Hydro One and “demonstrable consumer value”

Sorting out fact from fiction among Hydro One claims

The current media attention focusing on Hydro One and its executives is reminiscent of the not so distant past when Andre Marin was Ontario’s Ombudsman. In May 2015 an article in the Globe and Mail noted as a result of his report: “Hydro One issued faulty bills to more than 100,000 customers, lied to the government and regulators in a bid to cover up the problem, then spent $88.3-million in public funds to repair the damage.”

Hydro One installed Mayo Schmidt as CEO in 2015. Recent media reports have focused on why Mr. Schmidt was given a big raise ($1.7 million) to $6.2 million and how his termination (without cause) would cost $10.7 million. The current government signaled they were unaware of either the pay increases for the executives or the increased termination amount and the raises the Board of Directors gave themselves.

These issues were two of the items Hydro One’s Board of Directors had on the agenda for the Annual General Meeting (AGM) that required shareholder approval. As Andrew Willis of the Globe and Mail reported: “Shareholders voted 92 per cent in favour of Hydro One Ltd.’s executive compensation plan, which has faced intense scrutiny during the lead up to Ontario’s election campaign.” It appears that, of the shareholders who actually voted, only 8 per cent were against the increases.   But if the province had participated in the voting (they abstained) and used their 47 per cent shareholding, the motion could have been defeated with 55 per cent voting against it.

One wonders why they chose not to participate.

Christie Blatchford of the National Post was present at Hydro One’s AGM and took part in a short scrum after the AGM ended, with other reporters. The Chairman of the Board, David Denison, along with CEO. Mayo Schmidt represented Hydro One.  Blatchford’s article notes questioning from one aggressive reporter! Asked if he’d take a pay cut or resign, Schmidt said, “It isn’t about pay cuts.” The hellion reporter snapped, “Of course it is.” He then reminded the motley press that the company is committed to “building this high-performing champion,” that Hydro One has reduced costs by 31 per cent, and “turned the power back on for the desperate people.”

Now the only allusion Schmidt made to where those reduced costs came from at the AGM was reported by Andrew Willis who noted “management said the main drivers of earnings growth will come from consolidating local distribution companies in Ontario and cutting costs — the company got rid of 1,000 vehicles over the past year.”

While Schmidt (according to media coverage) was subdued and apolitical during the AGM, a couple of days later he lashed out as reported in the Globe and Mail’s Report on Business in an article by Tim Kiladze. Mr. Kiladze reported that “Schmidt is warning that threats from politicians in Ontario’s election campaign are weighing on the business and will have consequences.” Later in the article reporter Kiladze noted: “Speaking to Hydro One’s latest quarterly earnings, he noted that profit was up by 33 per cent from the year prior, and that Hydro One has added 400 jobs while delivering $114 million in cost savings since its IPO. “Those are remarkable statistics for a company that’s in transition,” Schmidt is reported to have said.

Despite Mr. Schmidt’s claim of improving profits and generating cost savings, the market has moved Hydro’s One’s stock price in the opposite direction. It reached a new low of $18.93 and closed the week at $19.10.   It appears investors are not impressed with either the quarterly earnings jump or the reported “cost savings.”

Examining the first Quarter report tells some of the story.

As CEO Schmidt noted, profit was up by 33 per cent or $55 million above the first quarter of 2017. It appears almost all of the increase was related to rate approvals for the transmission part of the business which increased $54 million due to rate increases approved by the regulator — the Ontario Energy Board (OEB). Electricity transmitted in the quarter was up by only one tenth of one per cent!

Go further into the quarterly report to Note 10, the possible reason for investor concern is significant and relates to the OEB’s Decision and Order in respect to the “transition from the payments in lieu of tax regime under the Electricity Act (Ontario) to tax payments under the federal and provincial tax regime”.

