Setting Payment Amounts for Output from OPG’s Prescribed Generation Assets TransAlta’s Presentation to the Ontario Energy Board September 15, 2006 File number EB TransAlta th Ave SW, Calgary, AB T2P 2M1 Phone: Fax:

2 Choosing a Regulatory Methodology - Criteria Board Staff criteria: Transparency Fairness Regulatory efficiency Consistency OPG “Non-Cost” Issues –Reliability –Capacity –Availability –New investment Expansions and refurbishments –Mitigation of market power Includes new investment

3 Also To Consider Market Policy –Stability important -> investor confidence Sustainable methodology chosen –Government's desire for a greater role for the private sector. –Methodology chosen should be flexible enough to work under various market design scenarios. –Shorter contracts (5 years) devised as a bridging mechanism until competitive market exists and coal decommissioned. Market Issues: –Impact on market price –Level playing field for market participants.

4 Cost of Service Complete transparency at the cost of regulatory efficiency? Does not fit with current structure/direction of the market. –Investor confidence –Can a level playing field be created? Difficult to address “non cost” issues. Other issues such as impact on market price and mitigation of market power will also be difficult to address with certainty. –Base loaded generation, bidding behavior? However, could be used as cost reference point for both Incentive Regulation and Regulatory Contract models.

5 Incentive Regulation General consensus that IR should not be undertaken without COS as a starting point. IR formula will be difficult to calculate, with few benchmarks available. –Also a more complicated method of addressing “non-cost” issues. –If done incorrectly will add risk to market. For both market participants and consumers. Investor confidence –New, untested element added to the existing hybrid market. –Mitigation of market power?

6 Regulatory Contract Can address Board Staff criteria if done properly –COS can be used to set the baseline price. Full COS review not necessarily required as frequently. –Think of contracts as an implementation method. Can address non-cost issues through contractual terms. –Likely easier than COS, IR Market Neutrality and Stability –Contracts already in place in the market today. Including existing base loaded facilities like Bruce Power. –Moving OPG to this regime would provide level playing field among market participants. Consistent approach between new and existing players. Incents consistent behavior.

7 Conclusion Risky to choose methodology in a policy vacuum. –Existing methodology could be the best choice for now. Criteria should be established. Impacts modeled We have the time!

8 Conclusion cont Regulatory contracts provide: –Market neutrality –Flexibility to address non-cost issues –Transparency can be build in Depends on pricing method chosen –Consistency Contracts are already well established in the hybrid market. –Investor confidence and level playing field.