Tuesday, May 10, 2016

Ontario appeals court upholds sentence of higher costs for ratepayers

The Ontario Court of appeal recently upheld a ruling adding over half a billion dollars to Ontario's electricity bills.[1] The case involved a number of electricity generators contracted between 1989 and 1994 challenging a 2011 change in the method of calculating a benchmark to which payments are indexed. Officially the generators' challenge is against the Ontario Electricity Financial Corporation (OEFC). Functionally, it is ratepayers that were punished. How ratepayers came to be guilty is a legal matter, but the failure in court is a result of the failures of the province's recent governments.

The generators were contracted during periods of Liberal (David Peterson) and New Democratic Party (NDP) rule. Neither party was positive on the public electricity entity, Ontario Hydro, and its concentration on nuclear power. Ontario Hydro was forced by the governments to contract supply from "non-utility generators" - now simply called NUG's.

The court documents reveal a group of NUGs contracted with pricing indexed to "Direct Industrial Customers ...whose average monthly maximum demand was 5 MW or greater." An additional and pertinent specification in the indexed model is "a 100% load factor, meaning a constant and consistent energy demand for all 8760 hours of a year."[2] 

The court's ruling, upheld on appeal, is that the NUGs getting paid based on,via indexing, a current industrial customer with monthly peak demand greater than 5 MW with, a 100% load factor, is unfair.

That's a suspect decision, but worse is the direction to revert to the previous methodology.

The court ruled the changes introduced for 2011 unfair because of the changes to the global adjustment (GA) mechanism introducing "Class A" pricing for 2011.[3]  The Court of Appeal ruling summarizes the issue:
[2] The respondents claimed that effective January 1, 2011, the appellant unilaterally changed the calculation of the Global Adjustment Mechanism (“GA”), one component of TMC, in a manner that was inconsistent with the definition of TMC [total market cost]. This change substantially reduced amounts payable to the respondents. The respondents argued that the change in the definition of the GA, which was effected by a new regulation, had nothing to do with the costs of producing or distributing electricity. Instead, it was designed by the government to provide a subsidy to large consumers of electricity to promote various government policies. The respondents further argued that by incorporating the new definition of the GA into TMC, the appellant contravened the agreements and effectively passed the costs of the government subsidy on to the respondents.
[4] The application judge found for the respondents. He directed that the GA component of TMC should be calculated as it had been before the new regulation came into effect
The judges are under an incorrect impression that there is a simple and fair rate for electricity sold to a large industrial consumer, and it appears to me they also remain unaware of how the GA has been calculated at any time.

The Global Adjustment (GA) was over a decade from existing when the last of the contested contracts was signed. The methodology for determining a rate for the model "Direct Industrial Customer" has had to be altered a number of times due to changes in Ontario's electricity sector. The essence from the original agreement is that there is a Total Market Cost (TMC), which is reduced to a rate (per kilowatt-hour) on an annual basis. That rate originally included the cost of electricity, and Wholesale Market Service Charges (WMSC). Analyzing the judgments requires contextualizing the initial contract period, and explaining subsequent revisions demanded by changing circumstances.

For the time period of the relevant contracts (1989-1994), data from the United States' Energy Information Administration (EIA) demonstrates the wide gulf in pricing between industrial and commercial consumers. From 1989-2002, industrial consumers paid, on average, 62% of the rate commercial consumers did. Ontario judges don't believe the original contracts, which specified a consumer with a constant load of 5 megawatts or more, intended to do exactly this. I think it extremely unlikely that is correct, because the 5 MW load is part of the benchmark.

The EIA data contains another notable fact that both Ontario judgments seemed unaware of: from 1990 to 2002 the price of electricity declined in the U.S.

During this period Ontario Hydro was broken up. The contracts it held with the NUGs passed on the official successor entity, the Ontario Electricity Financial Corporation (OEFC). The OEFC began life with $4.286 billion of liabilities due to Ontario Hydro's power purchase agreements with the NUG's - meaning over one-quarter of Ontario's residual stranded debt was due not to public sector investments, but to the NUGs that Tom Adams came to call Ontario Hydro's Most costly Legacy. A debt retirement charge (DRC) was introduced to pay down the residual stranded debt and that charge because part of the calculation of the TMC - making a circle where the entities responsible for the stranded debt would receive higher payments because of it.

