Newfoundland Power Inc

Newfoundland Power Inc.

Energy Plan Submission February 28, 2006

Energy Plan Submission

Table of Contents Executive Summary......................................................................................................1

Introduction ................................................................................................................2

Provincial Electricity Industry .........................................................................................2

Overview of Newfoundland Power ................................................................................3

Commitment to Customers....................................................................................4

Strategic Considerations ..............................................................................................6

Industry Structure and Efficiencies..................................................................................7

Generation.................................................................................................................8

Alternative Energy Sources ...........................................................................................9

Conservation and Demand Management (CDM)..........................................................10

Response to CDM .....................................................................................................11

Rate Design .......................................................................................................13

Regulation ................................................................................................................14

Human Resource Challenges......................................................................................15

Recommendations.....................................................................................................16

List of Appendices Appendix A Current Generation by Source Appendix B Electric Space Heating Market Share Appendix C Comparison of Electricity Rates Appendix D Newfoundland Power Capital Investments Appendix E Newfoundland Power’s Awards Appendix F Island Electricity System Costs Appendix G Hydroelectric Development and the Environment Appendix H Canadian Wind Energy Capacity Appendix I Conservation and Demand Management Appendix J Wholesale Rate Structure Appendix K Conservation and Demand Management Initiatives and Customer Response Appendix L Electricity Utility Rate Design Appendix M Performance Based Regulation Appendix N Human Resource Challenges Appendix O Glossary of Terms


Executive Summary The electricity industry in the Province of Newfoundland and Labrador is in reasonably good shape compared to some other jurisdictions, and the performance of the electricity system is efficient and reliable. However, the opportunity for greater efficiencies in the structure of the electricity industry exists. There is currently duplication and overlap in the delivery of electricity and the provision of customer service, both of which have an impact on customer electricity rates in the province. Eliminating this duplication could reduce operating costs to benefit customers over the long term. System planning should be open and transparent to ensure that proposals for system additions are competitive and least cost. All types of generation should be considered but should only proceed if they effectively meet system demand needs. Current regulation has served the province well and customers have benefited from stable electricity rates that are the lowest in Atlantic Canada. There are many forms of regulation and rate options in use today in various jurisdictions that are worth considering but are only desirable if they provide the intended benefits for the people of this province. Both regulation and rate design must be jurisdiction specific to ensure that customers’ needs are appropriately met. Customers are interested in learning more about energy efficiency and the wise use of electricity. Conservation and Demand Management (CDM) programs have been available to customers in this province for a number of years and should continue to be promoted. Appropriate assessments of further CDM initiatives are required to determine whether the desired outcomes can be achieved. Safe, reliable and competitively priced electricity is an important component for economic development. The electricity industry also plays an important role in contributing to the creation of income and employment opportunities.

Newfoundland Power’s goal is to operate efficiently, reduce operating costs and keep electricity rates as low as reasonably possible for the benefit of its customers while improving reliability, safety, customer service and the environment, thereby helping attract economic development. The Company will continue to look for ways to improve overall system efficiency for the benefit of customers while earning a reasonable rate of return for its shareholders.

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Introduction Newfoundland Power supports the development of a long-term Energy Plan that will maximize benefits for the people of Newfoundland and Labrador. The Government of Newfoundland and Labrador (Government) is to be commended on its extensive review of the province’s energy sector and the comprehensive Energy Plan Discussion Paper that has been developed. Newfoundland Power looks forward to working with Government to provide feedback and recommendations relating to the province’s energy future throughout this process. Newfoundland Power’s submission focuses on the electricity industry of the province’s energy sector. The major objectives of the Energy Plan in relation to the electricity industry as outlined in the Discussion Paper in section 4.1 have been considered in Newfoundland Power’s response. These are the key factors that are impacting and will continue to impact the electricity industry in the province. They are:

securing future electricity supply; reviewing our regulatory regime and industry structure; balancing electricity costs and reliability; supporting economic development; and, protecting the environment.

Provincial Electricity Industry The province is served by two electric utilities, Newfoundland and Labrador Hydro (Hydro) and Newfoundland Power. Hydro is a crown corporation primarily responsible for generation and transmission of electricity, in addition to serving approximately 35,000 residential and commercial customers in rural areas on the island and throughout Labrador. Newfoundland Power is an investor-owned utility which operates an integrated distribution system throughout the island portion of the province along with related transmission and generation facilities, and serves more than 227,000 customers. The province has 7,427 megawatts (MW) of electricity generating capacity, with 2,524 MW available to meet demand in the province. Of this available capacity, 1,917 MW (excluding isolated systems) is located on the island portion of the province1 (see Appendix A). The electricity system in the province is unique with the following characteristics that present significant challenges:

it is an isolated, stand-alone electricity system that is not connected to the North American electricity grid and must therefore be self-sufficient;

the small size of the system means that what works in larger systems elsewhere may not apply in this province;

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1 Developing an Energy Plan for Newfoundland and Labrador, Public Discussion Paper, November 2005


according to Environment Canada, the province experiences some of the harshest weather conditions in North America, and a significant amount of infrastructure is located along the coastline and is subject to high winds, salt spray and ice;

customers are widely dispersed across the province; and, many customers heat their homes electrically (see Appendix B) which makes system management challenging due to the seasonal variations with this type of usage.

Electricity sales on the island are expected to grow, on average, at 1.4% per year through 2010 and the number of customers is expected to grow at just under 1% per year over the same period. This may be further reduced by the impact of CDM initiatives. Cost management is critical given this low-growth environment. In the absence of a new industrial customer of significant size entering the market, generating capacity on the island is expected to continue to meet demand until at least 2011, when adjusted to reflect the recent closure of the Abitibi Consolidated mill in Stephenville. Since 2002, electricity rates for customers have risen over 20%. These rate increases have been driven by increases in generation costs, including rising fuel costs, and can be expected to continue to rise. Hydro generates between 30% and 40% of its annual energy requirements at its large oil-fired generating facility at Holyrood. The price of oil has been rising steadily over the past number of years, which has impacted Hydro’s cost of producing electricity. It is worthy to note that the Newfoundland and Labrador market is not different from the rest of Canada in terms of upward pressures on rates resulting from generation costs. Rising fuel costs are affecting most utilities.

Overview of Newfoundland Power Newfoundland Power has a long history of serving the people of this province with safe, reliable electricity in the most cost-efficient manner possible, and has contributed significantly to the social and economic well-being of the province. The Company serves approximately 85% of all electricity customers in the province and currently employs about 600 skilled women and men. Newfoundland Power has more than 120 years’ experience in the electricity industry in the province and has more than 100 years’ experience with the planning, design, construction and operation of small hydroelectric developments which commenced with the construction of the Petty Harbour Hydroelectric Generating Plant in 1900. The most recent hydroelectric development was the 6 MW hydroelectric generating plant at Rose Blanche which was commissioned in 1998. Newfoundland Power:

operates 23 hydroelectric generating plants, 3 diesel plants and 3 gas turbine facilities;

operates 136 substations;

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maintains over 10,000 km of transmission (2,100 km) and distribution (8,300 km) lines;

maintains over 10,000 km of transmission (2,100 km) and distribution (8,300 km) lines;

operates a state-of-the-art system control centre to monitor and control the electricity system; and,

operates a state-of-the-art system control centre to monitor and control the electricity system; and,

operates an innovative, multi-channel customer contact centre that responds to more than a half million customer calls a year.

operates an innovative, multi-channel customer contact centre that responds to more than a half million customer calls a year.

Newfoundland Power currently operates under traditional cost of service regulation and has a proven track record of being a low cost operator. As a result, residential electricity rates in the province are very competitive and are currently the lowest in Atlantic Canada (see Appendix C). Newfoundland Power’s contribution to the price customers pay for electricity has decreased by approximately 1.5% over the past 10 years, without accounting for the impact of inflation.

Newfoundland Power currently operates under traditional cost of service regulation and has a proven track record of being a low cost operator. As a result, residential electricity rates in the province are very competitive and are currently the lowest in Atlantic Canada (see Appendix C). Newfoundland Power’s contribution to the price customers pay for electricity has decreased by approximately 1.5% over the past 10 years, without accounting for the impact of inflation.

