Tuesday, September 26, 2017

Global Adjustment mechanism again headed to court.

Jeff Zochodne reports that a,
August lawsuit filed by National Steel Car (NSC) believes the revenue the IESO collects for the global adjustment, from the company “and others,” should be declared “an unconstitutional tax, not a valid regulatory charge.”
The company gives numerous reasons, including that the global adjustment allegedly “redistributes wealth from the consumers of electricity in Ontario to, among others, the generators of renewable electricity.”
I don't like their chances, partially because I doubt the quality of Ontario's courts, but I will discuss reasons the lawsuit has a chance at succeeding to demonstrate the need for changes in Ontario's too pliable electricity pricing structures.:
  • pricing includes the full cost of current supply despite the intent of the Green Energy Act to grow value outside of Ontario's electricity sector, 
  • the courts have already ruled the global adjustment structure to be a subsidy of one group of consumers, at the expense of all others,
  • only certain consumers were exempted, at the end of 2015, from the Debt Retirement charge, and,
  • another group of consumers has now been rewarded with a "Fair Hydro Plan"
The global adjustment mechanism being challenged was introduced in 2005 to ensure the full costs of electricity supply were paid by consumers of electricity (Section 25.33 (1) of the Electricity Act 1998) - it was intended to be the difference between what suppliers were paid through contracts (or regulated prices) and what the market valued supply at. In half of the first 26 months of the global adjustment the line item was a credit on consumer bills, but it's been a charge in all but one month since 2008.

Today's electricity act allows the global adjustment to collect anything contracted by the system operator (IESO) - electricity generation or not. It also allows for the recovery of expenses related to the "Fair Hydro Plan", which is a topic I'll return to.
National’s claim goes hard at green power programs begun in 2009 under then-premier Dalton McGuinty, especially “feed-in-tariff” contracts.
This is not likely to perform well in court - but it is responsible for much of the increase in electricity costs. John Speer's excellent report on the genesis of the Green Energy Act, included how Ontario came to copy Germany's Feed-In Tariff programs, crediting a meeting of anti-nuclear activists (David Suzuki, Hermann Scheer, Rick Smith and Jose Etcheverry are named) with kicking off Ontario's experiment. I've written of how these philosophers dislodged professional electricity sector planning in the province - but I haven't argued they weren't genuinely delusional about costs. The Minister tasked with implementing the Green Energy Act, was still clinging to a vision of it as a success in this 2015 report:
"The times required bold action and those bold actions have created the prospects for Ontario to be an enduring player in clean energy, which in the next decades will be a market measured into the trillions of dollars... It was right for Ontario at the time."
It was obviously not the right time for an orgy of electricity procurement from a standpoint of controlling current ratepayer costs: usage had plummeted with the recession, authorities were aware the losses in some sectors would be permanent, and the term "surplus baseload generation" was going mainstream. Nonetheless, the court is unlikely to rule the government procured both stupidly and illegally.

A better approach to disputing the global adjustment charges may be exposing the inequity of their application. There is not a single global adjustment charge. There are two distinct categories: Class A and Class B. Class A consumers can all have different Global Adjustment charges. Class B consumers may be charged at any one of 3 monthly rates (1st estimate, 2nd estimate and final) if they see a rate at all - because many class B consumers are charged under regulated price plans calculated by estimating costs for an upcoming period. It's all very confusing. What is not confusing is the Court has ruled that the Class A global adjustment mechanism is a subsidy:
[2] The respondents claimed that effective January 1, 2011, the appellant unilaterally changed the calculation of the Global Adjustment Mechanism (“GA”)... 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....
[4] The application judge found for the respondents. 
That is from the Ontario appeal decision in support of the original ruling (the Supreme Court did not accept the application to hear another appeal). I wrote on the case in Ontario appeals court upholds sentence of higher costs for ratepayers.

If all costs are recovered from ratepayers, and the system is designed to subsidize one group of ratepayers, it strikes me as obvious other ratepayers are forced to pay the subsidy. The Court having essentially already ruled the global adjustment mechanism subsidized one class of consumers at the expense of other classes of consumers will have to perform some contortions to deny the subsidy harms the group paying it.

Prior to the global adjustment a different mechanism was introduced to collect electricity sector debt from electricity consumers - the Debt Retirement Charge (DRC). Since the beginning of 2016 residential consumers have been exempted from the charge, leaving non-residential consumers to exclusively bear the burden of old debts.

The court, having ruled that the Class A global adjustment mechanism is a subsidy of one class should find it difficult not to consider the DRC exemption another subsidy of a different class.

This year the government introduced a "Fair Hydro Plan" which essentially discounts the bills of those ratepayers with a vote in the June 2018 election. The unfair plan has already "deferred" $605.5 million - in line with the estimated $2.5 billion a year that will need to be borrowed with the expectation it will be recovered from future ratepayers. Not only are many class B consumers, such as National Steel Car, excluded from the unfair plan, legislation was changed to allow the IESO to recover the financing of the plan, presumably through the global adjustment.

The government might argue in court the same nonsense they argued in public - the cost recovery of assets is simply being stretched out over a longer period of time. But a legitimate judge should see Class B consumers still paying the Debt Retirement Charge as a history of abusive behaviour making it unlikely they'll be treating fairly in the future if the courts allow the government to continue its discriminatory pricing of electricity.

When electricity bills for September arrive there will be class B consumers paying around $150/MWh - ones billed on the record high 1st estimate of the rate at $127.39/MWh plus the market rate which has thus far in September averaged over $23/MWh. Class B consumers billed on the final rate (to be released mid-October) are likely to pay about $40/MWh less than that, consumers benefitting from the (un)Fair Hydro Plan rates will about $30/MWh less than that, and an average Class consumer will pay $10-$15 less than that. With some consumers paying twice what others do, the lawyers for National Steel Car should be able to built a compelling case that a subsidy is being paid by their client (and many other companies).


This post is related to July's Premier Wynne's neglecting business. Since that time I've done some data work to allow comparison of Local Distribution Company data since 2005.


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