IPPSO FACTO, December 1995, electronic edition

IPPSO FACTO, December 1995, electronic edition
Excerpts from the magazine of the Independent Power Producers' Society of Ontario


Volume 9, No. 6, December 1995

What's In This Issue (Selected topics only)

Alberta prepares for open access soon

IPPSO releases policy statement

Utility Trade Corp. gets FERC and NEB permits to export

RETS shortlist detailed

BCUC recommends steps to wheeling

CanWEA's Conference

Canadians want more wind energy

Collaborative sets environmental costs

World Congress calls for sustainability

Federal study agrees that the tax system disadvantages efficiency

GE Canada sells more to China

IPPSO's position paper


Hydro can't have it both ways

Ontario Hydro wants to have its cake and eat it too - at the public's expense. On the one hand it wants the freedom to set its rates and conduct its business freely like any private company would in a free market. But on the other hand, it wants to continue making investments that are guaranteed by the public. Hydro can choose if it wants to retain the special protection and privileges of a crown corporation, or engage in risky competitive private sector practices. But it can't continue to do both, if we want to retain a functional economy.

Right now a hospital or factory that wants to install cogeneration to save money and gain other benefits is being told that mother Hydro is prepared to put our money at risk just to make the company's efficiency idea unattractive. (See cover story on anti-cogen rates). Yet at the same time Hydro is pouring huge sums into investments that are neither efficient nor financially attractive. And both schemes are being paid for by virtue of Ontario Hydro's ongoing right to take whatever it needs out of the consumer's pocket.

Hydro's pocket-picking rights arise more from the fact that its schemes are based on borrowing, and today's borrowings will be paid for by the consumer either through future rates or through future stranded asset retirement charges. We may be witnessing here what will turn out to be the greatest scam during this era of restraint, largely thanks to the absence of regulatory or market discipline acting on Ontario Hydro.

In both cases these incompatible privileges are more than fond hopes for Ontario Hydro. Hydro already enjoys more freedom than its competitors in other provinces and states, in terms of ratemaking and other matters. And at the same time, Hydro is actually making investments that are guaranteed by the public, without any public review or even market discipline. These investments are not small items - as we speak, they are mounting up at a rate of almost ten million dollars per day.

IPPSO has just developed its position paper on restructuring the Ontario electric sector. It does not claim that all new independent capacity investments are justified, or that all new Hydro investments are unjustified. (Ontario Hydro makes the opposite argument, based on intuitive reasoning alone.) IPPSO claims only that some investments are good and some are bad, and that the market should be the judge. And where the market is not able to judge, there should be some sort of independent review of the questions. Given that Ontario Hydro has differential tax status, publicly guaranteed borrowing without real limits, and a monopoly on sales, the market alone probably won't do the trick.

IPPSO's argument has been that there are some cases where the financial returns and other benefits of new independent generation may outweigh the cost of idling a small portion of Hydro's generating capacity for awhile, particularly if all the distortions due to Hydro's preferential status are duly factored out. To know this sort of thing we have to be able to estimate efficiency benefits, operational benefits, environmental, job creation and social benefits of various forms of generation. But no one, nowhere, has the mandate to make such considerations or to do such calculations. Unless of course a regulator such as the OEB is empowered to make such judgements.

Ontario Hydro can not be allowed to claim that all new generation is necessarily more costly than its own - just because it has unused, inefficient and expensive capacity - as long as two other factors are in place:

- Hydro continuing to make capital investments to maintain or increase its own capacity, with no market discipline or independent review controlling such investments

- Hydro being free from competition for its customer base such that it can pick and choose to whom it charges only operating costs, and to whom it charges operating costs plus the cost of stranded debt - even though Hydro's competitors are not allowed the same privileges.

The independent power industry is not saying that stranded assets should be ignored or that the cost of idling publicly owned assets is insignificant in assessing the value of new generation proposals. It is only saying that the existence of stranded assets can not be assumed a priori to be the sole determinant of whether alternative supply projects are justified. (Ontario Hydro and some others are willing to make this automatic conclusion without any consideration of the details of the project and whether it may have benefits in excess of the cost of stranded assets it relates to. Such oversimplification of decisions is breathtaking considering the magnitude of the investments being contemplated.)