Commitment to CustomersCommitment to Customers Newfoundland Power is committed to meeting customers’ expectations and delivering customer service excellence. Customers are surveyed on a quarterly basis and consistently say that reliability and price are the two most important considerations when it comes to their electricity service, with the relative importance of both changing depending on the prevailing circumstances at the time of the survey. Newfoundland Power’s annual customer satisfaction rating is among the highest in the country. Customers have given the Company an annual customer satisfaction rating of at least 88% since 1999, achieving an annual rating of 89% in 2005. Such a high rating demonstrates that customer service expectations are being met.

CUSTOMER SATISFACTION RATING

65%

70%

75%

80%

85%

90%

95%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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By seeking every opportunity to improve the efficiency of its business, Newfoundland Power has reduced operating cost per customer by approximately 30% in the past 10 years, on an inflation adjusted basis.

By seeking every opportunity to improve the efficiency of its business, Newfoundland Power has reduced operating cost per customer by approximately 30% in the past 10 years, on an inflation adjusted basis.

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Capital investment in the electricity system directly benefits Newfoundland Power’s customers through enhanced reliability and reduced operating costs. Since 1997, capital expenditures of more than $460 million have been made to provide a high-quality electricity system (see Appendix D). The Company remains committed to investing in rural Newfoundland, even though the province is experiencing significant out-migration from these areas. Reliability performance continues to improve for customers despite harsh weather conditions.

Capital investment in the electricity system directly benefits Newfoundland Power’s customers through enhanced reliability and reduced operating costs. Since 1997, capital expenditures of more than $460 million have been made to provide a high-quality electricity system (see Appendix D). The Company remains committed to investing in rural Newfoundland, even though the province is experiencing significant out-migration from these areas. Reliability performance continues to improve for customers despite harsh weather conditions.

$210

$225

$240

$255

$270

$285

$300

$315

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

$ adjusted for inflation.

OPERATING COST PER CUSTOMER

RELIABILITY (Number of Outages per Customer)

2

3

4

5

6

1996 1997 1998 1999* 2000 2001 2002 2003 2004 2005

* Severe winter storm impacted results.


Newfoundland Power’s safety performance continues to be among the best in the Canadian electricity industry. In 2004, the Company was named as one of the best performing companies in Canada by the Canadian Electricity Association (CEA) for its commitment to employee safety.

Newfoundland Power’s safety performance continues to be among the best in the Canadian electricity industry. In 2004, the Company was named as one of the best performing companies in Canada by the Canadian Electricity Association (CEA) for its commitment to employee safety.

0

1

2

3

4

5

6

7

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

INJURY FREQUENCY RATE

As responsible stewards of the environment, Newfoundland Power employs rigorous programs and processes to ensure that its employees act in an environmentally responsible manner in the delivery of service to its customers. The Company continues to meet ISO 14001 Environmental Management System standards for its Generation, Transmission and Distribution systems. Newfoundland Power also takes a leadership role in promoting environmental awareness and education in the community, and has received 6 environmental awards since 2000 (see Appendix E for a list of Newfoundland Power’s recent awards).

As responsible stewards of the environment, Newfoundland Power employs rigorous programs and processes to ensure that its employees act in an environmentally responsible manner in the delivery of service to its customers. The Company continues to meet ISO 14001 Environmental Management System standards for its Generation, Transmission and Distribution systems. Newfoundland Power also takes a leadership role in promoting environmental awareness and education in the community, and has received 6 environmental awards since 2000 (see Appendix E for a list of Newfoundland Power’s recent awards).

Strategic Considerations Strategic Considerations In Newfoundland Power’s view, there are a number of strategic considerations regarding the electricity industry that require careful review and evaluation in the development of a sound Energy Plan. They include:

In Newfoundland Power’s view, there are a number of strategic considerations regarding the electricity industry that require careful review and evaluation in the development of a sound Energy Plan. They include:

the opportunity for greater efficiencies in the structure of the electricity industry; the opportunity for greater efficiencies in the structure of the electricity industry; the establishment of an appropriate evaluation and selection process for new generation projects based on least cost, and the removal of the permanent moratorium on new, small hydroelectric generating projects;

the establishment of an appropriate evaluation and selection process for new generation projects based on least cost, and the removal of the permanent moratorium on new, small hydroelectric generating projects;

the utilization of sustainable, renewable resources in meeting future energy needs; the utilization of sustainable, renewable resources in meeting future energy needs; the role of CDM over the long term; the role of CDM over the long term; the opportunity to improve regulation to reflect a more efficient and cost-effective approach; and,

the opportunity to improve regulation to reflect a more efficient and cost-effective approach; and,

the impact human resource challenges may have on the electricity industry. the impact human resource challenges may have on the electricity industry.

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Industry Structure and Efficiencies In the simplest terms, there are essentially two aspects to the electricity industry – supply and delivery. It is common for the electricity industry to be divided along functional lines – generation (supply) and transmission and distribution (delivery). In the current structure, Hydro is the largest generator of electricity in the province, while Newfoundland Power is the largest provider of delivery services in the “poles and wires” business. The delivery of electricity is a natural monopoly and as such should be regulated, while the supply is not a natural monopoly and the need for regulation may not be the same. Currently, Newfoundland Power maintains and operates approximately 80% of all distribution support structures (poles and wires) and serves 85% of all customers in the province. The current industry structure contains duplication between Hydro and Newfoundland Power. Overlap exists in the delivery of energy over transmission and distribution lines, and the provision of customer service, both of which have an impact on customer electricity rates. The resources necessary to perform these functions are, to a significant degree, duplicated by Hydro for a much smaller group of assets and customers. A structure in which Hydro has responsibility for large generation, system planning, dispatch and control, and Newfoundland Power has responsibility for transmission and retail distribution service, would be more efficient. It would eliminate the inefficiencies inherent in the current structure and reduce the impact these costs have on electricity rates for customers. The construction and maintenance of transmission systems require much the same resources as the construction and maintenance of distribution systems. Material depots, technical and line staff, and transportation assets are required in constructing and maintaining poles and wires whether they are moving electricity at transmission or distribution voltage. The interaction with customers through a call centre and associated systems such as meter reading and customer billing are also duplicated for a smaller group of customers (Newfoundland Power – 227,000 customers; Hydro – 35,000 customers). By eliminating this duplication, operating costs could be reduced to benefit customers over the long term. In 2001, Newfoundland Power agreed to acquire most of the poles owned by Aliant Telecom Inc. in the province. The underlying rationale for this transaction was that Newfoundland Power could achieve lower costs, primarily through economies of scale available to a single owner. Newfoundland Power’s customers have seen the direct benefit of this transaction through increased pole rental revenue which helps to offset electricity rates. The impact is approximately $4 million in lower costs over the 10 years of this agreement. Newfoundland Power also performs engineering services for Aliant and cable companies on a mutually cost-effective basis. Similar economies of scale are available with the remaining poles and wires in the province, particularly on the island portion of the province.

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Ownership of the assets does not have to be linked to “system control,” which would allow Hydro to maintain control of system planning and dispatch functions. For example, in Ontario, the Independent Electricity System Operator (IESO) is the system controller, forecasting how much electricity will be needed and advising generators how much power they can send into the province's interconnected grid of transmission lines. In New Brunswick, the Independent System Operator (ISO) is the system and market operator with no ownership interests in generation facilities. Removing the duplication in the delivery of electricity to customers that currently exists will provide operational efficiencies, reduce future regulatory costs and have a positive impact on keeping electricity rates as low as possible for customers. The sale of Hydro’s transmission and distribution assets would also provide Government with capital to finance other priorities.

