1. OEB Cap and Trade Framework for Natural Gas Utilities Staff Presentation – April 2016

2. 2 Outline of Presentation Purpose of Today Background −Context for draft Framework −Purpose of Framework −Objectives of Framework Draft Regulatory Framework Elements −Issues and Options Timing April 2016

3. Purpose of Today Seek stakeholder views on: −Key Elements of the Framework - Issues and Options −Any other issues? Views will support the development of Staff Discussion Paper on the Regulatory Framework 3 April 2016

4. 4 Background: Context for draft Framework Draft framework is based on provincial government’s Proposed Climate Change Mitigation and Low-Carbon Economy Act, 2016 (Bill 172), The Cap and Trade Program dated February 25, 2016 April 2016

5. 5 Background: Purpose of Framework The purpose of the framework is: To support the successful implementation of the government’s cap and trade program and utility compliance plans To ensure clear and consistent expectations are held by natural gas utilities, ratepayers and other stakeholders To provide OEB’s approach to assessing the cost consequences of natural gas utility compliance plans and establishing a mechanism for recovery of these costs in rates April 2016

6. 6 Background: Objectives of Framework The framework will be guided by the following objectives: Cost-effectiveness: compliance plans are optimized for economic efficiency and risk management, and investment decisions are prioritized and paced to ensure just and reasonable rates consistent with the government’s cap and trade program Rate predictability: consumers should have reasonable, predictable rates regarding the impact of the utilities’ cap and trade activities Cost Recovery: prudently incurred costs related to cap and trade would be recoverable as a cost pass-through (similar to natural gas supply procurement ) April 2016

7. 7 Background: Objectives of Framework (cont’d) Transparency: investment/procurement strategies, and optimization processes are transparent and well documented to facilitate the OEB’s assessment of the plans and costs, while ensuring market integrity Flexibility: plans are flexible and can adapt to changing market conditions and utility-specific characteristics; potential for framework to evolve as market matures and experience is gained Continuous Improvement: plans demonstrate continuous improvement of processes and practices, including the use of existing systems April 2016

8. 8 Draft Regulatory Framework Elements 1.Compliance Plans 2.Modeling and Forecasting 3.Cost Allocation and Rate Design 4.Monitoring and Reporting 5.Customer Outreach and Education April 2016

9. 9 1. Compliance Plans Utility-specific plans developed and attributed to the utility based on guidance from the OEB These plans will meet: −Customer-related obligations, which include compliance and procurement for residential, commercial and industrial customers (excluding Large Final Emitters [LFEs]), and natural gas-fired generators −Facility-related obligations, which include compliance and procurement obligations for utility’s owned or operated facilities April 2016

10. 10 1. Compliance Plans Plans could include provisions for: −Compliance Instruments (see slide 11) −Investments for customer-related obligations: o Customer abatement programs o Renewable energy, new technology, building retrofits, etc. −Investments for facility-related obligations: o Measures to mitigate and reduce fugitive emissions o Investments in new technology o Renewable energy, building retrofits, etc. April 2016

11. 11 1. Compliance Plans – Compliance Instruments InstrumentMarket Risk Level Definition Auction AllowancesPrimaryM Real and verifiable allowances available during government administered auctions. Clearing price risk in competitive auction with some predictability Allowance Bi-lateralsSecondaryL Negotiated price for government sourced allowances between counterparties, improves price certainty, higher availability risk Allowance FuturesPrimaryM Standardized futures contract traded on an exchange by a broker with delivery dates, volume and spec. terms and margin call requirements Allowance ForwardsSecondaryM Customized contract traded over the counter (OTC) that includes both market and credit risk OffsetsSecondaryL Compliance-grade instrument generated by emission reduction activities outside of covered emissions scope. Must be quantified and verified, leading to performance, credit and market risks Offsets FuturesPrimaryHExchange traded futures contracts for verified offsets Allowance DerivativesTertiaryH Allowance derivative products offering the right to buy or sell an allowance for a set price during a future period (options) and swaps April 2016