Canadian data is, unfortunately, far more suspect than data from the EIA. Statistics Canada heavily manipulates electricity pricing data. For consumers over 5 megawatts (the group relevant to the court rulings) the current table they present indexes the 2009 price as 100 - and for Ontario the data shows a price dip in 2009 which did not happen according to IESO data or, in fact, the OEFC data for metrics of relevance in the court cases. Nevertheless, the data does demonstrate the stagnant pricing of the 1990's and swiftly rising rates upon the opening of the Ontario market in 2002.

Indicated in the Statistics Canada data is a moderating influence of the original 2005 Global Adjustment period, ending in 2010. While prices for large industrial consumers do drop in the first year of the new Class A Global Adjustment mechanism in 2011, the increases return thereafter and Ontario's industrial electricity costs are shown to have increased at a rate above the national average from 2009 to 2015.

The appeal judge's summation of the initial ruling includes, "change in the definition of the GA... to promote various government policies." Those policies are competitive industrial electricity pricing, with the non-sinister subtext of employment in energy intensive industry. Neither judge approaches communicating an understanding of the implications of the original peg of pricing to large industrial consumers, and neither subsequently comprehends changes being required to maintain competitiveness as necessary. The ruling functionally opposes competitive electricity pricing throughout Ontario. All jurisdictions seeks to structure electricity sectors to make industrial pricing attractive; most don't have activist judges undermining those efforts.

Notably, at no point does either judge measure harm to the NUGs except in relation to the one method of calculating the Total Market Cost (TMC) and subsequent Direct Customer Rate (DCR) calculation (which is simply an average of recent years' TMC rates) method that immediately preceded the Class A Global Adjustment method. There is a non-trivial distinction between NUGs not maximizing benefits as they would under older methods, and NUGs suffering losses due to the revised industrial pricing.

The original ruling provides a formula for calculating the global adjustment which is wrong:

This is wrong because the global adjustment exists to recover electricity supply costs that are not met selling into the electricity market operated by the IESO. "Total Market Demand", as defined by the IESO, includes exports, but exports are not part of denominator in global adjustment calculations. In 2015 the differences in calculating the rate as total Ontario, or "system" demand is quite significant.
  • Total $ charge divided by Total Ontario Consumption = 7.098 cents per kilowatt-hour (kwh)
  • Total $ charge divided by [Total Ontario Consumption plus exports] = 6.113 cents/kWh
In ordering a reversion to the previous calculation method, the judge is ordering generators contracted between 1989 and 1994 be paid a bonus due to exports being subsidized.

The difference is understood by Ontario's ministry of energy as they announced in December "the average price of electricity generation in Ontario... in 2015 was $83/MWh" -  which is 8.3 cents/kWh and that includes the portion recovered through market sales (in 2015 under 2.4 cents/kWh).
This is only one of non-purchase price impacts included in the global adjustment. The cost of curtailing generation is also in the global adjustment pot, and surely that should be reflected in the rate being captured to index NUG contracts. In 2015 we know of 4.8 billion kWh that was curtailed: adding this to the denominator the cost would drop to 5.937 cents/kWh. Additionally we have the costs of conservation programs included in the global adjustment without the negawatts (avoided consumption) calculated in the denominator.

And we have the green energy issue.

The government was very clear the green energy act was intended to spur the economy, The fact that it did not (as economics dictated it could not) does not eliminate the fact that the cost of contracting wind and solar supply included ambitions beyong the purchase of electricity. In Germany, from where Ontario copied its ill-conceived feed-in tariff program, the costs of the wind and solar contracting are removed from large industrial users altogether. Doing the same thing in Ontario would not only be sensible, it would be justified under the original ruling's characterizing supply for the benchmark Direct Industrial Customer; "it was assumed to take “firm” power from Ontario Hydro, which was the most reliable form of power available" (paragraph 15). Wind and solar do not provide firm power, and could be considered irrelevant in calculating the DCR.

