As a result of all of the written filings, direct examinations and
cross-examinations of witnesses in this Application, the Commission has
identified several issues that have been placed before it for determination.
The issues for consideration are as follows:
considering the "public necessity and convenience test", will the
proposed transmission line provide any benefit for (i) the COS's inside
customers, (ii) the COS's outside customers and/or (iii) MECL's customers
residing within the municipal boundaries of the City of Summerside? In
reaching a determination on the required test the Commission believes it
If the COS business case placed
before the Commission is reasonable and results in benefits to any or
all of the three groups to whom the test applies; and
Does the proposed transmission
line constitute a by-pass of the existing MECL transmission system?
(b) Is the
COS Application subject to operation of section 8 of the
 The Commission intends to
deal with each of the above noted issues.
In addition, it should also be noted that a preliminary issue was
raised at the outset of the hearing by the COS with respect to the scope of
MECL's participation as an Intervener.
While this matter was addressed prior to any evidence being presented
in support of the Application, it will be dealt with herein as a preliminary
issue as a matter of completeness.
 In its opening comments,
the COS indicated that as a result of the July 13, 2011 decision of the
Prince Edward Island Court of Appeal, MECL's participation in the
Application as an Intervener should be limited.
Specifically, the COS stated that MECL was only participating in the
Application to protect its own business interests, which, according to COS,
the PEI Court of Appeal indicated could not be considered.
As such, the COS stated that MECL did not have a legitimate interest
in the Application before the Commission.
 MECL stated that it had
participated as an Intervener since the Application was initiated in 2008,
and that its role as an Intervener should not be limited or curtailed in any
way. Reference was made to MECL's legislated responsibilities as per the
and that those responsibilities require its participation in the hearing.
Additionally, MECL stated that if its role was to be limited, the COS should
have clearly set out and stated its position in this regard in advance of
 Although the Province
participated in the Application in a limited manner, it did support MECL's
position in relation to this preliminary matter.
The Province indicated that it had viewed MECL as having substantial
experience in relation to the construction of transmission lines, and the
associated costs, and that MECL was in a better position to assess the
information and evidence submitted by the COS in support of its Application.
The Province stated that if it had been aware that MECL may be limited in
its participation in the hearing, the Province may have proceeded
 The Commission considered
the preliminary issue raised by the COS and issued an oral ruling which
noted that MECL had been granted Intervener status in 2008 and has been
participating in that role ever since. The Commission also noted that it has
the authority to establish its own rules in relation to procedures in
matters before it in accordance with its enabling statute, and that it is
the normal practice of the Commission to allow for full participation by
 The Commission also noted
that in raising this preliminary issue, the COS referred to the fact that
the Commission is the "guardian of the people", in that it has a
responsibility as per the
Act, to ensure that electricity rates on PEI are
reasonable and publically justifiable. In considering this preliminary
issue, the Commission noted that hearing from all parties, including MECL,
allowed for all information and evidence to be fully canvassed and
considered which assists the Commission in its role as the "guardian of the
people". Therefore, the Commission held that MECL would be allowed to
participate in the hearing with full intervener status.
5. Position of the Parties
Public Convenience and Necessity Test
 As noted previously, the
COS filed this Application with the Commission seeking a permit to build a
transmission line as a means of reducing its cost of transmission associated
with the electricity it purchases from NB Power. This reduced cost could
occur if the Commission grants a permit for the COS to build the line based
on a positive Net Present Value (NPV) of the potential savings stated in the
COS business case. However and as previously noted, the COS Application
stated that the COS reserved the right to either build the line or use the
right to build the line as justification to seek a reduced fee under the
MECL OATT tariff.
 In the original
application, filed November 7, 2008, the COS stated that customers would
benefit directly from the reduced cost of transmission through reduced
electricity rates. Since the original Application, the COS has stated in
response to Commission interrogatories, both written and orally, that
benefits of any cost savings will accrue to the citizens of Summerside but
that no decision has been made by Summerside City Council regarding how
savings will be distributed. The Summerside Electric Utility is owned by the
City of Summerside and operates as a Department of the City with final
decisions on electricity rates made by the City Council.
 During the hearing, the
COS stated that the savings, if proven, could be allocated in a variety of
reduced municipal taxes to
reduced electrical rates;
a rebate to its electricity
investment in new public
infrastructure (i.e. parks).
 Currently, the COS
voluntarily uses the MECL tariff structure as its own electric rate/tariff
structure and does not require Commission approval. The
Electric Power Act
and the Electric Power Act - City of Summerside Electric Utility Exemption
Regulations (the "Regulations") generally exempts COS from requiring
Commission approval of its rates, except under certain limited
Regulations set out the conditions that COS needs to meet
in order to ensure that its rates do not require Commission approval. Most
Regulations state that:
the utility shall, before charging new rates, tolls and charges, file with
the Commission a copy of the new rates, tolls and charges; and
the utility shall not charge outside customers any rates, tolls and charges
that exceed the rates, tolls and charges that the utility charges customers
located inside the boundaries of the City of Summerside;
 Regardless of the actual
rates charged to customers, the parties differ on whether or not any
transmission savings from the construction of the proposed transmission line
will benefit electricity customers.
