The Pietists, the Pusillanimous,
and the Pointless:
a NETWIT special report
First published in May 2002
As we write, Ontario is on the eve of committing itself to the folly of an electricity "market," just as the coalition of interests that pushed a compliant ideologically-blinkered true-believer government into the policy that created this idiocy is becoming unglued. Aristophanes is smiling, somewhere.
Readers of NETWIT will be aware that electricity system restructuring in Ontario was foist on an unwilling but complacent public by a troika that consisted of; Bay Street, the big power users (AMPCO) and a dominant faction in the Hydro brass that preferred vast personal enrichment to (well-paid) public service. As we noted with some glee in a previous bulletin, AMPCO has realized that it is trapped in a nightmare of its own making. The new order is going to be much more expensive than the old "mother Hydro". While they've whined their way to temporary relief they are clearly ready to embrace a more stable way out.
Bay Street, however, remains hungry for the commissions and customer goodwill they expect to garner for the largest Initial Public Offering of shares in Canadian history - for Hydro One. Enter two unions in a last-ditch effort to delay or prevent the same. Blow us if the judge didn't agree to grant an injunction! So, for now, the ball is in the government's court on how it wants to go forward. While this game is far from over there must be some nervous folks in the towers of downtown Toronto, especially those occupied by the executives of Hydro One.
Hence the delicious irony of the opening of the market at a time when the real reasons for creating it have either vanished or are deeply imperiled!
So this is an excellent time for NETWIT to remind Ontarians what a complete waste of time and resources the electricity market will be and to prepare them for what will happen, since the Ontario government and the erstwhile public regulator seem disinclined to do so.
Here's the bottom line for the residential consumer: you have no more choice than you did; your costs will go up; you'll have the annoyance for at least several months of wildly inaccurate bills from your utility; and, you'll be subjected to all kinds of unnecessary, and irritating marketing schemes that will distract you from curing the world of all known disease, watching Slutty Susan Likes it Firm or devising tasteful arrangements of daisies for the day Martha Stewart drops in. Based on what we've seen in Blighty and the former antipodean colonies plus what we've gleaned from the inscrutable Ontario Energy Board (OEB) website we flesh these predictions out below.
To explain all of this there are two key concepts we have to lay out. The first is called "load shape" or "load profile". Producing electricity costs more at different times of the day and different seasons of the year. The governing factor is the total size of electricity demand or load. In a given hour the cost of meeting the load is the cost of the last type of generator need to meet the load. This is known as the "merit order" principle. Generators are stacked from cheapest to most expensive and called on as needed. The cheapest are large hydraulic stations, like Niagara Falls and the most expensive are small natural gas or oil fired generators. To give some examples, in the early hours of the morning the total Ontario load in the Spring drops to about 12 -13Gigawatts (GW)(billion watts) and this load can be met by a combination of nuclear and large hydraulic plants, hence the cost is low. In contrast by about 6pm load will be about 20GW and will need coal burning plants to be running, which cost more.
This is not new, as you might imagine. The cost of electricity always reflected the merit order in an approximate way, through a "declining block" structure, by which you paid less the more you consumed. To understand what is new we need to introduce our second concept - the load-weighted average price. Before we proceed directly to that task we will first review the concept of a weighted average. Those readers who are already comfortable with weighted averages may wish to skip the next paragraph.
Suppose that green apples cost 50cents each and red apples cost 40cents each. What's the average price? Well that depends on how many of each you buy. If you bought 2 green and 3 red the average price of your apples would be 44cents. There are two arithmetically equivalent methods of calculating this: 2 X 50 + 3 X 40 = 220 cents, divided by 5 gives 44; or, 50 X (2/5) + 40 X (3/5) = 20+24=44. The latter makes explicit that this is the "colour-weighted" average cost of your apples where 2/5 and 3/5 are the weights applied to the respective prices, representing the share of apples at those prices in your collection. Someone who bought ten apples of which 5 are green and 5 red the average price would be 45 cents (50 X (1/2) + 40 X (1/2)).
