A Plague of WAHSPs:
Ontarians Continue to Get Stung by Electricity Restructuring
A NETWIT special report
With a summer of potential brownouts and blackouts ahead for Ontario, we can now assess the manifold benefits of "a competitive electricity market" after a year. A good way to assess them is to compare the payments made to the despised former Ontario Hydro in 1998, its last year of operation, with the year of the "market".
First, we'll briefly review the full-scale retreat represented by the introduction in November 2002 of Bill 210 by the Eves government. As we predicted, prices in the Independent Market Operator (IMO) electricity "market" over the summer were high and volatile. When these prices were passed through to consumers they got higher still, since they depended on the "net system load shape" (NSLS) of each distributor, from which is calculated the Weighted Average Hourly Spot Price or "WAHSP" (which we explained in an earlier article). This, of course, did not include the fixed, regulated portion of consumers' bills. By September millions of Ontarians were delighted to receive electricity bills at rates double or triple their normal rates. Combined with high consumption, due to the relatively hot summer, these produced massive bills.
Despite Ontarians' willingness to accept these high bills with good grace because they were coming courtesy of the magic "market", Mr. Eves apparently took their tongue-in-cheek letters, faxes, emails and calls of protest at face value and, after an unusually hot September had sent prices even higher, hit the panic button. At the heart of the panic response, legislation known as Bill 210, is a tried-and-true approach, borrowed from that notable free enterpriser and abuser of the homeless, Ralph Klein - bribe everybody.
The bribe took the form of a cap, retroactive to May 1, 2002, of $43/MWh for the "competitive" electrical energy for "low volume and designated" consumers, with a rebate of the difference between $43 and the WAHSP, retroactive to May 1. When informed of the technical impossibility of carrying out the calculations necessary and getting cheques out by Christmas, the government decided to issue $75 to low-volume consumers, irrespective of their consumption. The process of figuring out the rest is still going on, as the IT departments of the distributors continue to work nights and weekends.
The total payments for electricity to Ontario Hydro in 1998 were $8.6 billion. These have been replaced by the following payments: to generators in the "market" overseen by the Independent Market Operator (IMO); to the IMO for various "services"; to Hydro One for transmission and, in some areas of Ontario, distribution; and, to the Ontario Electricity Financial Corporation(OEFC) for the Debt Reduction Charge(DRC), arising from the so-called "residual stranded debt" of Ontario Hydro. The recipients of the generating payments are now: Ontario Power Generation (OPG), Bruce Energy (as lessee of the 3.3 gigawatts available at the Bruce nuclear station), the OEFC (as holder of the Non-Utility Generator -NUG - contracts), Brascan (as buyer of about 500MW of hydraulic plant on the Mississagi River) and US sellers via transmission interconnections (plus a minor amount to Hydro Quebec).
From IMO data, in the past year payments to generators alone totalled $9.7 billion for 157 terawatt-hours (tWh) of energy at an average of $62/MWh (6.2 cents/kWh). We don't know the exact breakdown but we can make reasonable estimates (see below). IMO received "uplift" payments of about $1 billion. Extrapolating from its 2002 Annual Report, Hydro One received $2.3 billion and everyone paid about $1 billion in DRC. The payments received for the total services performed by the successor organizations to Ontario Hydro were thus about $14 billion. Correcting for inflation since 1998 this would be about $12.5 billion in 1998 dollars. However, the services carried out in 2002-03 are not strictly the same: total load has increased - from 137 tWh to 157 tWh, and the distribution services of Hydro One have expanded from the equivalent services of Hydro. Correcting for the load, the payments drop to $11 billion and for the expanded service territory we have about $10.6 billion. So the same services formerly provided by Ontario Hydro now cost about $2 billion more, or a roughly 25% real increase.
