Accounting And Ontario's Electricity System: A Farce

People are trying to make sense of the record low electricity price Ontario achieved this Sunday.  I wrote about it Monday morning, but most are getting their information from other sources, including the Toronto Star– and these source don’t seem to working with any foundation in accounting.  I have some experience with ‘retail math’ – which is probably about a grade 7 level of math. I combined unease with my qualifications, my interest in technology and theories of education, and my occasional feeling I should take a more active interest in my children’s schooling, and brushed-up on my accounting with some lessons at the Khan Academy (which I learned of in a recent column by Margaret Wente). 

So let’s look at August 28th figures in Ontario using the Khan Academy cash basis accounting lesson as a guide.

Revenues for August 28th came from the sale of electricity in the market. August 28, 2011, in Ontario, 376,344MWh of electricity were sold at a weighted average price of -$17.53. So total revenues were -$6,597,310. This is a big point of confusion for some reason.

John Spears wrote, “In fact, the Ontario system took a loss of $6.6 million on Sunday as it sought to dump the surplus.”

That’s not the loss ... that’s the revenue

We do have expenses too.[i]  I know the average cost of electricity[ii] has been about $70/MWh in 2011– but I’ve used actual production figures for the 28th along with my estimates of the levelized unit costs, or the contracted/regulated prices, of each source. One of the reasons I did so was to add a line item for generation we probably paid not to occur. This was reduced output at Bruce B units, which I’m assuming Bruce Power will receive payment for, at the floor price they are contracted to receive. 

	MWh	Est $/MWh	Daily Cost
Nuclear	258123	$57	$14,583,950
Coal	806	$40	$32,240
Gas	26012	$100	$2,601,200
Hydro	70720	$38	$2,687,360
Wind	15597	$135	$2,105,595
Other	2416	$100	$241,600
Imports	1613	$29	$46,885
Total Supply	375287	$59	$22,298,829
Bruce B Bypass	8000	$51	$408,000
Total Expenses			$22,706,829

Subtracting these expenses from the revenue, of negative $6,597,310, in cash basis accounting we arrive at the loss.

$29.304,139.


But cash basis accounting is for chumps.  Accrual accounting is for the big guys   

Cash basis is built upon with accounts receivables, and deferred revenues.  

The accounts receivables, in Ontario's market scheme, is called the global adjustment, and it changes based on the value of the profit/loss from the cash basis accounting example above.

The cash accounting loss becomes the most significant portion of the global adjustment receivable.

So we lost $29.304,139 on August 28th.  That figure moves into the Global Adjustment pot and will then be allocated to Ontario ratepayers when the bills for August go out in September.  This happens all the time now.  Days that appear to be bad, like Sunday, only have the impact of upping the GA portion of the bill - directly on the bill if one is a wholesale market customer (aka an employer) - indirectly for residential rates.  The small difference is that instead of that part of the bill being around $26.57, as was forecast before August 28th, it will be much higher.  That's not abnormal at all.  The GA is usually above that now.  $26.57 would equate to about a $320 million, monthly, loss/account receivable (it's so much less confusing just to call it the global adjustment - so few understand that a loss in the electricity sector is a receivable!), but once the August figures are finalized they'll be in line with a 12-month running total approaching $5 billion (over $400 million per month).  That would put August's adjustment closer to $34.45- which is, I would guess, closer to what the final August figure will be.

.

It is noteworthy that the $5 billion figure equates to a loss of about $13.7 million dollars a day, in the immature sense that the market electricity sold for that much less than we paid suppliers for it.  So August 28th was bad, but .. so are most days.

So we paid $20 to export MWh's we paid around $60 for.  We usually only get $30 anyway.   The running 12-month total on that difference is about $500 million.

Se we paid $20 to export MWh's for wind production we paid about $135/MWh anyway.  That loss, when selling it under $40/MWh, is averaging about $1 million a day anyway - $2.4 million isn't that exceptional.

I shouldn't have questioned my ability to interpret the accounting on this.

I am well qualified to understand.

I worked for Eaton's.

---

[i] Primarily the electricity purchased from suppliers.  These differ by supplier, and many are not knowable.  Nuclear is $50-$70/MWh, hydro from the HOEP but mostly a little under $40/MWh, but there’s some private supply contracted at higher rates.  Wind might be as low as $80 but is probably closer to the currently offered price of $135/MWh – and natural gas supply is really confusing because many of the new contracts paid capacity payments knowing they won’t be utilized frequently – but $100/MWh is a useful figure.