In this regard, the COS indicated that it has options with respect to
any transmission savings resulting from the construction of the proposed
transmission line. Regardless of
how the transmission savings are allocated, the COS is of the position that
there are benefits to be gained from the construction of the proposed
 MECL stated that there is
no benefit to be gained from the construction of the proposed transmission
line. Specifically, if the
transmission savings are passed on to the taxpayers, by way of further
investment in resources and infrastructure within the municipal boundaries
of the City of Summerside, MECL is of the position that the electricity
rates for the customers of the COS electrical utility could increase.
 As noted, the COS
electric utility has maintained a practice of following the rates utilized
by MECL. If the proposed
transmission line is constructed and the COS pays reduced transmission fees,
MECL has indicated that electricity rates for its customers could
potentially increase. As such,
if the COS constructs the proposed transmission line, and continues to
follow the rates established by MECL, then the rates for the COS customers
would also increase. As such,
MECL is of the position that there is no benefit to be gained should the
proposed transmission line be approved if the result is a rate increase for
all electricity customers. This conclusion assumes the COS will continue to
follow the MECL tariff.
 The COS is of the
position, that in constructing the proposed transmission line, it will incur
reduced transmission costs as compared to the rates that it currently pays
to MECL. MECL, conversely, is of
the position that the COS will incur more costs should the COS proceed to
construct its own transmission line.
 In setting out its
business case, the COS filed a variety of materials, reports and exhibits.
However, in considering the business case, the COS indicated that
there are three particular areas which should be considered in assessing its
business case, namely, the construction costs for the proposed transmission
line, the operating costs associated with the transmission line and the
transmission savings incurred as a result of constructing its own line.
Within each of these areas there are several separate matters that
need to be considered. Overall,
the COS is of the position that constructing its own transmission line will
result in transmission savings of approximately $11.438 million over a 40
year period (being the estimated life of the line).
 MECL also filed various
reports and exhibits in relation to the COS business case.
In analyzing the COS business case, MECL approached its analysis in a
very similar fashion to that used by the COS, and focused on the same three
elements as noted above.
However, MECL initially concluded that the COS will lose approximately $3.0
million over the next 40 years should it proceed to construct its own
transmission line. During the
hearing, and as evidence was presented, MECL revised its analysis and stated
COS will lose approximately $12.3 million over the next 40 years should the
proposed transmission line proceed. The difference was mainly attributed to
MECL's position that the COS is not by-passing the existing MECL
transmission system, and as such, will be required to pay the OATT tariff in
 In considering the
business case associated with the construction of the proposed transmission
line, it is clear that the COS and MECL differ on several components of the
business case, including line construction costs as a result of various
technical component requirements, load growth, interest rates for
discounting cash flow analysis, the required communication infrastructure
between facilities, metering, and the backup requirements or the use of
critical spares. Some of the
critical differences between the parties will be noted and discussed in more
 In order to argue that
the COS is entitled to a bypass discount rate, as per the interim OATT, the
COS needs to establish that it is in fact capable of constructing a
transmission line that will bypass the existing transmission system.
Again, the parties differ on whether or not the proposed transmission
line does in fact constitute a bypass.
 The COS is of the
position that the proposed transmission line is a bypass, as it will allow
for a new line to be constructed which would directly connect the COS's
Ottawa Street Substation with MECL's Bedeque switching station.
All of the existing MECL transmission facilities would be by-passed
as a result of this proposed transmission line being constructed except for
the interconnection in Bedeque.
 The COS stated in its
Application and during the hearing that by connecting the proposed
transmission line to the MECL owned Bedeque switching station, it would be
essentially by-passing the existing MECL transmission system and should not
be responsible for any MECL OATT fees as a transmission customer.
 The COS stated during the
hearing that the current interconnection between PEI and NB, consisting of
the submarine cables and components of the Bedeque switching station, were
provided by previous federal and provincial governments and should be shared
between MECL and the COS. The COS feels it is simply connecting to the
interconnection provided by government to all citizens of PEI. The COS is
prepared to assume costs required to interconnect with the Bedeque switching
station, although, it disputes some of the costs proposed by MECL and would
rely on a System Impact Study to determine the extent of the equipment
required for a safe and efficient interconnection.
 MECL is of the position
that the proposed transmission line is not a bypass at all.
Specifically, MECL is of the position that the proposed transmission
line interconnects directly with the MECL transmission facilities in
Bedeque, and as such, is not a bypass. Further,
MECL is also of the position that the two submarine cables which connect
Prince Edward Island to the New Brunswick power grid, together with the
potheads and overhead transmission lines that run from Richmond Cove to the
Bedeque switching station are an integral part of MECL's transmission
system. As such, MECL is of the
position that the transmission line being proposed by the COS does not in
fact bypass the existing MECL transmission infrastructure.
 The Commission was
informed during the hearing that the MECL Bedeque switching station is a
very critical piece of infrastructure for the PEI transmission system. Any
transmission interruption problems created at the Bedeque switching station
could leave PEI with no electricity until on Island generation is available
and/or the necessary repairs are completed. Depending upon system load
requirements at the time, together with the availability of PEI generation,
PEI customers could be without electricity for the duration of any Bedeque
switching station difficulties.
