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Electricty restructuring Bryne Purchase

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Information about Electricty restructuring Bryne Purchase
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Published on January 12, 2008

Author: Dante

Source: authorstream.com

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Political Economy of Ontario’s Electricity Restructuring: Part One:  Political Economy of Ontario’s Electricity Restructuring: Part One School of Policy Studies Queen’s University Bryne Purchase PRESENTATION OBJECTIVES: PART ONE:  PRESENTATION OBJECTIVES: PART ONE Look back at the changing governance structure of Ontario’s electricity sector: Structure of old Ontario Hydro; Reasons for Change; New Market Governance Structure (1999 and 2002); Errors in Execution and Design; Political Economy of Electricity Markets and Prices PRESENTATION OBJECTIVES: PART TWO:  PRESENTATION OBJECTIVES: PART TWO Focus on the Hybrid Market, it’s economic rationale, and its possible evolution: Reminder of supply and demand fundamentals to 2020; The need for a capacity market in electricity sector; Outline some “market limiting” factors. Concluding observations Ontario Electricity Sector: Old Governance:  Ontario Electricity Sector: Old Governance Ontario Hydro (1906 – 1999): corporation centrally planned, built and operated Ontario’s electricity supply; vertically integrated monopoly: generation; (high voltage) transmission; and, (rural) distribution. non-profit, providing “power at cost”; largely self-regulated; engineering dominated culture. Ontario Electricity Sector: Old Governance:  Ontario Electricity Sector: Old Governance Ontario Hydro (1906 – 1999): Relationship to Ontario government: no formal ownership of Ontario Hydro; Province guaranteed OH debt; Premier selects Chairman and the Board. Local Distribution Utilities in 1995 there were over 300; primarily non-profit; owned by municipalities; OH involved in rural distribution. Why Restructure?:  Why Restructure? Confluence of three forces for change: poor monopoly performance (Darlington and industrial consumers); ideas and circumstance (economic theory, CCGT technology and natural gas prices); ideological politics and money (Common Sense Revolution and Bay Street). The New Governance (1999 & 2002):  The New Governance (1999 & 2002) Separate monopoly wires (transmission and distribution) from competitive generation. Give Ontario Energy Board rate regulating responsibilities in monopoly “wires”. Create a competitive market in generation. Restructuring Ontario Hydro:  Restructuring Ontario Hydro The New Governance:  The New Governance Ontario Government: takes ownership of OPG and Hydro One in debt for equity swap with OEFC; makes all companies, including municipal utilities, “for profit” corporations; creates corporate income tax regime for the electricity sector; and, creates a Debt Retirement Charge. Capitalizing of OPG and Hydro One:  Capitalizing of OPG and Hydro One Ontario Power Generation Total Value April 1, 1999: $8.5 bn As at Dec. 31, 2005 Total equity $5.1 bn – Total equity $5.4 bn Total debt $3.4 bn – Total debt $3.9 bn Initial Capitalization: 60% Equity, 40% Debt Hydro One Total Value April 1, 1999: $8.6 bn As at Dec. 31, 2005 Total equity $3.8 bn – Total equity $4.7 bn Total debt $4.8 bn – Total debt $5.1 bn Initial Capitalization of Regulated Transmission and Distribution: 36% common equity, 4% preferred shares, 60% debt Stranded Debt:  Stranded Debt April 1999 Estimate ($ billions) Closed System Directs Electricity Revenues To OEFC:  Closed System Directs Electricity Revenues To OEFC Ontario Hydro was legally continued as OEFC, a Crown Agency, in the Electricity Act, 1998: DEBT AND LIABILITIES OF OEFC PILs from OPG, H-1, MEUs Interest payments from OPG and IESO Interest payments from Province on debt for equity swap Debt Retirement Charge (DRC) Electricity Sector Dedicated Income Slide13:  Province’s Income Statement OPG and Hydro One net income is consolidated as income from investment in government enterprises at $1,090 M OEFC’s payments-in-lieu of taxes from OPG, Hydro One, and MEUs are consolidated as taxation revenue. Debt Retirement Charge collected from consumers. Proceeds from sale of NUG power Draw down of NUG liability Cost of NUG power purchases OEFC Financial Results:  OEFC Financial Results OEFC’s unfunded liability (“Stranded Debt”) increased by about $1.1 billion from April 1, 1999 to March 31, 2004. Main reasons for increase Underperformance of OPG, particularly related to underperformance and higher than planned costs in OPG’s nuclear division OEFC funded the government’s price freeze on electricity which cost about $900 million, and provision of temporary generation in summer 2003 which cost $70 million Stranded debt is projected to decline to $19.3 billion in 2005-06. Fundamental Changes :  Fundamental Changes Second Thoughts: The California Question:  Second Thoughts: The California Question Market opening in 2000 delayed by IMO software development problems. In 2001, an electricity pricing crisis in California market raises caution flag in Ontario. But Ontario was not California: Adequacy of supply, Pickering A units (2000MW) would begin return to service in 2001; Customers could buy a fixed price hedging contract from a retailer (25% did); Second Thoughts: The California Question:  Second Thoughts: The California Question But Ontario was not California: Dominant OPG (75% of market) is government owned and owners should be enriched if prices rise; OPG already had a price mitigating rebate (MPMA) in place; Customers could enjoy a fixed price throughout year with only a year- end true-up (eg Toronto Hydro -25% of customers); Some price pressure released pre market opening – no public response. Implementation: The Perfect Storm:  Implementation: The Perfect Storm May 2002. Market opens. But: Pickering A is an engineering and financial Black