An equivalent way of saying the same thing is that if Hydro had not been broken up Ontarians would have paid it about $11 billion ($8.6 billion adjusted for inflation and higher load) for the same services provided by the new system from May 1, 2003 to April 30/03 at a cost of $14 billion. This does not include the cost increases to customers of distributors other than Hydro One, who serve about 70% of the load served by distributors. Until the Ontario Energy Board makes figures public we don't know this impact but it's clear it's at least another 10% real hit on the wallet on the cost of distributor services.
If this sounds senseless, it gets worse, if you'll just bear with us and "follow the money".
The bulk of the increase is caused by payments to generators in the alleged market. These payments were formerly all included in Ontario Hydro's costs (including any net imports, debt service and the non-utility contracts); now they are scattered a little more widely, but not by much. OPG and OEFC are wholly-owned by the Ontario government and represent about 85% of Ontario's (total about 30 gigawatt) capacity. Where did the $9.7 billion go?
Bruce Energy is the biggest beneficiary. While exact figures will not be available for another 6 months, using figures on the website of British Energy, the owner for most of the period, they clearly got at least $1 billion, of which about half would be straight operating profit. Payments to US sellers were another $0.7 billion. Brascan would have made about $200 million and the OEFC would have received about $0.8 billion for its NUG contracts. That leaves about $7 billion for OPG. According to its financial statements, OPG's costs would have been about $5 billion.
The remaining $2 billion is just a ridiculous shell game. OPG overbid to set high prices just so its surplus revenues can be redistributed back to consumers through two rebate schemes. Oh, and Bruce Energy, US importers and Brascan get to siphon off close to $2 billion, as described above. All in the name of a "let's pretend" market! $1.2 billion of this is earmarked under the Market Power Mitigation Agreement (MPMA) for rebates; it's essentially a choice of the government as to how much of the remaining $0.8 billion or so it will let OPG keep, to pretend to be a "commercial" business, and how much will be used to pay the bribe to consumers required by Bill 210 thereby reducing the rate of growth of the dreaded "residual stranded debt".
Let's look at how it's worked out for different types of consumers.
For those in the "low volume and designated" category, probably slightly over half the Ontario load - about 80 tWh - generators were paid about $5.5 billion, using the likely WAHSP for this category, about $70/MWh, but the consumers have been asked to pay only $3.4 billion. This truly massive subsidy (which has been underestimated by most media and their "experts" as the difference between the spot price and $43/MWh) completely undercuts the government's posture that it is promoting energy efficiency with an assortment of tax measures that have never worked at various times in the past. Thanks to increases in the other "regulated" parts of the bill even the bribe/subsidy hasn't prevented overall costs from going up (aside from all of the aggravation).
How have the members of our favourite lobby group, the Association of Major Power Consumers of Ontario (AMPCO), made out? We figure that this 30 tWh chunk of load would have averaged about $43/MWh - a massive increase over historical costs - contributing $1.3 billion to the coffers of the generators. Fortunately, they get this reduced by a subsidy and a rebate. The subsidy they negotiated before "market opening" is worth about $210 million (identified as Transition Rate Option Contracts in OPG"s books) over three years and comes directly out of OPG's coffers. The rebate is the MPMA. Readers may want to read our earlier piece on this. At that time we estimated that it might work out at $4-5/MWh, assuming a spot price of $51/MWh. The numbers are now in; the average spot price was $62/MWh and our estimate jumps to $8/MWh, although the exact number depends on detailed knowledge of the treatment and performance of Bruce Energy, which are both secret. Incorporating the subsidy and the rebate reduces AMPCO's likely average costs to about $30/MWh. Since they also have to pay the DRC and the IMO and Hydro One costs more than Ontario Hydro used to, they still lose relative to the deals they had with Ontario Hydro, but until the OPG subsidy runs out, the damage is minor.