Electric Power Act - Section 8
 Neither the COS or MECL
submitted extensive evidence in relation to the issue of whether or not
section 8 of the
has any application in relation to this particular
 The COS filed an email
dated July 25, 2011, from its solicitor to various parties associated with
the Application, including Commission staff, in relation to its position on
the applicability of section 8.
In that particular email, the COS indicated that it was of the position that
section 8 of the
does not apply to this Application for four fundamental
reasons. Briefly stated, those
reasons are summarized as follows:
the COS has only applied for a
permit under section 2.1(2) of the
the PEI Court of Appeal decision
held that the COS Application is to provide transmission service which
includes both the proposed transmission line and the proposed
section 8 of the Act does not
apply since the COS is not a public utility, nor is it a person
providing cable or telephone service; and
section 2.1(2) of the
operates independently of section 8 of the Act.
 The COS is of the
position that an Application pursuant to section 2.1(2) of the
the Commission with the authority to grant a permit for the construction of
the proposed transmission line and for a permit to interconnect to MECL's
facilities located at the Bedeque switching station.
 MECL, on the other hand,
submitted in its closing comments that section 2.1(2) and section 8 of the
are separate and distinct.
In short, MECL is of the position that section 2.1(2) of the
service, whereas section 8 of the Act relates to the use of equipment.
According to MECL, the COS should have applied pursuant to section
2.1(2) of the
for a permit to provide service, and pursuant to section 8
for a permit to interconnect with MECL's Bedeque switching
6. Discussion and Findings
Public Convenience and Necessity Test
 The COS Application for a
permit to construct a transmission line was made pursuant to Section 2.1(2)
of the Electric Power Act which reads as follows:
Commission may, on application by any person, and following a hearing in
respect thereof, issue a permit authorizing the holder to provide service in
any area of the province if the Commission is satisfied that the present or
future public convenience and necessity of the area requires or will require
the service that the applicant proposes to provide.
 As noted previously, the
public convenience and necessity test in this Application was a matter the
Commission reviewed as a procedural issue at the beginning of this process.
The Commission's decision and subsequent decision of the PEI Court of Appeal
made it clear the test must be applied to the customers of the COS who will
be served by the proposed transmission line, both the inside and outside
customers, and can be applied to MECL customers located within Summerside
 The COS maintains the
test of public convenience and necessity will be met because the public will
receive a cost saving over the 40 year life of the proposed transmission
system. The COS presented a business plan which proposes a transmission line
savings of $11.438 million dollars. The COS has proposed several
possibilities regarding the treatment of these savings including customer
rate savings or re-investment in alternative public infrastructure. However,
during the hearing, the COS did not provide any evidence as to proposed
customer rate amendments or specific customer public infrastructure
proposals associated with its business plan. Simply stated, the COS
indicated that there will be transmission rate savings but did not provide
any evidence as to how these savings will actually be allocated.
 As noted by the PEI Court
of Appeal, in assessing and considering the public convenience and necessity
test, the Commission is to consider the interests of the
customers served by the COS, together with
the MECL customers who reside with the City
of Summerside municipal boundaries.
Without any evidence as how any of these customers will benefit from
the potential transmission savings, the Commission recognizes the uniqueness
in applying the public convenience and necessity test.
 Similarly, neither the
COS nor MECL presented any extensive evidence as what is meant by the term
"public convenience and necessity" within the context of this Application.
From a practical perspective, the COS is currently receiving
transmission services from MECL, and as such, it would appear that the
proposed transmission line is not necessary from a provision of service
perspective. However, neither
the COS or MECL discussed what was to be considered in applying the public
convenience and necessity test in the context of an application for the
construction of a transmission line that would amount to a duplication of
services if constructed.
 In light of all the
foregoing the Commission views the public convenience and necessity test as
being two fold. First, the Application must demonstrate that there will be
benefits to the electricity customers from a financial perspective (e.g.
rate reduction). Secondly, the project must be required, from a technical
perspective, for the provision of safe and reliable transmission service.
 The original COS
Application and subsequent revisions referenced proposed customer rate
savings; however, no specific rate proposal was included with the
Application. During the hearing, the COS indicated that City Council has
considered rate amendments but has not made any decisions on electricity
rates at this time. Therefore, no specific rate proposal was included with
 The Commission accepts
the COS position that rate amendments could result from transmission
savings, if proven, but this approach does not establish that there will be
any benefits to electricity customers. A project must demonstrate that cost
savings will reduce customer rates. The information before the Commission
provides only general comments about possible rate amendments. Rate savings
will occur only if City Council decides it will apply proposed savings to
rates as opposed to funding other public infrastructure.
 A challenge for the COS
and, therefore, the Commission, is the application of the public convenience
and necessity test to the three distinct groups of customers that are to be
considered. For example, if the Commission accepts the COS position that
transmission cost savings were used to support municipal infrastructure, the
"benefit" would not necessarily flow to the COS customers residing outside
the City's municipal boundaries. Further, reducing the COS electricity rates
would benefit the COS customers, but not those MECL customers residing
within the City's municipal boundaries. Unfortunately, applying the public
convenience and necessity test is further complicated by the lack of clarity
from the COS as to how any savings would be applied to customers. The
Commission believes this is a key element of the Application that requires
far greater specificity in order to be properly considered.