[ii] Cost here is defined as it was in the IESO’s 2010 summary, which is the HOEP plus the Global Adjustment rate

Sunday Sees Record Low Pricing in Ontario’s Electricity Market

The official daily report from the system operator shows August 28^th’s  an average HOEP at $-22.58 (weighted average of $-17.53/MWh).  This is the lowest average price throughout a single day on record – breaking a record set only January 1^st.  

A number of elements combined to drive the price down.  The most obvious of these is simply the reduced demand of a cool August Sunday.  The average Ontario demand, of 14,146 MW, was the lowest since late in June.

But the reduced demand also worked in tandem with 2 other factors.  The traditional Ontario one was an increasingly suspect supply mix and economically inept procurement policies.  On this cool August day, all of Ontario’s nuclear units were operating, and Ontario’s industrial wind turbines were having their second highest daily output of the summer.  The nuclear units at Bruce B reduced output (through the steam bypass that should be made requisite in upcoming refurbishments), but the IWT output thoughtlessly continued, with the cost of attempting to export the unnecessary, ill-timed, output adding to the already excessive cost of the unnecessary contracts.

And finally, it appears the export markets simply weren’t available to the extent they usually are.  As imports ground to a halt, export levels were only slightly above the summer's average, despite paying, at times, as much as $128.40/MWh in an attempt to find a grid to take our excess production.

While the day was exceptional, the issues that caused the record, negative, pricing are systemic.  Export markets are not becoming more lucrative.  Surplus baseload generation, which can be seen each night in the above graph, has been a growing problem for a long-time now, and it continues to grow as the supply mix becomes increasingly less flexible (with the return of 2 nuclear units next year and a 50% increase in wind capacity).

It is only a matter of time until new market pricing lows are set.

The call for a moratorium, on procuring new supply, does not seem to have been heard.

The call to renege on existing contracts probably will be.

That too, is only a matter of time.

Duncan's Grow-Op Is Stealing Hydro

Public generation is increasingly being demoted to servicing private interests in Ontario. In April 2004, minister Dwight Duncan delivered a speech, to the Empire Club, titled “Choosing what Works for A Change.” In hindsight, the obvious question should have been, “Works for who?”

“... we will be introducing legislation for sweeping institutional reform that would see a combination of a fully regulated and a competitive electricity sector. There would be a split between regulated prices for electricity coming from major nuclear and baseload hydro generation assets, and a healthy, competitive market for all other generation.  This combination of pricing mechanisms would result in a blended cost for consumers.OPG's nuclear and baseload hydroelectric assets would be regulated by the Ontario Energy Board, who would set regulated prices, while the wholesale price for other electricity generated in the province would be set by the market, which would continue to operate as it does now.Fixed prices for a large part of the energy consumed in the province would keep the overall blended price for electricity relatively stable.”

The 'relatively stable' electricity price noted has since shown Ontario Power Generation (OPG) prices being held down in order for the public generator to fund private schemes. The overall rate shown in these graphs I've referred to here as the Independent Electricity System Operator (IESO) Commodity Charge (I've called it the wholesale rate elsewhere on this blog). I've done so as that is how it is shown in IESO monthly reports, but also because the term 'commodity' has a specific meaning in economics. OPG is the majority of production, so the actual difference between what OPG receives and what other market recipients receive is far greater than shown in this graph.

The monthly IESO reports show the two components of the commodity charge, which are the Hourly Ontario Energy Price (HOEP), and the Global Adjustment (GA). The GA is a mechanism to recover the full cost paid to generators – increasingly we have inched towards all generation being contracted (or regulated in OPG's case), so the GA reflects the difference in the value of contracts and the market value (distorted by those contracts, but somewhat functional), Revisiting 2004's intentions, it is notable how the two components have shifted since the GA was introduced. The market price does come close to following the demand movements – as demand drops so does price. But 2008 was the last year the HOEP, or market price, had real meaning in determining the value of production. Since 2008, and never so significantly as in 2011, there is no value to the production of electricity without an existing contract for purchase of the production, outside the uncertainty of market fluctuations.   The value is in the contract - not in any competence in efficiently generating electricity that can service demand for electricity.

This answers the question as to who this 'market' is supposed to work for – whoever the government chooses it should!

The money to pay the global adjustment (GA) does comes, disproportionately, by selling the production of OPG at higher and higher rates while keeping the payments to OPG steady. OPG's production does include coal (thermal), which has been greatly curtailed. Combining the production of OPG, and their pricing, we see that despite declining total output there is an enormous, and growing gap, between what the 'system' pays OPG for their production, and what we pay the system for that same production (in the graph this is the “profit on OPG production”).