Generation Generation costs account for approximately 60% of customers’ bills in Newfoundland and Labrador (see Appendix F). This is consistent with the Canadian experience. Given that price is one of customers’ most important considerations, future generation projects must be selected and managed prudently. Furthermore, new generation can be expected to cost more than existing generation. The large proportion of electricity costs related to generation and the high cost of new generation underscore the need to ensure that generation additions are least cost. If any generation project can satisfy the requirements of environmental acceptability, reliability and public safety, and is selected as being the most desirable project from a least cost perspective, then it should be considered. However, developments should proceed only if they effectively meet the system’s demand needs. The generation selection process should be open to any proponent and to any generation technology. Generation diversity within the electricity grid minimizes the impact of variability in pricing, and is both technically and economically beneficial. The provincial Energy Plan should not prohibit any type of generation from being considered. In particular, a permanent moratorium on small hydroelectric developments is not warranted at this time and could result in increased future costs to electricity customers. The Energy Plan should include changes to current regulations that prohibit the development of renewable energy such as small hydroelectric generation. Newfoundland Power’s 23 hydroelectric generating facilities are small; however, production costs are very low. These plants are located throughout Newfoundland Power’s service territory, do not require full-time operators and assist in providing emergency energy supply. Hydro routinely calls on Newfoundland Power’s hydroelectric production as part of its current system dispatch protocol.

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The island electricity system is isolated and therefore must be self-sufficient. Both demand and/or energy can drive additional generation requirements. The appropriate mix of generation technologies is dependent on circumstances that may change with the passage of time. Current forecasts of energy and demand requirements in the province suggest that growth will be slow for the foreseeable future. This fact, combined with the high cost of new generation sources relative to existing sources on the Island of Newfoundland, indicate that smaller projects may more economically match provincial energy growth. Smaller developments also carry less risk. Very large capital intensive projects relative to the size and future growth could impose significant upward pressures on electricity rates for customers. Smaller generation facilities can be strategically located, geographically, across the province to enhance reliability and also may provide greater opportunity for local engineering firms, contractors and suppliers to participate and develop expertise as opposed to projects of much larger size. Any electricity generation development will have environmental impacts. However, hydroelectric development, the environment and fish can co-exist. This has been demonstrated with the Rose Blanche and Granite Canal hydroelectric development projects (see Appendix G). Hydro has significant experience in system planning and should continue to perform this role. However, system planning guidelines that have the benefit of input from all significant stakeholders would be desirable to ensure both fair competition and appropriate system development. To attract the most competitive proposals for system additions, the system plan should be available publicly. The status of the plan and any material change in circumstances should be available through the publication of periodic reports (e.g., annually or biannually), as necessary. As part of the Energy Plan, the future of the aging, thermal generating plant at Holyrood needs to be considered. Increasing environmental standards may make Holyrood more expensive to operate and maintain which will make small hydroelectric and other renewable energy sources more attractive in the future.

Alternative Energy Sources Alternative energy sources such as wind are likely to become more cost-effective with rising oil prices and technological advances. There is significant interest worldwide in increasing wind generating capacity. In 2006, the installed capacity of wind generation in Canada represented less than 1% of Canada’s gross generation capacity (see Appendix H). The same

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is true in the United States. Denmark is the nation that generates the highest portion of its power from wind, with approximately 20% of its electricity coming from wind sources2. Wind generation is becoming more viable compared to traditional generation methods as its economics become more competitive. Increased development of wind generation depends on a number of technical challenges. The most significant of these challenges is the fact that wind cannot be turned on at will. Wind must be blowing at appropriate speeds to produce electricity. As a result, wind cannot be fully relied upon to provide generation when a system requires it. While this situation can be aided by diversity of generation locations, the intermittent nature of wind presents particular challenges to our isolated island electricity system that need to be adequately considered. Newfoundland Power supports the exploration of the feasibility of wind energy development. The current expectation that wind has the technical potential to generate 10 to 15% of island energy is a reasonable starting point for this exploration. Using wind to replace thermal generation requires a careful, planned, phased-in approach. Newfoundland Power is engaged in this process and working with Hydro since many of the proposed sites are within Newfoundland Power’s service territory and require connection to the Company’s electricity system. All alternative sources of energy require detailed economic assessments to ensure they meet appropriate environmental, reliability and safety considerations, and to ensure that they are least cost. Appropriate regulatory regimes are also required to promote sustainable, least cost development. There are many other alternative energy sources and technologies that can be considered in the development of a comprehensive Energy Plan such as natural gas, tidal and other ocean related technologies, solar, hydrogen and biomass. However, given that Newfoundland and Labrador is a relatively small market with a low electricity sales growth rate, scale is a very important factor to consider when evaluating alternative energy sources and it is best to limit the number of alternative energy sources explored.

Conservation and Demand Management (CDM) CDM has gained much interest both nationally and internationally. CDM refers to different means of influencing customers to change their use of electricity, thereby reducing demand or energy consumption that would otherwise have to be met through increased supply (see Appendix I). This interest is being driven by increasing consumption, rising fuel prices, increasing consideration of impacts on the environment and shortage of electricity supply.

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2 The American Wind Energy Association, Global Wind Energy Market Report, March 2004.


At the national level, public policy interest in CDM has increased markedly. Newfoundland Power is engaged, through its membership in the CEA, with other Canadian electric utilities and the federal government in sharing CDM experiences, determining the achievable potential for energy efficiency, and influencing national energy efficiency campaigns and programs. The direct impact of CDM initiatives on reducing generation needs has not yet been fully ascertained. CDM is a tool that can be utilized to impact electricity consumption, but it must be part of a broader approach that includes all stakeholders to effectively deal with electricity supply issues. Appropriate assessment of various CDM programs needs to be conducted to ensure desired outcomes are achievable before large amounts of money are invested. The utility should have a reasonable opportunity to recover the costs of delivering such programs either through direct recovery or incentives. Newfoundland Power has offered CDM programs for a number of years and has responded to customers’ interest in this area by offering information as well as rebate and financing programs to assist customers in managing their electricity consumption. In 2005, Newfoundland Power spent approximately $1 million on CDM activities. Customers place a high value on electricity, and behavior regarding the wise use of electricity can be difficult to influence as it often requires customers to change habits. Customer participation in energy efficiency practices is also impacted by the amount of customer investment required. Customers are more interested in simple, low cost initiatives such as buying compact fluorescent light bulbs. Customers require more information before they participate in initiatives that require a higher investment such as buying an ENERGY STAR appliance or insulating their basement. The higher the customer investment, and the higher the value placed on electricity by the customer, the more specific and tangible the benefits must be, and the more information customers require up front in making the decision.

Response to CDM An incentive already exists for Newfoundland Power to reduce demand and energy usage in the form of a demand and energy wholesale rate structure. Purchased power is Newfoundland Power’s largest single expense, representing over 60% of total revenue. In December 2004, the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB) ordered changes to the rate structure for Newfoundland Power’s purchases of power from Hydro to be implemented in 2005. The new wholesale rate structure contains both an energy and a demand component. The new rate structure incents Newfoundland Power to reduce both demand and energy usage (see Appendix J).

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Although implementation is in its early phase, this wholesale rate structure is producing the desired results. On January 23, 2006, Newfoundland Power successfully implemented its demand management strategy when monitoring of the system indicated that a system peak would occur on that day. Newfoundland Power has taken a three-pronged approach to its demand management strategy.

Demand reduction/curtailment in Newfoundland Power’s buildings: the Company’s 15 office and maintenance buildings across the province can be managed in order to reduce demand during peak times – 4 of these 15 buildings have standby diesel generation available. By utilizing these generators during peak conditions, demand is reduced.

Customer curtailable rates: the Company has successfully signed up 15 additional commercial customers by offering them an incentive if they reduce their demand during peak times. There are 22 customers currently taking advantage of curtailable rates, with a combined demand reduction of approximately10 MW.

Optimizing voltage on the system: studying the relationship between electricity system voltages and peak demand through voltage optimization (controlling voltages can lower demand) has begun. Although this is new for Newfoundland and Labrador, it is a common practice across the country.

Newfoundland Power’s energy requirement is primarily that of its customers and to reduce energy usage requires influencing the actions of customers. Newfoundland Power has implemented a strategy that is aimed at informing, educating and assisting customers to get the most out of their energy dollar by using energy wisely (see Appendix K). Newfoundland Power has expanded its customer surveys to keep abreast of customer attitudes and usage of electricity. Many customers have already adopted energy efficiency actions. In June 2005, a customer survey indicated that 80% of those surveyed set back their thermostats and washed clothes in cold water, while 70% indicated that they line dry clothes. These actions, as well as many others that Newfoundland Power is actively promoting, provide tangible energy savings. Going forward, Newfoundland Power’s focus regarding CDM will be on:

continuing its existing programs that have supported customer conservation efforts; expanding programs if appropriate assessment indicate they would be beneficial; expanding its peak load management efforts; expanding its customer education awareness programs; and, establishing communications and support for other agencies involved in promoting conservation efforts.

