Trends in Ontario Electricity rates by Consumer Segments

The graphic illustrating trends in electricity pricing in Ontario will be more impactful with some explanation. First I'll deal with the terminology housekeeping, allowing for some discussion of the trends.

Definitions/Terminology

• Regulated Price Plan (RPP) consumers are most residential and small business consumers whose rates are set by the Ontario Energy Board (OEB), essentially on a forecast of supply costs over the next 12 months;
• Class B consumers pay the flow-through cost of supply on their monthly bills (although usually as an estimate);
• Class A consumers were the very largest consumers in the province - as of 2011 they could lower their bills by lowering their consumption during 5 peak hours;
• Exporters pay only a real-time market price (RTP) for supply.

The Class A commodity rate is calculated as the statistical average Hourly Ontario Energy Price (HOEP) plus the average global adjustment for the class (total Class A charges divided by consumption). The Class B commodity rate is calculated as the weighted average HOEP plus the average global adjustment rate for the class. The global adjustment in my estimates differs slightly from figures reported by the IESO as global adjustment figures are publicly disclosed at gigawatt-hour level (GWh), while I expect the IESO calculated at a finer level of detail.

Exporters do not pay the global adjustment, and they settle at the real-time price (RTP) for particular jurisdictional interties, not the HOEP. As I only have RTP data from 2010 on, the figures from 2005 to 2010 are based on the HOEP which effectively underestimates the average cost. From other data (including this) it is known the actual average intertie-specific RTP value realized on exports was about 10% higher than the HOEP value during those years.

Two average rates are shown: the average for Class A and B (or, prior to the introduction of the classes in 2011, simply the Ontario average) is shown as the "Average Ontario Commodity Rate", and the "Average Commodity Rate" which also includes exports. Those averages are all weighted according to the consumption of each consumer class. Notably, RPP rates are not in the average calculations (as they should simply be a different type of Class B rate).

Discussion and Analysis

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.

Premier Wynne's neglecting business

"Small business optimism in Ontario took a nosedive in June."

So begins the Ontario section of the Business Barometer from the Canadian Federation of Independent Business (CFIB). The members of the CFIB have legitimate reasons to be pessimistic. In this post I will demonstrate the indifference to the needs of employers in the current Ontario government's electricity policies, with a particular focus on the unfairness of the so-called Fair Hydro Plan.

I recently spoke with Jocelyn Bamford of the Coalition of Concerned Manufacturers. The group has been in the press due to electricity cost concerns, but other concerns are newly presented to these employers, by the provincial government. I perceive 3 primary concerns:

1. Electricity
2. Cap and Trade
3. Labour costs

I'll begin with electricity. 

As context for the following information on rates in Toronto, the U.S. Energy Information Administration (EIA). American data shows U.S. residential consumers pay 86% more for a unit of electricity than industrial consumers, and about 20% more then commercial consumers. The definitions of groups don't work well in comparing to Toronto, but note small consumers pay, on average, the most per unit, and largest the least. 

On July 1st rates dropped for Ontario consumers charged on Regulated Price Plans (RPP), due to legislation dubbed a "Fair Hydro Plan" (FHP). I pulled average consumption levels for residential and other customers of Toronto Hydro from the spreadsheet accompanying the Ontario Energy Board (OEB) 2015 Annual Yearbook of Electricity Distributors, calculated average monthly figures and fed those into the OEB's Bill Calculator for Toronto Hydro customers. For non-RPP consumers (Class A and B) I found a Toronto Hydro presentation considering monthly figures for one consumer (on slides 19 and 20). There are some issues the presentation data, but the 18 cents/kWh for Class B consumers is what I expected.

Not only do "Class B" industrial users not enjoy preferential electricity pricing, they probably pay more than the average Toronto household. This is exceptionally rare. I can find instances of American utilities charging industrial consumers more than residential ones, but nothing for a decade among utilities the size of Toronto Hydro with one notable exception: Niagara Mohawk Power Corp. [1] Ontarians might be interested in knowing the territory of that utility includes the American cousins of Niagara and St. Lawrence river power plants (in Canada, Beck and Saunders). Legal cases have established set uses for the power produced by the big public hydroelectric plants in the New York. Regardless, it's been 6 years since even that utility saw residential rates lower than industrial ones.

Ontario government acting like small manufacturers' bad boyfriend

We are tripling the size of the cut we're making to people's hydro bills from 8% to an average of 25%. - Ontario Premier Kathleen Wynne

On March 2nd the Premier of Ontario announced "Fair Hydro Plan" actions "cutting electricity bills by 25 per cent." The announced actions cut no actual costs. To the contrary, interest expenses are expected to climb to $1.4 billion annually, perhaps totaling $25 billion in the fullness of time. Perhaps $40 billion.

