Wednesday, August 31, 2011

Accounting And Ontario's Electricity System: A Farce

People are trying to make sense of the record low electricity price Ontario achieved this Sunday.  I wrote about it Monday morning, but most are getting their information from other sources, including the Toronto Star– and these source don’t seem to working with any foundation in accounting.  I have some experience with ‘retail math’ – which is probably about a grade 7 level of math. I combined unease with my qualifications, my interest in technology and theories of education, and my occasional feeling I should take a more active interest in my children’s schooling, and brushed-up on my accounting with some lessons at the Khan Academy (which I learned of in a recent column by Margaret Wente). 

So let’s look at August 28th figures in Ontario using the Khan Academy cash basis accounting lesson as a guide.

Revenues for August 28th came from the sale of electricity in the market. August 28, 2011, in Ontario, 376,344MWh of electricity were sold at a weighted average price of -$17.53. So total revenues were -$6,597,310. This is a big point of confusion for some reason.

John Spears wrote, “In fact, the Ontario system took a loss of $6.6 million on Sunday as it sought to dump the surplus.”

That’s not the loss ... that’s the revenue

We do have expenses too.[i]  I know the average cost of electricity[ii]
has been about $70/MWh in 2011– but I’ve used actual production figures for the 28th along with my estimates of the levelized unit costs, or the contracted/regulated prices, of each source. One of the reasons I did so was to add a line item for generation we probably paid not to occur. This was reduced output at Bruce B units, which I’m assuming Bruce Power will receive payment for, at the floor price they are contracted to receive. 

MWh Est $/MWh Daily Cost
Nuclear 258123 $57 $14,583,950
Coal 806 $40 $32,240
Gas 26012 $100 $2,601,200
Hydro 70720 $38 $2,687,360
Wind 15597 $135 $2,105,595
Other 2416 $100 $241,600
Imports 1613 $29 $46,885
Total Supply 375287 $59 $22,298,829

Bruce B Bypass 8000 $51 $408,000
Total Expenses


Subtracting these expenses from the revenue, of negative 
$6,597,310, in cash basis accounting we arrive at the loss.


But cash basis accounting is for chumps.  Accrual accounting is for the big guys   

Cash basis is built upon with accounts receivables, and deferred revenues.  

The accounts receivables, in Ontario's market scheme, is called the global adjustment, and it changes based on the value of the profit/loss from the cash basis accounting example above.

The cash accounting loss becomes the most significant portion of the global adjustment receivable.

So we lost $29.304,139 on August 28th.  That figure moves into the Global Adjustment pot and will then be allocated to Ontario ratepayers when the bills for August go out in September.  This happens all the time now.  Days that appear to be bad, like Sunday, only have the impact of upping the GA portion of the bill - directly on the bill if one is a wholesale market customer (aka an employer) - indirectly for residential rates.  The small difference is that instead of that part of the bill being around $26.57, as was forecast before August 28th, it will be much higher.  That's not abnormal at all.  The GA is usually above that now.  $26.57 would equate to about a $320 million, monthly, loss/account receivable (it's so much less confusing just to call it the global adjustment - so few understand that a loss in the electricity sector is a receivable!), but once the August figures are finalized they'll be in line with a 12-month running total approaching $5 billion (over $400 million per month).  That would put August's adjustment closer to $34.45- which is, I would guess, closer to what the final August figure will be.
It is noteworthy that the $5 billion figure equates to a loss of about $13.7 million dollars a day, in the immature sense that the market electricity sold for that much less than we paid suppliers for it.  So August 28th was bad, but .. so are most days.

So we paid $20 to export MWh's we paid around $60 for.  We usually only get $30 anyway.   The running 12-month total on that difference is about $500 million.
Se we paid $20 to export MWh's for wind production we paid about $135/MWh anyway.  That loss, when selling it under $40/MWh, is averaging about $1 million a day anyway - $2.4 million isn't that exceptional.

I shouldn't have questioned my ability to interpret the accounting on this.
I am well qualified to understand.
I worked for Eaton's.

[i] Primarily the electricity purchased from suppliers.  These differ by supplier, and many are not knowable.  Nuclear is $50-$70/MWh, hydro from the HOEP but mostly a little under $40/MWh, but there’s some private supply contracted at higher rates.  Wind might be as low as $80 but is probably closer to the currently offered price of $135/MWh – and natural gas supply is really confusing because many of the new contracts paid capacity payments knowing they won’t be utilized frequently – but $100/MWh is a useful figure.
[ii] Cost here is defined as it was in the IESO’s 2010 summary, which is the HOEP plus the Global Adjustment rate


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