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Rate Design Newfoundland Power provides service to its customers utilizing rate structures which are the most common form of rate design used in North America (see Appendix L). These rate structures contain prices that generally do not vary by season or time of day. Some utilities provide rate options to customers as part of their demand management efforts. The objective of these rate options is to either lower peak demand, or shift it from peak to off-peak times. The associated savings are realized from deferring the requirement to build additional electricity generation plants, and transmission and distribution lines to serve peak demand. Time of use (time of day and/or seasonal) and curtailable rates are the most common rate options. However, what works in other jurisdictions may not work here. The National Energy Board said in a review released February 23, 2006, that “Across Canada, no two provinces or territories have equivalent rate-making structures or tariff regimes in place.” On the island portion of the province, the cost of supplying additional demand does not vary throughout the day as the cost is generally equal to the cost of production at the Holyrood thermal generating station. On larger interconnected systems, the use of different generation sources as demand varies result in the cost of supply varying throughout the day. This creates a case for time of day rates in many jurisdictions that does not exist here. One of the objectives of alternative rates is to provide customers with realistic and practical options. In many jurisdictions where time of day rates are available, only a small percentage of customers have taken advantage of these rates. The basis for establishing pricing for alternative rate options is the marginal cost of the next kilowatt of generation on the system. The potential for offering time of use rates in this province was first evaluated in 1984 at which time it was concluded that mandatory time of day rates would not be expected to provide material overall benefits to the system. The high cost of implementation due to the required replacement of existing metering systems played a role in the conclusions of the study. Newfoundland Power currently has a curtailable rate option available to large general service customers that was implemented in 1994. The curtailable rate option provides an annual payment to customers who reduce their demand requirements from the system during peak periods, at the Company’s request. There are currently 22 customers who avail of the curtailable rate option providing approximately 10 MW of on-peak demand reductions. In 1997 Newfoundland Power conducted a study of potential alternative rate designs. The marginal cost estimates used to design the potential rates was developed without the benefit of Hydro’s participation. As discussed in Appendix L, this process is proceeding with Hydro currently conducting a marginal cost study which will be submitted to the PUB by June 30, 2006. Upon Hydro’s completion of its 2006 Marginal Cost Study, Newfoundland Power expects to conduct a further review of alternative rate options and the potential benefits to

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customers on the Island Interconnected System. At this time, it is premature to anticipate what rate options should be offered to customers. The implementation of alternative rate options on a large scale can have implications for all customers. The potential impact on customers and overall rates must be evaluated properly before appropriate rate design decisions can be made.

Regulation Regulation in this province has been stable, has worked well and is currently moving in the right direction. Under the existing system, customers have benefited from improved operating efficiencies, enhanced reliability, customer service excellence and environmental diligence. A continued focus by all stakeholders on more efficient and cost-effective regulatory processes will best reduce the scope and complexity of regulatory hearings and would be beneficial for customers. For example, a recent initiative by the PUB to negotiate settlements rather than litigate resolution has been a very positive development in enhancing the efficiency of the regulatory process. There are other alternatives to the existing traditional cost of service regulation currently used in Newfoundland and Labrador. One alternative is Performance Based Regulation (PBR) (see Appendix M). There is no common definition of PBR and many different variations exist depending on the specific needs of the jurisdiction in which it is being used. Whatever form it takes, the goal of PBR is to incent utilities to become more efficient by allowing them to share in efficiency gains. Goals of PBR include lower costs and improved service, and can also include aspects such as incenting CDM and increasing the time between major regulatory hearings. PBR has had very limited use in Canada. The province’s current cost of service regulation provides strong incentives for cost reduction, service improvement and energy efficiency. Some of the characteristics of a PBR system, such as the use of an automatic adjustment formula to set electricity rates and a range of return on rate base, already act as an incentive to improve efficiencies under current regulation in this province. In Newfoundland Power’s last General Rate Order No. P.U. 19 (2003), the PUB described the range of return on rate base as follows:

“In the Board’s view the range of return on rate base can act as an incentive device to encourage NP to seek efficiencies between rate hearings, which can then be passed on to customers. This is evidenced in the operational efficiencies and cost savings that have been implemented by NP since the last rate hearing in 1998.” (page 76)

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This incentive environment resulted in Newfoundland Power reducing operating costs per customer by 30% over the past 10 years, on an inflation adjusted basis. In addition, Newfoundland Power’s customers received the full benefit of rebates totalling approximately $7.5 million since 2000. The fundamental question that must be answered for Newfoundland and Labrador is whether PBR would be a superior regulatory approach when compared to the existing regulatory incentive structure. Under the current system, Newfoundland Power has managed its business in a manner that has provided customers with the benefit of:

decreased operating costs per customer; improved reliability; improved safety; improved customer service; improved environmental performance; targeted CDM programs and energy efficiency information; and, electricity rates that are the lowest in Atlantic Canada.

PBR may present opportunities for the electricity industry in Newfoundland and Labrador; however it needs to be explored further and completely understood first. It is important to recognize that whatever form PBR takes, it must be jurisdiction specific. Should a move to PBR be contemplated, it would be best considered with a full understanding of all of the aspects associated with rate setting in Newfoundland and Labrador. Any move to change to PBR regulation should be approached with caution. Changes from the current regulatory system need to be assessed to ensure that the change will result in ‘better’ regulation rather than just a ‘different’ form of regulation.

Human Resource Challenges The skills required by the electricity industry are more challenging than many other industries. In 2004, CEA partnered with Human Resources and Skills Development Canada in a comprehensive study which provided an overview of the human resource challenges for the Canadian electricity industry. Appendix N outlines these key challenges as well as Newfoundland Power’s workforce management approach which is focused on mitigating these challenges. In order to minimize the risk that these challenges pose for the electricity industry, collaboration between utilities, governments and educational/training institutions will be advantageous to ensuring the right skills are developed in sufficient supply.

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Recommendations Newfoundland Power provides the following recommendations for consideration in the development of a long-term Energy Plan for the Province of Newfoundland and Labrador: Industry Structure: The elimination of duplication and overlap will minimize system costs and ultimately keep rates as low as possible for customers. To achieve this objective, the electricity industry should be separated along the functional lines of supply (generation) and delivery (transmission and distribution). System Planning: To ensure that the most competitive proposals for system additions are attracted, system planning guidelines should be established and the system plan should be available publicly. Generation: Generation additions should be based on the least cost principle, open to any proponent and all types of generation should be considered. In particular, changes should be made to current regulations that prohibit the development of renewable energy such as small hydroelectric generation. Alternative Energy Sources: Alternative energy sources and technologies may have merit but must be evaluated using the same least cost approach as any other generation addition. However, due to the isolated system, relatively small market size and low electricity growth rate, these should be approached carefully. CDM: CDM practices are in place and should continue to be promoted. However, CDM alone will not deal with supply issues and therefore should be part of a broader array of system solutions that includes all stakeholders. Before significant financial investments are made, appropriate assessments of various CDM programs need to be conducted to ensure desired outcomes are achievable. The utility should have a reasonable opportunity to recover the costs of delivering these programs. Rate Design: Appropriate rate design is jurisdiction specific. Marginal cost studies that are currently underway will assist in determining appropriate rate design for Newfoundland and Labrador. Rates should provide the right price signals to customers and should appropriately reflect the costs of supplying and delivering electricity to customers. Regulation: Changes from the current regulatory system need to be assessed to ensure that the change will result in ‘better’ regulation rather than just a ‘different’ form of regulation. A continued focus on initiatives such as negotiated settlements will result in a more efficient and cost-effective regulatory process. Customers are receiving the benefits of efficiency improvements under the existing regulatory structure.

Page 16


PBR: There is no common definition of PBR and many different variations exist depending on the specific needs of the jurisdiction in which it is being used. PBR may present opportunities for the electricity industry in Newfoundland and Labrador; however, it needs to be considered with a full understanding of all the aspects associated with rate setting in Newfoundland and Labrador. The small size of this jurisdiction suggests that a practical approach that is simple and easily understood by all stakeholders is warranted. Human Resources: Ensuring an adequate supply of skilled workers is critical to the future of the electricity industry in this province and throughout Canada. Collaboration between utilities, governments and educational/training institutions will be required to ensure an adequate workforce with the right skills is developed for the future.

