Sunday, May 4, 2014

Wither the I in the IESO: politics hit May's global adjustment estimate

It's called the IESO, for Independent Electricity System Operator, but it hasn't looked independent for some time, and never less so than this week.

On the afternoon of April 30th the IESO posted its "2nd Estimate" for April's Class B Global Adjustment (GAM) rates, and the "1st Estimate" for May's.  I noted a month ago how bad April's 1st estimate was; it was honestly bad.
May's first estimate of the GAM looks to be the opposite - dishonestly alright - and that's indicative of a bigger problem.

The budget released May 1st restated the Liberal government's desire to, "consolidate two electricity agencies — Ontario Power Authority (OPA) and the Independent Electricity System Operator (IESO)." A former bill to merge the two entities was introduced in 2012, but died when former Premier McGuinty prorogued the legislature and fled to Harvard. With the omnipresent threat of consolidation, there is not only the danger of a power struggle within Ontario's several electricity sector bureaucracies, but a danger that struggle will be won by sycophancy, and not capability nor competence.

The 1st Estimate

The public is not privy to the actual numbers used in calculating global adjustment estimates, but we do know the final figures, and the process is public.
pg 37 of  Market Manual 5, Part 5.5: Physical Markets Settlement Statements

Assuming consumption doesn't change a whole lot from month to month, we can use the rates ($/MWh) to estimate the 1st estimates. [1]

As an example:
last September the first estimate was a record $87.18/MWh.  That was close to the $62.45/MWh final GAM for August plus the difference between that final GA for August and the low 1st estimate ($40.13).  Ontario's record commodity rate, comprised of the Hourly Ontario Energy Price (HOEP) and the GAM, is $95.13(Feb. 2014), so the $87+ first estimate of the GAM component attracted some press attention at the time.

The 1st estimate for April 2014 was ridiculous in the context of an intelligent prediction of what pricing would be in April (natural gas price spikes ending along with winter).  The final GA for March (-$0.27/MWh) plus that figure less the first estimate for March (11.03) is -$11.57, and the 1st estimate was relatively close to that at $-9.65/MWh. This was obviously not going to be near the final global adjustment for April, but the 1st estimate for April does appear to be the result of the methodology

Not so for the 1st estimate for May 2014.

The 2nd estimate for April is $54.53.

That is $64.18 higher than the April first estimate of $-9.65/MWh - so the first estimate for May should be ~120/MWh ($54.53 plus $64.18)[2]; but it's posted as $53.56/MWh.  $53.56 will likely be a little low, but it's assuredly far closer to what the final May GAM will be than the ~$120/MWh.

The concern is why the IESO dumped their methodology for May, but not for April.

The most likely reason the IESO altered course is the threat, now realized, of the government falling and a pending election.


The estimates of the global adjustments aren't just estimates; customers can be billed at any of the 3 rates depending on their billing cycle.  With the average weighted Hourly Ontario Energy Price (HOEP) being ~$33.3/MWh (in Aprile), that means some consumers will be seeing partial billings for April of ~$23.65/MWh, using the first estimate of the GAM of $-9.65.

Not bad for the last bill before a ballot - but some others may get bills before the June vote charging May's usage based on the first estimate for May: now they'll be billed at the HOEP (say $30/MWh) plus the estimated $53.56 - probably still lower than average total commodity cost. If May's global adjustment was set at $120/MWh, the average for April and May on billings using the 1st estimate of the GAM would be ~$87/MWh - which is close to what the average weighted HOEP, plus the final global adjustment charges, will be for April and May.

Instead of a high May first estimate recovering the cost of supply from consumers billed on the low first estimate in April, the costs will spill into future months pools of the global adjustment.


Other Points of Interest

From the Ontario Energy Board (OEB):

The OEB posted a speech delivered by it's Chair and CEO, Rosemarie T. Leclair; Consumer-Centric Regulation: From Vi son to Reality.  Some of the headings: "Consumer Centric Regulation at the Board",
"Energy Literacy":, "Public Engagement and Public Trust" ... if you follow energy in Ontario at all, you know the spiel.

The limitations of "communication" strategies is apparent in an important initiative the OEB is undertaking, "Rate Design for Electricity Distributors."  A deadline for written comments was extended this past week (to June 6).

The initiative is excellent, and the draft report explains why it's necessary.

But the draft report also repeats a lot of the nonsense from the time-of-use (TOU) planning, on the need for simplicity in rate structures and, particularly, a need for being revenue neutral.

Electricity pricing in Ontario used to be progressive.  As TOU pricing bumps the old tiered rate, it means a rate hike for a frugal consumer of electricity with a typical usage pattern and consumption entirely within the lower tier of consumption (600kWh per month in the summer, 1000kWh per month in the winter).  As of May 1st the average rate in Ontario will be 9.25 cents/kWh; the lower tier price 8.6 cents/kWh; meaning a low consumption customer pays 7.5% more on the new, simple, revenue neutral TOU rates than under the older tiered structure.

The people paying less on TOU (because of the revenue neutrality basis) are those with significant consumption in the higher tier (10.1 cents per kWh).  This is unnecessarily regressive because it's unnecessarily simple.

Similarly, the cost of distribution currently has a high component based on per/kWH charges on electricity consumption, and that has generally been a progressive pricing scheme.  The OEB's draft report doesn't indicate any concern with creating another pricing policy that transfers costs to poorer, lower consumption households.

I'd suggest either revenue neutrality needs to be abandoned, in order to recover additional funds to subsidize lower income households, or a more complicated pricing structure need to be implemented that guarantees little price movement in the lower consumption households.

The most complicated of the OEB's pricing plans for distribution is "Proposal 3 – a fixed monthly charge where the size of the charge is based on use during peak hours."  It's also the closest to being fair - although I'd go by simply peak draw as opposed to draw at system peak (annual or, better yet, 2 periods a year for winter and summer).

Proposal 3 is also the most complicated; proposal 2 (size of connection) along with a recognition of the impact of the change on lower income households, and government action to compensate for the increase, may be more sensible.

Regardless of what is decided, communicability is not a greater goal than fairness - and fairness is not an easy thing to communicate.


1. The market manual outlines a methodology for calculating a bulk dollar amount and consumption - then calculating the rate, but only the rates are publicly displayed, not the component figures used in the calculation of the rate.
Aside from the fact demand does change from month to month (most significantly due to temperature change), there is no disclosure of any component figures used in calculating the global adjustment total amount - including, most egregiously, adjustments for misses in previous months.

2. The second estimate of a month's global adjustment is also not a clean reflection of what the final global adjustment is predicted to be (at the time the 2nd estimate is posted) as it also is impacted by adjustments for the previous month. In this post I've compared final global adjustments and 1st estimates from the previous month for all figures except for May 2014, where only the 2nd adjustment is available.  In other words, we don't know exactly what the methodology should produce as 1st estimate for May's global adjustment, but we do know it is almost certainly should have been between $105 and $140/MWh.

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