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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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10-yr ARRs Front Loaded 12

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10-yr: Transfers for Front-Loaded Costs 13

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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

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30-yr (Depreciated Life) Before Transfers 15 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.

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30-yr After Transfers 16

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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

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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

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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

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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

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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

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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

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Decisions for CAWG 23

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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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