There are two remaining categories and one contains the big losers. Larger consumers who are not AMPCO members either have hourly "interval" meters or not. Those that do would have paid about $46, reduced by their share of the MPMA to about $38; their contribution to generator welfare would be about $0.7 billion. Those that do not would have paid according to the NSLS, about 30 tWh; we estimate they paid about $70/MWh, which would reduce to $62 after the MPMA, having paid about $2.2 billion to generators. This last group the government is attempting to mollify before a possible Spring election by accelerating the payment of the MPMA rebate. Another downside of delaying the election call is that by the Fall, this group, which includes many of the members of the "small business" lobby and landlords, will have figured out that even after their rebate they are getting hosed.
The biggest outrage of all concerns the retailers. If nothing else, Bill 210 made it clear that electricity retailing in Ontario is a purely parasitic activity. Protected customers who signed with retailers will pay $43 and the retailers will get paid the difference between $43 and their contract prices. For doing what? Conning people into signing the contracts. Clearly the customers get their power for $43 whether or not the retailers exist or go broke. Don't sound too essential do they? They're not.
While the total load signed by retailers is not known you can bet these are not trivial amounts. A reasonable guess is 10twh. Retailer contracts are around $60, so that's (60 - 43) X 10 = $170 million plus another $10 X $8 million = $80million under the MPMA (most retailer contract require consumers to sign over MPMA rebates). If the IMO prices persisted at this level to 2006 that's $1 billion for retailers over that period.A nd what exactly would be the benefits of this? Nada. Guess who are major contributors to the Tory war-chest. Step forward, Direct Energy, the major retailer. Incidentally, we hear that in a little-known regulation, the Evesites have watered down consumer protection for contract renewals by allowing "negative option" renewals. Presumably, Ernie the ferret was impressed by Ontarians' enthusiasm for this form of consumer choice when it was offered by Rogers Cable about ten years ago.
Let's now summarize the likely impacts of the dizzying flow of money on the "stranded debt", supposedly the Tories' major concern. The total bribe to pay for the $43/MWh cap and rebate, assiduous readers may recall, is about $2.1 billion. Available funds under the MPMA from OPG, as indicated, are only $1.2 billion. Worse, only $0.55 billion of these funds may be flowed to the bribees, the rest goes to AMPCO, the other interval-metered consumers and the "losers". That leaves $1.55 billion. As noted, OPG has only likely another $0.8 billion available, leaving a shortfall of about $0.75 billion. Thus the minimum addition to the stranded debt from Year One is $0.75 billion. As we said earlier, to the extent the government allows OPG to pretend it's a "real business" this could climb to about $1 billion. For those who love details, it's a bit more complicated: OPG pays pseudo income taxes and a "dividend" towards the "stranded debt", so if the government scoops all of its income for the bribe it loses these contributions.
Finally, let's see how long, if ever, it takes for those ferocious watchdogs of competition, the Ontario Energy Board, the IMO's Market Surveillance Panel and the federal Competition Bureau to notice that OPG has clearly manipulated prices lower since Bill 210.
A comparison of average prices for loads above 21 gigawatts before and after November (when Bill 210 was introduced) reveals the following. In the 443 hours prior to November the average price was $124 whereas in the 555 hours after November it was $107. This difference is statistically significant at the .001 level (that is, the chances of this difference being an accident are pretty remote). In the 289 hours load exceeded 22 gigawatts the pre-November price was $143/MWh, the post $114 (205 hours), a difference again significant at the .001 level.
Why might OPG have wanted lower prices after Bill 210? Its owner would have to pay less in bribes, for a start. Surely, not! Surely Mr. Eves would not have asked Mr. Osborne, the CEO of OPG, to do such a thing. Or, surely Mr Osborne would not have thought it politic to do it on his own? The statistical evidence is strongly against it happening by chance. Well, whatever the reason OPG's bidding strategy after Bill 210 saved about $200 million on the 12 tWh sold when load was over 21 gigawatts since November. Not all of this would have helped with the "stranded debt" but all of it would have benefited voters. Oops! We mean "consumers".
A Plague of WAHSPs: Ontarians Continue to get Stung by Electricity Restructuring
© Coolth, 2002Posted May 29, 2003