12. 12 1. Compliance Plans – Issues and Options IssuesOptions Assessment of Plans A systematic approach to pacing and prioritization in the short and long term A buying strategy that demonstrates a balanced portfolio of compliance instruments Forecasts (of load, greenhouse gas (GHG) and carbon prices) Risk assessment (identification of key risks [e.g., forecasting risks, market risks] and how these risks will be mitigated) Cost assessment o Marginal abatement cost curve (MACC) o Costs per tonne (CAD $/tonne) per compliance activity o ICE (carbon price benchmark) o Compare costs of investing in GHG abatement activities with cost of allowances and offsets o Financing costs over the compliance period Compliance Strategy Prescription/ Guidance Level OEB requires that the utility have a portfolio of compliance instruments to ensure cost-effective plans and rate predictability. Utility decides on how best to develop its portfolio and participate in the market OEB sets minimum auction purchases (e.g., a certain percentage per year) OEB sets limitations on certain compliance instruments (e.g., offset futures) – see slide 11 April 2016

13. 13 1. Compliance Plans – Issues and Options (cont’d) IssuesOptions Plan Term (duration of plans) 4-year plan to align with first compliance period; followed by 3-year plans to align with subsequent compliance periods. Recognizes the multi-year compliance approach Ontario is taking for cap and trade and the effect that may have on strategies for utilities. Annual plans, with 3-year compliance strategy for reference to be filed in the first year of each compliance period Treatment of Longer-term Investments Separate longer-term GHG investment plans (e.g., 5 to 10 years) to be filed with compliance plans Included as part of the utility’s existing asset/capital planning process and to be filed at the time of rebasing April 2016

14. 14 1. Compliance Plans – Issues and Options (cont’d) IssuesOptions Review of Plans and Treatment of Confidential Market Information OEB review of market information through in-camera sessions where appropriate. Align with provincial government`s Cap and Trade Regulatory proposal Treatment of New Business Activities OEB decides on a case-by-case basis whether utility can undertake new business activities Use existing OEB accounting policies for non-utility activities and affiliate relationships April 2016

15. 15 1. Compliance Plans – California (For Reference) IssuesCalifornia Treatment Plan Assessment Compliance plans reviewed annually through the existing process Longer term plan elements are used for reference and informational purposes only Compliance Strategy Prescription/ Guidance Level Electric utilities approved to procure allowance futures and forward contracts and offsets forward contracts, but not options and swaps or offsets futures California Public Utilities Commission (CPUC) holds the right to limit the use of any other compliance instrument, including the percentage of offsets available for compliance CPUC approved electric utilities to purchase allowances through bi-lateral contracts, but must follow approved procurement procedures and affiliate transactions Confidentiality of Market Information California Air Resource Board (CARB): AB-32 regulation establishes confidentiality requirements that limit the amount of bidding strategy information that can be publicly shared to protect the integrity of the carbon market California Public Utilities Commission: o Certain components of plans (i.e., bidding strategies) are confidential - protected by Confidentiality Protocols in D. 14-10-033. If review is required, in-camera protocols apply o Developed confidentiality protocols listing information that cannot be made public and options to discover through in-camera sessions. o Considered both commercial sensitivity of utility strategies and principles of confidentiality defined by California Air Resource Board (CARB) April 2016

16. 16 1. Compliance Plans – California (For Reference) IssuesCalifornia Treatment Plan Term (duration of plans) Annual plans Treatment of Longer-term Investments Cap and trade procurement and compliance plans incorporated into California Public Utilities Commission’s long-term (10 year) planning process (currently only for electric Investor Owned Utilities) but there is no formal link to rate design/recovery (as this happens annually) Updated every 2 years to align with larger, collaborative planning process Treatment of New Business Activities New businesses are expected to be treated by existing affiliate and corporate relationship regulations and approved and managed under this context April 2016

17. 17 1. Compliance Plans – Québec (For Reference) IssuesQuébec Treatment Plan Assessment Régie approves cap and trade related costs as part of broader rate case procedures Compliance cost estimates and compliance strategy based on 3 year forecast in the rate case Each year end actual costs are reported, and after each auction an administrative report is filed as well for information purposes Compliance Strategy Prescription/ Guidance Level Utilities present a compliance period strategy before the Régie during a rate case and the Régie discusses and approves or amends the buying strategy Régie has not yet adjudicated on a formal set of guidelines or procedures for compliance plans and approves each utility’s plan on a case by case basis However, Régie has been active in debating the individual utility compliance strategy and has intervened with adjustments to the plan through the first compliance period Régie reserves the right to review and inquire about any cost and buying strategy element within a utility’s compliance plan throughout implementation Confidentiality of Market Information Buying strategies and auction strategies have been reviewed and approved by the Régie through in-camera sessions April 2016