 Initially, the COS
Application indicated that the construction of the proposed transmission
line would provide additional voltage support to western PEI and would
reduce the need for both the COS and MECL to run expensive on Island
generation. However, no further evidence was presented during the hearing to
demonstrate technical system need for this transmission line. In other words
no evidence was presented to demonstrate a necessity for the construction of
the proposed transmission line from a technical and service reliability
perspective. Evidence filed regarding existing capacity and the COS load
growth expectations does not support the necessity to construct the line to
meet capacity requirements for the COS as the current transmission line,
T-11, has sufficient capacity to meet the COS system requirements.
 The Commission finds that
without a specific and detailed customer rate savings proposal that clearly
shows a benefit to the customer interests in applying the public convenience
and necessity test, and the absence of a clear system requirement for this
project, the COS has not met the public convenience and necessity test as
required by legislation. The Application fails on this point and the
Commission will not issue the permit as requested by the COS pursuant to
section 2.1(2) of the
 Given the length of the
hearing and the numerous issues considered in the Application, the
Commission will consider other aspects of the Application, including various
components of the COS business case, the issue of by-pass and the
application of section 8 of the
Act; however, unless customers receive rate
reductions and/or the technical requirements for the transmission line are
demonstrated, the public convenience and necessity test cannot be satisfied.
 The initial business case
presented by the COS stated that the net present value ("NPV") of the
savings associated with the construction of the proposed transmission line
would amount to $11,438,438 over the 40 year estimated life of the line.
This saving is calculated as the NPV of the avoided monthly network service
transmission charge for use of the MECL transmission system minus the
initial capital cost of constructing the proposed line and annual line
operations and maintenance costs.
 During the hearing, the
COS reviewed various components of its business case. The Commission also
heard alternative viewpoints of the COS business case components from MECL.
 Overall, in considering
the business case put forward by the COS, the Commission does not believe,
on the balance of probabilities, that the COS will achieve transmission rate
savings from the construction of the proposed line.
In assessing the COS business case and in arriving at this
conclusion, the Commission considered numerous items associated with the COS
business case. However, for the
purposes of this decision, the Commission will only discuss those items that
it believes have a significant impact on the business case as presented
and/or raise concerns as to the completeness of the COS business case.
 The capital cost for the
construction of the transmission line, as presented by the COS, was
initially $4.1 million including allowances for engineering, project
management, environmental studies and contingencies. Updated evidence
provided by a consultant engaged by the COS, Mr. Blaine Irving P.Eng., who
provided a peer review of the initial construction estimates completed by
Coles Associates, revised the construction cost to $5.1 million.
 MECL provided evidence
which suggested the initial construction cost would be $7.0 million. In
addition, MECL engaged the services of Mr. Nick Strum, P.Eng. to assess the
project capital cost. Mr. Strum estimated the project costs at $7.5 million.
 As there was a wide range
between the parties in relation to construction costs (and other matters),
the Commission engaged the services of Synapse Energy Economics, Inc., as an
independent party, to review and assess the cost estimates for the
construction and operation of the proposed line and the related technical
issues. The Synapse report commented on the costs as presented by both
parties and highlighted cost difference issues for the Commission's
consideration. According to the Synapse report, the construction cost for
the proposed transmission line ranges between $4.9 million and $6.2 million.
 During the hearing
considerable evidence and testimony was heard regarding the technical
components required for the configuration of the transmission line. The
consultants from both parties reviewed their estimated cost components and
the related electrical standards. Items such as the span distance between
poles, the conductor diameter, substation's breaker requirements,
transformer configuration requirements, communication infrastructure between
switching/substation systems and other technical requirements were reviewed
 The Commission accepts
that certain components of both parties' estimates are viable and reasonable
based on the evidence provided. The COS stated the estimate provided would
be considered a Class C construction estimate. The precision of this class
of estimate is +25%/-15% variance. The COS maintains this precision of
estimate is sufficient to assess the project at this stage of the approval
 The Commission
understands that the creation of a more reliable class of estimate is more
costly and requires further engineering and environmental studies. The
Commission, however, must assess the project based on the evidence filed and
it is incumbent on the COS to provide the most accurate estimate in support
of its Application. This is a 40 year asset that is being proposed. The
Commission should not be expected to decide this matter on what was referred
to by a COS witness as a "ballpark estimate". The Commission is not
comfortable providing conditional approval that would await a more detailed
cost estimate to gain final approval. If the COS wanted to construct a
transmission line, it should provide a complete business case that supports
 MECL and Mr. Strum
provided a more detailed estimate based on their extensive experience
constructing similar transmission lines on PEI. MECL and Mr. Strum would
consider their estimate closer to a Class B estimate which has a +20%/-10%
degree of precision. Although components of their detailed estimates may not
be necessary, from a technical perspective, the identification of those
components was valuable for the Commission's consideration.
 The Commission found Mr.
