IR 2002-16 – November 4, 2002
Ontario Power Generation vs. Ernie Eves?
Giant utility seeks reduction in rebate payments to consumers;
Premier determined to keep his promise to hold the price line
INVERHURON, Ontario — Soaring electricity prices experienced by Ontario’s consumers since the
provincial energy market was opened to competition should result in a considerable rebate to
the average energy customer, according to an Ontario Power Generation (OPG) revenue cap imposed
by regulators at the time. The questions are: how much of a rebate and when will it come?
The same soaring rates have brought windfall profits for OPG. But the public utility says it
has reasonable grounds under the new rules to ask for a reduction in the promised rebate.
The stage appears set for a confrontation between OPG and Ontario Premier Ernie Eves, who has
vowed to hold the line on electricity prices. OPG, meanwhile, has hired the high-profile law
firm of Torys as counsel, a sign that the utility wants to solidify its case in advance of a
possibly difficult political, if not legal, battle ahead.
Excess revenue requires OPG to pay rebate, with GST
OPG controlled about 70% of Ontario’s electricity market when the market was opened to
competition on May 1, 2002. To help ease concerns that too much price control was in the hands
of one company, the government capped OPG’s revenue under the “Market Power Mitigation
Agreement” for four years after the market was opened.
Under the Agreement, the lion’s share of OPG’s Ontario generated revenue is capped at 3.8 cents
per kilowatt hour. Excess revenue generated by higher average hourly market spot prices
requires OPG to rebate the difference to consumers through the Independent Electricity Market
Operator (IMO). The IMO regulates and operates Ontario’s wholesale electricity market. It was
formed as part of the restructuring of the old Ontario Hydro.
An unseasonably warm summer in Ontario caused supply shortages and price spikes. The average
hourly spot price paid by consumers since market opening, almost 6 months to the day, has
climbed to 5.61 cents per kilowatt hour. If this level is maintained for a full year until
next April, OPG’s first annual rebate could be as high as $1.8 billion. Every 0.2 cent change
in the rebate formula average price would change the rebate by $204 million.
Payment of the rebate to the IMO next spring would mean consumers could expect cheques next
summer. The Settlement Agreement between OPG and IMO also specifies that the rebate include
associated GST, which would also be passed back to Ontario’s electricity customers.
OPG files application for reduction in rebate
Late this past summer, OPG applied to the Ontario Energy Board (OEB) for a reduction in the
rebate it must pay. That request has drawn the ire of Ontario Premier Ernie Eves who promised
taxpayers that the line would be held on electricity prices, even as the utility reduces its
Ontario market share to 35% in a series of steps over 10 years, as directed by the government.
To encourage OPG to make the steps to 35% of market share on time, the utility may be allowed a
reduction in the rebate if it can satisfy the OEB that it has transferred “effective control”
of generating assets to a private sector company. If allowed, the reduction in rebate would be
in step with OPG’s decrease in market share.
In May of 2001, Bruce Power signed a lease agreement with OPG to operate the Bruce nuclear
generating stations and its 8 reactors, located in Inverhuron, Ontario. In its application to
the OEB for a reduction in rebate, the utility argues that the Bruce transaction has met the
rules for transfer of effective control. OPG is seeking a 19% reduction in its rebate
payment. Based on a conservative rebate estimate of $1.2 billion (not including GST), this
would amount to a $228 million reduction in the rebate to consumers.
Fourteen organizations with an interest in the proceedings have filed for intervenor status
with the Ontario Energy Board. Many represent large corporate power users who want to maximize
their rebate. The Independent Power Producers’ Society of Ontario, among other concerns, wants
to address “mechanisms to ensure that the proceeds of the transaction (reduction in rebate) are
applied to reduce the stranded debt.” That debt currently stands at $20 billion.
Eves says no reduction
The biggest intervenor of all, though, could be Premier Eves, who is on record saying there
will be no reduction in the rebate. Eve’s also wants the rebates in the hands of consumers
before the end of the first year of the open energy market, not after.
Complicating matters further:
· Eves has ordered a review of the Ontario Energy Board. OEB officials have welcomed the
review, saying they are unfairly handcuffed by government salaries, and can’t attract top
talent to effectively oversee OEB’s growing mandate as a market watchdog.
· OPG’s agreement with Bruce Power does allow OPG to share in increased revenues at Bruce Power
as a result of higher energy prices.
· Bruce Power is 82% owned by British Energy, a company on the financial ropes only temporarily
helped up from the canvas by a massive $1.6 billion U.K. government bailout. In its request
for intervenor status, the Independent Power Producers’ Society of Ontario has also raised the
issue of “applicability and impact on decontrol requirements in the event of early termination
of the lease by Bruce Power.”