Energy Probe

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

Eric Reguly
Globe and Mail
November 17, 2001

The Ontario government’s moment of clarity on electricity deregulation was certainly brief. This week, Ontario taxpayers and ratepayers learned that Premier Mike Harris is in a panic about deregulation. How else to explain the surprising development — kept secret for months by the Tories — that Hydro One could very well be turned into a not-for-profit entity, with no shareholders, no ability to compete with commercial rivals and a board a directors stuffed with the province’s top industrial power users?

In the late 1990s, when Ontario put the machinery in place to bury old Ontario Hydro’s gory legacy of overbuilding, useless make-work projects, nukes that didn’t work, laughable inefficiencies and $21-billion of stranded debt, there was a vision: A fully deregulated market, where buyers and sellers could negotiate prices, and where Hydro’s successor companies — Ontario Power Generation and Hydro One, the transmission business — would be accountable to shareholders. Taxpayers would no longer be on the hook for dumb decisions. Ontario Power Generation and Hydro One would eventually become commercial companies that would strive to build efficiencies and a competitive, North American business that paid dividends and taxes and, most importantly, faced the discipline of the market. Value-destroying monster projects, like the Darlington nuclear plant, would never happen again.

Now this: The government is giving serious consideration to converting Hydro One into a not-for-profit organization, with no share capital. The new entity would issue about $10-billion in bonds, roughly equivalent to its asset value, with the money going to pay down the $21-billion of stranded debt. This structure is the antithesis of a commercial company. In effect, it would be a co-operative. With no shareholders, it would be accountable to no one.

Three forces appear to be at play here. The first comes from RBC Dominion Securities. Bay Street’s biggest dealer, led by Tony Fell, desperately wants a piece of the action, but is neither an adviser to Hydro One nor Ontario Superbuild, the province’s infrastructure arm whose mandate includes evaluating the ownership and control options for Hydro One. In investment banking, he who invents the idea gets the deal. It was Mr. Fell’s idea to turn Hydro One into a not-for-profit entity, and Premier Harris has ordered the concept to be studied. Presumably, if Hydro One goes that route, RBC Dominion will be hired to flog the bonds, a nice little assignment that could net it as much as $40-million.

The second force is the big power consumers — Dofasco, General Motors and Imperial Oil, among them — who are apparently terrified by the notion that deregulation, as it did in California’s botched example, will result in higher prices; historically, Ontario’s energy-intensive industries have paid much lower prices than other consumers and, no surprise, they want to keep it that way. Now along comes a golden opportunity, in effect, to keep Hydro One from playing the deregulation game. The big power consumers would probably receive disproportionately large representation on Hydro One’s board, increasing the likelihood that any notion of higher transmission charges would get shunted off the agenda.

The not-for-profit structure would prevent Hydro One from raising enough capital to build transmission corridors to the United States, boxing Ontario’s electricity in Ontario. This would help preserve the made-in-Ontario price — now lower than those found in neighbouring American states — which would suit the big industrial consumers just fine. This is dangerous short-term thinking. A lack of investment could create more bottlenecks that could raise prices down the road. Suppose, for example, that an Ontario nuke went down, forcing the province to beg Quebec or Michigan for surplus electricity. With little transborder transmission capability, Ontario might freeze in the dark.

The third, and perhaps greatest, force is political fear. Deregulation in California created nasty headlines and moving cautiously on the home front by preventing Hydro One’s privatization might buy the Tories some votes. Optically, the not-for-profit structure preserves the status quo, with the added bonus of ensuring that Hydro One managers can never use share options to transform themselves from bureaucrats to greedheads — another sight that wouldn’t play well with the public. Mr. Harris’s Common Sense Revolution is ending with a whimper.

Graeme Smith
The Globe and Mail
November 17, 2001

Environmentalists disagree over whether the province should abandon deregulation of Ontario’s energy sector.

“It [ending deregulation] is a terrible idea, and it suggests the government’s thinking is really slipping,” said Tom Adams of Energy Probe, which has lobbied for more than a decade for Ontario’s energy to be privatized.

But Gord Perks of the Toronto Environmental Alliance said the idea “is an enormous relief. A free energy market would be a huge disaster.”

The Globe and Mail reported that the Ontario government is considering a proposal to convert Hydro One, which runs the province’s power-transmission system, into a not-for-profit entity. The government had previously intended to convert the utility into a fully commercial, privatized company.

Some environmentalists suggest that adoption of the proposal would save the electricity system from a profit-hungry corporation that would have no incentive to promote electricity conservation or alternative clean energy projects. Others say it would create a monolithic public company without the kind of fiscal and environmental accountability that could have been imposed by shareholders of a privatized utility.

Still others, such as David Martin, a policy adviser with the Sierra Club of Canada, say the ownership structure of the utility isn’t nearly as important as the environmental and consumer safeguards imposed by government.