Intuitively, it is almost laughable that Hydro would claim that it should be allowed to keep competitors out of the market, precisely on the basis that its own generating capacity is too inefficient and expensive. On the face of it, that would seem to be a good reason to let competitors in, particularly in the new competitive environment.

With these new rates, Ontario Hydro really is claiming that it is the only company that has the right to generate electricity. That is clearly not acceptable. Remember that through all this debate, Ontario Hydro is quietly harbouring the assumption that any investment it has made or will make will be fully covered, if not through rates, then through special charges to consumers to help it retire stranded assets.

In the US, such rates are allowed only in special circumstances: a) where a public review proves that the rate is above costs; b) with the benefit of full cost accounting; and/or c) on the understanding that any and all capital investment from that point on will never be eligible for future treatment as stranded assets, and remunerated by consumers through any mechanism other than competitive rates for power.

In any case, anyone in the private sector has to wonder why his or her taxes are supporting a company that then turns around and says it doesn't really need to make the same return on capital (for a certain secret customer group) as its private sector competitors. Shouldn't a public investment make a good return too? Shouldn't we be let in on the details?

Either Hydro is a private generator that can offer risky and discriminatory rates to foil its competition, or it can use the public's money and publicly-conferred special status to provide stable and reliable rates and service in a regulated environment. It can't use the public's money to make unregulated risky investments and then use the public's money again in risky attempts to foil its would-be competitors and market its less than attractive power to a public with no choice in the matter.

- Jake Brooks, Editor

(Editorials published in IPPSO FACTO represent the personal opinions of the author, and not necessarily IPPSO policy)

New rates designed to intimidate would-be producers

Ontario Hydro launches direct attack on Self-Generation

Toronto: Ontario Hydro shocked the independent power industry in Ontario with the disclosure in late October of a special new deep discount rate - available only if the rate offer dissuades the customer from installing independent generation. "The new rates are a travesty of rate-making principles and contravene both official rulings and the principle of power at cost" said one observer. "A distortion will very likely be introduced into the electric system in favour of less efficient power generation and the costs will be paid for by ordinary consumers."

IPPSO Executive Director Jake Brooks claims that the introduction of the rate has another casualty: the English language. "Ontario Hydro has the temerity to label this its 'competitive pricing rate' when in fact it is an anti-competitive rate, a rate designed to prevent competition. This kind of thing is illegal elsewhere, precisely because it is anti-competitive. Hydro should be charged with uttering doublespeak." It is not the discounting itself which is anti-competitive Brooks says, but doing so in secrecy, without balanced consideration of alternatives, and in the context of a monopoly situation where other customers who subsidize the discounts have no other supply options. "There is no check on how far the discounts can go, or whether they are truly in the public interest as Hydro claims," Brooks says. "The monopolist can use captive customers' money to buy back its non-captive customers. And every deal is a secret."

IPPSO President Stephen Probyn wrote Ontario Energy Minister Brenda Elliott in early November describing the rates as predatory pricing and asking for the government to take a position on the matter. He noted that Premier Mike Harris had promised during this year's election to prevent Hydro from using the rate structure to discourage cogeneration.

Consumers Association of Canada (CAC) representative Peter Dyne said, "As a publicly owned utility Hydro should justify the costs and benefits of special rates. Hydro should not, itself, select customers for special rates, set these rates and fund them by increasing rates to other customers without public discussion and approval. "

Brooks says that in some cases, Hydro should offer rates that discourage self-generation. "It's sometimes the theoretically correct thing to do, if you have perfect information," he said. "But you have to know the customer's marginal value of energy, and the site-specific social cost of adding capacity, two things which Hydro doesn't know, and can't be allowed to calculate unilaterally, because it has a conflict of interest in doing so." He believes that if Hydro was really interested in setting proper load retention rates, it would have set up a transparent process to start determination of these questions, which could take some time.

"Stifling the industry that should comprise our electricity system into the next century is not the way to solve our current problems and will not ultimately be of any assistance to ratepayers." - Ian Mondrow, IPPSO Counsel

Brooks warned that with the rates "we have essentially opened the floodgates for a bunch of secret deals like the notorious arrangement between Hydro and Suncor in Sarnia." Last year, Ontario Hydro negotiated a secret deal with several Sarnia companies to convince them not to cogenerate and wheel electricity. The deal involved multi-million dollar concessions from Ontario Hydro and caused public criticism both on the floor of the Ontario legislature and elsewhere. (See IPPSO FACTO, May 1994, page 5).

