Ontario Releases Electricity Cost Mitigation Measures
Earlier today, Premier Kathleen Wynne and Energy Minister Glenn Thibeault announced a comprehensive series of measures, entitled Ontario’s Fair Hydro Plan, aimed at reducing electricity bills for Ontario ratepayers. This announcement follows Premier Wynne’s commitment to provide additional relief for consumers incremental to the provincial HST rebate, which came into effect January 1, 2017.
The Plan reflects a substantial shift of certain electricity system costs off of the electricity rate base, partially to be managed as general expense of government, similar to other publicly funded programs and forms of provincial infrastructure, and partially as a refinancing of generation costs to amortize those expenditures over a longer period of time. The Plan includes addressing issues related to the Global Adjustment (GA), wide disparities in delivery rates between Local Distribution Companies (LDCs), support for on-reserve First Nations households, and enhancements to low income consumer support programs.
The new measures will cost the provincial Treasury up to $2.5 billion over the next three years (excluding the refinancing of the GA, which will mean a transfer of costs from the GA of an additional $2.5 billion per year on average over the next ten years).
The government estimates that these actions, including the provincial HST rebate, will result in monthly savings of 25% for the average Regulated Price Plan (residential, small business, farm) customer, and higher for those who currently pay among the highest delivery rates in the province, as well as households enrolled in the Ontario Electricity Support Program (OESP). The government has also pledged to hold RRP rate increases over the next 4 years to the rate of inflation.
These measures are to take effect in the summer of 2017 (OEB rate setting for the RPP scheduled for May 1st).
Global Adjustment – Refinancing
The government has committed a rate reduction to RPP customers related to GA cost recovery by shifting electricity sector asset obligations over a longer period of time commensurate with the asset’s useful life (which has been referred to as “smoothing” in recent media coverage). This will be accomplished through accounting measures transferring a portion of obligation associated with cost recovery to a fiscal liability supported by Ontario Power Generation (OPG). This cost transfer will be later recovered by the rate base through the GA.
This will not impact generation contracts or assets regulated by the OEB. Although the government has stated that this measure would share costs associated with contracted generation more fairly, it places an additional emphasis on the IESO market renewal process for securing assets coming off contract (now that the costs associated with those assets are effective being carried beyond the contract terms).
Given this shift, GA will be impacted in such a way that RPP customers will see electricity rates decrease to approximately 2015 levels, while Class B and Class A consumers will see no change in the GA rates they currently pay.
Under current forecasts, the immediate reduction (e.g. the financed portion) in the GA would be about $2.5 billion per year on average over the first 10 years, with a maximum annual interest cost of $1.4 billion. The term of the GA refinancing is notionally intended to be over the next 30 years.
The government intends to introduce legislation that would, if passed, enable the IESO and OPG to work together to refinance the GA over a longer period of time. The legislation would also outline the role for the OEB, as it relates to the financing proposal.
Expanded Rural & Remote Rate Protection (RRRP) Program
The RRRP will be removed from regulatory charges associated with the electricity bill for all electricity consumers, and expanded to include customers in LDCs with the highest distribution rates, including Hydro One R1, Northern Ontario Wires Inc., Algoma Power, Atikokan Hydro Inc., Lakeland Power Distribution (Parry Sound), Chapleau PUC, Innpower Corporation, and Sioux Lookout Hydro Inc. It will be transferred as a fiscal obligation of the province, and further enhanced to include both low and medium-density customers. These changes will bring these rural and northern customers’ delivery rates in line with those of utilities like Toronto Hydro.
Importantly, this change will not adversely affect LDC cost of service recovery methodologies regulated by the OEB and will benefit all consumers through reduced regulatory charges.
The government intends to introduce legislation to broaden the scope of RRRP and to move forward in having RRRP costs be wholly funded by provincial revenues.
Ontario Electricity Support Program
The government will make available a significant increase in the amount of money available to customers eligible for OESP, and will shift the cost of administering the program out of regulatory charges and onto the fiscal plan of the province. This will further reduce the regulatory component of the electricity bill for all consumers and will also require legislative change.
