Energy Probe

December 1, 2003

Submissions from Energy Probe Research Foundation
(Energy Probe)

INTRODUCTION

In Energy Probe’s view, the starting point for consideration of the OEB’s priorities is the mandate of the Board as expressed in the purposes section of the OEB Act. Energy Probe strongly supports the purposes set out in the Act. Balance and fairness are necessities in addressing the public’s interests in regulated energy services.

Energy Probe warns against regulatory hubris

Not all energy problems are best solved through regulation. Regulation is a necessary but limited instrument in dealing with problems in the energy sector. Competitive markets, not regulation, are in the long run more likely to efficiently guide resource allocation and protect consumers. In considering regulatory priorities for the future, the Board should remain mindful of the major lesson of Ontario’s experience with monopoly energy services.

Ontario’s gas sector is a considerable success:

• Over $7 billion in private capital is currently serving customers of Union and Enbridge, and the structure of the market led to the recent acquisition of Union Gas’ parent corporation for a significant premium over the book value of the assets.
   
• Far from a burden on taxpayers, these firms actually pay substantial taxes.  
• Gas issues are rarely a major public concern.
   
• Distribution rates are reasonable by interjurisdictional comparison.
   
• The utilities serving customers are reasonably responsive to consumer concerns. Customers are actively represented in regulatory and other fora by a variety of groups who have demonstrable expertise.
   
• Demand and supply of the commodity are efficiently linked through price. By contrast, Ontario’s electricity sector is a major and growing public policy problem. Political intervention freezing rates and financing capital spending by OPG and Hydro One, has shifted cost from rates to the netherworld of undiscovered taxes. Municipal utilities have been unable to recover transition costs and regulatory assets, leaving many to large balance sheet risks. Some have even suffered negative cash flow. Until recently, there was not even a clear prospect for recovery. Most consumers lack even the most basic information to guide efficient consumption decisions.

  One of the most significant distinguishing features separating the gas and electricity markets is regulation. Ontario’s gas sector is accountable to an independent regulator. Historically, Ontario’s electricity sector was self-regulated. Non-binding public reviews by the OEB of near term rate proposals where introduced in the early 1970s. Consideration of capital spending was declared by all successive Ontario governments from 1974 – 1994 to be beyond the scope of these reviews. It was not until 1992 that Ontario Hydro became subject to directive power from government. Starting in 1998, experiments began with public regulation of electricity monoplies but the independence of that process has been variable.

  Ontario’s lesson is that good regulation can contribute to better governance

  Critics of gas industry regulation sometimes suggest that hearings are too long, there are too many intervenors, and that regulatory costs are unreasonable. The Board itself lists “streamlining the hearing process” as a key project. Energy Probe suggests that the Board should take a wide enough view to appreciate the lesson that good regulation can contribute to better governance. Validation of gas utility rates through public regulation that is based on due process, administered by an independent regulator works well. While the gas regulation can be improved, the model is fundamentally strong and should be preserved.

  The following sections respond to the questions contained in the OEB’s invitation for submissions, published 2003 October 17. In addition, we have provided additional comments on particular areas of concern to Energy Probe.

   

  1. What are the key challenges for the electricity and gas sectors in the short and long term? Ontario’s electricity system is burdened with obsolete, environmentally challenged nuclear, coal, and simple cycle oil/gas-fired generators, many of which are incapable of providing predictable output:
  

   

• In the annual period May 2002 until April 2003, these generators supplied 70.7% of the domestically produced power supplied to the IMO’s market. The units providing this output number 37 – 33 of which are passed middle age. Several, like the four Lakeview units, are very close to their point of expiry.
   
• At least half Ontario’s electricity demand lacks demand-responsive prices due both to administered prices and obsolete metering.
   
• Taxpayer-backed electricity stranded liabilities are rising.
   
• Many LDCs are suffering unsustainable financial pressures.
   
• The power system is vulnerable to acute disruptions, due to potential supply/import shortfalls or transmission problems.
   
• In addition, all major governmental electricity institutions, both industrial and regulatory face governance challenges. By contrast, Ontario’s gas market is an oasis of efficiency, solvency and customer service. However,
  

   

• The market does suffer from some illiquidity.
   
• Consumers are currently challenged in dealing with volatile and historically high commodity prices.
   
• Ontario customers are currently burdened by supporting excess transmission capacity into the province.  

  2. What should the OEB do to respond to these challenges?Electricity

  The OEB should encourage LDCs to facilitate customer adoption of interval metering where it is likely to be cost effective in future. There may be efficiencies to be gained through metering and meter data management services being facilitated or managed competitively.

  Energy Probe believes that the 2003 blackout demonstrates the need for utility regulators to pay attention to reliability:

   

• First Energy, the U.S. utility at the center of the blackout investigation, is regulated by the Ohio Public Utility Commission. Energy Probe notes that the Ohio Public Utility Commission is not mentioned in the interim report of the US-Canada Power System Outage Task Force “Causes of the August 14th Blackout in the United States and Canada”, although, the report does highlight a significant number of First Energy’s deficiencies.
   