The 2011 figures charted here are for only the first half of the year, which means OPG is on target to get over $2 billion less for their production this year than we are to pay for it. Since 2005 began, OPG has now received over $8.5 billion less for their output than Ontario consumers have paid.

This is not a commodity market.

If we were to add that $8.5 billion onto a similar amount collected, since 2002, by the debt retirement charge, we'd have a very large chunk on an alleged $21 billion shortfall at the old public Ontario Hydro entity. If we realized, beyond that, that the revenues from Hydro One, the distribution, and transmission, remnant of Hydro One, have also been rising, there is no need to take the initial claim of a 'stranded' debt seriously. That is not to say everything could have continued without any changes – but it is to say the debt is now shown to have been manageable.

Now we are being charged a lot more, but not to pay down debt. Reportedly, these increased charges are to grow the 'green' energy sector. 2011 will not see a notable change in provincial demand for electricity, but it will see huge growth in intermittent supply. Wind power is most notable now; with capacity factors slightly over 13% in July, and slightly under that over the first 24 days of August, the inappropriateness of this source, in Ontario, is clear.

Nevertheless, 4 more wind 'farms' have appeared in IESO hourly reporting in recent weeks. Like narcotics, they grow to feed the demands of inebriated minds throughout the land. 

This Liberal grow-up is being funded by squandering our Ontario Hydro inheritance.

Government Machine Rewrites History To Protect McGuinty on Debt Retirement Charge

The OEFC's 2011Annual report for the next OEFC fiscal year, ended March 31^st, 2011, was being posted to their website as I was posting my article, Retire the Debt Retirement Charge .

Remarkably the 2010 report wasn't posted until October 2010 – who knew the next would follow 10, and not 12, months later.

I would note the phrasing on page 5 has been changed, specific to the residual stranded debt, has been changed to “Subtracting the $13.1 billion from stranded debt of $20.9 billion resulted in a difference of $7.8 billion, the initial estimated residual stranded debt.” [my emphasis]

The OEFC's 2010 report read “Subtracting the $13.1 billion from stranded debt of $20.9 billion resulted in a difference of $7.8 billion, known as residual stranded debt."

The OEFC's 2000 annual report read, “...and estimated $7.8 billion of residual stranded debt. The Electricity Act, 1998 also provides for a Debt Retirement Charge (DRC) to be paid to the OEFC to retire residual stranded debt.”

The big addition in 2011 is:

The Debt Retirement Charge and Defeasance of Stranded Debt
The Electricity Act, 1998, provides for the DRC to be paid by consumers until the stranded debt is defeased.
Defeasance of stranded debt is projected to occur when the value of OEFC’s remaining debt and other liabilities is fully offset by the value of its assets such as notes receivable from the Province, OPG, IESO and NUGs; electricity sector dedicated income; and the estimated present value of future payments-in-lieu of taxes.

The debt repayment plan estimates stranded debt will likely be defeased between 2015 and 2018, the same range that was reported in last year’s Annual Report, and the DRC is expected to end after defeasance and will no longer be charged on consumers’ bills. The estimated defeasance of the stranded debt and the end of the DRC is provided as a range to reflect the uncertainty in forecasting future dedicated revenues to OEFC, which depend on the financial performance of OPG, Hydro One and municipal electrical utilities, as well as other factors such as future tax rates and interest rates. For example, PIL of taxes to OEFC have varied from as low as $321 million in 2010–11 to as high as $949 million in 2005–06, while the electricity sector dedicated income, which depends on the net incomes of OPG and Hydro One, has been zero in five of the years since 1999–2000, and as high as $771 million in 2010–11

This is nonsensical obfuscation. The debt retirement charge is for the 'residual stranded debt', which is being deliberately confused with the 'stranded debt' for a purely political reason. 

What is the current calculation of the residual stranded debt and when did it change?

My understanding is that the only requirement, under the Electricity Act, 1999, is for the Minister of Finance to say the 'residual stranded debt' is being recalculated – apparently as the entire debt.

Mr. Duncan, what is your calculation of the residual stranded debt?

All of the unfunded liability?

If Mr. Duncan provides a figure, we will know the value the government currently places on the assets of the province, which the malfeasant defeseance section notes as including, “OPG, Hydro One and municipal electrical utilities.”  

The need to focus on the value propositions, and performance, of these businesses/bureaucracies is precisely the reason why the DRC crutch should be removed.