Strum to be a helpful witness. He has extensive experience in transmission
line construction within the region, including 138kV single pole
construction as proposed in the Application. Mr. Strum has worked for both
MECL and the COS and the Commission rejects suggestions that Mr. Strum was
slanting his evidence in support of a higher cost to collaborate the MECL
estimates. Mr. Strum's approach appeared to be a fresh look at the project
wherein he considered the various components he felt were necessary, priced
those components and arrived at a total cost. The Commission recognizes that
not every item Mr. Strum suggested may necessarily be required and therefore
the weight given his total cost estimate is diminished. However, Mr. Strum's
evidence was helpful in identifying the various components, potential
challenges, and the potential impact of various options or requirements on
the total cost of the proposed transmission line.
 Mr. Irving was also
helpful in providing evidence regarding the line project and its components.
However, Mr. Irving testified that he did not take a "new start" to the
project but rather provided a peer review of the work performed by Coles
Associates, the original engineer retained by the COS. While Mr. Irving did
consider other costs or ways of doing things and did make some
recommendations that resulted in the COS revised cost estimate, it would
have been more beneficial to the Commission if Mr. Irving had given a
completely independent and full cost estimate of the project.
 During the hearing the
Commission heard a number of quotes about the cost of poles with
considerable variance in the price. This is but one area where the
Commission believes that a much more reliable and detailed estimate from the
COS is required in order to substantiate its business case.
 A Class C estimate, with
the precision as noted, is not sufficient to make a final determination on
the capital cost of the project. The costs of some line items can change
significantly depending upon the environmental studies (which have not yet
been completed), the choice of configuration of the line and the
requirements for interconnection with another transmission system.
 The Commission notes that
cost differences form only one part of the overall business case. Due to the
lack of confidence associated with a Class C estimate, the lack of an
environmental review of the project together with cost implications that
could arise following such a review, the Commission cannot accept the
capital costs as presented by the COS. Based upon all of the evidence placed
before it, the Commission believes the construction cost for the proposed
line would be approximately $6.5 million. This is based on the revised
Irving estimate of $5.1 million plus the +25% Class C estimate allowance,
plus an allowance for potential environmental and interconnection cost
changes. In fact, because of the issues identified by Mr. Strum, it would
not be unrealistic to estimate the line cost at $7.0 million.
 The Commission views a
higher estimate of construction cost as necessary because the COS has
provided a limited level of detail in its estimated costing. The Commission
needs to have greater confidence in the cost estimate than that provided in
a Class C level estimate.
 The most significant
factor in the business case associated with this project is the avoided
monthly transmission charge which the COS would have to pay MECL in
accordance with the OATT for transmission services. As discussed above, the
COS must pay MECL for transmission services received based on the OATT fee
schedule. This avoided cost of approximately $500,000 annually would be
replaced by the cost and operation of this new transmission line. The COS
stated during the hearing that by building their own transmission line and
interconnecting at the Bedeque switching station, the COS would be
"predominantly by-passing" the MECL system. Thus, the COS could avoid the
monthly OATT charges. The COS' position is that it would pay a nominal fee
for access to the Bedeque switching station, and its share of the operating
costs of the switching station and submarine cables interconnecting with New
 As noted, MECL does not
consider the proposed line to be by passing its existing transmission
system, with the result being that the COS would still be required to pay
monthly OATT charges for the transmission service MECL would provide to the
point of interconnection. As the
OATT tariff is based on a postage stamp principle, distance is not a factor,
and as such, the COS would be paying similar amounts under the OATT to what
it would be required to pay if the line was not constructed.
As such, determining whether or not this line is in fact a by-pass
has a significant effect on the COS business case.
 The Commission received
limited evidence from the COS respecting various regulatory cases in other
jurisdictions relating to by-pass interconnections. MECL provided several
cases dealing with the issues of by-pass, including the Consumers' Gas Co.
case which was heard before the Ontario Energy Board ("OEB"). The OEB
considered a by-pass as the total avoidance of existing infrastructure. The
COS did file a 1999 decision from the British Columbia Utilities Commission
in which BC Hydro was seeking approval of the bypass rate guidelines that it
had developed and proposed to apply in determining when to offer a bypass
rate to its customers. The COS
noted that BC Hydro was of the position that a bypass of part or all of its
system may lead to a bypass rate being issued, and as such, the COS relied
on this proposal (i.e. the BC Hydro position that the notion of a partial
bypass exists in other jurisdictions).
However, the bypass rate guidelines that were developed and submitted
by BC Hydro were not accepted or approved by the British Columbia Utilities
Commission, which limits the applicability of this decision to the COS'
 The Commission notes that
the Consumers' Gas Co. case requires the by-passing customer to connect
directly with a third party provider. To apply the test, as determined in
this case, to this situation would require the COS to interconnect directly
to transmission facilities not part of the MECL transmission system. While
the COS stated that its Application is a "predominant by-pass", it did not
provide sufficient legal authority to support its position that a
"predominant by-pass" entitles one to a by-pass competitive rate (i.e. a
 The Commission has
already determined that the cables are a federal undertaking and beyond the
jurisdiction of the Commission. However, the Commission received evidence
from the COS and MECL regarding the history of the submarine cables and the
interconnection between New Brunswick and Prince Edward Island.