• Energy Probe supports the National Energy Board’s recent initiative to review international transmission system reliability issues. Energy Probe urges other regulators, such as the Ontario Energy Board, to participate actively in grid reliability issues.
   
• At a minimum, the OEB should require standardized reporting and publication of distribution utility delivery-related reliability and power quality data. Gas

   

• The OEB should develop gas transmission and storage access rules. Unbundling system contracting for transmission capacity should be considered. Absence of such rules goes some of the way to explaining why gas in Ontario is relatively illiquid.
   
• The OEB should provide strategic direction encouraging the development of a more competitively oriented storage sector while fairly allocating historic value as appropriate to shareholders and ratepayers.
   
• The OEB should provide seasonally relevant advice to consumers on gas price trends, bill expectations, and conservation options.
   
• The OEB might consider inviting the gas utilities to propose a common weather normalization method for forecasting and analytic purposes.  

  3. Are there existing activities in which the OEB is engaged that should be given greater or lesser priority? Implementing Electronic Regulatory Filing appears to have dropped off the OEB’s list of priorities but now should be reattached. ERF would promote public access and should also provide an avenue for efficiency improvements.

   

  4. What new initiatives should the OEB undertake and what priority should they be given? The OEB should work with the IMO to develop a workable program of locational marginal prices (LMP) for electricity that flows through to the retail electricity market. Wholesale LMP was strongly recommended by the Ontario Market Design Committee (Second Interim Report, Recommendation 3 – 4 Nodal Prices). Energy Probe believes that demonstrating progress on LMP would improve the efficiency of Ontario’s overall electricity market and help to restore investment confidence.

  The OEB should consider establishing the capability to undertake economic research on regulatory questions. For example:
  

   

• The Board should be analyzing the benefits of separating electricity transmission and distribution.
   
• There is a prima facie case that Ontario’s rate of efficiency enhancement for household gas usage is less than the rate of efficiency improvements in jurisdictions without utility subsidized conservation programs, not withstanding Ontario’s record of about 10 years of utility subsidized gas DSM. Is OEB-approved gas DSM impairing conservation? There is a widespread belief among some electricity policy professionals in Ontario that reducing the number of LDCs would enhance distribution efficiency. The largest consolidation of LDCs since 1998 was Hydro One’s MEU buying spree – a business strategy that appears to have significantly reduced Hydro One’s financial flexibility and does not appear to have enhanced shareholder value or reduce costs for consumers. Aside from Hydro One, the next largest LDC in Ontario is Toronto Hydro, which has among the highest distribution rates of any large urban utility in Ontario. Neither of these experiences suggests that size is an important determinant of efficiency. What are the factors that drive distribution utility efficiency?

  The Memorandum of Understanding between the OEB chair and the government should be published as it is updated.

  The OEB should not set up an ombudsman office to replace the role of public interest intervenors.

  5. What do you think our first priority should be?

  Energy Probe believes that the Board’s top priority should be to contribute to Ontario’s exit from Bill 210 and the host of problems it has exacerbated or created:
  

   

• Developing a workable PBR formula for electric LDCs should be included in the scope of a Bill 210 exit strategy.  
• Energy Probe suggests that a generic hearing be convened to consider formulaic approaches to LDC ratemaking.  
• Energy Probe further suggests that, since the benefits associated with Bill 210 were not evenly spread among consumers, that the Board should propose appropriate guidelines to ensure that costs associated with Bill 210 are recovered from the customers associated with those costs, if the government deems it appropriate for Bill 210 related costs to be recovered from electricity consumers. Future of System Gas

  In addition to the questions identified by the Board, Energy Probe suggests that the Board consider providing guidance to the market place on its views about the future of system gas.

  In October, Enbridge circulated a paper among interested parties discussing the future of system gas (“The Need for System Gas” October 2003). The paper observes that system gas is a mechanism for providing valuable load balancing and backstopping services. Energy Probe supports this observation. Energy Probe also believes that system gas can facilitate customer mobility to, from and between marketers. Many customers prefer to use a non-contract service, perhaps because they prefer dealing with a recognized supplier, or because they anticipate that the short commodity market will outperform long markets over the long term, or because they would prefer to address themselves to other matters.

  Energy Probe does not necessarily agree with Enbridge’s assumption that it must continue to take long-term positions in pipeline capacity but that problem is not an immediate concern in any event. Except for potential future issues around pipeline contracting, Energy Probe supports continued utility provision of system gas.

  Energy Probe’s preference is that system gas be priced in a way that is as market-based as possible, with minimum risk to the utility. Energy Probe’s preferred model for system gas is one that is purely spot price pass-through, like the system recommended by the MDC for pricing default electricity service. However, whether system gas is hedged as Ontario’s major gas LDCs currently do, or not hedged as Energy Probe would prefer, system gas provides a valuable service to consumers and should be allowed to continue.

  Promoting Public Participation in OEB Consultations

  Energy Probe suggests that the Board consider developing a funding process to facilitate professional representation for customer groups and public interest intervenors in Board-initiated consultation processes. This will assist the Board in widening the response to its initiatives beyond those stakeholders with a concentrated commercial interest.

  Thank you.