Retire the Debt Retirement Charge

Ontario's Debt Retirement Charge (DRC) has become an election issue. The PC party made the removal of the DRC, which they introduced while forming the government¹, a part of their election platform . The pledge is contained in the “Getting Home Energy Bills Under Control” section of their Changebook platform. The elimination of the DRC should help do that in the long run, but probably not in the short term.  

The DRC is one tool to service a debt calculated as being left by Ontario Hydro after the break up of that Crown corporation – with the intention to sell the pieces off. The Ontario Electricity Financial Corporation (OEFC) is the entity established, by the same Act that authorized the DRC, to handle the accounting. I would say handle the money, but my understanding is that all financing for the OEFC comes from the Ontario Financing Authority (OFA). Effectively, the cost of financing through the OEFC is the same as the cost the province receives on all it's debt.²

The debt that the DRC is to address is known as the “Residual Stranded Debt.” In 1999 , the OEFC “inherited” a $38.1 billion debt from the former Ontario Hydro. Of that debt, notes receivable were also transferred; from the province $8.9 billion, OPG $3.4 billion, Hydro One $4.8 billion and IESO $0.1 billion (I've updated the entity names). $20.9 billion was not considered to be backed by these notes (the 'initial unfunded liability'). Of this amount $13.1 billion was considered recoverable through other revenue measures (“payment in lieu of taxes and electricity sector dedicated income”). From the 2010 OEFC annual report:

“Subtracting the $13.1 billion from stranded debt of $20.9 billion resulted in a difference of $7.8 billion, known as residual stranded debt.

The Act provides for the DRC to be paid by consumers until the residual stranded debt is retired. The debt repayment plan estimates residual stranded debt will likely be retired between 2015 and 2018.“

The 2015-2018 dates appear to be nonsense. We know the MWh sold in Ontario, we know the DRC is $7/MWh since May 1, 2002, and we have a pretty good idea of the cost of OEFC financing, and the cost of financing public debt has fallen dramatically since 2002. My amateur estimates show the DRC should complete paying off the residual stranded debt in 2012.

	MWh	DRC $/MWh	Estimated Interest Rate	Residual Stranded Debt	DRC Revenue	Interest on Residual Stranded Debt
2002 (May 1 -)	102,972,868	$7	7.31%	$7,800,000,000	$720,810,076	$332,519,393
2003	151,719,470	$7	6.92%	$7,411,709,317	$1,062,036,290	$512,779,912
2004	153,436,970	$7	6.65%	$6,862,452,939	$1,074,058,790	$456,195,025
2005	156,971,620	$7	5.91%	$6,244,589,174	$1,098,801,340	$368,822,607
2006	151,054,281	$7	5.74%	$5,514,610,442	$1,057,379,967	$316,761,358
2007	152,205,637	$7	5.69%	$4,773,991,833	$1,065,439,459	$271,717,852
2008	148,675,912	$7	5.05%	$3,980,270,227	$1,040,731,384	$201,049,590
2009	139,165,604	$7	4.50%	$3,140,588,433	$974,159,228	$141,448,070
2010	142,194,821	$7	4.38%	$2,307,877,276	$995,363,747	$101,161,492
2011	88,170,559	$7	4.27%	$1,413,675,021	$617,193,913	$60,322,272

The residual debt is defined a little differently in the Electricity Act, 1999, than in the documents from the OEFC. The act states, “The Minister of Finance shall determine the stranded debt and shall from time to time determine the residual stranded debt in accordance ...” It appears the DRC can stay as long as The Minister of Finance calculates there is a debt that won't be recovered through other means. That appears to be the case as the initial “stranded debt” was $20.9 billion, which was adjusted to a $19.4 billion “unfunded liability,” after paying off $6.4 billion from my calculations, the 'unfunded liability' would be reduced, by the end of 2010, to $13 billion by the DRC alone. The OEFC reported as of March 31, 2010, it was still $14.8 billion.

We should have seen more revenues coming in from the non-DRC sources, which are payments in lieu (PIL) of tax, and electricity sector dedicated income . The figures from the OEFC indicate these were to handle the bulk of retiring the alleged 'unfunded liability.'

The revenue figures, from the 2010 OEFC annual report, and older annual reports, show the shortfall is most notably due to 'electricity sector dedicated income.' Hydro One, and Ontario Power Generation (OPG), carry on their business, with revenues and costs, and in the end their balance sheets show a profit or loss. Then the province gets paid – which is paying off the equity in the funded liability (remember that $17.2 billion of the debt was back by assets, and this is the government's payment for equity). If there is anything left – it goes to pay down the unfunded liability³. 