“We’ve been in the non-profit, publicly owned utility world since the turn of the century in Ontario and it’s been a disaster for ratepayers and a disaster for the environment,” Mr. Martin said. “By the same token, I don’t agree with Energy Probe that private ownership is the solution to this problem. What we need are good environmental policies, regardless of how this structure question is resolved.”

Ontario NDP Leader Howard Hampton, a long-time opponent of privatized energy, said he thinks the government is going to give up the idea of privatization because it would bring higher energy costs for businesses and consumers.

“I think the Conservative government just blinked,” Mr. Hampton said. “They recognize they cannot continue with this story they’re telling, that privatizing huge chunks of Ontario Power Generation and privatizing Hydro One would not affect electricity consumers.”

Mr. Hampton said a private Hydro One could sell large quantities of power to the United States, where prices are higher, and force prices up in Ontario. He also pointed out that few jurisdictions have successfully privatized their electricity.

“This government first pointed to California as a model, and now [Energy Minister] Jim Wilson doesn’t even want to whisper the word California.”

One of the dangers of opening Ontario to the North American power market would be allowing companies to shop around for the least-regulated place to construct generators, Mr. Perks said.

“We’d get the emissions and the companies get to export power somewhere else,” Mr. Perks said.

John Spears
Toronto Star
November 17, 2001

Hydro One, the provincial government corporation that owns Ontario’s main electricity transmission grid, could be turned into a non-profit operation.

Current policy calls for Hydro One to become a “commercial electricity company” that would likely be privatized.

But a behind-the-scenes battle at Queen’s Park and on Bay Street is now being waged over its future.

Advocates of a non-profit structure are arguing that it would allow the province to raise more money to pay off the debts left behind by the old Ontario Hydro, and would help give the province made-in-Ontario rates.

But opponents say it would in effect turn control of Hydro One over to big businesses that use a lot of power, and they wouldn’t necessarily make decisions in the interests of consumers.

And it could leave Ontario businesses open to attack by U.S. interests in much the same way as Canadian softwood lumber producers.

Until now, the provincial government had planned at some point to sell Hydro One, either to a private buyer, or by offering shares to the public.

The non-profit proposal has emerged as a third option, though no one yesterday wanted to take ownership.

Officials at the ministry of energy and at SuperBuild, the province’s agency co-ordinating public-private infrastructure projects, each pointed fingers at the other as being responsible for the proposal. They declined to answer detailed questions, beyond confirming that idea is on the table.

Hydro One has been working hard to become more commercial, in part by branching into new businesses. It currently has annual revenue of $3 billion, and assets of $10 billion.

In a speech last month, chief executive Eleanor Clitheroe said Hydro One wants to expand by buying U.S. transmission companies.

Hydro One has also charged into the gas and electricity retailing sector, and into telecommunications through its network of fibre-optic cable.

Clitheroe also said Hydro One wants to build more interconnections with neighbouring states and provinces, allowing for more electricity imports and exports.

The future of those profit-making enterprises would be in question if Hydro One goes the non-profit route.

Stanley Hartt, who heads the Canadian arm of Salomon Smith Barney, and has advised Hydro One, has circulated a letter criticizing the non-profit proposal.

In an interview yesterday, Hartt acknowledged that the province would get a short-term economic gain by turning Hydro One into a non-profit corporation. In that model, it would probably issue bonds worth about $10 billion, turning the cash over to the province to retire the billions of dollars of unpaid debt left by Ontario Hydro.

The alternative is to privatize, either by selling to another company, or, as Hartt prefers, sell shares to the public. He estimated that would raise about $8.5 billion.

But going the route of selling outright ownership would leave a stronger company, Hartt argued, because it would still be able to issue debt for expansion into the U.S., or into new ventures. A non-profit company with $10 billion of debt on its balance sheet would be unable to do that, he said.

The non-profit company would be unable to expand Ontario’s import and export links, he noted. That leaves the province vulnerable to supply shortages: during last August’s heat wave, the province’s system was stretched to the limit, and there was little capacity to import more power from Quebec, Manitoba or New York.

Expanded links with the U.S. would also allow Hydro One to act as a conduit for Quebec to export power to the midwestern sates, he said.

The shares would be a good investment vehicle for Canadians, he added.

“I think we could use an addition to our stock markets, instead of always having our companies lost through buyouts,” Hartt said. “I think we need head office jobs and head office personnel and all the ancillary services that surround head offices. Ontario needs that boost to its economy.”

Tom Adams, executive director of Energy Probe, said the board of directors of a non-profit Hydro One would be dominated by companies that are big power users, and they’ll try to set rates that suit them.

“We’ll have a few big power guzzlers deciding how much of their transmission bill the rest of us should pay for,” he said.

Hartt said that if a non-profit Hydro One board sets rates favourable to Ontario industry, it will open the province’s businesses to attack under trade law.