The following comes from that note: “On November 9, 2017, the OEB issued a Decision and Order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB’s calculation would result in an impairment of Hydro One Networks’ transmission deferred income tax regulatory asset of up to approximately $515 million. If the OEB were to apply the same calculation for sharing in Hydro One Networks’ 2018-2022 distribution rates, for which a decision is currently outstanding, it would result in an additional impairment of up to approximately $370 million related to Hydro One Networks’ distribution deferred income tax regulatory asset.”

The conclusion from the OEB’s decision is that they were simply doing their job and honouring their first listed mission statement which reads: “Strengthening the focus on demonstrable consumer value during a period of sector evolution.”

The decision is being challenged by Hydro One’s executives and (presumably) their Board of Directors who are upset the $885 million may not wind up in shareholders pockets. As a result, in October 2017 the Company filed a Motion to Review and Vary (Motion) the Decision and filed an appeal with the Divisional Court of Ontario (Appeal). On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018.

In both cases, the Company’s position is that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. To put the $885 million in context; it exceeds the annual after-tax profit of Hydro One for a full year!  The results of the OEB hearing will determine whether Hydro One proceed with the appeal to the Divisional Court of Ontario.

Perhaps Hydro One’s Board of Directors and senior executives don’t comprehend they operate a monopoly that is regulated for the express purpose of ensuring their focus is “on demonstrable consumer value during a period of sector evolution.”

As ratepayers, we should hope the OEB continues to place an emphasis on “demonstrable consumer value.” Ordinary ratepayers do not enjoy the benefits Hydro One’s executive have awarded themselves.

Parker Gallant

May 22, 2018

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Time to tax the wind?

March 19, 2018

Ontario electricity consumers are already on track this year to pay more for wind, and for the cost of wasting (clean) power from other sources due to surplus power — is it time for some fairness in the electricity sector?

The science on using wind energy to generate electricity is branded as innovation, but it’s actually very old.

Power generation via windmills was technology developed by Scottish engineer James Blyth (1839-1906). “In 1887, while a professor at Anderson’s College in Glasgow (an ancestor of the modern Strathclyde University), he constructed a windmill attached to a dynamo to light his cottage in his home village of Marykirk.”

In Ontario, government brought us the Green Energy Act touted as a revelation to clean our air and create 50,000 jobs. The government claimed: “Ontario wants green energy business. These regulations will help ensure industry and municipalities that jobs will be created, investment is committed and that the renewable energy industry grows across the province.”

To try to make that happen, we were saddled with the FIT (feed in tariff) program offering payment for generation by wind and solar generators at multiples of power already in place. Additionally, to attract the investment in renewable energy, developers and operators were granted tax breaks. Examples follow.

Tax Breaks                                                                                                                                    The Finance Minister instructed MPAC to limit their assessment of wind turbines to $40,000 per/MW of capacity, meaning municipalities would receive meagre realty taxes and had no say in accepting or rejecting them. Subsequent to that direction it was changed for large installations (over 500 kW) of both wind and solar to: “10.7% to the industrial tax class.”

Additionally, the federal government granted wind developers the ability to allow them to accelerate deductions (depreciation) of the capital costs under “Class 43.2 of the Income Tax Act.” And those rights were recently extended by the federal government, as noted by CanWEA here to 2025.

So, wind and solar power developers are paid high prices for generation classified as “baseload” power meaning the grid operator, IESO, is obliged to accept and pay for the power. That’s a guarantee whether the sun shines or the wind blows they will be paid the contracted prices, or paid slightly less for curtailed generation. At the same time, developers walk away with the cash and pay almost no taxes except for meagre realty taxes.

Cashing in                                                                                                                                    Ontario’s ratepayers have been adversely affected by the continued addition of wind capacity as IESO and its predecessor, the OPA, follow[ed] ministerial directives and continue to contract for more and more capacity. As CanWEA notes, “Ontario remains Canada’s leader in clean wind energy with 4,900 MW of installed capacity.”

The cost of grid- (TX) and distribution-accepted (DX) wind and curtailed wind in 2017 was more than $1.6 billion, and that’s without factoring in the additional ratepayer costs of steamed-off nuclear, spilled hydro, subsidized exports of surplus generation or idling gas plants (built to back-up the wind and solar generation). So far in 2018, the costs of wind (generated and accepted plus curtailed) versus 2017 for the months of January and February are $447 million — $44.7 million higher than 2017.

