 2322 6% 72380 430 14 98 52100 60% 500 52100 2345 5% 50430 480 15 99 52700 55% 600 52700 2372 5% 23480 480 16 100 53200 50% 500 53200 2394 0% 0480 530 17 101 53700 45% 500 53700 2417 5% -23530 580 18 102 54300 40% 600 54300 2444 5% -50580 640 19 103 54800 34% 500 54800 2466 6% -72640 680 20 104 55300 30% 500 55300 2489 4% -95680 730 21 105 55900 25% 600 55900 2516 5% -122730 770 22 106 56400 21% 500 56400 2538 4% -144770 800 23 107 56900 18% 500 56900 2561 3% -167800 840 24 108 57500 14% 600 57500 2588 4% -194840 860 25 109 58000 12% 500 58000 2610 2% -216860 890 26 110 58500 9% 500 58500 2633 3% -239890 910 27 111 59100 7% 600 59100 2660 2% -266910 920 28 112 59600 6% 500 59600 2682 1% -288920 940 29 113 60100 4% 500 60100 2705 2% -311940 950 30 114 60600 3% 500 60600 2727 1% -333950 960 31 115 61200 2% 600 61200 2754 1% -360

The model for each trial calculates the energy value amount for the quantity of energydifference from normal and sets that up as the deferral amount for the year.

The model determines the amortization amount for the deferral account based on the %amortization input parameter for the PODAB approach. For the DARR approach themodel determines the rate rider % for the range into which the deferral account balancefalls and then determines the amortization amount based on the value of a I% rateincrease input parameter, which for the base case is $33 million.

The amortization amounts for both PODAB and DARR are then deducted from theopening deferral account balance and the weighted cost of debt input parameter times thedeferral account balance is added back into the deferral account balance. This leads tothe closing deferral account balance.

The closing deferral account balance is then cycled into the opening balance for the nexttrial and the deferral account model process is repeated again.

Following the simulation of the deferral account balance entries, an analysis for eachtrial is calculated to show the rate effects for each trial. The rate rider % of rates isdetermined to match the amount of the amortization. In addition the cost of carrying thedeferral account balance is determined based on the weighted average cost of capitalinput parameter less the weighted average cost of debt input parameter multiplied by thedeferral account balance. This cost of carrying the deferral account is then calculated asa % of rates so that it is in the same terms as the rate rider. These two rate effects arethen added together for each of the PODAB and DARR approaches to provide the totalcost to ratepayers of the process used to manage the water inflow variability. The effectsare added together separately for the positive and the negative rate riders and costs ofdeferral in order to isolate the differences between the two approaches with respect torate increase and rate decrease effects on rate payers.

A determination was made of the absolute differences between the two approaches for arange of different amortization rate inputs for the PODAB approach while holding theDARR constant. This has identified the quantitative difference between the approaches.

To the extent that circumstances lead to asymmetric values for energy based on whetheror not the Be Hydro system is above or below normal water inflows then the relativedifference in performance between the two approaches would become very importantrelative to managing the rate increase and rate decrease effects on rate payers.

In addition to analysis of the rate increase and rate decrease effects the year to yearchange in the rate increases and rate decreases is computed. This enables a determinationof the degree of impact on rate payers created in any given year and therefore allows adetermination of the degree of rate impact smoothing or rate volatility reduction.

Also, a determination was made of the frequency distributions for deferral accountbalances to show the probable requirement for managing rate volatility.

The models have been runs for different values of energy to test the robustness of thedifferent approaches under higher or lower energy prices.

The models have been run for different values of a I% increase in rates to show therobustness of the different approaches under circumstances where electricity rates areincreasing quickly.

The DARR model has been run with different size ranges for the .5% rate riderassignment in the model to determine the effect of moving the DARR model closer tothe PODAB model. This provides a form of proof that both models are workingappropriateIy.

The model has also been run with different shapes for the probability of exceedence todetermine what effect moving away from a symmetrical shape for the water inflowprobabilities may have.

The model has also been run without different weighted average costs of capital and debtand without the accumulation of the weighted average cost of debt into the deferralaccount.

Initial balance levels for the deferral account have also been run to determine what effectthis may have on the impacts on ratepayers.

1.6. Comparison of Mechanisms

The difference between the PODAB and the DARR approach shows up in the fact thatthe PODAB has a lesser impact on rate payers in terms of the size of the rate riders andthe size of the rate effects of the cost of carrying the deferral accounts. This differencevaries significantly with the amortization period chosen for the PODAB approach.

Difference Between PODAB vs DARRFor Absolute Rate Impacts

0.80%

c:::c:::

0.60%CItQ

~l:Q 0.40%CIt

8Q.

0.20%'0GI...CGI 0.00%...GI:I:Q

-0.20%'"GI...I'D

c:::'0 -0.40%

'*-0.60%

% Amortization of the Deferral Account Balance

~--% of Rates Difference for PODAB vs DARR

Interestingly as the PODAB approach has the amortization rate increased it becomes verysimilar to the DARR in its effects on rate payers. This is a very logical outcome because theDARR approach is amortizing in the 30% plus range near where the performance betweenthe two methods crosses over.

On the other end of the comparison once the PODAB approach uses longer amortizationperiods then the differences in deferral account carrying costs catch up and erase theadvantage over the DARR approach.

The DARR mechanism delivers more volatile average rate riders, costs of deferrals, annualrate changes and combined impacts on ratepayers than the PODAB when the PODAB

amortization rates are between about 7% and 40%.Consequently the PODAB mechanism is amore robust approach to managing the deferral account rate impacts.