My two previous posts have looked at rate components from a residential bill perspective, and an overall system supply cost perspective. I hope I have communicated that rates have risen substantially due to one small set of recently contracted supply, while nuclear and hydro provided the bulk of supply but little of the cost increases - and that not all consumer groups shared the burden of the rate increases. In this post I'll review the politics of recent electricity pricing policy decisions.

"We feel that a lot of manufacturers are the middle child that are completely left out...They saw almost nothing in the recent announcements." 

Jocelyn Bamford - Coalition of Concerned Manufacturers

It's been over 6 weeks since the government announced it's so-called "Fair Hydro Plan", and while some details will remain sketchy until enabling legislation/regulation is introduced, the overall intent is clear. Ontario governments reacting to increases in electricity prices with rash programs to calm the populace are nothing new, but the current government's targeting of rate reductions is.

Graphic originally from Ontario’s perceived electricity cost inflation

Significant previous actions include the rate freeze introduced in the early 1990's by the NDP government headed by Bob Rae, and a rate freeze introduced a decade later by the Progressive Conservative (PC) government headed by Ernie Eves. An article from November 2002 puts into perspective the long duration of the rate freeze:

Communication, Politics, Money: Wynne's electricity/electoral strategy

The Premier of Ontario launched a campaign advertising her concern about the impact of high electricity rates in proroguing the legislature, which allowed for a New Speech from the Throne setting government priorities. The speech announced a new policy for residential electricity consumers, re-implementing an old policy but providing an excuse to discuss the communication strategies impacting the electricity narrative in Ontario - among the political parties, and allegedly public servants.

A brief reverse timeline on tax policies and electricity in Ontario:

• September 12, 2016 the Wynne government announces the provincial portion of the Harmonized Sales Tax (HST) will be rebated on residential and small business consumer bills as of January 1, 2017;
• January 1, 2015 the Wynne government removes the Ontario Clean Energy Benefit (OCEB) that deducted 10% of residential electricity bills
• January 1, 2011 the McGuinty government (same party) introduced the OCEB
• July 1, 2010 the McGuinty government adds 8% to residential electricity bills when the Provincial and Federal sales taxes are harmonized as the HST

Let's not pretend that today's announcement is creative or terribly meaningful, but uncover the limitations that prevent the Premier from doing something meaningful to control costs - or allow her to let rates rise higher.

David Herle is an influential political strategist notable for co-chairing the Premier's successful 2014 election campaign. In February (2016) Mr. Hearle delivered a presentation to the Canadian Nuclear Association (CNA). The first point Mr. Hearle had on his slides was:

Rates are an increasingly major concern in Ontario. The cost of electricity is not just seen to be unreasonably high, it is widely seen as damaging to the provincial economy. 

• Slowing rate increases is critical. 
• Electricity is a necessity not a luxury.

A conservative strategist, Nick Kouvalis delivered a similar presentation to the Ontario Energy Association in the fall of 2015. That presentation also showed survey results indicating economy and jobs topped concerns, with energy prices not far behind.

Mr. Hearle noted some characteristics of public opinion that now drive Ontario Liberal Party public speaking on electricity. People like:

• the elimination of coal
• improved reliability
• conservation
• renewable energy (many remain positive on industrial wind - and most on solar)

Hearle, it seems to me, indicates a communication strategy that recognizes people don't want to blame cost hikes on things they like, and therefore Liberal policy is to challenge people to associate increased rates to the achievement of outcomes they desired - specifically coal's elimination in the generation of electricity, and alleged improvement to system reliability.1

Ontario government seeks a creative lie to justify raiding Hydro One riches

The plan is to sell Hydro One for far more than its book value and use the unlocked additional value to fund a build-out of transit in the Toronto ecosystem.
That's the plan as presented for public consumption.

The plan might not do much damage to Ontario's electricity sector, but it's not likely to do anything beneficial for transit or provincial finances either. Mostly it's more deceptive spectacle from a government that's been spectacularly inept money managers. This post will primarily discuss two issues: the impact of the sale on the perceived electricity sector debt, and the role of the Ontario Energy Board (OEB) in not only consumer pricing - which it's being claimed it regulates responsibly - but the pricing of the share sale.

The plan to sell shares in Hydro One is part of the recommendations in a report from the Premier's Advisory Council on Government Assets. I'll call this the Clark Report as that body is chaired by the architect of Pierre Trudeau's National Energy Plan in the 1980's, Ed Clark - he is also known as a banker.

Hydro One's 2014 Financial reporting indicates total equity of $7.6 billion.
The Clark Report values Hydro One much higher than that:

The Council’s analysis indicates that, in today’s markets, the integrated Hydro One transmission and distribution business would likely command a fully distributed equity valuation of between $13.5 billion and $15 billion in a public offering, excluding Hydro One Brampton. We believe this valuation is a conservative range in the context of today’s market:

Call it $15 billion, which is $7.4 billion higher than the total equity reported by Hydro One.