18. 18 1. Compliance Plans – Québec (For Reference) IssuesQuébec Treatment Plan Term (duration of plans) 3-year compliance period plans (i.e., 2015-2017, 2018-2020) Treatment of Longer-term Investments (how to incorporate longer term investments such as new technologies, renewables, etc. into plans) Compliance period plans can include strategies for longer-term investment Where capital requirements are necessary, the planning links to rates proceedings as part of the capital needs filing There is no evidence that a process for discrete long term cap and trade compliance plans has been contemplated to date Treatment of New Business Activities New businesses are expected to be treated by existing affiliate and corporate relationship regulations and approved and managed under this context April 2016

19. 19 2. Modeling and Forecasting Utility expected to prepare and file forecasts as key input to support development of compliance plans Forecasts to include: −Load forecast −Forecast of greenhouse gas (GHG) emissions o Utility to report on actual GHG emissions as outlined in Ontario Regulation 398/15 (and the Ontario’s Guideline for Greenhouse Gas Emissions Reporting, dated February 2016) − Forecast of carbon prices April 2016

20. 20 2. Modeling and Forecasting – Issues and Options IssuesOptions Forecasting Period (Aligns with Compliance Plan Needs) 4-year forecast to align with first compliance period; subsequently 3-year forecasts Annual forecasts, with longer-term forecasts that align with compliance period for reference Load Forecast Utility to use existing OEB approved methodology. However, need to ensure no double counting with respect to Large Final Emitters (LFEs) GHG Emissions Forecast Utility to use methodology outlined in Ontario Regulation 398/15 (and the Ontario’s Guideline for Greenhouse Gas Emissions Reporting, dated February 2016) and the load forecast (above) to prepare emissions forecast. However, need to ensure no double counting with respect to Large Final Emitters (LFEs) Carbon Price Forecast Annual Use a large, liquid and public Market Exchange for carbon price forecast. California uses Intercontinental Exchange (ICE) carbon price Long-term (for 3-year plans and longer-term investment planning ) -Utility specific methodology -Together utilities purchase a forecast from a single reputable source -Together utilities purchase a number of forecasts to calculate consensus forecast April 2016

21. 21 2. Modeling and Forecasting – California (For Reference) IssuesCalifornia Treatment Forecasting Period Annual forecasts; forecasting period aligns with annual compliance plan period Load Forecast Utility specific methodology aligned with approved load forecasting approach GHG Emissions Forecast Prescribed methodologies for calculating forecast GHG emissions based on load forecast Carbon Price Forecast Proxy annual carbon price is to be based on the settlement price of a California Compliance Allowance on the Intercontinental Exchange (ICE) with a vintage of December of the forecast year Compliance cost forecast must be reasonably accurate and explainable, required for rates and based on the forecast allowance proxy price California Public Utilities Commission does not require the utilities to prepare a long-term carbon price forecast April 2016

22. 22 2. Modeling and Forecasting – Québec (For Reference) IssuesQuébec Treatment Forecasting Period Compliance period based on annual three year rolling forecast approach Load Forecast Three year rolling volume forecasts drive compliance forecasting needs GHG Emissions Forecast Prescribed methodologies for calculating forecast GHG emissions based on load forecast Carbon Price Forecast Utility-specific approach for annual and long-term price forecasts. For initial compliance planning, relied on price forecast developed by third party consultants Moving forward expected to rely on external studies and data sources (e.g., Bloomberg) April 2016

23. 23 3. Cost Allocation and Rate Design Costs include: −Customer-related obligations (which include compliance and procurement costs for residential, commercial and industrial customers [excluding Large Final Emitters], and gas-fired generators) −Facility-related obligations (which include compliance and procurement costs for utility’s owned or operated facilities) −Administrative to meet compliance obligations, such as monitoring, reporting and verification of emissions (MRV), purchasing/trading functions, new IT systems, etc. April 2016