There is some philosophical accounting in all that. If the 'electricity sector dedicated income' was consistently paying down the unfunded liability, wouldn't that mean the initial equity was undervalued (the province is paid, first, for it's equity). And if the funded liability (through the notes), was 0, and the unfunded liability was the entire $38.1 billion, would that $17.2 billion dollar debt be getting paid off quicker? If the full debt was on the books at OPG and Hydro One, would that improve the operations of those companies, through motivating management to keeping employee expenses aligned more closely to other companies and forcing the possibilities of bonuses to depend on a better evaluation of the profit/loss performance, including the cost of capital?

These questions are necessarily rhetorical, not only because of the difficulty in evaluating the initial debt calculations, but because of the current regulatory, and political, environment.  There is no attempt being made to allow OPG to be profitable.  The exact opposite is true.

Electricity is, to most, a commodity. The value of that commodity should be considered what is paid for it.

In Ontario, that is either the combination of the Hourly Ontario Energy Price (HOEP) and the Global Adjustment (the two comprise the wholesale rate), or a Regulated Price Plan⁴.  The rates paid to Ontario Power Generation (OPG), vary by source, but the biggest impact on the average $/MHh they receive is driven primarily by regulated rates, set by the Ontario Energy Board, for both nuclear and select hydroelectric assets. I've collected up the data from OPG annual reporting, the IESO for global adjustment, consumption and HOEP figures, and the OEB for regulated price plan date --- and it shows that, since only 2005, OPG's output has been resold for $7 billion more than 'they' – which is 'we' – were paid for it. If OPG were receiving for their output what 'the system' receives for their output, the paying off of the entire 'unfunded liability would be nearing completion.  That is where this amount should have gone.

 But that isn't where the money goes.

That money stays in the system to settle up with all suppliers based not on market pricing, but on contracts the government has been directing the Ontario Power Authority to gift, to the types of people the government wants to gift contracts to. It has nothing to do with planning, regulators are not relevant, and a market isn't involved in any way.  The system does give a measurement of the increasingly dysfunctional nature of what is sometimes called a 'hybrid' market. That measurement is the global adjustment (GA) – which is the pot of money collected from all consumers, in Ontario, to settle the difference between what the market, via the HOEP, valued electricity at, and what our contracts with suppliers valued it at. The actual figures are not as relevant as the trend, which shows the distortion/dysfuntion, of the market, is growing.

That's not entirely unexpected as politically people struggle to value external factors in pricing electricity – but this is exactly where Ontario's market is the greatest failure. The recent trend in Ontario is that the months with the greatest consumption are seeing the lowest prices, and the highest CO2eq. emissions. Similarly, the hours with the highest demand are seeing the greatest drop in market, HOEP, prices. More bizarrely, the generation that should be most highly valued is paid the least. Niagara Falls generation is synonymous with electricity in Ontario – it is why we call our provider 'Hydro', yet that generation is put in the important role of balancing the grid while being straightjacket to regulated rates, by the Ontario Energy Board. Here is one recent week of hourly data, showing a generation source that wanders about oblivious to demand, and OPG's Niagara Plant Group diligently working up and and down to balance the grid. The wanderer, wind, is contracted at $135/MWh – OPG's regulated hydro is restricted to $34.13/MWh.⁵

This makes no rational sense under any consideration of 'value' in any market. Those with an interest in electricity systems  know the search is on for electricity storage solutions, and the companies pitching flywheels, batteries, pumped storage, etc., in a market sense, rely on peaking, and ramping, power to be valued much greater than intermittent, or baseload, supply.  The ridiculous pricing relationships Ontario has introduced cannot exist in a 'green market' anymore than they can exist in a market defined by polluting/GHG emitting sources.   

The challenge everywhere, including Ontario, is for proponents of markets to develop the market mechanisms that both allow for competition among suppliers, and value the environmental attributes that societies desire to value.  The DRC is one mechanism for pretending public supply is more expensive than the selected private supply the Ontario government is currently contracting.  Canceling the DRC won't change pricing overnight, because the prices have been rising due to contracts that exist regardless of the DRC.  It will remove a crutch from a sick electricity market that is failing to thrive, and it will focus the attention where the attention needs to be focused.  

On the contracts.

Without a competitive electricity market, there is no context to calculate a new figure for either 'stranded debt' or 'residual stranded debt':

“stranded debt” means the amount of the debts and other liabilities of the Financial Corporation that, in the opinion of the Minister of Finance, cannot reasonably be serviced and retired in a competitive electricity market”

The figure provided for the 'residual stranded debt', repeated since 2002, is almost paid.  No new figure has been, or could be, provided. The only thing left to do is to find a Minister of Finance who recognizes these realities. and declares the residual stranded debt retired.

