Wednesday, July 31, 2019

OPG's nuclear facilities are now the major cause of increasing electricity costs

Ontario rates are on the rise again, after going largely unchanged for the final two years of the previous, Liberal, government. Many consumers won't realize the 7% increase during the first half of 2019 as the impact is hidden by subsidies, which have grown to about $4 billion a year in the recent provincial budget. In stark contrast to past years, this year it is publicly owned Ontario Power Generation (OPG) nuclear units driving the increase. I estimate all supply costs up a little over $400 million (nominal) during the first half of 2019, while the cost of OPG's nuclear output is up a little under $500 million.

This article is going to be about electricity rates - promised and realized. It will touch on too many complex areas I've spent too little time on to understand fully, but enough to understand Ontario’s rate-setting process cannot deliver reliable pricing on regulated nuclear supply.

Ontario's government announced it was "moving forward with nuclear refurbishment at Darlington Generating Station," in January 2016. That station has 4 reactors - the last 4 new-builds in the province, with the last of those entering commercial operation 25 years ago.
The average cost of power from Darlington nuclear units post-refurbishment is estimated to range between $72/MWh and $81 MWh, or 7 and 8 cents per kilowatt hour.
The low end of the estimate, $72/MWh, is what Ontario's consumers were paying for supply from OPG's nuclear power plants at the time of the announcement in 2016. Today we are paying $89.70, which could generously be considered as just above the high end of the estimate (adjusted to real 2015 dollars). This is somewhat explained by the inability of the regulator, the Ontario Energy Board to set a rate in 2017, but another 6% rate hike is already baked in for 2020, so we will be back at the high end of the estimated range in 2020 regardless.

It is not, however, accurate to blame the recent rate escalation on the refurbishment project.

The first reactor at Darlington to enter refurbishment was unit 2, in the fall of 2016. That project is on time and on budget, or better. Reputable accounts of the overall plan have been positive, including those of both The Office of the Auditor General of Ontario and the province's Financial Accountability Office (FAO).

From the FAO's report:
the FAO projects the average OPG Nuclear Price will be $80.7/MWh. This price includes the PNGS and the pre-refurbishment DNGS production. During the refurbishment period (2016 to 2026), OPG is projecting higher Nuclear Prices for two reasons. First, lower OPG Nuclear Production while DNGS units are shut down for refurbishment. Second, an increased Revenue Requirement once the first refurbished unit ($4.8 billion) is added to the rate base in 2020.
Considering the average rate is to be $80.70/MWh and the current rate is higher than that, my mind struggles to understand how lower cost power entering service should push up the price - but the Auditor General seemed to understand. From that report:
OPG expects (subject to approval by the OEB) its nuclear rate to increase at less than 2% per year on average between 2017 and 2036. Figure 8 shows OPG’s expected nuclear electricity rate growth from 7.8 cents per kilowatt hour in 2017 to 10.9 cents per kilowatt hour in 2036.

A lot of things confuse me, so it probably won't surprise smarter people this does too. By 2026 the older Pickering nuclear generating station will be closed and the four reactors at Darlington are supposed to have completed refurbished and expected to operate to the mid-century. I realize there are a lot of moving parts until then, but I'd expect the accounts to be providing a flat rate from 2026 to 2036, and beyond. The only way in which the 2016-2036 rates look normal is as a statistical distribution - maybe it's just some very subtle humour, particularly as that proposal is alleged to include "rate smoothing."

While the Auditor's report shows 7.7 cents/kWh as the approved rate for 2019, that's not what ratepayers are paying: another 10% is added to make up for the OEB's delay in ruling on OPG's May 2016 application to set 2017-2021 rates, and another pair of rate riders is piled on top those to recover costs in variance accounts - which is where the costs I'd like to address are hidden: the rates OPG applies for, and the Auditor examined in analysing the Darlington refurbishment, don't strike me as inclusive of all costs OPG should be anticipating.

Rate riders are not an insignificant contributor to today's costs.

An early test of the rate-setting structure that has OPG apply to the Ontario Energy Board (OEB) to set rates went, in my opinion, spectacularly bad. In 2011 the regulator turned down a section of employment expenses because it felt OPG paid exorbitant wages. The public generator (OPG) took the public regulator (the OEB) to court, and then they went to another court, and then another one, and finally they ended at the Supreme Court of Canada which ruled in 2015 - in the fashion that Canada's Supreme Court now does. My impression was OPG won. Some hoped the ruling could set a precedence for better regulation, while others seem to say only that the ruling would have some impact on how things unfold in the fullness of time. I'll opine it simply seems to have made everything worse - contentious topics have since been removed from the rate setting process altogether.