In the past, Ontario Hydro has used a range of techniques to discourage competition, Brooks says, including unfair backup charges, unfair buyback rates, subsidization of its own generation, a ban on wheeling, and simple bureaucratic obstructionism. The blatant use of anti-competitive pricing at this time suggests, according to Brooks, that "independent power is so attractive now that all the previous approaches to discouragement must have been judged inadequate, and desperate measures are therefore necessary." Brooks believes it is only a matter of time until such rates are struck down or withdrawn. "But until that happens, we run the risk that Hydro profits will come at the expense of the rest of the economy and the environment."

The good news is that very few customers will likely accept Ontario Hydro's anti-cogeneration rate offers. In order to qualify, the customer must submit to an expensive and detailed technical study by third party consultants who are pre-qualified by Ontario Hydro. Many customers are concerned that with all the turmoil within Hydro, any promises of confidentiality for participating in the study would be almost worthless. "Customers don't want to risk releasing crucial competitive data, just to get short term rate relief" said one consultant. "Employees at Hydro and with the consultants are just too mobile these days."

Apparently, such pricing practices may be technically illegal under federal competition law, and under Canada's international trade agreements. However, the mechanisms for addressing transgressions in either of these areas are too slow to be worth pursuing, according to some observers. "By the time the tribunals get to rule on this, there will be a totally new context for electric power development," Brooks says. This does not however, rule out the future possibility that injured parties may seek compensation in retrospect.

Hydro's rate offering is "Not part of a properly considered approach to rates," said Ian Mondrow, IPPSO's counsel at the HR23 rate hearings. "It is premised on a short term view that either ignores or discounts larger issues, issues like Hydro restructuring and how to pay for the capital investment mistakes on the one hand, and development of a sustainable and efficient electricity system on the other. Stifling the industry that should comprise our electricity system into the next century is not the way to solve our current problems and will not ultimately be of any assistance to ratepayers."

Brooks says the new rates "give full credit to the cost of stranding certain of Hydro's less competitive assets, but assign zero value to the benefits of high efficiency load displacment cogeneration, to say nothing of renewables." This is their fatal flaw, he says, because in some cases there is a valid argument to prevent the introduction of inefficient or costly new generation. "But if you're going to offer such rates, then you need a fair and balanced way of determining the prudency in each case, and just how far to go in each case, and we don't have that now." Ontario Hydro's program which includes these special rates doesn't even talk about Full Cost Accounting. "Cogeneration is the most cost-effective form of pollution reduction, and Hydro is using your money to make it not cost-effective."

Other concerns were raised by hospitals and municipalities. However, none were willing to go on the record, fearing that doing so might jeopardize their access to preferential rates, and other Hydro services.

Hydro's new rates fly in the face of this year's OEB findings, because the Board questioned the anticompetitive nature of such rates, and said that even if secrecy were necessary, the Board or some such agency should be able to examine the "secret deals" for prudency. Additionally, the OEB found that such deals should be limited in time, because so much significant change is expected in the sector in the next few years. Hydro is apparently making discount rate offerings for up to five years, even though the OEB said the limit should be three years at most.

Hydro watcher Dave Martin of the Energy Action Project says "We have no financial guarantee that Hydro is meeting its real costs with these rates, and the rest of us will pay the shot. As usual, environmental protection is particularly at risk in this process." He observes that this development shows what a shambles our current regulatory system is in. Just after the OEB makes a finding, Hydro dances off merrily in the opposite direction, barely tossing a glance in the direction of the official rulings. "OEB findings should be binding," he said.

Martin also notes that this sort of unregulated special deal is open to abuse. "Without regulation or transparency, these individual rates open the door to the possibility of outright graft." Observers are concerned about someone accepting a small gift in return for recommending a really good rate for a certain customer that is never externally reviewed.

Major industrial consumers have not asked Hydro for these rates, even though the rates benefit them, for several reasons: they are relatively short-term, they allow Hydro to arbitrarily pick and choose its favourite customers, and they do not set up a permanent incentive to control rates. Hydro had always indicated in the past that self-generation was the customers "right."