Evidence clearly points to wind power generation occurring during low demand hours, days and months, rather than high demand hours causing waste of nuclear and hydro power, still paid for by ratepayers.

Time for a tax?

If industrial wind power plants can’t generate power when needed, maybe it’s time to reconsider the pricing model, or find a way to recover some of those additional costs. As noted, above the only tax paid by wind power operators is realty tax at a rate of about $4,000 per turbine annually (estimated) which collectively, returns tax revenue of about $2 per ratepaying household.*

That $4,000 tax, however, is really not much more than the taxes paid for an ordinary house in Ontario. For a home assessed at $300,000, for example, the average realty tax is $3,300. Not far off from a huge, industrial-scale wind turbine which is reaping hundreds of thousands in income each year for its owners.**

The state of Wyoming has found a way to increase tax revenue: it simply levies a tax per MWh (megawatt hour) of generation.  Wyoming is currently looking at increasing that tax from $1/MWh to $2/MWh and had considered levying it at the rate of $5/MWh.

If Ontario used the Wyoming model, for example, a $5/MWh tax for grid-accepted generation (9.2 TWh) and a $20/MW tax for curtailed generation (3.3 TWh) in 2017 would have generated approximately $60 million in tax revenue. Even at those rates, it would only represent 2.2% of what ratepayers are paying for intermittent and unreliable wind power.

Perhaps it would be more fair for wind power developers and operators to pay up for the constant subsidization by the ratepayers and taxpayers of Ontario, and bring more revenues to Ontario’s stressed municipalities — tax them!

© Parker Gallant

* Ontario has approximately 4.9 million households.

** From The Toronto Star: “A turbine with a feed-in tariff contract receives 13.5 cents a kilowatt hour, or $135 a megawatt hour for its output. A two-megawatt turbine running at full speed, 24 hours a day for a year, would therefore produce 17,520 megawatt hours of power. Assuming it operates at 35 per cent capacity, in the real world it will produce about 6,132 megawatt hours. At $135 a megawatt hour, that means revenue of $827,820 annually. Assuming a more conservative capacity of 27 per cent, it would generate revenue of $638,604.” There are capital costs of course, like the “rent” paid to the landowner which might be $15,000 to $40,000 per year.

Ontario’s Fair Hydro Plan set to be less fair than ever

My latest, published in today’s Financial Post, here.

An excerpt:

When the province of Ontario in October announced its Fair Hydro Plan, which lowered electricity rates to current ratepayers by 25 per cent — by passing on costs to future ratepayers — the Association of Major Power Consumers of Ontario (AMPCO) had a problem. The group, representing companies in the province that consume significant energy in their production, took issue with a claim in the province’s revised Long-Term Energy Plan (LTEP) that stated: “Currently, the electricity price for industrial electricity consumers in Ontario is lower than the average price in the Great Lakes region as reported by the U.S. Energy Information Administration.”

Objected AMPCO at the time: “That statement sends the message that Ontario industrial prices are already competitive with surrounding jurisdictions. That is simply not the case.”

AMPCO had lobbied long and hard for special treatment under Ontario’s rising power rates. It got that several years ago when the provincial energy minister directed the Ontario Power Authority to develop and deliver a program that would bring relief to large industrial companies. The program — which required that the large industrial “Class A” ratepayers drive down peak demand — commenced in 2011 and has grown since then as more and more industrial clients were allowed to qualify with lower and lower consumption limits. Joining the Class A ratepayers can result in substantial savings, achieved on the backs of the rest of Ontario’s ratepayers who are the “Class B” group, made up of households and smaller businesses. …

A few dollars more: ordinary electricity customers pay for new conservation measures

Ontario’s Class B ratepayers will be digging deeper into their pockets to find more dollars to help universities, hospitals, court houses and other public buildings pay their electricity bills.

