Ontario Power Authority Response to the Auditor General's Special Report on the Oakville Power Plant Cancellation Costs
TORONTO, Oct. 8, 2013 /CNW/ - The OPA respects the Auditor General's work. The Auditor General estimated that relocating the Oakville power plant to Napanee may cost $675 million. In April, the OPA estimated the cost at $310 million.
While the OPA and Auditor General estimates are different, this is largely attributable to the assumptions used to calculate future costs and savings. The Auditor General's report states that two-thirds of the costs and 100 percent of the savings associated with the Oakville relocation will occur in the future. As such, we continue to stand by our assumptions, which differ from those of the Auditor General.
Specifically, the Auditor General and the OPA used different rates to put future costs and savings in today's dollars and used different in-service dates for the plants. The Auditor General's approach lowers the savings associated with having the Napanee plant up and running later than when the Oakville plant would have been in service.
Estimating the cost of relocating the plant during the negotiations with TransCanada Energy (TCE) was complicated by the short time period the OPA and Infrastructure Ontario had to negotiate a deal - 12 days. It typically takes 12 to 18 months to develop estimates when competitively procuring a gas plant. Nevertheless, when the relocation deal was announced, the Memorandum of Understanding (MOU) with TCE was clear that there would be costs in addition to the $40 million in sunk costs incurred in Oakville plant.
In its review of the MOU, which provided an outline for the subsequent Napanee contract, a third party, Deloitte LLP, found that financial elements and outcomes were generally consistent with the original contract and that, overall, the deal was commercially reasonable.
The Auditor General identified $170 million in potential benefits to TCE as well as $162 million in savings related to starting contract payments later. This delay means TCE must wait longer to start receiving a return on its investment.
The additional ratepayer costs for the Napanee plant are largely associated with its location. In announcing the cancellation of the Oakville plant, the Minister of Energy at the time said the plant would not be relocated in the GTA. These costs include accelerating replacement transmission in the Southwest GTA and the higher cost of delivering gas to Napanee, which is further from the gas storage hub near Sarnia.
Regarding the Oakville site, the Auditor General states that the OPA did not take municipal opposition to the plant into account during the procurement process. The OPA did not want the integrity of the procurement process to be affected by attempts to stop a plant midway through a well-defined and public process, and it continued to believe that locating a power plant in the SWGTA was valuable from both a system and ratepayer perspective. Ultimately, it was the responsibility of the successful bidder to obtain all necessary permits and local approvals. As the Auditor General's report states, the OPA provided the provincial government with "off ramps" during the procurement and contracting process at which times it could have been stopped prior to the awarding of the contract to TCE.
Since 2003, 21 gas-fired power plants have been contracted in Ontario, with 19 currently in service. The OPA and the Independent Electricity System Operator recently submitted recommendations to the provincial government on how to improve the planning and siting for large electricity infrastructure.
Chart to explain OPA $310 million estimate available at: http://files.newswire.ca/792/OPAresponseAGreport.pdf
Auditor General Special Report - Oakville Power Plant Cancellation Costs
Overall Cost Estimate
The Auditor General estimated that relocating the Oakville Generating Station to Napanee may cost $675 million. In April 2013, the OPA estimated the cost of cancelling and relocating the Oakville gas plant at $310 million. At that time, as noted in the Auditor's report, the OPA's CEO stated that the estimate would evolve over time as assumptions were refined and more information became available.
The OPA continues to support the $310 million estimate because the difference with the Auditor General is based largely on the different assumptions used to calculate future costs and savings.
Two-thirds of the costs of the Napanee plant and 100 percent of the savings will happen in the future. As the Auditor General's report cautions, "not only do our estimates therefore differ from the estimates of the OPA but they will likely also differ from the actual costs and savings years from now."
Difference in Forecasting Assumptions - Social Discount Rate and In-Service Dates
The Auditor General and the OPA used different social discount rates to put future costs and savings in today's dollars as well as using different in-service dates for the plants. The Auditor General's approach lowers the savings associated with having the Napanee plant up and running later than when the Oakville plant would have been in service.