Hole; OEB puts all default customers on spot market price; Government/bureaucrats endlessly debate a contingency mitigation strategy; New Premier: an election is near – panic is always close at hand; Weather is a scorcher. November, 2002. Government fixes the price for small consumers at 4.3 cts/kwh. Price Cap Policy: Popular Misconceptions :  Price Cap Policy: Popular Misconceptions The spot market was not closed on the supply side – generators still received market prices: but private investors had shied away from Ontario in any case; Large consumers (50% of consumption) were left out of the new 4.3 cts/kwh price cap. Price mitigation already existed (MPMA) – essentially a blended price of OPG market and non-market assets. Option 1: The logical approach was to extend this concept (later actually adopted in the hybrid market). Option 2: The other option was to set a low price and play with the “true-up” mechanism by keeping the customer’s account open for an extended period (expecting market prices to fall over time). Built up a large negative variance in the first year. In Retrospect: Key Restructuring Flaws:  In Retrospect: Key Restructuring Flaws Errors of judgment: Exposing small customers to spot market price as the “default option”. Not developing additional contingency measures or sending a directive to OEB re default customers. Errors of design: Not immediately breaking up OPG; Not taking nuclear problems seriously by creating a separate OPG nuclear company. However, Bruce lease was an “unintentional” design success. Not recognizing that nuclear generation (retrofit or new build) would not be viable in a real market setting. Political Limits on Ontario Electricity Prices (Markets):  Political Limits on Ontario Electricity Prices (Markets) Evidence is that politicians do not like using price (markets) as a policy tool, except to freeze them or reduce them: Through most of the 1990’s the price of electricity in Ontario was frozen. The market opened in 2002, prices rose and the market closed shortly thereafter, with prices rolled back to 2001 levels. There are still a plethora of political constraints on the price of electricity in Ontario: Maximum market clearing price; Imports do not set the Ontario price; OPG’s baseload nuclear and hydraulic assets are regulated using unrealistically low rates of return on equity; 85% of OPG’s “unregulated” production is subject to a further 3 year revenue cap of successively 4.6, 4.7 and 4.8 cents/kwh; and, Environmental impacts of S02, NOX and C02 are not fully priced into the cost of electricity produced from fossil fuels. Political Limits on Electricity Prices (Markets):  Political Limits on Electricity Prices (Markets) These pricing limits represent billions of dollars of subsidy annually to Ontario consumers of electricity; This subsidy encourages the consumption and waste of electricity, even as: Ontario is facing a potential supply crunch; and, Government touts conservation as a primary goal; and, Government stresses the importance of consumers paying the true price of electricity! Why? Political Limits on Electricity Prices (Markets):  Political Limits on Electricity Prices (Markets) Two major arguments against using prices (markets) to drive a culture of energy efficiency: impact on big industrial users; and, Impact on low income people. Strange bedfellows: but joined under the political banners of job protection and equity. Irony is that subsidizing electricity users is: highly inequitable; and, bad industrial policy for maintaining competitiveness and jobs – corporate welfare can become a culture of dependency every bit as much as social welfare. Can policy be different? Yes it can! Conclusions: Using Price (Markets) to Promote Energy Efficiency:  Conclusions: Using Price (Markets) to Promote Energy Efficiency I recommend the following program: Allow imports to set market prices; Raise the regulated rate of return to OPG nuclear assets to reflect the true social costs/risks of its operations; Allow OPG’s baseload hydraulic assets to earn market prices; Remove the revenue cap from OPG’s non-regulated assets; Impose appropriate fees for emissions (including carbon emissions) from fossil fired generating stations; and, Conclusions: Using Prices (Markets) to Promote Energy Efficiency:  Conclusions: Using Prices (Markets) to Promote Energy Efficiency In addition, I recommend : Use the additional OPG and tax revenues ($billions) to: Reduce taxes and enhance transfers to low income Ontarians; Increase targeted job training and relocation assistance in affected industries; and Fund large tax benefits to corporations who can demonstrate that they lead their industry globally in energy efficiency. Conclusions: Using Prices (Markets) to Promote Energy Efficiency:  Conclusions: Using Prices (Markets) to Promote Energy Efficiency Not a novel idea to raise energy prices and recycle the revenues. But never, in my experience, rigorously tried! What it lacks is an implementation program designed to reduce political risk. Recommend: Gradualism: raise price automatically every quarter over a specified period to the target level (true market price). Transparency: keep the additional revenues in a dedicated fund – out of the hands of OPG or the Ministry of Finance. Clear winners – designate those to benefit from the added revenues; and, Commitment - promise, in advance, how the estimated additional revenue will be used. Awaits a political entrepreneur who wants to lead, and not merely appear to lead, the parade! Natural Gas Prices :  Natural Gas Prices Sixty percent of cost of natural gas fired generation is for fuel Prices for a modern facility range from 5.5 to 9.0 cents, based on natural gas prices of $4 to $8 per mm BTU respectively Spot Market Electricity Prices:  Spot Market Electricity Prices Monthly average prices have ranged from 3 to almost 10 cents/kWh with peaks in the summer and winter months

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