These should not be called competitive rates, Brooks says. "They should be called the SAC rates: Secret, Subsidized, Arbitrary, Anti-Cogeneration rates."

IPPSO applauds government review plans

Toronto: IPPSO President Stephen Probyn publicly applauded the Ontario government's announcement of a new electricity sector review panel. "The terms of reference of Minister Elliott's review plans are spot on as far as we're concerned," he said. "The government has hit the nail squarely on the head, and appointed a capable and balanced team to carry it out." The committee will examine the restructuring of the sector, alternatives for regulation, and the introduction of private equity into Ontario's electric power system.

Former federal Finance Minster Donald S. Macdonald was appointed to chair the Committee. Environmental interests expressed concern that MacDonald was one of the most pro-nuclear politicians ever to hold the federal energy portfolio. However, "MacDonald's qualifications are excellent," according to Probyn. He is still active in the energy sector, and chairs a committee designed to promote partnerships between government and the private sector.

The new Committee is expected to report by April 30, which is considered a short time-line for a committee with such a broad responsibility.

Committee members appointed included a strong business emphasis. For details of the Committee's terms of reference and more background on Chairman Macdonald, , see pages 4 and 5.

NEB grants first Canadian NUG export permit to UTC

By David Bright and Stephen Salaff, PhD.

On November 2, the National Energy Board (NEB) granted the first non-utility export permit to transmit electricity from Canada into the United States (IPPSO FACTO, September 1995, p 24). This development, and related applications by non-utility electricity marketers at the NEB, could facilitate competitive challenges to Canadian utility monopolies.

Utility Trade Corp. (UTC) of Calgary, Alberta, a private company and affiliate of gas marketer Utility-2000 Energy Corp., received a permit to export surplus power it buys from Canadian independent power producers and utilities. UTC stated its preference to sell power within Canada wherever possible on the same terms and conditions it would offer to US customers, since this would in many cases reduce transportation costs.

The NEB export permit, which is valid for 10 years, entitles UTC to move up to 250 GWh of electricity per month and up to 3,000 GWh per year into the US market. UTC has authorization to enter into individual contracts of up to 5 years without having to obtain a specific permit each time and in advance from the NEB.

The permit applies to seven export points in the provinces of British Columbia, Saskatchewan, Manitoba and Ontario. UTC has yet to negotiate access to transmission lines with the utilities which own them.

UTC intends to market the excess power to utility corporations in North America, and through further anticipated deregulation, to industrial end users.

In its examination of the UTC application of March 1995, the NEB noted that objections were raised by Ontario Hydro, BC Hydro and other major Canadian electric utilities. However, TransAlta Utilities did not offer objections. The intervenors raised issues concerning the impact on the environment, fair market access, reliability, transmission access, restrictions on other applicants applying for export permits, exports being attributable to UTC permits, stranded investments, NEB jurisdiction to issue permits, the public interest, and the need for public hearings.

The NEB did not find any of these objections sufficiently substantial to call for a hearing, while UTC vice president Jim Keck called them "basically redundant in the light of the information we provided in our submission."

Keck said that the Board seems to be reflecting the often stated goals of all levels of government to reduce regulation and open markets where they can provide efficiencies and lower prices. The favourable NEB decision "will most likely open the door for the approval of the three other non-utility power marketing applications before the NEB," Keck told IPPSO FACTO.

Keck said that the export permit application process is "both a practical exercise in getting ready to export power when transmission access opens up, and an ideological push on the utilities to bring about such reforms."

A recurring theme in the NEB's reply to these objections was the concept of "comparability." The Board found that for the purposes of power export, UTC should have comparable privileges to traditional utilities. The NEB decision thus will most likely bring competition to Canadian electricity export marketing, which has thus far been monopolized by these traditional utilities. Comparability and reciprocity of electricity services are two of the key concepts in the recent open access regulations of the US Federal Energy Regulatory Commission.

The NEB is expected to rule in early December on the bid of Destec Power Services Inc. of Houston for a 10 year blanket electricity export permit. Destec has proposed to use Ontario Hydro's power lines to wheel surplus power from the Dow Chemical Canada cogeneration facility in Sarnia, Ontario to the US border and then into the US. Destec also seeks the authority to export electricity from other independent power and utility sources in Canada.

