Tom Adams, Energy Probe (preamble)

November 19, 2001

In the attached correspondence, staff of the Ontario Energy Board address concerns raised by Energy Probe over an October 12, 2001 decision by the Board to approve net metering for load displacement generation by end-use customers. Because the Ontario Energy Board approves distribution rates where a substantial portion of the fixed costs of distribution service are recovered in volumetric, or per kilowatt-hour, charges, net metering creates a financial liability for distribution utilities. If distributed generation from technologies like fuel cells become widespread, the existing rate structure combined with net metering will result in significant revenue erosion for distribution utilities. Any effort to switch to distribution rates that more closely match costs or to reverse net metering in favour of more efficient gross load billing, are likely to meet resistance from those benefitting from the cross-subsidies created by the status quo.

The OEB’s decision violates the principles for transmission and distribution ratemaking proposed by the Market Design Committee. As this correspondence makes clear, the decision was based only on considerations internal to the regulator and informal submissions from power sector insiders with no opportunity for public interest group participation.

Subject: Amendment to the Retail Settlement Code: Service
Transaction Requests and Embedded Retail Generators
Date: Mon, 19 Nov 2001 10:02:31 -0500
From: Russ Houldin
To: Tom Adams
CC: Mark Garner
Neil McKay

I have given a response (in bold) to each question immediately following the question. I must emphasize that the responses reflect the views of Board staff, only. Thank you for your interest and if I may be of further assistance please do not hesitate to contact me.

November 13, 2001

Mr. Russ Houldin, Energy Advisor Ontario Energy Board

Re: Amendment to the Retail Settlement Code: Service Transaction
Requests and Embedded Retail Generators

Dear Mr. Houldin,

Energy Probe seeks some clarification regarding a recent change to the Retail Settlement Code (RSC) related to net metering. The change was posted on the Board’s site on October 12 and you were identified as the contact person. For the convenience of your reply, we have numbered our specific inquiries.

Energy Probe was unaware of any public notice of an intention on the part of the Board to consider net metering. From what we can see on the Board’s Web site, a letter regarding amending the RSC was sent August 31 addressed to licensed distributors, generators and retailers. It appears that the letter was not sent to public interest intervenors with a history of involvement in net load billing matters before the Board. The letter contained no reference to net metering. We note that the letter was not posted until September 4 and that the comment period was only four business days.

1. What notice was provided to the public of the Board’s intention to permit net metering?
The information above is correct. However, the amendments that affect net metering were only one of three sets of proposed RSC amendments. It is also fair to say that the “net metering amendments” were viewed as a clarification, rather than as a change in approach. The clarification had become necessary because the Board had received reports that some LDCs were interpreting the RSC to preclude net metering.

2. What submissions did the Board receive on net metering?
Comments were received from Hydro One, OPG, Toronto Hydro, Ottawa River Power Corp,

3. What materials did the Board consider in making a decision on net metering?
The RSC, the proposed amendments, the comments and staff briefing.

The covering letter of the amendments states that they “allow for the continuation of existing distributor arrangements for ‘net metering.'”

4. Please define exactly what this statement means including but not limited to whether the volume limits on Toronto Hydro’s net metering program are required to remain in place and whether new net metering programs are permitted.
As noted, the Board wished to clarify that existing net metering arrangements are consistent with the RSC (and, by extension, should not be discontinued on account of RSC requirements). The statement means that nothing in the RSC prohibits net metering and the RSC should not be used to discourage net metering. We are not aware of Toronto Hydro’s program but volume limits would not affect the meaning of the amendments, since they clarify that a customer that is a “net load” over a billing period (suitably defined) is not an embedded retail generator and does not have to settle with the LDC on the Hourly Ontario Energy Price. Reciprocally, a net generator is an embedded retail generator and would have to enter into an agreement with the host LDC and settle for power at the HOEP.

5. Will net metering be allowed for utilities that recover fixed costs in variable charges?
We are not clear what this question means. What variable charges does Energy Probe have in mind? Net metering has no impact on the rates of a utility, since a net-metered customer is just a load, like any other (just, presumably, a relatively small load). If by “variable charges” the question means volume-based charges, yes, LDC s that have net metering programs will recover costs on per customer and per kWh basis. (It is possible, but unlikely, that customers that pay also per kilowatt may be net-metered.)

In the event that distributed generation technology becomes available and widely adopted and if fixed distribution costs are recovered in variable charges, net metering will result in significant revenue erosion.

6. Please explain how permitting a practice that can result in subsidies and revenue erosion is consistent with the OEB Act Section 1.5.
It is unclear how net metering leads to subsidies. Energy efficiency also leads to revenue erosion. To the extent that net metered loads use environmentally benign energy sources (e.g. photovoltaics) they, like energy efficiency, are highly compatible with section 1.6 of the OEB Act. Should net metering become so widespread as to have a material impact (Board staff understand total net metered power in Ontario to be less than one thousandth of one percent currently) the Board may have to review the RSC and its other regulatory instruments in that light. In any event, the sale and servicing of small-scale net-metered generators are also part of the electric industry, the viability of which is the object of s1.5. Board staff also note that if net metering becomes widespread, as with energy efficiency, there is considerable potential to reduce overall system distribution costs. Rather than build new substations, or add lines, reducing load to a particular area often reduces costs. This is particularly true in cities, where the costs of land assembly to expand distribution capacity alone can be very substantial.

7. Please explain in detail how the financial impacts of net metering (ie. free distribution services for some usage by some customers) will be dispositioned?
There is no free service. Currently there is a per customer charge, a per kWh charge & for larger volume customers, a per kilowatt charge. Net metered customers will, presumably, pay smaller charges per kWh and per kilowatt(however unlikely) than most comparable customers (e.g. size of residence).

8. How will PBR deal with net metering?
The Board will be holding proceedings next year to determine the next stage of PBR and net metering could be an issue.

9. In the event that subsidies are required, will shareholders or non-participant customers pay?
The need for subsidies needs to be substantiated. Does Energy Probe have in mind subsidies that may be offered by municipal, provincial or federal levels of government?

10. If non-participants are required to pay, what cost allocation and rate design principles will apply?
See Q. 9. Since there are no known subsidies the issue of who pays does not arise.

11. Please explain what avenues are available to encourage the Board to reconsider its decision on net metering.
As with any matter, you could request a proceeding or you could wait to take part in the PBR proceeding.

Sincerely,
Tom Adams