1.7. Results for Comparison of Mechanisms

The following is a comparison of the combined rate effects for the DARR and PODABmechanisms using a 12% amortization rate for the PODAB, $451MWh value of energy,$33 million per 1% increase, 5% weighted average cost of debt and 9% weightedaverage cost of capital and no opening balance for the deferral account.

Combined Rate %

For Water Inflow Variability Simulation Trials

5.00%

0.00%

-5.00%

The combined rate effects for theDARR show them contained withinAbout + & - 5% of ratesWith an average of about + & - 2.1 %

-10.00%

-Combined Rate %

Combined Rate Impact %

For Water Variability Simulation Trials

10.00% T-~------~--------~-----~~-------

'#.~ 5.00% ~-'-;;--H-

a::."

CIlc1 -5.00%

-10.00% ~----~--~--~-~---~---~-~~------~~--------

-Combined Rate %

The combined rate effects for thePODAB show them contained withinAbout + & - 5% of ratesWith an average of about + & - 1.8%

It is clear from the above comparison that the PODAB mechanism has combined rateimpacts much more frequently closer to the normal average water inflow 0% than theDARR, which much more frequently swings to its top 5% boundaries.

Combine Rate % Change from Year to YearFor Water Variability Simulation Trials

3.00% ---- ~----~~~--~-- ~---~-~---~~

IL

2.00%

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-Combine Rate % Change from Year to Year

The PODAB mechanism hasYear to year rate increasesBetween plus and minus 1.5%Averaging + & - .7%

I~~~~--- --~-~~---~~----~~--~~~~-~--- ---~~-II

.~ Combined Rate % Change Year to Year

I For Water Inflow Variability Simulation Trials iI... 8.00% -- --~----------~~-- --~~~~~~--- II i :~~: ..----~------~---~--------- i

I '; 2.00% !

II f! -:~~:~ ~ -4.00%

I "C -6.00% ----~---~~~---~--~~~--~~-~~---l L -combined Rate % Chang~Vear~o vear_

The DARR mechanism hasYear to year rate increasesBetween plus and minus 3%Averaging + & - 1.5%

Clearly from the above analysis the least rate impact approach or mechanism is thePODAB versus the DARR. The rate impacts on ratepayers are about 1/2.

This ability of the PODAB to reduce the peak and average rate volatility is a veryimportant characteristic of the comparison of the two mechanisms.

The other key variable to determine how well the amortization system works is thefrequency distribution for deferral account balances. The analysis below shows wherethe frequency of deferral account balances goes as the amortization rate for the PODABmechanism is changed across the whole feasible range.

Deferral Account Balance Size ($ in millions)Distribution Frequency

120%

0%

40%

20%

Deferral Account Amortization Rate %

60%

~IIIa::~ 100%Vi.:::.uIIILU

'0 80%(Jl

QIuCIII

16

'"1:5u

.a:16......-tQ

'0>uCQI:::la"~

l.I.

'fi!.

!ii! 0 to 100 100 to 200 200 to 300 !ii! 300 to 400 !ii! 400 to 500 500 to 600

!ii! 600 to 700 700 to 800 800 to 900 !ii! 900 to 1000 1000 to 1100 1100 to 1200

1200 to 1300 1300 to 1400 1400 to 1500 1500 to 1600 1600 to 1700 1700 to 1800

1800 to 1900 1900 to 2000 2000 and above

It is clear from examining the results with respect to the frequency distribution ofdeferral account balances that once the amortization rate for the PODAB mechanism isabove 10% the probability of carrying high balances diminishes to become a very smallIssue.

The frequency distribution for the DARR mechanism does not change with amortizationlevels. Therefore the distribution of deferral account balance amounts is shown on itsown for the DARR below. The +ve and -ve numbers have been aggregated forsimplicity.

Deferral Account Balance FrequencyFor the DARR Mechanism

iii......Ql';jQ

.e>'"'CQl:::la"~

u..

16.0%(Jl

2l 14.0%; 12.0%iii 10.0%co 8.0%1:5 6.0%'"' 4.0%:f. 2.0%

0.0%0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ...'-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 0, ~

...,N N ,.,.., ,.,.., '<t '<t '-"'l '-"'l \D \D r-- r-- co co 0') 0') 0 0,

0 0 , , , , , , , , , , , , , , , , ...,00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 , ...,

'-"'l ..., '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 '-"'l 0 0..., N N ,.,.., ,.,.., '<t '<t '-"'l '-"'l \D \D r-- r-- co co 0') '-"'l0')

~-DeferralAccount Balance Frequency

The DARR Deferral Account Balance Frequencies have then been compared with thosefor the PODAB mechanism using a 12% amortization rate. The reduced ratepayerimpacts of the PODAB mechanism are achieved with moderate increases in deferralaccount balance amounts.

Deferra1Account Ba lance Frequenciesfor DARR and PODAB 12%

35.0%(Jl

Qlu 30.0%cIIIiii 25.0%I:t:l....

20.0%c:::l0u 15.0%u<iii 10.0%......Ql 5.0%<+-Ql

Q0.0%'0

>uCQl:::lC"Ql...

1..1.

--DARR - Deferral Account Balance Frequencies

PODAB 12%Amort Deferral Account Balance Freq uencies

1.8. Recommendations

On the basis of the analysis presented, examination of the DARR mechanism andexamination of the proposed PODAB mechanism it appears clear that the PODABmechanism is superior in performance to the DARR.

Adoption of the PODAB mechanism is recommended for Be Hydro's F20ll year andfor future years because it is in the public interest.