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Energy Plan Submission - Appendices

Appendices


Appendix A Current Generation by Source


Current Generation by Source

Net Generating Capacity (MW) by Facility/Plant Island Interconnected System

MWNewfoundland and Labrador Hydro1

Hydroelectric Bay d’Espoir 592.0 Cat Arm 127.0 Upper Salmon 84.0 Hinds Lake 75.0 Granite Canal 40.0 Paradise River 8.0 Snook’s Arm, Venam’s Bight and Roddickton 1.3

Total Newfoundland and Labrador Hydro Hydroelectric 927.3

Thermal Holyrood (Oil-fired Steam and Gas Turbine) 475.5 Hardwoods Gas Turbine 54.0 Stephenville Gas Turbine 54.0 Hawkes Bay, St. Anthony and Roddickton Diesels 14.7

Total Newfoundland and Labrador Hydro Thermal 598.2 Newfoundland Power

Hydroelectric Generating Plants 94.6 Thermal Generating Plants 50.9 Total Newfoundland Power Generation 145.5

Non-utility and Industrial Generators1

Corner Brook Pulp and Paper 121.4 Abitibi Consolidated Inc. 58.5 Exploits River 32.3 Star Lake 15.0 Corner Brook 15.0 Rattle Brook 4.0

Total Non-utility and Industrial Generators 246.2 Total Net Generating Capacity for Island Interconnected System 1917.2

1 Newfoundland and Labrador Hydro, Schedule II, J. R. Haynes, General Rate Application 2003.


Appendix B

Electric Space Heating Market Share


Electric Space Heating Market Share

Non-electric 45%

Electric 55%


Appendix C

Comparison of Electricity Rates


Comparison of Electricity Rates

$125

$128

$149

$121

100 105 110 115 120 125 130 135 140 145 150

St. John's

Fredericton

Halifax

Charlottetown

Rate survey as of February 1, 2006, based on Newfoundland Power’s residential monthly average use of 1,276 kWh, including basic customer charge. Excludes federal and provincial taxes.

$

Note: 1,000 kWh monthly usage in Developing an Energy Plan for Newfoundland and Labrador Public Discussion Paper produces similar results.


Appendix D

Newfoundland Power Capital Investments




1997 – 2005* (000s)

Year Investment 1997 $30,965

1998 45,245

1999 42,282

2000 42,836

2001 66,305

2002 58,170

2003 64,311

2004 57,761

2005 52,980

Total $460,855

*Newfoundland Power’s Capital Budgets are approved on an annual basis by the Newfoundland and Labrador Board of Commissioners of Public Utilities.


Appendix E

Newfoundland Power’s Awards


Newfoundland Power’s Awards

Year Award Presented to Company Recognition

2004 Pinnacle Award for Employee/Internal Communication from the International Association of Business Communicators (IABC)

An award recognizing Newfoundland Power’s efforts and achievements to inform and motivate employees through its Information-Your Source of Power! internal communications campaign.

2004 Canadian Electricity Association’s 2004 President’s Award of Excellence for Employee Safety

National award recognizing the hard work and commitment of Newfoundland Power’s employees towards maintaining the highest standard of safety for the public and employees.

2004 Newfoundland Environmental Industry Association – 2004 Environmental Performance Award

Provincial award recognizing Newfoundland Power’s efforts to move beyond environmental compliance and demonstrate a commitment to improved environmental performance.

2003 Environmental Educators and Communicators Commission Award of Excellence in the category of Outstanding Private Company

National award recognizing Newfoundland Power’s Environmental Commitment Program and its range of environmental initiatives including: EnviroFest; Christmas tree mulching; composting; recycling; and, Fish Friends program.

2003 Employer of Distinction Award by the Newfoundland and Labrador Employers’ Council

Provincial award recognizing Newfoundland Power’s innovation, leadership, creativity and fundamental belief in the value of a healthy, safe and motivated workforce.

2002 Mount Pearl Chamber of Commerce Best in Business Environmental Award

Local award honoring Newfoundland Power’s commitment to the environment.

2002 International Personnel Management Association (IPMA) – Canada Gold Star Agency Award

National award recognizing innovative human resource management strategy, as well as the aligning of human resources with business objectives and employee success.

2002 Atlantic Canada Human Resources Awards’ (ACHRA) Strategic Partnerships Award

Atlantic Canadian award recognizing the successful aligning of human resources strategy with business strategy, and the impact of an employee success focus on the Company’s results.

2001 Canadian Information Productivity Award (CIPA) of Excellence for Customer Care

National award presented to Newfoundland Power for innovatively using technology and employee training to improve customer service.


Year Award Presented to Company Recognition

2001 CIPA Best of Category Award National award recognizing Newfoundland Power’s customer service solution as being the best in Canada.

2001 St. John’s Board of Trade Business Excellence Award

Local award recognizing Newfoundland Power for demonstrated outstanding achievements in business and a commitment to excellence and quality in its field.

2001 St. John’s Board of Trade Business Achievement Award for Productivity and Quality Improvements

Local award recognizing Newfoundland Power for demonstrated successes in productivity gains and overall service quality improvements.

2001 Newfoundland and Labrador Provincial Environment Award

Provincial award recognizing Newfoundland Power for demonstrating an exemplary attitude and concern for the environment.

2000 The Association of Professional Engineers and Geoscientists of Newfoundland (APEGN) Environment Award

Provincial award recognizing Newfoundland Power for demonstrating its commitment to going the extra mile to reduce the impact of its Rose Blanche Hydroelectric Development on the environment while at the same time pursuing sustainable energy.

2000 St. John’s Clean and Beautiful Mayor’s Award

Local award recognizing Newfoundland Power for its environmental work.

1998 St. John’s Board of Trade Business Achievement Award for Contribution to Community & Community Service

Local award recognizing Newfoundland Power for demonstrating its commitment to partnering with various organizations to better our communities.


Appendix F Island Electricity System Costs


Island Electricity System Costs

Transmission13%Customer

Service5%

Generation59%

Distribution23%


Appendix G Hydroelectric Development and the Environment


Hydroelectric Development and the Environment Hydroelectric projects can be selected, designed and executed in an environmentally friendly manner. Small hydroelectric developments can co-exist with various fish species on river systems with appropriate environmental planning, public awareness and input from key stakeholders. This has been clearly demonstrated with the Rose Blanche and Granite Canal hydroelectric development projects. These projects show that environmental concerns can be balanced with new hydroelectric power development and that proper planning can and will minimize the negative impacts of all generation developments on the environment. Rose Blanche Hydroelectric Development In developing the Rose Blanche Hydroelectric Plant, Newfoundland Power worked in partnership with various environmental organizations, such as the Department of Fisheries and Oceans, to ensure minimal impact on the environment. Environmental planning accounted for approximately $1 million, or 7%, of the total cost of the Rose Blanche project. A key component of this development project was a compensation plan for fish habitat. This plan included:

the creation of a 1 kilometre spawning and rearing habitat channel running parallel to the lower portion of Rose Blanche Brook;

the provision of improved access of the main river to anadromous salmonids through the construction and operation of two fishways, as well as improvements to the existing fishway that was located in the Rose Blanche water supply dam; and,

the installation of a valve on the hydroelectric plant to allow a minimum flow of water for fish.

In 2000, the Association of Professional Engineers and Geoscientists of Newfoundland presented Newfoundland Power with its 2000 Environmental Award for this project after being nominated by the Atlantic Salmon Federation. This small hydroelectric plant, which produced 20.7 gigawatt (GWh) in 2005, displaces approximately 33,000 barrels of oil and eliminates approximately 16,000 tonnes of greenhouse gas emissions annually in the province. Granite Canal Hydroelectric Development1

Part of Newfoundland and Labrador Hydro’s (Hydro) Granite Canal Hydroelectric Development was a comprehensive Environmental Protection Plan that included:

onsite Environmental Coordinators; and,

1 Newfoundland and Labrador Hydro’s website, 2006.


the development of a 45,000 m2 Fish Habitat Compensation Facility that provides spawning and rearing habitat for tens of thousands of land-locked Atlantic Salmon and brook trout that were displaced from the existing waterway below the Granite Canal discharge when the water in the Granite Canal was diverted.