24. 24 3. Cost Allocation and Rate Design (cont’d) Need to address cost causation, cost allocation, rate design, treatment of administrative costs and rate setting process to ensure just and reasonable rates April 2016

25. 25 3. Cost Allocation and Rate Design – Issues and Options IssuesOptions Cost Causation All customers excluding Large Final Emitters (LFEs) All customers in some cases (e.g., all customers including LFEs pay for utility facility- related compliance costs) (see slide 26) Cost Allocation Customer-related obligations Facility-related obligations Administrative Rate Design Annual Volumetric Charge for customer-related obligations Annual Volumetric Charge for facility-related obligations Reflects the relationship between GHG emissions and natural gas usage Recovery of Administrative Costs Incremental costs included in delivery charges (as a cost of doing business) April 2016

26. 26 3. Cost Allocation and Rate Design – Cost Causation: An example Customer Costs for Customer-related Obligations such as purchasing allowances Costs for Facility- related Obligations such as venting, fugitive Administrative Costs Residential √√√ Commercial √√√ Industrial √√√ Gas-fired Generator √√√ Large Final Emitter √√ April 2016

27. 27 3. Cost Allocation and Rate Design – Issues and Options (cont’d) April 2016 IssuesOptions Rate Setting Approach Annual rate is set based on: the annual forecasted volume (and associated annual GHG emissions) and the annual forecasted weighted average price of the utility’s compliance activities/tools for each year of the compliance period OR the forecasted volume (and associated annual GHG emissions) and forecasted weighted average price of the utility’s compliance activities/tools for the entire compliance plan With annual true-ups Quarterly rate is set based on: the annual forecasted volume (and associated annual GHG emissions) and the annual forecasted weighted average price of the utility’s compliance activities/tools for each year of the compliance plan OR the annual forecasted volume (and associated GHG emissions) and the actual weighted average price of the utility’s compliance activities/tools using the settlement price from the previous auction With quarterly true-ups

28. 28 3. Cost Allocation and Rate Design – California (For Reference) IssuesCalifornia Treatment Cost Causation Facility obligations – all customers Customer obligations – all customer except LFEs Administrative costs – all customers Cost Allocation Facility and customer related obligations costs are allocated on a volumetric basis (based on load forecast) Rate Design Uniform cents/therm charge for facility and customer related obligations costs. Cost recovered in base transportation rates Incremental administrative costs are currently tracked in a deferral account but this practice will be phased out. The recovery of these costs will be reviewed in upcoming rates proceeding True-Up Process, Frequency and Timing Annual compliance costs are recovered for the following year on a forecast basis in June and updated in October Symmetrical variance account captures differences between forecast and actual compliance costs Variance account disposed annually. Intervenors can challenge costs that are inconsistent with the utilities’ procurement authority April 2016

29. 29 3. Cost Allocation and Rate Design – Québec (For Reference) IssuesQuébec Treatment Cost Causation Facility obligations – all customers Customer obligations – all customer except LFEs Administrative costs – all customers Cost Allocation Facility and customer related obligations costs are allocated on a volumetric basis Administrative costs (including staff costs related to filing compliance report, procure allowances and other general administrative costs) allocated on a volumetric basis Rate Design Equal cents/therm charge for facility and customer related obligations costs. Costs (including administrative costs) recovered in a separate line time on the bill entitled – “Cap and Trade Emission Allowances” True-Up, Frequency and Timing Symmetrical variance account captures differences between forecast and actual compliance costs (including facility and customer related obligations costs, and administrative costs) Quarterly rate adjustment processes for rates and variance account disposition April 2016

30. 30 4. Monitoring and Reporting On-going monitoring of costs and performance will: −Support the assessment of actual costs for purpose of rate recovery −Provide useful and transparent feedback −Encourage continuous improvement Consistent metrics for each utility to allow comparison April 2016