“Retirement of residual stranded debt(6)  When the Minister of Finance determines that the residual stranded debt has been retired, the Minister of Finance shall publish notice of that fact in The Ontario Gazette. 1998, c. 15, Sched. A, s. 85 (6).
Determination final(7)  The determination of the Minister of Finance that the residual stranded debt has been retired is final and conclusive and shall not be stayed, varied or set aside by any court. 1998, c. 15, Sched. A, s. 85 (7).

1 The DRC was added to bills in May, 2002 (as per The Electricity Act, 1998)

2The interest rate estimates I've generated are simply the 'interest on debt' divided by the 'net debt' in the OEFC table here

3 Recently this figure is almost entirely dependant on the performance of the investments in the fund OPG is required to maintain for nuclear retirement/decommissioning/permanent storage, etc

4 Time-of-use (TOU) is one type of RPP - but it should equate to the older two-tier pricing structure, and if forecasting is correct, both will equal the wholesale rate (the GA added to the HOEP).

5http://www.opg.com/news/releases/110520Q1Financials.pdf

Time for Hudak to Step Up, Or …

In early October, Ontario will vote in the next provincial government.  Events of the past 2 weeks have made it much more likely that the new government could be the same as the old one.

I wrote a blog entry as the federal election campaign kicked off, which began, “I predict a strengthened Conservative government, and probably a majority.”   That race didn’t pan out exactly as I planned, but it was pretty close.  For the most part a weakened Liberal party allowed the Conservatives to pick up seats in Ontario beyond what I expected, but it also reduced the vote splitting in BC where the NDP did better than I thought.  In the end the result was as I had expected.

The federal election should bode well for Ontario's Tim Hudak led Progressive Conservative party.  The Federal Conservatives captured 73 Ontario seats, the NDP 22 and the Liberals only 11 seats.  The Conservatives captured over 2.45 million votes in the province – which was 44.4% of the marked ballots, and is in the high 20’s as a percentage of eligible voters.  The federal Conservatives benefited, in Ontario, from a split of 25.6% NDP vote, and a 25.3% Liberal vote. 

I prefer to look at election statistics in terms of the share of  potential votes.  In Ontario, as federally, the share of eligible voters voting has been declining.  What has not recently been changing, significantly, is the percentage of voters who support either the NDP or the Liberals.  The trend shows that these two parties are likely to collect 30-34% of the available votes.  It is possible to see the exception to that occurring during Mulroney’s majority rule federally, which supports the belief Ontario spits its support federally and provincially.  Regardless, since the Mike Harris PC party won in 1995, the trend has been a decline in voters which closely matches the decline in PC votes.

The May federal election saw a modest increase in voter turnout to 61.4%, almost fully 10% above the last Ontario turnout.  A 10% bump would make a big impact in Ontario.  If it occurred, it would likely go disproportionately to the PC’s, who collected a meager 1.4 million votes in Ontario’s 2007 election; over 1 million less than the federal Conservatives won in May.   The differences between McGuinty’s win in 2007 and Harris’ win in 1999 was 600,000 fewer PC voters, and a drop in voter turnout percentage which equated to over 500,000 fewer voters.

In the past couple of months, both opposition parties had, in my opinion, laid a good basis for an election campaign with the release of their platforms (I’m deliberately ignoring the Greens, and other fringe parties).

The PC’s‘Changebook’ platform should have benefited from the initial reaction in the popular press – a reception that basically said the offering continued McGuinty’s policies with some hopeful budget projections.  At first pass the press entirely missed what the figures shown for health and education spending meant.  The result of the careful presentation of the aggressive aspects of the platform should have freed up Mr. Hudak to concentrate on ceasing the escalation of electricity rates and providing the tax cuts that have been targeted to the most indebted voters – families.  The problem being that the PC’s then took the summer off, and Changebook may have ceased to be a significant issue.  Electricity rates, for residential customers, remained fairly consistent as the government chose to increase government debt to cover-up the increased costs of it’s policies (through the OCEB).  The fiscal questions internationally are likely to halt the rise in gasoline prices.  The debates Changebook hoped to lay the groundwork to win, seem increasingly unlikely to appeal to the missing million, who are potential PC voters.  