In 2004, Hydro was presented with an Environmental Award from the Professional Engineers and Geoscientists of Newfoundland and Labrador for the Fisheries Enhancement at the Granite Canal Hydroelectric Development. Hydro also received the 2005 Outstanding Stewardship of America’s Rivers Award for its environmental achievements with this hydroelectric development. The Granite Canal Hydroelectric Development, which produces an average of 220 GWh of electrical energy annually, displaces approximately 350,000 barrels of oil and eliminates approximately 165,000 tonnes of greenhouse gas emissions annually in the province.


Appendix H Canadian Wind Energy Capacity


Canadian Wind Energy Capacity

Canada’s Wind Tracker as of January 3, 2006

Province Installed (MW) Proposed* (MW)

British Columbia 0 0

Alberta 275.47 80

Saskatchewan 111.78 60

Manitoba 19.8 84.15

Ontario 14.61 1310.35

Quebec 212.25 1244

Newfoundland and Labrador 0 0

Prince Edward Island 13.56 0

Nova Scotia 34.26 62.4

New Brunswick 0 20

Yukon 810 (kW) 0

Northwest Territories 0 0

Nunavut 0 0

Total 681.73 2860.9

*Under construction or awarded a Purchased Power Agreement Source: Canadian Wind Energy Association


Appendix I Conservation and Demand Management


Overview of Conservation and Demand Management

Conservation and Demand Management (CDM) refers to a range of activities designed to influence the use of electricity by consumers, either by reducing overall electricity consumed, using electricity more efficiently, or by shifting usage to other times such as off-peak hours. CDM can be designed to bring about desired changes in overall system demand or the variation in demand over a specific time period. Today, many avenues exist to achieve CDM benefits. In order for CDM programs to be successful they should:

have direct and indirect benefits to the customer such as reduced energy costs and reduced air pollution, respectively;

be equitable to all customers including the availability of programs to customers and the impact on non-participants in a particular program; and,

provide the utility with reasonable recovery of the costs of delivering the program. CDM is generally targeted at conservation and energy efficiency and/or demand management. Conservation and energy efficiency programs result in reduced energy usage and/or lower demand. Conservation and energy efficiency is encouraged mostly through appropriate electricity rates or by direct programs by utilities, governments or agencies. Examples of these programs include rebates for insulation, encouraging the purchase of more energy efficient appliances and educating customers on the wise and efficient use of energy. The savings from these programs include fuel not burned at generating plants such as Holyrood, avoidance or delay of construction of new generation facilities and customer savings on their electricity costs. Demand management either lowers peak load or shifts it from peak to off-peak times. Examples of load management include water heater controllers, which shift demand to off-peak times, and curtailable demand programs. The savings from demand management programs are primarily the savings in resources from not having to build additional generating plants and transmission and distribution lines to serve a higher peak load. Appropriate CDM objectives for any particular jurisdiction are usually determined based on the unique characteristics of their respective electricity system and customer usage.

CDM programs are usually chosen to manage demand and energy in such a way as to save more than they cost. The choice of CDM program type (e.g., conservation, demand management, etc.) is driven by the ongoing cost of electricity production and the factors driving the addition of generating plants and transmission and distribution lines on the electricity system. The programs should be attractive and effective for customers and provide the utility with reasonable opportunity to recover of the cost of delivering the programs.


Appendix J Wholesale Rate Structure


Wholesale Rate Structure Purchased power is Newfoundland Power’s largest single expense, representing over 60% of total cost of service. Prior to January 1, 2005, Newfoundland and Labrador Hydro (Hydro) charged an energy-only rate for the electricity it sells to Newfoundland Power. To provide a better pricing signal to Newfoundland Power, the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB) approved implementation of a demand and energy wholesale rate structure effective January 1, 2005. The implementation of this rate structure is being phased-in, with full implementation occurring January 1, 2007. The wholesale rate structure now includes both an energy (variable) and a demand (fixed) component. The Demand and Energy Rate Energy Charges The fully phased-in wholesale rate contains a two-block energy charge as follows: 1st block Energy Charge for the first 250,000,000 kilowatt hours (kWh) per month………2.749¢/kWh 2nd block: Energy Charge for excess kWh per month…………………….…………………..4.700¢/kWh The energy charges result in a higher average price for energy as usage increases. Newfoundland Power’s purchases from Hydro exceed 250,000,000 kWh during all months of the year. Demand Charges The wholesale rate for demand is $79.68 per kW of billing demand per year. The billing demand is calculated based on the single peak native load (for a 15-minute period) during the winter season less a credit for the load that can be supplied by Newfoundland Power’s own generation. The Pricing Signal Peak Load Management The primary potential benefit of a wholesale demand and energy rate structure for the island electricity system is the incentive it provides for long-term demand management. Long-term demand management can have potential benefits for all electricity customers. Newfoundland Power’s forecast billing demand for 2006 is approximately 1,100 megawatt (MW). The forecast annual demand charge from Hydro totals approximately $88 million. Increases in peak demand result in a direct increase in Newfoundland Power’s purchased power cost. Conversely, peak demand reductions result in a direct decrease in purchased power cost. A 1% variance from forecast demand affects purchased power cost by approximately $875,000. The demand charge from Hydro provides a strong signal to Newfoundland Power to implement measures to control peak demand requirements.


Energy Conservation Another benefit of the demand and energy wholesale rate structure is to incent Newfoundland Power to help customers reduce their electricity consumption. Energy sales growth is normally accompanied by increased peak demand on the system. Therefore, Newfoundland Power must pay Hydro for additional energy charges, at a rate of 4.7¢ per kWh, as well as additional demand charges for all sales to new customers and all increased sales volumes to existing customers. The combined cost per kWh to Newfoundland Power of sales growth, including demand and energy charges, is approximately 6.9¢ per kWh. Revenue received by Newfoundland Power from the additional sales growth is approximately 7.0¢ per kWh. The contribution to Newfoundland Power’s earnings as a result of increased sales under the demand and energy wholesale rate (0.1¢ per kWh) is lower than the contribution to earnings under the energy-only wholesale rate (1.8¢ per kWh). Depending on future fuel prices, increased energy sales may result in a negative contribution to Newfoundland Power’s earnings. The 4.7¢ per kWh 2nd block energy rate currently charged to Newfoundland Power by Hydro reflects the cost of production at Holyrood based on a Bunker C fuel cost of approximately $28 per barrel. The current forecast cost of Bunker C fuel is approximately $45 per barrel. If $45 per barrel were reflected in the 2nd block energy charge, a negative contribution to Newfoundland Power’s earnings from sales growth is projected. Table 1 demonstrates the estimated impact of increased oil prices embedded in the demand and energy wholesale rate structure. The estimated contribution to Newfoundland Power’s earnings as a result of increased sales and a forecast cost of fuel of $45 per barrel would be negative (-1.9¢ per kWh) compared to the contribution to earnings based on a cost of fuel of $28 per barrel (0.1¢ per kWh).

Table 1 Estimated Earnings on Increased Sales

4.7¢ 2nd block ($28 per barrel)

7.0¢ 2nd block ($45 per barrel)

New Sales Revenue1 7.0¢ per kWh 7.3¢ per kWh2

New Sales Purchased Power Cost3 6.9¢ per kWh 9.2¢ per kWh4

Estimated Contribution to Earnings 0.1¢ per kWh -1.9¢ per kWh

1 Based on current customer rates, excluding revenue from basic customer charges as this revenue is offset by the

annual cost of new connections. Also excludes Municipal Tax Adjustment and Rate Stabilization Account rate riders.

2 Reflects an estimated increase in customer base rates as a result of the flow-through of the increased cost of fuel. 3 Assumes new electricity sales affect peak demand in the same proportion as existing electricity sales. 4 Estimated. Based on costs associated with incremental energy purchases using two-block energy charge structure.


Summary The wholesale demand and energy rate structure provides an incentive to control demand growth on the system. It also removes any incentive to increase sales in order to increase earnings that may have existed under the energy-only wholesale rate.