That fact has not been formally announced by the Ontario government; however, the IESO 18-month outlook said this about the Industrial Conservation Initiative or ICI.

“The changes to the ICI program this year have opened the door for participation from the commercial sector. Hospitals, office buildings, hotels, universities and other large commercial buildings with peaks greater than 1 MW can now minimize their electricity costs by shifting loads during the ICI peak day periods. The success of these changes from the perspective of the commercial sector comes back to their load flexibility and their ability to follow the system peaks. The commercial sector impacts are not visible to the IESO as all of these participants would be distributor customers. The ICI program is estimated to have reduced peak demand by about 1,300 MW in the summer of 2016 and with the changes to the program the expectation is that those savings will have increased in 2017.”

What does this change in the ICI program do? It allows public and private entities to pick the highest five peak demand hours in a year (or come close to the five highest) in order to receive subsidized electricity rates. The subsidy is basically a transfer of costs from the Class A ratepayers to the Class B ratepayers—Class B being ordinary folks like you and me.

Class B ratepayers are all residential households along with thousands of small businesses and franchised businesses (who are also struggling with how to manage the increase in the minimum wage which came into effect January 1, 2018).

In 2017, the ICI transfer added $1.2 billion to the costs of electricity for Class B ratepayers while reducing the Class A costs by the same amount. The addition of the business option to choose the ICI program is substantial and will increase the subsidy, but it doesn’t appear the Energy Ministry has bothered to provide that information, or completed a cost/benefit analysis to assess the effects.

Scott Luft noted the ICI cost shift for 2017 in a Tweet a few days ago:

Cold Air‏@ScottLuft Jan 6

yesterday I noted an ICI Hi5 hour being set – and noting the program shifted about $1.2 billion from large to small consumers in Ontario last year. Today’s hour 18 may also end up in the Hi5”

So, reducing “peak demand” by 1,300 MW for five hours is equal to 6,500 MWh and cost $1.2 billion, making the cost of reducing “peak demand” $184,615 per/MWh! ($1.2 billion divided by 6,500MWh).

We should expect this Class B to Class A shift to increase substantially in 2018 as the effects of lowering the ICI to the lower level of 1MW will provide an incentive to those who qualify.

If you happen to be in a hospital or university and notice the lights suddenly dimming you can guess it is probably one of the anticipated high five hours.

It also means, your electricity bill just went up.

Parker Gallant

OFA: lending support to Ontario’s new energy plan

The Ontario Federation of Agriculture has published support for the new Long Term Energy Plan — but did they even read the numbers? Government spending seems to run counter to OFA goals

 

OFA in conflict?

About a year ago, Energy Minister Glenn Thibeault told a community meeting in Sault Ste. Marie, “Since 2003, Ontario has invested more than $35 billion in over 16,000 megawatts (MW) of new and refurbished clean generation, including nuclear, natural gas and renewables – this represents about 40 per cent of our current supply and is the main reason why hydro bills will continue to rise in the future.”

That was followed on March 2, 2017 by Premier Wynne who put out a statement on Ontario’s Fair Hydro Plan and how much had been spent:  “In the past few years we’ve invested more than $50 billion in electricity infrastructure”.

Now, to the release of Minister Thibeault’s 2017 Long-Term Energy Plan  (LTEP) “Delivering Fairness and Choice” which says this: “Nearly $70 billion has been invested in the electricity system since 2003. These investments have several benefits, including providing a clean, reliable electricity system.”

In just one year, Ontario’s Premier and Minister of Energy changed the claims made about spending on the electricity sector to the point where they suggest we have spent an additional $35 billion dollars in just one year!

In response to the LTEP, the Ontario Federation of Agriculture or OFA put out a very short paper that simply seems to buy into the government claims: $70 billion was invested in our electricity system over the past 15 years, much of these investments were for the shift to non-emitting generation sources.”

You might think Ontario’s farmers, who are very dependent on energy, would be far from happy with electricity prices. In fact, on their Issues page on their website, they say “OFA believes Ontario farms need competitively priced energy, including access to natural gas and reasonably priced electricity, to be able to compete and to contribute to the growth of our rural economy.”