 MECL filed the
Interconnection Lease Agreement which was executed between the Province and
MECL at the inception of the interconnection (1976) and amended from time to
time. This interconnection agreement outlines the duties and
responsibilities of both parties. Specifically, the interconnection
Section 4 - Agreement to Lease
Following the In-Service Date, the lessor will retain ownership but will
deliver administration and control of the Interconnection to the Lessee and
the Lessee shall operate, repair and maintain the P.E.I. Component for and
on behalf of the Lessor at the Lessee's expense throughout its service life.
Lessee shall operate the Interconnection as an integral part of the Lessee's
electric supply and transmission system.
 The Commission notes the
interconnection agreement considers the submarine cables to be part of the
MECL transmission system. If this is in fact correct, any connection which
the COS proposes between Murray Corner, NB and the Bedeque, PEI switching
station would appear to constitute an interconnection to the MECL
 The Commission notes
that the process that has ultimately led to this Application started with a
direction from the Provincial government to pursue an Open Access
Transmission Tariff. As owners of an essential link they would have been
aware of the vital role the cables play in the operation of the OATT. The
Province has not amended the Interconnection Agreement at any time to allow
other parties to interconnect other than MECL. The Province was an
intervener at the hearing but did not lead any evidence on this point or
make any submissions. The silence of the Province on this matter suggests to
the Commission that the owner of the cables is content with the existing
lease agreement and all its provisions.
 The existence of the
lease agreement raises further complications about where the connection
would have to occur to achieve a by-pass. However, for the purposes of
determining whether or not the transmission line being proposed by the COS
is in fact a by-pass, the Commission notes that all parties, including the
COS, agree that the proposed transmission line is interconnecting at
Bedeque, which the Commission finds is not a by-pass. Therefore, the issue
of an interconnection to infrastructure which constitutes a federal
undertaking does not need to be considered for the purposes of this
 The Commission has
determined that the COS proposed interconnection at the Bedeque switching
station is an interconnection to the existing MECL transmission system,
Therefore, the COS is not by-passing the MECL system. Based on this finding,
and if the Commission were to approve the COS line application, and the line
was in fact built and interconnected with MECL in Bedeque, a by-pass would
not be achieved and the COS would still be subject to the requirements of
the interim OATT.
 The requirement to
comply with the OATT fee schedule results negatively on the COS business
case, as the COS would not achieve transmission savings. The COS'
requirement to pay the OATT fee charges results in the COS business case
going from an $11.4 million saving to a cost increase of $7.9 million. The
COS would in effect be building a redundant transmission line because of the
requirement to continue to pay MECL for transmission service from the
Bedeque switching station to the point of interconnection. Again, with the
postage stamp approach to the development of the OATT, distance of
transmission service provided is irrelevant to the OATT fee required.
The proposed transmission line and
the requirement to pay the OATT fee results in a situation that would not be
in the public interest for the customers of the COS.
Additional Components of the Business Case
 The Commission heard
evidence regarding the appropriate NPV discount rate, load growth
projection, requirement for back-up facilities or critical spares and other
related items included in the business case for this application. As these
are some of the more predominant items affected the business case, the
Commission believes that it is appropriate to comment on some of these
issues. However, at the outset,
it should be noted that there is no one of these that completely negates the
business case on a financial basis. In some cases, the actual financial
impact may be minimal, but the consideration, or lack thereof, of several
items, causes the Commission to have doubts with respect to the accuracy and
completeness of the business case submitted by the COS.
 The choice of the
appropriate discount rate is critical when reviewing a 40 year business
case. The COS has selected a discount rate of 3.85% which is based on a 20
year loan financing proposal from a Canadian chartered bank. Although the
financing proposal is for 20 years, which is half of the estimated project
life cycle, the COS maintains the balance of the loan at year 20 will be
significantly reduced and the risk of higher interest rates is not material
to its business case.
 The Commission heard
that the COS often finances its major capital projects by accepting some
degree of interest rate risk associated with shorter term loan
amortizations. The COS indicated this has been a favorable financing
approach and has resulted in cost savings for the COS in recent years.
 The Commission heard
evidence from MECL that most electric utilities finance capital projects
using long term financing which matches the expected life expectancy of the
asset being financed. A longer term loan may carry a higher interest rate
but shelters the utility and its customers from interest rate risk. The MECL
evidence presented suggested an appropriate discount rate of 4.5% for this
 The selection of an
appropriate discount rate is ultimately a judgment call where the
projections on future interest rate, the interest rate risk tolerance, and
the business approach must be considered. The Commission must consider the
interest of the customers who generally want the least cost of service and,
to the extent possible, certainty with future rates within controllable cost
items. Selecting a shorter term loan rate as a discount rate for a 40 year
project is not the typical regulatory approach for assessing a long life
project. Some consideration must be incorporated into the discount rate for
the possibility of rising interest rates. The COS would be investing in a 40
year project that either costs borrowed money, directly, or ties up
borrowing capacity for other projects. The selection of a discount rate
should recognize the cost of the money over a 40 year timeframe.