Appendix K

Conservation and Demand Management Initiatives and Customer Response


Conservation and Demand Management Initiatives Newfoundland Power has implemented a strategy that is aimed at informing, educating and assisting customers to get the most out of their energy dollar by using energy wisely. This strategy includes the following initiatives that are specifically targeted at energy efficiency:

customer seminars for seniors, special interest groups and industry partners; customer visits and energy efficiency advice; exhibit booths at trade shows and shopping malls; an enhanced website; customer Bright Ideas newsletters bimonthly; advertising (newspapers, magazines and radio); media (interviews, talk shows) education programs to develop employees as energy efficiency ambassadors; financing and rebate programs, including: Wrap Up for Savings insulation rebates; thermostat rebates; financing of EnerGuide assessment upgrades; energy efficient hot water tanks; and, electric heating system upgrades;

Blue Line Innovations Inc. pilot project on meter-monitoring devices that provide real-time feedback to customers on electricity consumption;

participation in Natural Resources Canada’s Office of Energy Efficiency campaigns - EnerGuide for Houses, Switch to Cold, Switch and Save, and Energy Star;

promoting EnerGuide for Houses evaluations with S.H.E. Consultants and AmeriSpec; working with Newfoundland and Labrador Housing Corporation to promote energy efficiency and deliver the Government’s residential energy efficiency program; and,

working with other stakeholders, including: Eastern Homebuilders Association; Hospitality Newfoundland & Labrador; Canadian Electricity Association; and, Canadian Mortgage and Housing Corporation.

Customer Response Newfoundland Power provides its customers with financing and rebate programs in addition to energy efficiency information tools and services to assist them to better manage their electricity consumption. The response by Newfoundland Power’s customers has been very positive and its customers are participating in energy efficiency initiatives.

A survey conducted in the fall of 2005 indicated that in the prior three-month period, 40% of customers took energy efficiency action.

The survey indicated that 25% of residential customers had installed compact fluorescent bulbs. This action alone would result in annual energy savings of at least 2,300 megawatt hours (MWh).

A recent one-day compact fluorescent bulb promotion at Costco resulted in energy savings of approximately 870 MWh.

Double rebates were offered through Newfoundland Power’s Wrap Up for Savings program in 2005. Rebates to customers were more than $80,000 and participation


tripled compared to 2004. In addition, energy savings of approximately 1,790 MWh were realized.


Appendix L Electricity Utility Rate Design


Electricity Utility Rate Design Newfoundland Power provides service to its customers utilizing rate structures which are the most common form of rate design used in North America. These rate structures contain prices that generally do not vary by season or time of day. Some utilities provide rate options to customers as part of their demand management efforts. Overview The need for alternative rates is driven by factors such as system efficiency, cost avoidance, reliability and customer service. Nationally and internationally, recent alternative rate developments have been substantially driven by deregulation of the electricity wholesale market place. Many of the pricing options being developed within these marketplaces would not be applicable to the Newfoundland system where the electricity market does not lend itself to deregulation. Load Management and Alternative Rates Where competitive electricity marketplaces do not exist, time of use and curtailable rates are the most common rate options for encouraging demand management. The basis for establishing the pricing for these rates is the marginal costs on the system. Determining Marginal Costs The marginal costs for an electric utility represent the cost of the next kilowatt hour of generation on the system. Calculation of marginal costs for an electric utility is complex. The appropriate marginal cost methodology is dependent upon the characteristics of the electricity system being analyzed. Marginal cost of service studies are usually time differentiated. That is, they calculate marginal costs within different time periods such as during periods of maximum demand (peak) and periods of low demand (off-peak). Marginal Costs on the Newfoundland Island Interconnected System Reducing peak demand can potentially defer the addition of generation, transmission, and distribution facilities. However, because the Island Interconnected System is predominantly a hydroelectric system, reducing peak demand may not, in reality, defer or avoid the need for additional generation. The energy available from a hydroelectric system is largely based on the amount of water available in any given year. Shifting energy usage from peak periods to off-peak periods can affect forecast peak demand requirements but may have no affect on energy requirements. The energy requirements may still drive the need for additional generation, despite reductions in peak demand.


Sophisticated modeling of various expansion plan scenarios is required to properly conduct a marginal cost study on the Island Interconnected System. The History and Study of Alternative Rates in Newfoundland The potential for offering alternative rate designs in Newfoundland was first evaluated in 1984. A comprehensive review of the potential for mandatory time of use rates concluded that due to the marginal cost characteristics of the Newfoundland System, time of use rates were not expected to provide material overall benefits to the system. At that time the high cost of implementation played a role in the conclusions of the study. In the early 1990’s, Newfoundland and Labrador Hydro (Hydro) was forecasting the need for new generation due to increases in peak demand. In response to the identified need, Newfoundland Power initiated a pilot curtailable rate option. In 1994 this pilot was given interim approval by the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB) allowing the rate to be offered to all eligible customers. Similarly, at that time, Hydro entered into a contract for interruptible load with the Abitibi Consolidated Inc. mill in Stephenville. The curtailable rate option is still in use by Newfoundland Power with 22 customers participating, achieving approximately 10 MW of on-peak demand reductions. In 1997 Newfoundland Power conducted a study of potential alternative rate designs for Newfoundland. This review suggested certain types of rate options may be practical for implementation in Newfoundland. The marginal cost estimates used to design the potential rates were developed without the benefit of Hydro’s participation. However, without Hydro’s involvement, the reasonableness of the assumptions used by Newfoundland Power could not be verified. This created concerns regarding the appropriateness of the potential alternative rate designs. In 1998, the provincial government began an Energy Policy Review (EPR) the mandate of which was the review of electricity pricing. At the request of the Government of Newfoundland and Labrador (Government) the matter of reviewing alternative rate designs with the PUB was deferred1. Following a 2003 General Rate Proceeding for Hydro, the PUB ordered Hydro to conduct a marginal cost study. This study should address the concerns expressed regarding Newfoundland Power’s 1997 marginal cost estimates. The study is to be submitted to the PUB by June 30, 2006.

1 At the pre-hearing conference, on September 17, 1998, a letter was submitted by the Deputy Minister of Mines and Energy proposing that consideration of rate design alternatives be deferred in light of the EPR. The Board complied with the request. In May 1999, a letter was submitted to the Board from John P. Andrews, Solicitor for the Department of Justice, requesting a further deferral of the matter.


Completion of Alternative Rates Evaluation Upon Hydro’s submission of the 2006 Marginal Cost Study, Newfoundland Power expects to conduct a review of alternative rate options that may be beneficial to customers on the Island Interconnected System. At this time, it is premature to anticipate what rate options should be offered to customers. Designing and Evaluating Alternative Rates Design and evaluation of potential alternative rates must consider a wide variety of factors. These factors include:

the prices should be reflective of the marginal costs on the system; the prices should provide the revenue required by the utility to recover its overall costs of service;

the rate structure should be understandable to customers; the rate structure should be practical to implement; and, the rate structure should provide stability in charges to customers and revenue to the utility.

These factors often need to be balanced against each other in order to develop acceptable rate options. For example, seasonal rates will generally cause customers’ bills to increase in winter and decrease in summer. If seasonal rates are offered on a mandatory basis, many customers will likely be unhappy about the increase in costs at a time when their electricity bill is the highest. If seasonal rates are offered as a voluntary rate option the customers who are most likely to adopt the seasonal rate are those with consumption patterns that would result in lower electricity bills without materially changing their consumption patterns. This would create revenue loss from these customers requiring the utility to increase rates in general to offset the revenue loss. Predicting the amount of revenue loss and the associated increase in other customers’ rates will likely create controversy.

Careful consideration of these factors will be required in order to ensure that the design and implementation of potential alternative rates are effective in meeting the design objective and minimizing any negative effects on consumers.