31. 31 4. Monitoring and Reporting – Issues and Options IssuesOptions Monitoring and Reporting Provisions Metrics: Marginal abatement cost curve (MACC) Costs per tonne (CAD $/tonne) per compliance activity ICE (carbon price benchmark) Compare costs of investing in GHG abatement activities with cost of allowances and offsets Compare actuals with forecasts Financing costs Frequency and Timing Annual reporting filed with annual rate application April 2016

32. 32 4. Monitoring and Reporting – Issues and Options (cont’d) IssuesOptions Monitoring of Plans and the Treatment of Confidential Market-sensitive Information (e.g., procurement strategies, etc.) Monitoring reports do not disclose auction-related information; sensitive information is redacted. Align with provincial government’s Cap and Trade Regulatory proposal Confidential review process conducted by OEB with in-camera sessions where appropriate Align with provincial government`s Cap and Trade Regulatory proposal April 2016

33. 33 4. Monitoring and Reporting – California (For Reference) IssuesCalifornia Treatment Metrics for monitoring The compliance cost forecast and annual rate adjustment process provides a continuous monitoring opportunity No formal incremental monitoring process has been set for natural gas utilities Changes to submitted compliance plans and use of compliance instruments can be requested through the Tier 2 Advice Letters, which also provided opportunity for review and adjustment Frequency and Timing Annually with the compliance review Monitoring of Plans and Confidentiality of market-sensitive information California Air Resource Board`s AB-32 regulation establishes confidentiality requirements that limit the amount of bidding strategy information that can be publicly shared to protect the integrity of the carbon market California Public Utilities Commission developed confidentiality protocols listing information that cannot be made public and options to discover through in-camera sessions. These procedures consider both the commercial sensitivity of utility strategies as well as the principles of confidentiality needs defined by California Air Resource Board In review of utilities’ compliance strategies, certain confidential info and bid strategy continue to be protected by the Confidentiality Protocols adopted in D. 14-10-033. Some forecast information could be included under this protection. If review is required, in-camera protocols apply April 2016

34. 34 4. Monitoring and Reporting – Québec (For Reference) IssuesQuébec Treatment Metrics for monitoring No specific metrics for monitoring of cap and trade compliance costs or implementation appear to have been developed to date Same tests of prudency and reasonableness applied as to all other rate change considerations Frequency and Timing Process has evolved in relatively ad-hoc manner, no set timelines for monitoring and assessment Currently ongoing tracking quarterly (aligned with allowances auctions) and annually (aligned with rate cases). Included in the annual compliance strategy review, not discrete or additional monitoring process Monitoring of Plans and Confidentiality of Market-sensitive Information In-camera sessions held, certain components of the plan (i.e., bidding strategies) are confidential No formal additional confidentiality protocols appear to have been developed relative to cap and trade compliance strategy consideration between Régie and the utilities April 2016

35. 35 5. Customer Outreach and Education Customer outreach and education includes informing customers about the provincial government’s cap and trade program and associated bill impacts, and how customers could manage their GHG emissions to reduce their bills Need to ensure consistent and coordinated messaging What should be the role of the utility ? April 2016

36. 36 5. Customer Outreach and Education – California (For Reference) State-wide outreach programs Utilities to leverage existing customer relationships to deliver targeted messaging −Activities to include: bill inserts, bill onserts, e- mail notices, newsletters, and information on the utilities’ websites −Activities are not to conflict with state-wide outreach efforts April 2016

37. 37 5. Customer Outreach and Education – Québec (For Reference) Utilities do most of the outreach −Bill inserts, online materials and other communications have included information about cap and trade, the expected government use of funds and the changes to the bill April 2016

38. 38 Planned Timing MilestonesTiming MOECC releases Draft Cap and Trade legislation and regulation February 25/26, 2016 OEB staff meetings to inform Discussion paper – Targeted meetings to include gas utilities, consumer groups, environmental groups, industry groups April/May 2016 Discussion Paper for stakeholder commentApril 2016 major Potential working group meetings to review major issuesJune/July 2016 MOECC releases final Cap and Trade regulation July 1, 2016 (estimated) OEB draft framework for stakeholder commentJuly/August 2016 OEB approved frameworkOctober 2016 Utilities file Compliance Plans - Interim rates set as of January 1, 2017 January 2017 April 2016