Transfers from BP: For what time period?

Transfers from BP: For what time period? June 28, 2011 Mike Proctor

Purpose for Transfers • Portions of the existing SPP transmission system going into the BP were not equally balanced in terms of congestion. • Thus, areas that are more highly congested would have higher benefits than areas that had less congestion. • Instead of allocating costs in proportion to benefits, the BP allocated the cost on a load ratio share and used transfers so that no zone would have a B/C < 1. • Calculation: Transfers existing zonal costs to the region wide rate for those whose B/C < 1, thereby bringing their B/C = 1.

Results of BP 9 Zones had B/C > 1 3 Zones had 0 < B/C < 1 4 Zones had B/C < 0 All of these calculations were based on a PV calculation over 10 years of benefits and 10 years of annualized/levelized costs.

Transfer Calculations • Transfers to a Region-Wide rate has a two-part impact. • Decrease in Zonal Rate Cost = 100% of zone’s transfer for zones with B/C <1. • Increase in Region-Wide Costs = load ratio share of the sum of all the transfers for all zones. • Result can be that zones with B/C > 1 whose costs go up can end up with B/C < 1 after the transfer. • When this happens, additional transfers are required from those zones. • Final results reflect these additional transfers.

Calculation of Transfers from BP 7 zones with B/C >1  B/C > 1; 2 zones with B/C >1  B/C = 1; 7 zones with B/C < 1  B/C = 1

Estimates of BP Cost Increases From Original Estimates • Costs estimates have increased by approximately 25% > initial planning estimates. • Balanced Portfolio still has a B/C > 1. • 8 zones with B/C > 1; 4 zones with 0 < B/C < 1, and 4 zones with B/C < 0. Prev B/C >1

BP Transfers with 25%  Costs Multiplier Effect: a 25% in costs resulted in a 119% increase in transfers. 6 zones with B/C >1  B/C > 1 2 zones with B/C >1  B/C = 1 8 zones with B/C < 1  B/C = 1

The Costs Will be Trued Up to Actual Costs • When 10% or greater of the revised cost estimates go into rates the transfers begin. • The transfers will increase each year thereafter. • When all the costs are into rates there will be a true up of the transfers to match the costs. • There will be no true up of benefits.

Time Period for Transfers • RSC approves, and CAWG makes a recommendation. • Various Options to Consider: • Permanent Transfers • Theoretical Option – calculations based on infinite sum of levelized transfers = PV of transfers. • Transfers for Limited Time Periods • Starting with time that costs are trued up • From 10 years to Depreciated Life of Transmission Upgrades.

Ten-Year Calculations • These calculations would use ten-years of ARRs for the trued-up costs and the PV of the ten year benefits (see previous tables) to calculate the PV of transfers to be implemented on a levelized basis over the next ten-years. • To be determined: (These are technical questions to be determined by the RTWG) • Calculation for the ARRs for the trued-up costs. • Appropriate Discount Rate • Treatment of costs and transfers phased-in prior to the true up.

10-yr Costs: Levelized vs. Front-Loaded Costs • Front-Loaded = Costs Recovered in ARR each year over first 10 years. • Levelized = Same Costs Recovered each year over 30 years but applied for only 10 yrs. • Levelized costs have same PV as FL costs when applied over 30 years.

10-yr ARRs Front Loaded

10-yr: Transfers for Front-Loaded Costs

Depreciated Life of Upgrades or Beyond 10-Years Benefits are increasing over time. If you don’t include increasing benefits, the transfer payments will increase.

30-yr (Depreciated Life) Before Transfers 30-yr costs were calculated using and Benefits were assumed to increase over last 20 years. B/C increased from 1.48 for 10 year to 2.30 for 30 year.

30-yr After Transfers

Comparing 10 to 30 Years:After Transfers • Compare PV • L: 30-yr has the lowest PV = $453 Million • M: 10-yr Levelized is $41 Million higher than 30-yr • H: 10-yr Front-Loaded is $753 Million higher than 30-yr • Compare Per Year • L: 30-yr has lowest per year transfers = $37 Million • M: 10-yr Levelized is $31 Million per year higher than 30-yr • H: 10-yr Front-Loaded is $129 Million per year higher than 30-yr

 10-yr Front Loaded Arguments For Arguments Against • These reflect the true costs that will actually be paid over a 10 year period. • This has the highest transfer payments of any of the alternatives. • Significantly overstates the true PV of transfers

30-yr (Depreciated Life) Arguments For Arguments Against • Has the lowest transfer payments • Also reflects the true PV of costs paid over a 30-yr period • Transfer payments go over a long period of time • Have to decide how to treat last 20 yrs of benefits

10-yr Levelized Arguments For Arguments Against • Is only slightly higher than 30-yr PV transfers • Pay out is for limited time period • Don’t have to extrapolate benefits • Has high per year payments; almost double that of 30-yr

Examples for Other Years • We can also consider 15, 20 or 25 year levelized payments. • This will lower the per year payments from the 10-yr levelized, and will get closer to 30-yr PV

Other Alternatives Considered • Set 20 year out benefits = 2022 benefits that were calculated in the study. • This actually results in lower benefits and greater transfers. • Set PV of transfers = those calculated for the 30-year (depreciated life) • Determine the # years for transfers • Calculate the levelized payments that gives the PV for the # years chosen.

Decisions for CAWG

Summary & Recommendation • 10-year front-loaded significantly overstates the PV of transfers and should be rejected. • 10-levelized has the shortest payout period, but the per-year transfers are very large ($68M/yr). • 30-year has the lowest per-year transfers ($37M/yr), but they extend over a long time period. • 15-year modified to collect the same PV as the 30-yr (depreciated life) lowers the per-year transfers to $49M/yr and cuts the payment period in half, and may therefore be a good compromise.

Transfers from BP: For what time period?