Social Discount Rate
A social discount rate is used to measure the impact of a public sector investment decision by considering the costs as well as the social benefits to be generated over the lifetime of the project. The OPA used a nominal social discount rate of 6 percent. The Auditor General used 4 percent. This reduced the savings associated with payments being made further into the future than they would have been in Oakville and increased the overall cost.
The Ontario Ministry of Finance uses a nominal discount rate of 5.5 percent, Treasury Board of Canada uses 5 percent or 10 percent depending on the evaluation, Manitoba Hydro 8 percent and BC Hydro 7 percent. Ideally, the social discount rate would be set by the Ontario government so all provincial infrastructure investments can be compared on an apples-to-apples basis.
The Napanee plant will be in service later than the Oakville plant would have been, which results in savings to ratepayers because the OPA will start paying for power later. The original contract required the Oakville plant to be operating by February 2014, and the new contract for Napanee sets an in-service date of December 2018. The OPA estimated savings of $539 million using these dates. The Auditor General used December 2015 as the in-service date for the Oakville plant and October 2017 for Napanee, resulting in savings of $162 million. There is no verifiable way to know when the Oakville plant would have come into service if it was built, because it's an event that will never happen. The OPA therefore stuck with the contract date to make its calculation.
The majority of the costs and savings associated with relocating the Oakville plant will occur in the future. As the Auditor General stated, the current estimate will not be the final cost, which will only be known when more information becomes available. OPA CEO Colin Andersen put the same qualification on the OPA's $310 million estimate when he testified before the Justice Committee in April. It typically takes 12 to 18 months to develop cost estimates when competitively procuring a gas plant.
Procurement Process for the Oakville Plant
The OPA carried out a competitive procurement process for the Oakville Generating Station, a process that was overseen by a third-party fairness advisor. The Auditor General noted that the OPA told bidders that proposals would be evaluated based on the municipal requirements in place at the start of the procurement process, a process that required bidders, not the OPA, to identify sites and obtain all necessary permits and approvals. With a process already underway, the OPA felt locating a power plant in the Southwest GTA was valuable from both a system and ratepayer perspective and as such wanted to be fair to proponents, maintain a healthy roster of bidders and be able to affirm the integrity of the process. Throughout the procurement and contracting process, the OPA provided the provincial government with "off ramps" at which times the process could have been stopped prior to awarding the contract to TransCanada Energy (TCE).
Contract with TCE
A third- party review of the MOU and the subsequent contract for the Napanee plant by Deloitte LLP found that the financial elements and outcome for TCE are both largely consistent with the original Oakville contract and that overall the deal is commercially reasonable. The Auditor General identified $170 million in potential benefits to TCE. The Auditor General also identified $162 million in savings related to starting contract payments later. This delay means TCE must wait longer to start receiving a return on its investment.
The increased ratepayer costs for the Napanee plant are largely related to the plant's location. In announcing the cancellation of the Oakville plant, the Minister of Energy at the time said the plant would not be relocated in the GTA. Location-related costs include accelerating replacement transmission in the Southwest GTA, line losses that result from transmitting power from Napanee to where it is needed elsewhere in the province, higher costs for connecting the Napanee plant to the grid and delivering gas to Napanee, which is further from the natural gas storage hub near Sarnia than the Oakville plant would have been.
Savings Associated with Delaying Purchase of Replacement power
The Oakville plant was under contract to produce power until 2033. The Napanee plant has a contract until 2038. If the Oakville plant had been built, replacement power would have had to been purchased starting in 2033 at a cost higher than what will be paid for power at the Napanee plant. The OPA estimated having this less expensive source of power available at Napanee between 2033 to 2038 results in a savings of $50 million. The Auditor General did not attribute any savings for the cost of replacement power during this period because she felt it too far into the future to estimate. The Auditor General did estimate the costs for gas management and delivery over this time period.
SOURCE Ontario Power Authority
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