First Nations On-Reserve Delivery Credit
The government intends to introduce legislation to create the First Nations On-Reserve Delivery Credit and have its costs be funded by provincial revenues. This would include eliminating the delivery charge for all on-reserve First Nations households and removing the monthly service charge for customers of licensed distributors which charge a bundled rate.
The OEB estimates this would provide on-reserve First Nations residential customers an average monthly benefit of $85.
A New Affordability Fund
The Affordability Fund will assist electricity customers who cannot qualify for low-income conservation programs and need financial assistance to undertake energy efficiency improvements. It will work as a complementary measure with existing programs offered by LDCs.
The province intends to work with Hydro One, in consultation with all other LDCs, to establish an independent Trust to serve as the administrator of the Affordability Trust. This will be paid for through provincial revenues.
Expanded Industrial Electricity Incentive (ICI)
Effective January 1, 2017, the eligibility threshold to opt-in to participate as a Class A industrial facility was lowered from 3 MW to 1 MW. That threshold will now be lowered to 0.5 MW and the program’s previous NAICS eligibility requirement will be reinstated for qualifying facilities with peak demands from 0.5-1.0 MW. This will have a significant impact on a number of manufacturers as well as other industrial customers.
Introduced in 2010 through O.Reg 429/04, ICI establishes an industrial rate classification (Class A) and an alternative methodology of determining GA payments for Class A consumers. Initially, eligibility was restricted to facilities with average peak demand greater than 5 MW, a threshold which was subsequently reduced to 3 MW in 2014, and in the government’s Speech from the Throne last year it was announced that a further reduction to 1 MW would occur in 2017.
While consumers 50 kW-3 MW (Class B) currently pay GA volumetrically each month, Class A consumers have their GA rate for the year determined based on their percentage contribution to the five peak demand hours of the year. This results in lower GA for Class A consumers, and depending on a facility’s ability to shift grid demand away from those peak hours, the amount of the benefit can be substantial.
Automatically an expansion of Class A consumers to qualifying facilities who participate in the program with 0.5 MW peak demand should result in a decrease of rates for those facilities. Should customers engage in load shifting and other conservation measures as noted above, the savings could be as high as 30%.
The Ministry of Energy will be working with the Ontario Chamber of Commerce on a targeted outreach campaign to small manufacturers and industrials to encourage participation in the expanded ICI program.
Provincial HST Rebate for RPP Customers
As of January 1, 2017 the government began rebating the provincial portion of HST (8%) charged on electricity back to electricity consumers. This rebate will continue to apply to RPP customers pre-tax and functionally be facilitated through customers’ bills. This measure, on its own, saves the typical household approximately $130 annually.
Collectively, the aforementioned measures represent a sizable benefit to RPP customers, and the reduction in regulatory charges should provide an automatic volumetric benefit of $3/MWh to Class A and Class B facilities.
This announcement will be followed by the release of Ontario’s updated Long-Term Energy Plan (LTEP) anticipated in mid-Spring, which will provide a 20-year forecast of residential and industrial electricity prices and we believe will articulate additional structural changes that may bear on future costs and market changes. The government announced today that its deliberations around the LTEP will also include additional efforts through the OEB to drive cost efficiencies amongst LDCs, including encouraging partnerships and shared services between utilities, reviewing regulatory requirements to reduce “red tape” and eliminating unnecessary costs on LDCs, and looking at new and innovative technologies and business processes. The Minister today also reinforced the importance of the IESO Market Renewal process, intended to find greater savings and efficiencies in the management of the electricity system.
It will be important that businesses and stakeholders remain engaged in the LTEP and IESO Market Renewal processes. Sussex will continue to assess these matters and counsel clients appropriately.
A link to the government’s news release and backgrounder can be found at https://news.ontario.ca/opo/en/2017/03/ontario-cutting-electricity-bills-by-25-per-cent.html. Please also read our colleague Jim Burpee’s recent article in the Toronto Star on related issues, at https://www.thestar.com/opinion/commentary/2017/02/28/explaining-the-rapid-increase-in-energy-prices-opinion.html
Do not hesitate to contact our team if you have questions about today’s announcement.