The cost of purchasing a kWh of supply in Ontario is much farther from the preceding method of calculating the TMC (and DCR) rates (indexing NUG payments) than is the current methodology employed by the OEFC (via the consultant Navigant).
In attempting to be thorough the initial judgement displays an ignorance of the costs of supply and how they can be attached to a unit cost:
[122] For completeness, OEFC also argues that the inclusion of certain items in the components of TMC that are not strictly related to current costs of generating and supplying electricity demonstrates that TMC is not a cost index but rather a price index. I accept that TMC includes certain costs that customarily have been paid for by electricity customers that are not strictly related to the costs of current generation and supply. Most of the costs in this category are, however, referable to the historic costs of such activities that must be amortized. In any event, I am not persuaded that the inclusion of certain other costs, such as for example the costs of safety inspections, convert the TMC into a price index.
The discretionary costs are not primarily historic, "safety inspections" are a poor example of how the cost and price issues diverge. Not understanding these things the judge isn't expected to be persuaded to "convert the TMC."

The functional result of these court rulings include:
  • as more exports are sold further below cost, contracts signed two and half decades ago are to get more expensive
  • as wind is increasingly curtailed as vote-winning turbines continues to festoon in non-Liberal areas, the cost of those old NUG contracts is to increase
  • as conservation spending continues, rate hikes for the aged NUG contracts will continue
  • as solar panels contracted on the basis of two votes in every micro-FiT household, nearly 3-decade old NUG contracts will get more expensive.
 This is not justice, but it is an outcome of Ontario's version of a justice system.

Unfortunately, and this seemed the root of the appeal court's decision, it's not easy to spot an error in the original judgement. Well I have attempted here to point out here were the judge failed to understand content and context, I saw little evidence the lawyers and testifiers arguing for the OEFC provided the judge the opportunity to understand content and context.

In fact, I've see no evidence the government of the day attempted to win the court case.


The legal case was launched against the Ontario Electricity Financial Corporation (OEFC). People who rail against all high-paid civil servants may find solace in the fact no employees at that organization appear on Ontario's Sunshine list of public servants earning over $100,000, but they'd be less comforted by that if the knew the entity had no employees the last time I checked.

The court ruled against a shell corporation.

The OEFC does have a board of directors and, the last time I checked, it consisted of public sector mandarins, primarily from the Ministry of Finance. The current Premier of Ontario announced plans to spend the proceeds from selling off assets sworn to retire debt at the OEFC in March 2015 - which I was the first to note was illegal. Some messy law changes were made to hurdle that fact, but, as I noted in April 2015, the government needed the OEFC to have an unfunded liability in order to plunder it - and subsequently the Minister of Finance has taken numerous actions to avoid the OEFC looking healthy financially. The most galling of these is a commitment to renege on funds owed the OEFC from the province. If Ontario was a lawful jurisdiction, the OEFC board, and its auditor (which is Ontario's Auditor General) would be in the impossible position of creating annual financial statements that are to reduce its "owed from the province" assets on the whim of Charles Sousa - but that's a big "if". [4]

With no employees, and in the absence of integrity, the OEFC is now simply a shell company for the machinations of Ontario's Premier and Finance Minister. The OEFC had nobody to represent it's processes in court. Most of the testimony referenced in the rulings came from the consultant Navigant - who could address the technical methods of how things are done, but could not address the political necessity of competitive industrial electricity pricing, and could certainly not insult its real client (the province) by noting such obvious things as spending 82 cents/kWh on solar power isn't an electricity supply contract but a vote buying one.

There are many people who wish government to outsource everything.
This court ruling is half a billion reasons for them to reconsider that wish.

If you were hoping for the Minister of Finance to care whether Ontario's ratepayers get hit with another $500 million expense, you haven't been paying attention.


While the Liberal Party has not been good for electricity ratepayers, it has been a very lucrative place to be from.
It was recently revealed former environment minister  John Wilkinson is the lobbyist for the province's well rewarded biggest corporate donor to Premier Wynne's Liberal party.

A former President of both the Ontario and Federal Liberal parties. Mike Crawley, currently is an officer of Northland Power, which announced it will benefit $225 million from these court rulings. [5]


The government has done the groundwork in preparation for losing this case for years. From Dalton McGuinty denying exports were losing money five years ago to the IESO's poor reporting on curtailment and embedded generation.
Years of conniving on how to suck funds out of the electricity sector, and particularly the shell OEFC entity, and continued efforts to hide the costs of the green energy experiment, are great contributors to the current culture of ignorance.