The NDP, similarly, developed a platform that I thought was very strong, and could have formed the basis of a campaign leading to government.  Targeting the HST on all energy was appealing, but adding gasoline to the exemptions should have really bumped their support in the north.  But again the platform was useful in laying the groundwork for a debate – and before that debate could occur the NDP sabotaged themselves by becoming the Greenpeace fringe party as soon as they went off script (like the Greens). 

My advice to the NDP would have been to maintain the national brand that has aided it’s success federally, and in provinces from Nova Scotia to Manitoba – in fact I’d have the phrase ‘like Manitoba’s long-term NDP government’ worked into as many sentences as possible.  I would not have talked of nuclear as ‘dangerous’, putting the public generator, one that advocates for nuclear internationally, in charge of procuring wind supply, and then talking of bike policy as if the Premier of Ontario should act like the Mayor of Pleasantville.

As we enter the real campaign season (hindsight is likely to show it started a week ago), we have an unappealing PC option and the increasing likelihood the NDP/Liberal vote will not be evenly split.  As it becomes more likely the PC’s would need to win an election by actually presenting themselves favourably to potential voters, the conventional political position that the leader in the polls should never take a chance on any position of substance is increasingly likely to hurt a PC leader who currently comes across as more smarm than smart. 

It is difficult, for me, to see a scenario where the PC’s don’t take more seats than in 2007, especially in the 905 regions surrounding Toronto, and eastern Ontario, and it’s very hard to see the NDP not winning in Ontario’s north, as they did federally.  It’s also hard to see how a minority PC government could govern effectively – but that is the most likely outcome.  

Federally, the one piece I didn’t foresee was the movement to the NDP during the campaign.  I believe the single greatest cause of that was Jack Layton’s debate performance, most importantly in hammering Ignatieff’s attendance record in Parliament.   Canadians didn’t exhibit much patience for not showing up, regardless of Mr. Ignatieff’s reasons (which were likely sound). 

As Ontario’s election campaign came to life in the past two weeks, with the Liberals and the army they’ve enriched (Green Energy Act beneficiaries, and government unions), and as the NDP committed Harakiri with a bicycle, Hudak was reportedly on two weeks of vacation.  I am aware Tim Hudak has a personal life – and I certainly think there are more important things than public life for all of us.  But to lead a party he needs to be present.  Not being Dalton McGuinty is an attribute 7 billion people on the planet share; that can’t be the basis of asking for the votes of Ontarians, who need something to vote for – and for the PC’s to win a majority they need over half a million, and perhaps closer to a million, Ontarians to chose to vote for them instead of choosing not to vote at all.  Apathy is as great, or greater, an opponent as the Liberals or the NDP.  

Voters need to be convinced.

It is time for Tim Hudak to step up … or to step down.

A 400% Rise in the Global Adjustment, and Other Disturbing Trends

The Global Adjustment provides both adequate energy supply and green energy for Ontario. It accounts for differences between the market price and the rates paid to regulated and contracted generators and for conservation and demand management programs.

The IESO provided a second, lowered, estimate for July's Global Adjustment (GA), of $30.75/MWh or $390.3 million. In July 2010, the figures were $7.50/MWh and $98.8 million.

The GA is important because it indicates the discrepancy about what the government values electricity at (which is the rates paid to suppliers), and what the market values it at, which is the Hourly Ontario Energy Price (HOEP). The combination of the HOEP and the GA is the wholesale rate in Ontario (which will equate with the residential regulated price plans if OEB forecasting is accurate) – it can also be considered the 'cost of power' in Ontario¹. On exports, Ontario cannot charge the GA. We can endlessly debate the extent to which exporting benefits Ontario, but at the simplest level if the cost of electricity is the HOEP plus the GA, there is a subsidy on exports because they don't have the GA. The increased GA means, increasingly, external customers pay less than Ontarians do for Ontario's electricity production. Tracking 12 month running totals, the difference is now about $550 million dollars, and will likely end August 2011 about $200 million above the level of August 2010².

Many people that wish to alleviate anthropogenic global warming (AGW) argue that markets undervalue electricity because the externalities (most notably emissions) aren't accounted for in the market. That may be true (in my opinion it is), but electricity consumption over the first half of 2011 was up very slightly over the first half of 2010, and July 2011 use was nearly identical to that in July 2010(down 0.07%). The comparison of the two months, of July, is apples to apples.

The market price, or HOEP, declined from $54.29/MWh in July 2010 to $37.08/MWh in July 2011. That is a slightly different subject, except to note peak production seems to be becoming increasingly cheaper.I briefly examined export statistics for various province the other day, and the Ontario experience looked to be typical – and that experience is cheaper pricing at higher demand levels, and fewer hours at elevated demand levels.