$7.4 billion. Remember this number.

Ontario's new electricity pricing program essentially taxes businesses to fund social program

The news of an electricity program leaked out Tuesday night: by Friday even the press most favourable to the government was aware that the government was gaming somebody. The news during the week noted program including the OCEB, OESP and DRC (I'll get to each), but didn't pay much attention to an equal number of customer classes, each of which is impacted differently by changes the government is making. Confusion continues to be built as new and changed programs continue to be introduced to counter the impact of other new and changed programs. In the end the sleight of hand this week disguised charges to businesses via their electricity bill to fund a government's social program.

The press release on the new program included:

Government graphic for new program - and old

Ontario is helping make electricity more affordable for families by removing the Debt Retirement Charge for all residential consumers and introducing the Ontario Electricity Support Program for low-income families.
The proposed program, administered through the Ontario Energy Board, would come into effect on January 1, 2016...
Qualifying individuals could be eligible for a $20 to $50 monthly credit based on the size of the household and income.
...
The proposed Ontario Energy Support Program would be ratepayer funded with an estimated charge of less than one dollar a month for a typical residential customer in 2016.

New program, new acronym: OESP.

New spin, old problem: honesty. While the OESP may be partially funded by "an estimated charge of less than one dollar a month for a typical residential customer," those types of ratepayers will be paying only a fraction of the full program cost

Sir Adam Beck is dead: The Gifts of Nature have been taken from the public

The Adam Beck Memorial.

dona naturae pro populo sunt

-the gifts of nature are for the public-

Early in the 20th century, Adam Beck lobbied the Premier, from his position as a Conservative Member of Provincial Parliament, for a commission to investigate the electricity sector.  An advocate of public ownership in the sector, a century later Sir Adam Beck has Ontario's largest hydroelectric facility bearing his name, and his statue sits prominently in Toronto surrounded by iconic structures housing iconic organizations - including Osgood Hell, the Four Seasons Centre for the Performing Arts, and the Bank of Canada.

I hope the iconic institutions surrounding his statue endure better than Beck's legacy has.

My previous two posts have demonstrated the global adjustment mechanism measures the dysfunction of the market, and that large, and increasing, capacity payments are serving to drive down the market price (HOEP).  This post will show how the reduction of the HOEP, and the global adjustment mechanism, have combined to take the benefits of public hydroelectric facilities away from the public, and distribute them to the private entities awarded contracts by the McGuinty government.

A Pale Blue Imitation of Ernie Eves

Tuesday, May 15th, 2012 saw 3 related events:

• former Premier Ernie Eves has his portrait hangedat Queen's Park
• the current government released the first accounting of the residual stranded debt since prior to Eves' Premiership
• the current PC party released a white paper, Paths to Prosperity: Affordable Energy, outlining directions for electricity policies in Ontario.

"Those who don't know history are destined to repeat it."

-Edmund Burke

Ernie Eves became Premier April 15, 2002, after winning the leadership of the PC Party of Ontario; some weeks later he'd win a by-election to gain a seat in the legislature.  The PC leadership campaign was quite divisive - with Eves running against Jim Flaherty (now Finance Minister federally); Flaherty referred to Eves as "a pale pink imitation of Dalton McGuinty," during that campaign.  The only general election contested with Eves leading the party was lost to current Premier McGuinty's Liberals.  Federally Ontario's PC Party would soon disappear, with it's membership primarily moving to the right with the new Conservative Party of Canada.

August Electricity Stats, and Thoughts On the Election

I've been discombobulated this week, after driving my son off to begin university last weekend.  I did run my normal routines capturing summary figures for Ontario's electricity system in August, and I did watch energy specialists from Ontario's major parties, and the Greens, on The Agenda with Steve Paikin.  It was an ugly display for somebody with my positions on the electricity system.

My discombobulated might be far more coherent than people find in other places, so ... here's my look at August's stats using the Agenda discussion to indicate points of interest.

Government Machine Rewrites History To Protect McGuinty on Debt Retirement Charge

The OEFC's 2011Annual report for the next OEFC fiscal year, ended March 31^st, 2011, was being posted to their website as I was posting my article, Retire the Debt Retirement Charge .

Remarkably the 2010 report wasn't posted until October 2010 – who knew the next would follow 10, and not 12, months later.

Retire the Debt Retirement Charge

Ontario's Debt Retirement Charge (DRC) has become an election issue. The PC party made the removal of the DRC, which they introduced while forming the government¹, a part of their election platform . The pledge is contained in the “Getting Home Energy Bills Under Control” section of their Changebook platform. The elimination of the DRC should help do that in the long run, but probably not in the short term.