 The selection of a
discount rate of 4.2% should be a reasonable balance taking into
consideration the evidence provided. The Commission makes this observation,
not because a change in the discount rate itself undermines or is
determinative of the viability of the project, but because it serves as
further evidence that the business case presented by the COS is not
 Load growth
determination is a significant factor when determining electric utilities
capacity requirements, and in this case, certain costs in the business case
of this project. The MECL OATT tariff fee for network service, the required
level of service for the COS to avoid curtailments, requires a projection of
electric consumption load growth to determine the appropriate monthly OATT
charges. The COS needs to determine its future demand so that it can
forecast how that electricity will be transmitted and the potential costs
and/or savings associated with those decisions.
 The COS provided a
projection of 2% load growth for each of the next 40 years and incorporated
this into its business model. This number was calculated based on a simple
average of the past 25 year average load growth experience by the COS. This
may have been an appropriate approach had there been some evidence filed to
suggest that the circumstances of past 25 years will repeat over the next 40
years. The Commission does not find this to be a reasonable assumption.
 The COS did not provide any
evidence regarding its customer base and potential changes in this customer
base which might impact load growth in the future. For example, the COS did
not provide any evidence regarding the impact its Smart Grid, Heat for Less
Program may have on future load requirements. The Commission also notes that
HST implementation is likely to have a dampening effect on the amount of
electricity consumed. In addition,
changes occurring in the energy market place with oil prices, natural gas,
green energy initiatives, customer demographics, population projections, and
urban and rural migrations all can have impacts on electric load growth.
These are all factors which can increase or decrease electricity consumption
and should have been considered and documented in determining load growth as
presented in the Application.
 The Commission was
presented with evidence of other load growth forecasts such as the one
completed by NB Power. While recognizing it is a different scale in terms of
customer base, the NB Power forecast does underscore some of the elements
that can impact load growth. It is troubling for the Commission that the COS
method of calculating the load growth for the use in the business case does
not consider any influencing factors and makes no account for such factors.
The Commission does not accept that only what has happened in the past will
happen in the future, and therefore, an averaging of past experience would
not capture any future factors that might influence load growth.
 Another issue identified
during the hearing was the need for backup transmission or critical spares
of key transmission components so that if one of these key pieces of
equipment is damaged, there is a plan in place to "keep the lights on". The
COS did not provide a comprehensive plan regarding backup services. It
appears the COS would have some minor replacement parts or spares on site
but would seek to make arrangements with MECL or enter into sharing
agreements with other Maritime utilities for critical spares. The impact on
the business case is significant, but an even greater concern to the
Commission is the potential impact on customers of an outage. The business
case does not financially quantify lost business and residential convenience
associated with potential outages. When the COS generation does not meet the
customer load requirements, customer interruptions may be necessary. This
may be an acceptable risk for the COS but in the view of the Commission this
is not in the public interest of the customers of the COS. To be clear the
Commission finds the lack of the COS planning for back up as part of this
Application is a significant deficiency.
 The COS business case
should have incorporated costs associated with either critical spares or
fees for backup transmission services. For example, the Commission heard
evidence that a second transformer, which would serve as a back-up, would
cost in excess of $1.0 million. As this is a significant cost, COS should
have addressed the issue of critical spares in more detail in its business
 The COS presented an
estimation of the transmission line operations and maintenance costs based
on their past experiences within their own utility service area. The
evidence presented by MECL suggests such costs will be significantly higher,
based on its experience with transmission line management on PEI. A
realistic plan for operations and maintenance costs is an important element
of the project. The Commission notes that the COS has not had any past
experience in operating and maintaining a transmission line in rural PEI.
Therefore, the Commission views that it would be more appropriate to
incorporate, as a project cost, a higher provision for this item than what
was included in the COS Application.
 During the hearing the
COS indicated that it would be able to incorporate the management,
operational requirements and maintenance of this line within its current
resource complement of staff. Regardless of whether the COS uses in-house or
external resources, these costs should be accounted for as part of this
 COS described the
various large scale projects which it has accomplished recently. The
Commission accepts the experience which the COS has regarding project
management. The Commission views project management costs as part of the
total project costs and these should be included in the business plan. In
addition, the Commission views the various soft costs, such as legal and
professional fees, as costs that should be included in the overall project
costs and the business plan. However, the COS did not include a component
for legal fees and other professional fees in its business case.
 The COS made reference
to a cost in their business plan for a share of the current submarine cable
and maintenance operation. The COS stated the cost estimate included was
obtained from MECL during the interrogatory process. The COS included in the
business plan this amount as a cost of the interconnection with MECL. The
Commission views this number as relevant only if the COS were by-passing the
MECL transmission system. As noted above and for the reasons indicated, the
COS is not by-passing and therefore this cost is irrelevant to the COS
 There was little
disagreement between the parties concerning the cost of running on-island
generation while the Bedegue switching station was out of service during the
interconnection work. The Commission accepts the COS estimate.