In the brave new world of electricity prices instead of two types we have as many types as there are hours in the relevant billing period. What is new is that you will be assigned an explicit load shape, called the "Net System Load Shape" (NSLS). What this does is takes your measured use (usually over 60 days) and allocate it to the 1,440 individual hours covered by the bill. Your cost will then be these allocated quantities multiplied by the hourly price set by the Independent Market Operator from its auction process.
This is called a "market"; in fact it's just the old merit order stacking. It just costs a lot more because of all the new computer systems needed to go through the charade of "bidding".
Never mind. The result for you, dear Ontarians, is that within the next six months you will pay a lot more. This is on top of the increases you'll already have had to bear as a result of Hydro One and the distributors now earning a return on equity and paying proxy income taxes. However, due to an obscure manoeuvre we picked up on the OEB's website on April 25, most of you won't face the "market prices" until July. The OEB is allowing distributors to choose not to "pro-rate" their bills during the first "billing cycle" after May 1. What does this mean?
Consider the following typical situation. Your regular cycle calls for your meter to be read on the 20th every other month on a 60 day cycle. Suppose May 20 is your next 'read" date. If the market were truly "open" your distributor would have to bill you for 40 days under its regulated rate and 20 days at the "market" rate - your NSLS weighted average price multiplied by 20 days of consumption. Ideally the market would open on a staggered basis - as in the UK - with everyone starting on a new meter read but the best that could be done in Ontario is to pro-rate the two periods, i.e. allocate two-thirds (40/60 days) of the measured 60 day consumption to the old rate and one third to the "market" rate. It seems that distributors are to decide in the next few days whether their computer systems can pro-rate or not. Does this sound like a system that's "ready" to you?
Thus, for most Ontario readers the "market" effectively opens July 1. Even at that point you will not be exposed to the delights of a pseudo-market. Those who remain on the "standard supply service" (SSS) will initially see a drop in their bills because they will pay price set by the OEB - 4.3 cents per kWh. The big shock will come when you have to "true-up" to the "market price". When this will happen is difficult to say. We gather that just about everyone will be on an "equal billing" plan, whereby the distributor tries to smooth out their bills. The problem is that no one knows what the prices will be.
However, we can confidently predict that when the reckoning comes it will be ugly. Remember that your 60 day bill will represent the weighted average price of the 1,440 hours since your last meter read. Not just any hours. Hours during the Spring and Summer. Which include many more expensive hours than, say, a 1,440 hour interval from October 1 to November 29.
We wouldn't be surprised if the Eves government tries to rush through privatization legislation, or at least hearings on it, before these whopping bills start to land. In this they are relying on people's confusion and lack of interest in inspecting their bills carefully. In this they could be correct but we think they will still find themselves undone by this pseudo-market in a way that they probably don't expect. This will be in the form of weird bills, which will still alarm a lot of people even if the source of the alarm is not the actual "market". What do we mean?
Well, the only real difference in the entire charade is that the system now has fantastically more complicated billing systems. This is to accommodate the "switching" between "default" supply by distributors and retailers and among retailers. This never had to be done before. Lotsa work for geeks. Which wouldn't be so bad except that for every geek there's 3 or 4 freeloaders who do marketing, glad-handing, general bull-shitting and "managing". As a result of these efforts, no large software project is ever done on time, on-budget and with intended functionality and this "market" is one mother of a software project! It's already over two years late.
Based on experience in the UK and California, the eventual bill is going to be over $1 billion but we won't know exactly for many years. As to functionality…Ontarians are about to find out for themselves. We hope you enjoy getting bills for 4 or 5 times what you normally pay; good luck sorting out the corrections as the utilities' call centers get deluged.
Well, at least you've got choice. Wrong again! The retailing is a total shell game. If you followed our account above about the merit order and load shape, you'll realize that retailing has absolutely nothing to do with which generators provide the power and therefore its cost. Why else would it make no difference if you don't choose a "retailer"? You have no more choice than the choice of grade of steel for the pistons of your automobile.
