7/27/2019 AG OGS Napanee OPA Backgrounder

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B A C K G R O U N D E R

Audi tor General Special Report Oakvi lle 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 plantat $310 million. At that time, as noted in the Auditors report, the OPAs CEO stated that the estimatewould 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 Generalis 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 Generals report cautions, not only do our estimates therefore differ from the estimates of theOPA 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 intodays dollars as well as using different in-service dates for the plants. The Auditor Generals approachlowers the savings associated with having the Napanee plant up and running later than when the Oakvilleplant would have been in service.

Social Discount RateA social discount rate is used to measure the impact of a public sector investment decision by consideringthe 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 savingsassociated with payments being made further into the future than they would have been in Oakville andincreased the overall cost.

The Ontario Ministry of Finance uses a nominal discount rate of 5.5 percent, Treasury Board of Canadauses 5 percent or 10 percent depending on the evaluation, Manitoba Hydro 8 percent and BC Hydro 7percent. Ideally, the social discount rate would be set by the Ontario government so all provincialinfrastructure investments can be compared on an apples-to-apples basis.

In-service datesThe Napanee plant will be in service later than the Oakville plant would have been, which results insavings to ratepayers because the OPA will start paying for power later. The original contract required theOakville 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 AuditorGeneral used December 2015 as the in-service date for the Oakville plant and October 2017 forNapanee, resulting in savings of $162 million. There is no verifiable way to know when the Oakville plantwould have come into service if it was built, because its an event that will never happen. The OPAtherefore stuck with the contract date to make its calculation.

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7/27/2019 AG OGS Napanee OPA Backgrounder

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Evolving Costs

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 knownwhen more information becomes available. OPA CEO Colin Andersen put the same qualification on theOPAs $310 million estimate when he testified before the Justice Committee in April. It typically takes 12to 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 processthat was overseen by a third-party fairness advisor. The Auditor General noted that the OPA told biddersthat proposals would be evaluated based on the municipal requirements in place at the start of theprocurement process, a process that required bidders, not the OPA, to identify sites and obtain allnecessary permits and approvals. With a process already underway, the OPA felt locating a power plantin the Southwest GTA was valuable from both a system and ratepayer perspective and as such wanted tobe fair to proponents, maintain a healthy roster of bidders and be able to affirm the integrity of theprocess. Throughout the procurement and contracting process, the OPA provided the provincialgovernment with off ramps at which times the process could have been stopped prior to awarding thecontract to TransCanada Energy (TCE).

Contract with TCE

A third- party review of the MOU and the subsequent contract for the Napanee plant by Deloitte LLPfound that the financial elements and outcome for TCE are both largely consistent with the originalOakville 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 savingsrelated to starting contract payments later. This delay means TCE must wait longer to start receiving areturn on its investment.

Location-Related Costs

The increased ratepayer costs for the Napanee plant are largely related to the plants location. In

announcing the cancellation of the Oakville plant, the Minister of Energy at the time said the plant wouldnot be relocated in the GTA. Location-related costs include accelerating replacement transmission in theSouthwest GTA, line losses that result from transmitting power from Napanee to where it is neededelsewhere in the province, higher costs for connecting the Napanee plant to the grid and delivering gas toNapanee, which is further from the natural gas storage hub near Sarnia than the Oakville plant wouldhave 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 contractuntil 2038. If the Oakville plant had been built, replacement power would have had to been purchasedstarting in 2033 at a cost higher than what will be paid for power at the Napanee plant. The OPAestimated 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 replacementpower during this period because she felt it too far into the future to estimate. The Auditor General didestimate the costs for gas management and delivery over this time period.

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Media contact:

Kristin Jenkins416-969-6007/416-302-9717