 There was significant
disagreement between the parties concerning the cost of communications
required to interconnect the COS's Ottawa Street substation and MECL's
Bedeque switching station. The COS'
cost estimation for communications was based on an example of fibre-optic
pricing the COS pays on an unrelated project. This is not a suitable method
of pricing a project component for presentation at a Commission hearing of
this magnitude. The Commission accepts there are alternatives and perhaps
less expensive methods to provide the required communications service.
However, the consequences of system failure due to communication system
shortcomings can have serious ramifications to the COS customers. As such,
the Commission would have expected more detail in relation to this item from
the COS. The Commission's concern in this area is magnified by the lack of
application details in the area of back up facilities or critical spares.
 All parties state this
is a simple project yet after many days of testimony and many different
engineers the parties do not agree on a significant number of the elements
required to construct the proposed line. For example, the Commission heard
conflicting evidence regarding such items as insulators, transformers,
metering types and location, conductor gauge, and pole spacing.
 The Commission heard
that the building of the transmission line by the COS will provide many
intangible benefits to the COS. The COS reviewed their 40 plus year desire
to by-pass the MECL system and control their own destiny. The COS provided
verbal evidence of the intangible items and stated that being independent
will permit them to make business deals, seek customers, and facilitate the
overall growth of the COS.
 The Commission also
notes this transmission line proposal is to interconnect with the existing
Bedeque switching station and submarine cable infrastructure. This
infrastructure is over 35 years old and plans are being contemplated for its
replacement. MECL stated that any plans being considered focus on the
Confederation Bridge and/or Borden substation in relation to a third cable.
This is a considerable distance from the COS proposed transmission line. The
COS provided no evidence to suggest they considered the implications
associated with interconnecting cable infrastructure that could be retired
in the near future.
 During the hearing the
COS raised issues with regards to a current discount in the MECL OATT fee
structure for export wind transmission and the ownership of MECL customers
which now reside in the COS municipal boundaries. These issues are not
related to the current transmission line Application and are not relevant to
the Commission in consideration of this Application.
 Considerable time, money
and expertise have been invested in this process to date. The Commission is
not confident it will end here. From the Commission�s perspective it appears
the COS-MECL relationship is tainted by a small number of irritants that
cloud consideration of various decisions and courses of action. It might
well be wise for the two main parties, MECL and the COS, to come to the
understanding they must co-exist and will have to continue to collaborate.
It would be useful to commit equal resources to building a stronger
relationship and fostering greater cooperation. In addition, the Provincial
and City governments should review the legislation and business practices
which contribute to the disagreements between the parties and both must
provide leadership in making changes so the system can operate more
effectively and efficiently. That would be in the public interest.
Electric Power Act - Section 8
 As noted earlier herein,
the COS and MECL differ on the application of section 8 of the
The COS' Application for a permit to construct the proposed line and
to interconnect with MECL's Bedeque switching station was made pursuant to
section 2.1(2) of the
Act, which is consistent with the COS' position that
section 2.1(2) acts independently of section 8 of the
MECL disagrees and is of the position that an application should have
been made pursuant to section 2.1(2) for a permit to construct the proposed
line, together with an application pursuant to section 8 of the
permit to interconnect with the switching station in Bedeque.
 The Commission
recognizes that the applicability of section 8 is an issue for
consideration. However, as
noted, little information was provided by either of the parties in relation
to the application of section 8 to this proceeding.
Based upon the PEI Court of Appeal decision, it appears that the
application of section 8 to this matter may allow for the Commission to
consider the interests of MECL's customers, beyond those residing within the
City of Summerside, in assessing the COS' Application.
However, for all of the reasons that have been stated herein, the
Commission is of the opinion that it does not need to make a determination
on the applicability of section 8 in deciding this matter.
As the application of section 8 would only broaden the scope of the
MECL interests that the Commission could consider in the Application, a
positive or negative finding on section 8, from the COS' perspective, does
not affect the business case put forward by the COS in support of its
 A great deal of evidence
was put forward by the COS and MECL in relation to the Application.
However, for all of the reasons that have been stated herein, the
Commission is denying the COS' request for a permit to construct the
proposed transmission line, and its request for a permit to interconnect to
MECL's Bedeque switching station.
By way of summary, the Commission finds that the COS has not:
established that there will be
any benefits in the form of rate savings for its electricity customers;
established that there is a
clear system requirement for the construction of the proposed
 In addition, the
Commission does not believe, on the balance of probabilities, that the
business case put forward by the COS will achieve transmission savings.
In this regard, the Commission finds that the business case presented
by the COS:
underestimated the cost of
constructing the proposed transmission line;
did not contain a completed
environmental review of the proposed project, together with cost
implications that could result from a completed environmental review;
did not select a discount rate
which was reasonably supported based upon the expected life of the
proposed transmission line;
did not consider future events
that may affect load growth over the estimated 40 year life of the
did not sufficiently consider
and address the issue of back-up transmission/critical spares;
did not adequately include
provisions for professional fees, such as legal and engineering services
even if provided by internal resources, in relation to the construction
of the transmission line;
did not adequately consider and
cost the communication equipment required to facilitate timely
communication between the Bedeque switching station and the COS' Ottawa
St. substation; and
does not constitute a by-pass of
the existing MECL transmission system.
 An Order will therefore
be issued implementing the findings and conclusions contained in these