Why it’s time for a flat distribution fee in Ontario

(August 6, 2014) The Ontario Energy Board’s move towards a flat distribution is the right one.

There has been much gnashing of teeth and pounding of tables in response to the Ontario Energy Board’s (OEB) proposal to allow electricity distributors to charge consumers a flat distribution fee. Many of these opponents say the move will work against conservation, promote wasteful energy consumption, benefit the province’s richest residents and hurt low-income households.

Such claims are at best misguided and, at worst, incorrect. The current distribution fee contains many subsidies that benefit the province’s wealthiest households, while also sending the wrong price signal to all households about the price of delivering power. Eliminating those distortions will do little to hurt the province’s push towards conservation. It’s time that we get the price signal right in regards to distribution costs.

The OEB’s proposal should be seen as just the first step in fully aligning the price that consumers pay to have safe, reliable energy sent to their home with what it costs distributors to undertake that delivery. Additionally, eliminating much of the risk to distributors frees the OEB to lower the guaranteed rate of return offered to distributors – that are nearly all government-owned –  and lower the fixed charge paid by all consumers.

Currently, ratepayers pay a distribution charge split between a fixed cost – that stays the same each month – and a variable charge that depends on how much power a household uses. But because the costs to distributors, the utilities in charge of running wires to each customer, are largely fixed, the OEB is arguing that the volumetric charge should be eliminated – a move industry insiders call decoupling. Doing so ensures that households pay the true cost of what it takes to deliver power to their home.

The reason decoupling is needed is because the cost to distributors is fixed and largely based on the number of customers connected to the grid and has little to do with how much power each ratepayer consumes. Letting ratepayers believe that if they cut back on their electricity usage they can reduce the cost of delivering power is misleading.

Implementing a flat rate for distribution – particularly one based on a ratepayer’s usage during peak periods – should be just the first step. The OEB could also move other portions of the distribution charge – such as the levy for line losses, which is the cost of energy lost during transmission – to the volumetric portion of the bill that charges consumers on how much power they consume. Doing so would make that flat rate charge an even smaller percentage of the overall hydro bill – with distribution charges currently accounting for around 30% of the total bill.

Criticisms that the move to a flat distribution fee would hurt the province’s push to conservation don’t hold up. With a lower rate of return and line-losses moved to the volumetric portion of the bill, more than 70% of a ratepayer’s bill would depend – although it would vary with each distributor – directly on how much power one uses. The incentive to use energy more efficiently would be very clear to all households, as a majority of their bill would still relate to how much energy they consume.

Other criticisms that it would subsidize energy hogs – particularly high-income households – also don’t hold up. Under the current model, a typical middle to lower-income household of four or five people may be overpaying for their share of distribution costs. They do so because while their energy bill may be higher – making it appear as if they use a lot of electricity – the amount of energy consumed per person may be quite low.

Compare that to a high-income one or two-person household where the overall bill may be lower than five-person household, but the amount of energy per person may be much higher. Under the current model, the family is paying too much in distribution costs, while the smaller household is paying too little. The cross subsidies between households are systemic and impossible to contain under the current distribution fee model.

Furthermore, low-income households who can’t afford expensive efficiency upgrades or use baseboard heating will get a break, while high-income households with two homes or who leave the country for long periods of times – snowbirds, for example – will pay more. Decoupling, then, will in many cases be more equitable.

More importantly, the move to a flat distribution fee sends the right price signal to consumers. Any market that sends a price signal to consumers that doesn’t fully align with costs will result in distortions and cross subsidies. The move to decoupling attempts to end this distortion and, instead, ensure that all ratepayers pay their fair share for distribution costs.

Read Energy Probe’s report on decoupling here.

Brady Yauch is an economist at Energy Probe. You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or (416) 964-9223 ext 236

This entry was posted in Reforming Ontario's Local Electrical Distribution Sector, Reforming Ontario's Local Electrical Distribution Sector, Utility Reform and tagged , , , , , , , , , . Bookmark the permalink.

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