Electricity rates held steady by Ontario’s inept energy regulator

The Ontario Energy Board (OEB) released regulated price plan (RPP) rates for Winter 2016-17 on October 19th, leaving rates unchanged from summer 2016 rates. The lateness of the news had me expecting they were being politicized, so maintaining existing rates didn’t surprise me. Reading the report rationalizing the prices, there is some good news for consumers as rate pressures decrease (as predicted in the government’s Long Term Energy Plan forecasts). There’s also some very bad news for consumers, as the OEB has negligently punted costs down the road – again.

Reviewing and setting prices every six months protects consumers from fluctuating commodity prices and provides stability and predictability on the electricity line of their bills. It also ensures supply costs are fully recovered so that the system continues to operate effectively.   – OEB news release

The goals of rate setting are to recover the full costs of supply with “stability and predictability.” The rate setting methodology for accomplishing this is set out in Regulated Price Plan Price Reports – I’ll call these RPPPR.

Essentially these reports forecast all supply cost, how much of that cost is to be recovered from Regulated Price Plan (RPP) consumers (while the vast majority of consumers in Ontario are charged this way, the exclusion of larger consumers from the plans means only a little over 40% of all provincial consumption). The RPPPR is very much a forecast of what the market rate, plus the “class B” global adjustment rate, will average over the next 12 months (although rates only apply for 6 months, when the process repeats). For those familiar with the sector’s jargon, the RPP is a forecast of the Class B commodity rate.

Part of the RPPPR process is recognizing a variance account tracking the extent to which the RPP fails to recover the full costs, or recovers too much. Ignoring the variance account, the newly released Winter 2016-17 RPPPR calculates a rate of $110.13 per megawatt-hour (MWh), or 11.013 cents/kWh. One year ago the RPPR calculated a rate of $109.49, but the variance account provided a reduction of $2.22/MWh a year ago, whereas the recent report included a charge of $2.26/MWh reflecting rates not recovering the full cost of supply over the past year. This is curious – keeping rates down despite the variance account growing indicating rates were too low to recover all supply costs.

“[Ensuring] supply costs are fully recovered,” is a stated goal of the regulator.

Rates for the upcoming winter are 4% higher than the rates for the previous winter (although the same as this past summer’s), but that’s primarily due to variances between the RPP rates, which are predictive of costs, and reality. Looking at the details, it’s clear the new rates won’t reflect the reality of future costs, and therefore will only postpone a rate hike.

To explain why, look at the 4 groups of costs the OEB’s RPPPR documents forecasts in the latest report, and the report one year earlier:

Despite higher rates, the new “2016”(-17) RPPPR is calculated with lower overall system costs. While “renewables” are expected to cost 10% more (~$400 million), non-utility generator costs are to drop a little (as contracts expire); by far the most significant change is a drop of $900 million in the anticipated costs of OPG’s prescribed generators.

The current rate OPG is receiving for nuclear generation is $70.13/MWh, of which $10.84/MWh is a “rate rider” – which means it’s a make-up for costs not recovered when they occurred. OPG currently has a rate application in for approval with the OEB, but because they figure they won’t get around to a decision on that for a long time, they are dropping the rate rider approved only for 2016, and calculating OPG’s rate as only $59.29/MWh in planning the rates for this winter.

The prescribed generators are comprised of the rate‐regulated nuclear and hydroelectric facilities of Ontario Power Generation (OPG). The amounts paid for the prescribed generation as set out in the EB‐2013‐0321 Payment Amounts Order dated December 18, 2014 is $59.29/MWh for nuclear generation, $40.20/MWh for prescribed hydroelectric generation and $41.93/MWh for the newly prescribed hydroelectric generation. OPG filed an application (EB‐2014‐0370) for the clearance of certain deferral and variance account balances. On September 10, 2015, the OEB approved payment amounts riders that were made effective July 1, 2015 with an implementation date of October 1, 2015.    The amounts approved for the nuclear and hydroelectric generation facilities are $777.1 million and $155.6 million respectively and will be recovered until December 2016.  The RPP forecast includes a proportionate share of these costs being recovered through December 31, 2016.    No charges related to the EB‐2014‐0370 application are included in the RPP forecast from January through October, 2017.

On May 27, 2016, OPG filed an application (EB‐2016‐0152) seeking approval for payment amounts for its prescribed generation facilities commencing January 1, 2017 through to the end 2021.  Consistent with past practice, the OEB has assessed whether it is prudent to take into account some effect of the application in this RPP forecast.  This approach is in keeping with one of the objectives of the RPP, which is to smooth changes in prices over time.  The OEB has concluded that, given that the review of this application remains in the early stages, no provisions for OPG’s application have been included in this forecast. Current payment amounts are assumed to persist in real terms through to the end of the forecast period.

Now… I’m pro-nuclear, but OPG’s rate application calls for enormous increases. OPG describes it as 11% a year, over the 5-year rate period in its application. While the rate increases look large, it actually requires OPG to hold costs fairly constant as it loses the output of Darlington Unit 2, which is now being refurbished, as planned and approved by the province.

OPG’s rate application uses a new approach, intended to smooth rates – which sounds like it would coincide nicely with the OEB’s stated intention to, “[protect] consumers from fluctuating commodity prices and provides stability and predictability.”

The OEB is dropping the rate for nuclear from $70/MWh to $59, which is simply asinine as OPG’s cost barely change while production drops. OPG will  later receive a rate increase, and a rate adder to compensate for revenue lost as the OEB deliberated.

Rate adders should be viewed not so much as a tool to ensure suppliers receive fair value for their output, but as an indication neither the generator nor the regulator did their jobs very well.

This is inept regulation. Within the confines of the OEB’s routines this could make sense, but it fails in providing value – “stability and predictability” – to RPP consumers.

Four months after the Canadian Press reported OPG “applied for a whopping 69 per cent increase in the amount it is paid for nuclear power over the next five years,” the OEB is allowing rates to drop as it meditates on an application. The 69% was exaggerated in pretending the current rate was only the base $59/MWh, and not the real $70/MWh due to the rate rider – but it still flagged a steep increase of 43% from 2016’s real rate. The OEB, the body OPG applied to, is reducing the rate 15% in this forecast – which is ludicrous, but at least it’ll make the Canadian Press right about a future 69% increase.

It will simply occur over a shorter time.

The most predictable thing about this OEB rate setting is the rate instability it creates.