OPG’s 2017 results grate

Yesterday Ontario Power Generation released their 2017 Financial Results:

Ontario Power Generation Inc. (OPG or Company) today reported net income attributable to the Shareholder of $860 million for 2017, compared to $436 million in 2016.

That must be considered a great number in the context of the income history at OPG as it’s the highest they’ve ever accomplished. The apparently excellent results may leave some wondering what critics commenting on the sector have been braying on about. I, a critic, have reviewed the results and found some things to bray about.

OPG annual financial results

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Accolades for OEB’s regular regulation

The Ontario Energy Board (OEB) has issued a decision today on guidelines for funding the expansion of natural gas delivery. The ruling is extraordinary in adherence to sound regulatory principles – at least in light of the willful plundering that’s been allowed to fall on electricity consumers for years, and which I noted was continuing just two days ago.

Contrast the government’s spend/contract first, do the math never, electricity experience with:

This proceeding is a generic hearing convened by the Ontario Energy Board (OEB) to establish a framework within which natural gas service could be expanded to communities in the province of Ontario that are not currently served.

Despite the benefits of natural gas, there are still areas of the province that are not being served. In most cases, these are rural and/or remote communities where there are challenges to building out natural gas infrastructure (primarily pipelines) in an economic way. Although the costs of building the infrastructure can be high, so too can the benefits of having access to natural gas. Despite some of the high up-front costs, it appears that for many communities the economic benefits of having natural gas would greatly outweigh these costs. In spite of this, many of these communities are not being served under the existing framework. Clearly, there are barriers. The purpose of this proceeding is to assess what these barriers are, and to determine what steps, if any, can be taken to overcome them.

Under the existing framework, utilities are generally only permitted to expand to communities where the incremental revenues that will be generated from the expansion will, over time, cover the costs of the expansion. If the revenues do not recover the costs over time, an up-front payment in the form of a capital contribution will be required from new customers. This ensures that existing customers do not have to pay higher rates to subsidize the extension of natural gas service to new communities. This is known as the “benefits follow costs” principle, and has been used for many years in Ontario and other jurisdictions.

The OEB has determined that [a requirement to charge customers that are in the same rate class the same rate] is one of the primary barriers to expansion, and it will therefore allow utilities to charge “stand alone” rates to new expansion communities.

The other chief measure proposed to enable more expansions was a subsidy from existing customers. … The communities that receive the benefit will be the ones paying the costs.

Bravo.

I would hope the OEB would reflect on all the electricity sector spending they’ve allowed costs recouped on – along with profits – and ask what communities that spending benefited.

And which it did not.

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.Read More »