In fact, extending the analogy, it's as if everyone gets the identical car (identical kilowatt-hours) at the same price (the hourly auction prices times the corresponding hourly quantities derived from the NSLS) but can choose terms of payment; either pay monthly on a floating interest rate (the default or Standard Service Supply) or at a fixed rate for a chosen number of years (the "retailer" price).
For larger consumers there is a potential benefit but this comes with a large caveat and an irony. The benefit is the use of "interval" meters that record hourly use; this will encourage energy efficiency in those who can change their consumption patterns. The caveat is that the use of interval meters would be much cheaper under the "old" system without all the computer paraphernalia for "bidding" and "retailing". The irony is that large users are now forced by regulation to install interval meters - in the name of choice! Can you imagine the screams of outrage if Ontario Hydro had told its large customers and those of the municipal electric utilities that they had to install certain kinds of equipment?
So why is this rough beast still slouching towards May Day to be born? We don't really know but a good guess is that no one can be bothered to stop it. There is one major issue that could yet prevent it. This is the matter of the risk of skyrocketing prices and who "holds the bag" - who will have to pay. In California the misbegotten market enterprise was sunk because it drove utilities into bankruptcy. In Ontario this issue is apparently being discussed as a matter of "prudentials", meaning the security deposits that the IMO is demanding so that it can pay the generators.
We don't pretend to know the detail in the IMO's byzantine "Market Rules" but we do know there are two key parts: a deposit payment in advance for so many days worth of electricity; and, "margin calls" for immediate payments when volatile prices cause a market participant (a distributor or large industry) to run through its deposit. The key variable is the price. If prices hit the allowed cap they can be over 30 times the average price. You don't need too many hours at this price before everyone has to meet their "margin calls". Since distributors get paid on a 60 day cycle there's a real concern that they could not come up with the cash and would go bankrupt. The Bay Street crowd and the Hydro One execs are gambling that Ontario Power Generation (OPG) has so much market power that it will keep prices under control. Over the whole year OPG can likely keep the average price down but a long spell of really hot weather will mean huge price spikes and this is the danger to the prudentials scheme.
The distributors and the government are engaged in a game of "chicken". As explained above, the SSS regime temporarily insulates consumers from the much higher "market" energy price. However, the greater the cushioning of consumers the greater the risk of distributor distress. Let's look at some specific numbers. The OEB reference price is not even the correct price for pre-market energy because it ignores the effects of load shape; 4.3 cents is the expected average price to the entire Ontario load not, as the government's information says, the residential user. Until they "true-up" the distributors will be collecting 4.3 cents but having to pay up to $1.50 per kWh to the IMO. Yet because there are so many hours, even in a 60 day bill, the weight of a few hours at very high prices - while potentially devastating to the distributors who have to meet the IMO "margin calls" - is relatively small for their customers. Nevertheless, we expect eventual "true-ups" that will be close to double a normal bill. At that point the distributor's pain becomes its customers' pain, if it can maintain the cash reserves to avoid bankruptcy.
Quoting rather than merely paraphrasing Yeats, "The best lack conviction and the worst are full of passionate intensity". Still, perhaps the willingness of two unions and a judge to stare down the Hydro One privatization will inspire broad support to derail the entire misbegotten enterprise.
Ironically, a consumer revolt against their "retailer" contracts (typically 5.7-5.9 cents), distorted by the OEB's ridiculously low SSS reference price (4.3cents) and by the government's own disinformation campaign (which deliberately indicated that the 4.3 cents is an appropriate comparator), could also undo their schemes. Or the software gremlins may yet cause more delay. Or the distributors may screw up their courage and refuse to sign the "prudential" deals or go along with the irresponsible retail "readiness" plan that fails to test the new billing systems properly before using them for real billing. If not, we told you what to expect.
The Pious, the Pusillanimous, and the Pointless © NETWIT, 2002
No portion of this article may be reproduced without the permission of the author