Bringing us to pensions and other post-employment benefits. Sorry to gloss over the court stuff, and skimp on references, but here's a taste of what blurs my eyes in reviewing rate application documents:
This schedule sets out OPG’s proposal to recover amounts related to the company’s pension and other post-employment benefits (“OPEB”) costs recorded in the Pension & OPEB Cash Versus Accrual Differential Deferral Account established by the OEB in EB-2013-0321 and most recently continued in EB-2016-0152 (the “Interim Account”).
OPG’s proposal implements the OEB’s policy on pension and OPEB cost recovery set out in the OEB’s Report: Regulatory Treatment of Pension and Other Post-employment Benefits (OPEBs) Costs (the “Report”), issued in the OEB’s generic consultation on the issue (EB-2015-11 0040). OPG proposes to recover the audited balances of the Interim Account as of December 31, 2017, which total approximately $614M, and associated income tax impacts.
$614 million is what caught my attention in investigating the latest rate hike, and from this quote we see the Pension and OPEB costs were pushed out of the normal rate process around 2013. Since then nuclear rate riders have been set to recover $847 million (there's also rate riders on hydro, but I'll stick to nuclear). Today's rates for OPG’s nuclear output include rate riders for pension and OPEB costs from two separate applications (one made in 2016 and the other in 2018). Over the next 3 years pension rate riders will add over a 1/2 cent per kilowatt-hour to the rates paid for OPG's nuclear output - and possibly more if the next application follows 2 years after the previous one, as has been the trend.

Questions on pensions were all the rage in 2013. My friend Parker Gallant wrote "Retirement Deficit coming to your hydro bill" in the Financial Post eight months before Jim Leech delivered a Report on the Sustainability of Electricity Sector Pension Plans to the Minister of Finance. I'm not sure what impact that report had - hopefully not much because its overview of OPG included two terrible whimsies:
  • "all ratepayers are responsible for OPG’s pension contributions",
  • "Although [Combining Nuclear Decommissioning and Spent Fuel Storage Funds with OPG pension assets] represents a potential opportunity for greater efficiency of asset management.
The pension issue, identified as a crisis 6 years ago, is increasingly pushing up nuclear rates - but outside the normal rate process. The regulator can't do much about it, lest the public generator spends another half decade fighting it in court only to acquire another foggy ruling. OPG can't do much about it - their last agreement with union leadership got voted down by the Power Workers' Union, which stated, "The primary issue is OPG’s refusal to provide over 300 ‘term’ workers the rights of full-time employees at both the Darlington and Pickering Nuclear Plants."

OPG started 2018 with 10 operating reactors. When unit 2 at Darlington entered refurbishment that fall it was planned to be the last time 10 operated. When unit 2 returns, unit 3 will enter refurbishment (the process already underway having been green-lighted by the government early in 2018) - the plan then has the operating fleet reduced to 8 midway through 2021, 6 for 2023 (as Pickering 1 and 4 are retired) and then down to 4 remaining operating reactors by 2025 as Pickering B is retired.

I couldn't reconcile the PWU's urge to recognize more workers as full-time employees with reduced productive units and increased cost to consumers to fund pensions - and I understand the arbitration process logically enforced the contract that had been rejected by the union membership.

It's not difficult to find positives with nuclear power in Ontario: the supply chain is delivering, as are the operators. Emissions from the electricity sector are very low and though overall electricity prices rose sharply for a decade it is only in 2019 that nuclear, specifically at OPG, is the primary driver of rates rising.

Looking across the province we see the desired pricing consistency delivered at the Bruce nuclear power station (NPS) that OPG was forced to lease out after its predecessor, Ontario Hydro, was broken up.

For all the talk of “rate smoothing” in the interminable OPG rate applications and hearings, it is the other Ontario operator with smooth rates - and their next refurbishment is now expected to provide supply at $75/MWh.

What can be done?

It seems to me not much within the current structure. The courts constrained an already constrained regulator: OPG's management can't blend a rate, the OEB is tamely supporting rate obfuscation with the rate rider process, and OPG's workers are not recognizing operations will soon be significantly shrunk.

It would be nice to know:
  • what the true all-in costs would be for refurbished supply from Darlington
  • how much of the current charge is due to pension and OPEB liabilities and how long rate riders will push costs up because of it
  • what is being done to harness decommissioning funds as soon as the break is opened for the last time at Pickering units
In short, what's being done to provide value in supplying electricity to Ontario consumers, and how is that attempt hampered by historical liabilities?

Refurbishing all four Darlington reactors and operating them with the publicly owned generator is not the only option the government has for the Darlington facility. In the United States there is a growing sector for decommissioning reactor sites, and some instances of reactors being taken over by other operators.

Until OPG - including its unions - and the regulator can deliver to the government a rate schedule containing a constant rate of between “$72/MWh and $81 MWh” after 2024 (in real 2015 dollars), without the added and unknown burden of rate riders covering normal costs of business such as pensions, I won’t advocate for the refurbishment of the final two units at Darlington.

OPG Pension riders
OPG rate components

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