While I do not agree with the court's decision, I don't find flaws with the judges as I see little evidence they were presented with demonstrations of the rapidly expanding portion of Ontario rates that comes from the whimsy of the Green Energy Act and related dumping of excess supply on export markets, and outright curtailment of contracted supply.

The ruling is bad for Ontario ratepayers, and it is bad for Ontario's ability to retain industry reliant on affordable electricity, but I don't know that Ontario's so-called justice system is supposed to be more than a machine that processes arguments and returns rulings.

The OEFC reportedly has until mid-June "to seek leave to appeal the decision to the Supreme Court of Canada."  That would provide hope if anybody actually worked there, or if the Minister of Finance had ever indicated any interest in protecting ratepayers, or if there was any indication they could build a legal team capable of making the arguments required to reverse decisions that did appear to follow the legal, logical, code.

Garbage in, garbage out.

This is a court ruling supporters of Ontario's Liberal party voted for.


1. From the ruling on the appeal (with emphasis added):
[42] As indicated above, the Reallocation Regulation did not reflect any real change in the cost, direct or indirect, associated with the production and delivery of electricity by the NUGs. The decision to use the formula in the Reallocation Regulation did, however, have a significant downward impact on the calculation of the GA amount to be included in TMC. That reduction rippled through to a reduction in the DCRnew and an ultimate reduction in the amounts payable to the NUGs under the PPAs. The respondents estimated that the change in the formula for calculating the GA portion of TMC made after the Reallocation Regulation came into effect would cost the respondents in excess of $530 million over the lifetime of the PPAs.
2. From the original ruling:
[13] The original PPAs executed with the Applicants also included a price adjustment index to escalate annually the amounts payable, or portions of amounts payable, to the Applicants under their original PPAs. This index provided the NUGs with protection against general electricity industry-related cost increases. The price adjustment index that the parties selected was Ontario Hydro’s “direct customer charge” (“DCC”) or “direct customer rate” (“DCR”), which was derived from Ontario Hydro’s Direct Industrial Customer rate schedule. It is agreed that the terms DCC and DCR are interchangeable for present purposes. To be clear, the DCR and DCC did not constitute the rates payable under the original PPAs. Rather, the DCR and DCC were used as an index and the change in such index was used to calculate changes in the rates payable under the original PPAs.

[14] Direct Industrial Customers were retail customers served directly by Ontario Hydro whose average monthly maximum demand was 5 MW or greater. These Direct Industrial Customers were grouped together in one customer class.
3. I wrote on Class A a number of times, most pertinently to this case in "Stakeholders" destroying the viability of Ontario's electricity market (May 2015)

4. The profits of Hydro One and Ontario Power Generation were legislated to pay down debt, but the legislation was changed (I think for 2006) so that the government would never pay down the debt, just provide the OEFC with a note the funds were owing. These funds have built up substantially without interest. They are not funds for anything at OEFC - and of course they are funds the government has both spent and upped the asset value of Hydro One and OPG by. Here's how Minister Sousa promised to rip off the OEFC in the fall economic statement:
...debt paydown does not affect OEFC’s stranded debt, as OEFC’s receivables from the Province will be reduced by an equivalent amount.
The one has nothing to do with the other.

5. Northland estimates $225 million more revenue due to the court hearing, and reveals ratepayer impacts began last year:
Northland estimates its share of past and future lost revenue over the life of the relevant agreements would have been approximately $225 million (originally estimated to be $200 million) had the Court found in favour of OEFC. Since the original decision by the Superior Court, the OEFC has made increased contractual payments of approximately $25 million for the period starting February 2015, consistent with the Superior Court's interpretation of the contracts. Subject to the right of appeal referred to above, Northland anticipates that its share of the remaining lost revenue from the period prior to the original decision, approximately $90 million including interest, will be paid in the coming months, and going forward, rates under the contracts will be indexed according to the interpretation confirmed by the courts, consistent with the rates that have been applied since February 2015

spreadsheet with data, and graphics, for this post


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