The NEB is also considering 10 year electricity export applications from TransCanada Northridge Power Ltd. (TNP) of Calgary, an affiliate of TransCanada PipeLines Limited, and from Multi Energies Inc., an independent entrepreneur of Montreal. Like UTC and Destec, neither of these firms owns transmission lines. Multi Energies has applied for a blanket permit, whereas the TNP application envisions NEB approval of each export contract.

UTC president Darcy White said that the company will continue to pressure all relevant authorities to deregulate the Canadian electricity industry and create a competitive marketplace, as in the natural gas and telecommunications industries.

The US continues to deregulate its electric industry on a wholesale level, and many states have started to investigate the benefits of retail competition. The first phase of open competition in Canada has been in Alberta's power market and will begin in 1996 with the launching of the provincial power pool. "There is strong empirical evidence that competition will result in greater efficiencies and lower prices," said White. UTC expects structural changes and a power pool to follow in British Columbia.

Laurent Cusson, vice president of Multi Energies Inc., added that many roadblocks and barriers still impede the opening of transmission lines in Canada. "It took 10 years to deregulate and open the gas industry. Now that the US is rapidly opening its electricity market, Canada will be forced to do the same."

Ontario Hydro (OH) intervened at the NEB against the applications by UTC and Destec. OH stated directly that UTC failed to demonstrate that an electricity export permit would be in the public interest. OH noted the recent trend for an increasing number of entities without "international" power lines to seek export permits. OH stated that UTC has no contractual path and that some of the transmission facilities UTC proposes to export over are the property of OH. Ontario Hydro also remarked that Canadian federal and provincial negotiators are working on a new agreement to promote interprovincial wheeling by statutory utility monopolies, and that any permit issued by the NEB should follow and be consistent with that agreement (IPPSO FACTO, September 1995, p 18).

UTC conceded that transmission is still owned and operated by utilities under provincial jurisdiction, and agreed that there might occasionally be transmission capacity constraints. However UTC asked for comparable treatment with all others seeking transmission access.

Ontario Hydro claimed that UTC exports could result in new generating capacity built in Canada, and that UTC has not provided any indication to the NEB on the environmental impact, or how and when the impact would be regulated. SaskPower intervened to argue that the electricity export permits for UTC could lead to a situation where new generation is developed strictly for export purposes, and that such new generation could hinder Canada's attempts to stabilize CO2 emissions.

In addition to the potential environmental problems, SaskPower claimed that the incentives for new generation would increase the risks of stranded investments to existing utilities.

In spite of these objections, the NEB ruled that the UTC application would not lead to the construction of new facilities having long useful lives to serve the short-term sales contemplated in the application. In fact, the NEB accepted UTC's argument that all power to be exported will be generated from and transmitted over existing facilities.

Ontario Hydro and other utilities including SaskPower and BC Hydro expressed concerns about the potential absence of "fair market access". The NEB was persuaded that UTC will in fact offer electricity to those in Canada seeking to purchase it. The decision affirmed that "fair market access places an onus on both the exporter and prospective Canadian purchasers to bargain in good faith and work out for themselves mutually acceptable and appropriate fair market access procedures. Accordingly, UTC should be given an opportunity to determine how it communicates with potential purchasers and sellers of electricity."

The NEB recognized the mandate of the North American Electricity Reliability Council (NERC) in promoting reliability of electricity supply. UTC agreed with the need for NERC "control areas" such as BC Hydro and Ontario Hydro to schedule transactions. UTC has retained an independent private firm as a provider of dispatch and coordination services in the US. This arrangement has satisfied the obligations of NERC members to fulfil NERC control area responsibilities. The NEB is satisfied with UTC's assurances that NERC policies, criteria, standards and guides will be met, and has not imposed such conditions in the UTC permit.

In response to interventions from Alberta Power Limited and BC Hydro/Powerex, the NEB said that the UTC export permits would not restrict or prevent other parties from applying for export authorizations in the future.

The Board saw no requirement for the existing electricity export utilities which might wheel electricity for UTC to account for any UTC exports under their own export authorizations. Responding to utility concerns about NEB jurisdiction to issue blanket approvals of the type requested by UTC, the Board pointed out that it had already granted blanket approval for electricity exports from Hydro Qu

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