Appendix M Performance Based Regulation


Performance Based Regulation

The Provincial Energy Plan Discussion Paper discusses an alternative to the traditional cost of service regulation currently employed in Newfoundland and Labrador: Performance Based Regulation (PBR). Background PBR is a general term used to describe a variety of regulatory approaches that rely on financial incentives to encourage desired behaviours. Specific goals and incentives are normally unique to different jurisdictions. There is no “one size fits all” solution. Whatever form, the goal of PBR is to incent utilities to become more efficient by allowing them to retain a portion of increased profits resulting from the efficiency gains. Goals of PBR almost always include lower costs and improved service, and can also include aspects such as conservation and demand management. PBR Experiences It is not a given that a particular PBR proposal will create stronger or better incentives than an alternative regulatory plan such as traditional cost of service regulation. The question that will need to be answered is whether incentives provided for under PBR can produce better results than those produced today. PBR implementations in other jurisdictions have met with mixed results largely due to the impact of unintended effects. PBR has generally found its best application in environments where supply functions have been deregulated and rates have been unbundled. In Canada, PBR mechanisms are only in use in British Columbia. In British Columbia, PBR was first implemented in the late 1990’s. Stakeholder concerns with recent mechanisms include undue complication, lack of transparency and lack of understanding. In some jurisdictions, PBR has been criticized for leading to lack of required investment in system and infrastructure. PBR mechanisms in British Columbia are being refined but continue to be rooted in cost of service based regulation. The Ontario Energy Board instituted PBR when its electricity distribution rates were unbundled in 2001. However, in December 2002, transmission and distribution tariffs were frozen by the Ontario Provincial Government. The practical effect of this was to negate the potential benefits that PBR was intended to provide.


Appendix N Human Resource Challenges


Human Resource Challenges The skills of the electricity industry are more challenging than many other industries. In 2004, Canadian Electricity Association (CEA) partnered with Human Resources and Skills Development Canada in a comprehensive study which provided an overview of the human resources challenges for the Canadian electricity industry. The following are some highlights of the study:

CEA is predicting a significant “skills” shortage within five years. The average age of workers in the electricity industry is 44 years. Retirements will have a significant impact on the industry - 17% of employees will be eligible to retire within the next four years and 37% by 2014.

Of particular concern is the fact that retirements will impact at the point when significant electricity infrastructure replacement and new capacity development is needed across the country.

The electricity industry faces a more challenging age demographic than the general Canadian workforce with fewer younger employees and more workers between ages 40 to 54 than the general workforce (i.e., 65% in electricity industry versus 38% for others). This difference is even more significant in trades-related occupations. Given that it takes five or more years to become proficient in electricity trades-related occupations, these demographics pose a significant challenge.

There will be intense competition for “new” talent across the country. The demand for engineering and technical talent is projected to be higher than supply. It is estimated that the supply-demand gap will range between 2,000 and 3,200 workers each year for the next five years in Canada.

Newfoundland Power is mitigating the impact of these factors through strategies aimed at ensuring skills continuity by:

working with other utilities and local educational institutes to ensure supply will meet demand;

promoting Newfoundland Power as an employer of choice; increasing cooperative engineering and apprenticeship program presence; increasing the number of apprentices hired to ensure trained and qualified line staff are available to meet local market needs;

hiring engineers and technologists to ensure technical expertise is secured for the long term; and,

utilizing succession planning that is focused on preserving and growing operational knowledge and expertise.


Appendix O

Glossary of Terms


Glossary of Terms Allowed rate of return The rate of return on investment a regulated entity is allowed the opportunity to earn. Automatic adjustment formula A formula used annually to set the appropriate rate of return for a utility without the cost of a full hearing review. Capacity In the electricity industry, capacity has two meanings: 1. System Capacity: the maximum power capability of a system. 2. Equipment Capacity: the maximum power capacity of equipment. Conservation and demand management Method of influencing customers to change their use of electricity, thereby reducing demand or energy consumption that would otherwise have to be met through increased supply. Cost of service The total cost, including the cost of invested capital, operational and maintenance expense, depreciation, amortization and taxes, required to produce any given utility service. The cost of service is also referred to as “revenue requirement.” Cost of service regulation A form of regulation based upon ensuring the utility is provided an adequate opportunity to recover its cost of service. Curtailable rates (interruptible) A form of rate options in which the utility and the customer enter into a contractual agreement whereby the customer will reduce demand at the request of the utility in return for an incentive payment or reduced electricity rate. Demand The rate at which electricity is delivered to or by a system at a given point in time, usually expressed in kilowatts or megawatts. Demand management The planning, implementation and monitoring of utility activities designed to encourage customers to modify patterns of electricity use, including the timing and level of electricity demands.


Distribution The process of delivering electricity from convenient points on the transmission or bulk power system to customers, including the operation and maintenance of distribution plant. Electricity A manufactured form of energy, as opposed to naturally occurring energy resources, such as coal, oil or natural gas. On a large scale, electricity is produced by rotating machines (generators) which operate on the principle that an electric current is generated whenever a conductor moves through a magnetic field. Energy The quantity of electricity delivered over a period of time. The commonly used unit of energy is the kilowatt hour. Energy efficiency Refers to programs that are aimed at reducing the energy used by specific end-use devices and systems, typically without affecting the services provided. Environmental impact Any human alteration to the environment affecting human, animal, fish and/or plant life. Generation The process of converting thermal, mechanical, chemical or nuclear energy into electric energy. Gigawatt (GW) Unit of electrical power, used to measure the generating capacity on an electricity system, or the maximum demand of electricity customers. Gigawatt hour (GWh) A standard unit for measuring bulk electricity transfer. Grid A network of electricity power lines and connections. Hydroelectric generation Generating electricity by harnessing mechanical energy from running water. Interconnected system Two or more individual transmission systems that have one or more interconnecting lines.


Isolated system An electricity system that is not electrically connected to any other electricity system. ISO 14001 The internationally recognized specification for an environmental management system. Investor-owned utility Utility that is structured as a tax-paying business financed through sales of common stock, for the purpose of providing electrical power service and earning a profit for its shareholders. Kilowatt (kw) The commercial unit of electric demand; 1,000 watts. A kilowatt can best be visualized as the total amount of power needed to illuminate ten 100 watt light bulbs. Kilowatt hour (kWh) The commercial unit of electric energy; 1,000 watt hours. One kilowatt hour can best be visualized as the amount of electricity consumed by ten 100 watt light bulbs in use for an hour. Marginal cost The change in total costs associated with a unit change in quantities supplied (e.g., demand or energy). Megawatt (MW) A unit of bulk power; 1,000 kilowatts or 1 million watts. Megawatt hour (MWh) A unity of bulk energy; 1,000 kilowatt hours. Natural monopoly A single company that is the only supplier or distributor of electricity. In many cases, this is due to the cost structure of the industry. Non-utility generator Generation by producers having generating plants for the purpose of supplying electricity required in the conduct of their industrial and commercial operations, and not for retail sale. Peak The greatest demand on an electricity system during any prescribed period.


Peak demand The maximum power demand registered by a customer or a group of customers or a system in a stated period of time. The value may be the maximum instantaneous demand or more, usually the average demand over a designated interval of time, such as one hour. Normally stated in kilowatt or megawatt. Performance based regulation A form of rate regulation where the regulated entity has financial incentives to improve its efficiency or achieve other goals. Power system The interconnected facilities of an electric utility. A power system includes the generation, transmission, distribution, and protective components necessary to provide service. Regulation The process by which a government or regulator ensure that monopoly utility service providers deliver a reasonable level of service at a fair price. Return on rate base regulation A form of rate regulation where the focus is on allowed rate of return, in particular the allowed return per dollar of capital investment (rate base). Substation A distribution centre principally used for converting the voltage of electricity through transformers so it can be moved along transmission and distribution lines in an effective manner. System planning The process by which long-term electricity supply and delivery needs are determined and managed to ensure the electricity requirements of customers are met. Transformer An electromagnetic device for changing the voltage of alternating electricity. Transmission The act or process of transporting electric energy in bulk on high voltage lines from the generating facility to other principal parts of the system or to other utility systems, for delivery to retail customers. Thermal generation The production of electricity from plants that convert heat energy into electric energy. The heat in thermal plants can be produced from a number of sources such as coal, oil, gas or nuclear fuel.


Voltage The electric force or potential that causes a current to flow in a circuit (just as pressure causes water to flow in a pipe). Wholesale rate structure The rate which Newfoundland and Labrador Hydro bills Newfoundland Power for the purchase of electricity. Watt The scientific unit of electric power. A typical light bulb is rated 25, 40, 60 or 100 watts.

Newfoundland Power Inc

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