The implications for sanity in variable pricing policies is being impacted by these market trends. I am opposed to time-of-use rates (TOU), and not to real-time pricing (RTP)rates, but the difference is looking increasingly inconsequential. When Ontario first introduced TOU rates the ratio was 1:2:3 for low/mid/high demand, and a recent OEB exercise indicated the government felt that remained desirable.  Reality has seen the ratio, which existed in these usage groupings as recently as 2009, eliminated.

The HOEP doesn't really matter to the wholesale rate within Ontario. If the market rate was $0 then the GA would just be the entire wholesale rate!  For July the wholesale rate will end up around $67.83/MWh, and that will be almost 10% higher than the previous year. We know the GA adjusts the charges to match the contracted costs – so the wholesale price, paid by many businesses, is up 10%, with consumption at the same level, not because of any market reason, but primarily because the government drove up the rates 10% arbitrarily (which is, coincidentally, the arbitrary election year reduction they have taken off consumer bills).

But ... the wholesale rate was lower in July than it has been in the previous months of 2011 – and the same was true in 2010. It's worthwhile to examine why it is that the highest demand month has the lowest cost (in 2010 July had the most demand, but in 2011 July ended up with just .03% less consumption than January).

One reason is the growth of industrial wind turbine generation in Ontario, and their feeble output in July, which is a benefit in lowering contracted prices for the months of July and August. In 6 years of IWT's at operational locations exceeding 10MW capacity, the July output has ranged between 13% (2007 and 2011), and 16% (2008).³

This low in production during Ontario's peak demand season isn't the only negative aspect of wind supply on pricing/supply. As demand ramps up in the morning, wind is, on average, dropping down to it's daily low-point in production. Similarly, as demand is stepping down in the last hours of they day, wind is headed upwards in production. Ontario's public hydro assets handle some of the ramping adjustments necessary for system stability – carbon plants handle the rest. They are more necessary because of wind supply.

The natural gas plants, and the coal plants, are the big driver of lower cost electricity during higher demand periods for electricity. I've previously noted the nature of our most recent CCGT contracting impacts – a guaranteed base payment . A net revenue requirement for the natural gas plants means the first MW of production, for the 4000MW of capacity at the big 5 plants contracted since 2007, is very expensive ($7900/MWmonth, which ends up at about $1,050,000 a day), but after that the price drops with each MW produced (to the cost of the fuel).⁴ I punched a figure of $32.50/MWh for the fuel into a spreadsheet, and added up the generation for the 5 plants over a couple of months. April's 400GWh of production cost worked out to about $111/MWh, and July's 3X greater production reduces the price per MWh to only $58. The more we burn, the cheaper it gets. Coal has no regulated price at all, and the plants are essentially treated as having no value. So, as with gas, if the HOEP is above only the cost of fuel, coal is a money maker. In July Ontario had more production from coal than it had during the first 6 months of the year. Consequently, the wholesale rate of electricity in Ontario (the HOEP + GA) has been dropping during Ontario's highest demand months.

As an election approaches in Ontario, with choices in electricity policy ranging from a return to public power, to a renewed attempt at competitive markets, Ontarians need to understand where the past years, of what is flatteringly referred to as a 'hybrid' market, has brought us. Higher demand increasingly means lower prices, due to the increase in supply from fossil fuels – and thus the pricing curve moves in the opposite direction of the emissions trend. 

In fairness, there is a trade component that makes scoring emissions far more difficult.  Ontario overwhelmingly exported to Michigan and New York in July, and if that generation did not come from Ontario's gas and coal plants, it would have come from other coal plants anyway - and those emissions would have drifted into Ontario.  There is also a trend that makes the costs, or benefits, of exporting difficult to measure - in July those exports occur primarily during higher use daytime hours (as they did in January).  These things don't change the overall messages.

Higher demand equating to lower prices, and lower prices equating to higher emissions, is not what we wanted - and it is not sustainable. 

 If we want a market system, we should move on to questions of regulation, market design, and, above all, value.  

If not, we should re-examine the public option.

The free market cannot continue to be synonymous with the free lunch.

1 The second last paragraph of the IESO's summary of 2010 figures defines it as such.

2 Data, queried from IESO hourly data and GA monthly figures, is in this spreadsheet.

3 The generation data is from the IESO, filtered to data after commercial operation dates as shown at the OPA site – and the formulated data I've put here.

4 See page 16 of this OEB document, and this IESO page for the capacities of each location.