# Detailed Notes and Explanation – OPG Rebate Calculation

What is the formula to calculate the rebate?

The actual formula to determine the rebate that Ontario Power Generation (OPG) must pay the Independent Electricity Market Operator (IMO), which is ultimately passed to consumers, is:

Rebate = [(AP – CAP) x CRQ] – Adjustments

AP is “average price,” but is not quite the average market hourly spot price in cents per kilowatt hour (kWh). The formula “average price” is calculated by giving more emphasis or “weight” to hourly market spot prices when OPG is estimated to be supplying more electricity to Ontario’s market. This more closely reflects the revenue OPG generates in which to determine the rebate amount.

The formula “average price” is thus a “weighted average” of hourly market spot prices. The weights used are called “Q” factors. A single “Q” factor represents 90% of OPG’s estimated share of the Ontario market in megawatt hours (MWh) during a particular hour. All “Q” factors were estimated by sophisticated computer modeling before market opening and are fixed for the four years (after market opening) that OPG is subject to the rebate mechanism under the “Market Power Mitigation Agreement.”

The “Q” factors for all four years, for each hour, are published on the IMO’s website (www.theimo.com ) under “Transition Market Information” (see Financial Data “Market Power Mitigation Data”) or go copy this link into your browsers address line: www.theimo.com/imoweb/transinfo/spotmarket.asp .

All “Q” factors can be downloaded for a given year.

CAP = 3.8 cents per kilowatt hour

CRQ = “Contract Required Quantity” is the annual quantity of electricity, measured in terawatt hours (TWh), on which OPG rebates are determined. A terawatt is one trillion watts. CRQ represents 90% of OPG’s estimated share of the Ontario market in that year. As with the “Q” factors described above, annual CRQ’s were determined by sophisticated computer modeling. An annual CRQ for a given year is the sum of the hourly “Q” factors for that year. The annual CRQ factors are also published on the IMO website at the top of the “Q” files (see above). For 2002 and 2003, the CRQ factor is 102 TWh.

There are three possible adjustments:
1. “Price Spike Adjustment” is intended to reduce the rebate for revenue that OPG never earns on price spikes above \$125 per MWh. This adjustment only comes into play if OPG’s actual generation in any given hour is less than its associated “Q” factor (90% of its estimated generation for that hour) when hourly spot prices are above \$125 per MWh.
2. “Force Majeure Adjustment” is intended to compensate OPG for reductions in revenue caused by acts generally beyond OPG’s control, such as war, earthquakes and tornadoes.
3. “Rebate Carry-Forward Adjustment” allows for negative rebates (years where the “average price” was less than 3.8 cents per kWh and OPG’s revenue was lower). Rather than charging consumers, this adjustment is carried forward to future settlement periods and would have the effect of eliminating or reducing any future positive rebates that would be paid to consumers.

For more information, see Market Power Mitigation Detailed Description on OPG’s website.

What would the rebate be for the first full year after the market opened to competition on May 1/02?

The average hourly market spot price that consumers have paid from May 1, 2002 to October 29, 2002 (almost exactly 6 months from market opening) is 5.61 cents per kilowatt hour. This is published on the IMO website under “Market Summaries” in the “Weekly Market Reports” as the “Weighted Average (Hourly Ontario Energy Price) Based on Ontario Demand since Market Opening.”

This average is based not only on hourly market spot prices, but also the associated consumption of electricity by Ontario customers. This reflects the actual average hourly spot price that consumers have paid.

Although the formula “average price” is not exactly this average hourly price, they should approximate each other and be reasonably close. Assuming current price levels continue for a full year to April 30, 2003, 5.6 cents would approximate the formula “average price.” Using this average, assuming no “adjustments” and ignoring GST, the approximate rebate would be:

Rebate = (AP – CAP) x CRQ
Rebate = (5.6 cents/kWh – 3.8 cents/kWh) x 102 TWh
= 1.8 cents/kWh x 102,000,000,000 kWh
= \$1.836 billion

OPG is applying for a reduction in the rebate as a result of its transaction to lease the 8 reactors at the Bruce nuclear complex to Bruce Power, deeming this to be a transfer of “effective control” under new provincial rules.

How does OPG estimate the amount of reduction in its rebate when it transfers “effective control” of generating assets to other market participants?

OPG estimates its reduction in the CRQ factor for the generating assets transferred. For example, in its application to the Ontario Energy Board it estimates the reduction in the CRQ from the transfer of the Bruce reactors is 19.5 TWh. This would reduce the annual CRQ factor from 102 TWh to 82.5 TWh, resulting in a 19.5/102 TWh = 19.1% reduction.

OPG is also expecting to file an application shortly with the OEB to recognize the sale of the four Mississagi hydroelectric generating stations in Northern Ontario and its 490 MWh capacity to Great Lakes Hydro Income Fund in May of 2002. This could further reduce its CRQ factor for the first year to 81.4 TWh based on OPG’s estimate.

Has OPG recognized a liability on its balance sheet for the rebate?

In releasing its 3rd quarter results to the end of September 30, 2002, OPG disclosed in the financial notes that “OPG has recorded a market power mitigation agreement rebate liability at September 30, 2002 equal to the excess of the hourly spot price over 3.8 cents/kWh, multiplied by the amount of energy subject to the rebate mechanism. As at September 30, 2002 the Company had deferred 1.779 cents/KWh on a volume of 31.7 TWh.” These figures already take into account the anticipated reduction in rebate (in CRQ factors) for the Bruce Power and the Mississagi transactions.

Although OPG has not disclosed the actual amount of this liability, multiplying 1.779 cents by 31.7 TWh yields \$563.9 million. This should approximate the liability accrued for the first five months after Ontario’s electricity market opened to competition.

Does OPG have to include GST in its rebate?

Yes. According to the Settlement Agreement between IMO and OPG, OPG must also include the associated GST with any rebate payment, which is also passed back to consumers. This is defined in Article 2 “Rebate Calculation and Payment” of the Settlement Agreement. This Agreement is available from the IMO or Friends of Bruce.