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TRANSFERS FROM BP: FOR WHAT TIME PERIOD? June 28, 2011 Mike Proctor.

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Presentation on theme: "TRANSFERS FROM BP: FOR WHAT TIME PERIOD? June 28, 2011 Mike Proctor."— Presentation transcript:

1 TRANSFERS FROM BP: FOR WHAT TIME PERIOD? June 28, 2011 Mike Proctor

2 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. 2

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

4 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. 4

5 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 5

6 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. 6 Prev B/C >1

7 BP Transfers with 25%  Costs 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 Multiplier Effect: a 25% in costs resulted in a 119% increase in transfers. 7

8 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. 8

9 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. 9

10 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

11 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. 11

12 10-yr ARRs Front Loaded 12

13 10-yr: Transfers for Front-Loaded Costs 13

14 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. 14

15 30-yr (Depreciated Life) Before Transfers 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.

16 30-yr After Transfers 16

17 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 17

18 10-yr Front Loaded  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 Arguments ForArguments Against 18 

19 30-yr (Depreciated Life)  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 Arguments ForArguments Against 19

20 10-yr Levelized  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 Arguments ForArguments Against 20

21 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 21

22 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. 22

23 Decisions for CAWG 23

24 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. 24


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