They are no doubt concerned about the Fair Hydro Act and what will happen when the bill for its $40-billion cost falls due and electricity rates shoot up again. But you wouldn’t know that from reading their LTEP review: it suggests refinancing the Global Adjustment to defer costs was a good thing!

Perhaps Don McCabe, former President of the OFA, still plays a role in determining the OFA’s position on the electricity sector?   As people may recall, McCabe was one of several “environmentalists” who were members of the GEAA (Green Energy Act Alliance) who claim responsibility for bringing us the Green Energy and Green Economy Act. Back in 2011 the Ontario Sustainable Energy Association (OSEA) awarded Don McCabe a trophy for that role! (The OFA continues to maintain membership in OSEA but the current representative is Ian Nokes.)

As an OFA executive, Mr. McCabe should step up and help the Premier and Minister to present a dollar amount to the public that is consistent, and doesn’t suggest spending jumped $35 billion in one year.

On the other hand, he and the other members of the GEAA could be blamed for increasing electricity bills plus the removal of the rights of rural communities to say yes or no to industrial wind turbines, and for the negative impacts on neighbours of any farmers who signed leases with wind power developers

Perhaps Mr. McCabe is content to keep a low profile as the spending claims keep growing!

Hydro One’s shopping list: new Smart Meters”!

Ka-ching! And, Hydro One is considering asking you to pay for electricity up-front …

Electricity: soon to be a luxury in Ontario? More families choose between heat, or eat

It was just a couple of years ago when then Ontario Ombudsman Andre Marin issued his damning report about Hydro One’s billing errors. As quoted by the Globe and Mail, “Hydro One issued faulty bills to more than 100,000 customers, lied to the government and regulators in a bid to cover up the problem, then spent $88.3-million in public funds to repair the damage.”

The Office of the Ombudsman cannot now report on Hydro One due to partial privatization, so ratepayers obtaining their electricity from them should be prepared for this monopoly to do whatever it wants.

Prior to the release of the Ombudsman’s report the OEB said this:  “On March 26, 2015, the OEB issued a Decision and Order to amend Hydro One’s distribution license to include an exemption from the requirement to apply TOU pricing to approximately 170,000 Regulated Price Plan customers that are outside the smart meter telecommunications infrastructure. The exemption expires December 31, 2019.”

Those 170,000 RRP customers represented about 14% of Hydro One’s customer base. In December of 2015 the Ontario Auditor General in her annual report noted: “Hydro One installed 1.2 million smart meters on its distribution system at a cost of $660 million”. The math on that indicates a probable cost per meter of $550 each, including the 170,000 meters that aren’t working as they should. Now, Hydro One is back in front of the OEB seeking rate increases that will impact their ratepayers for the next five years. They are submitting thousands of pages of documents to justify their needs to increase distribution rates by 1.56cents/kWh for their rate-paying clients.

Looking at one of the Hydro One application documents, you find the following (untenable) claim related to smart meters: “There is a significant increase in projected spending in 2022, which reflects the anticipated commencement of smart meter replacement, as the current population of smart meters approach end of service life.”

This should alarm Hydro One customers—should we once again be concerned about billing problems? Will the replacements once again fall short of being able to communicate data?

Ontario’s record with smart meters is not stellar. A report issued in August 2016 by The Brattle Group report notes: “Besides Italy, Ontario is the only region in the world to roll-out smart meters to all its residential customers and to deploy TOU rates for generation charges to all customers who stay with regulated supply.” The old mechanical meters were much cheaper and longer lasting as an article from 2010 states: “Itron, which formerly produced mechanical meters and now makes smart meters, said that older instruments generally have a lifespan of about 30 years before they start to slow down.”

Another disturbing issue is found on page 2038 in yet another of the documents submitted for the rate increase discloses Hydro One’s plans when it comes to ratepayers who are slow to pay their bills:

“One method of enabling customer control of their electricity consumptions, while in arrears condition, and minimizing Hydro One Network’s financial risk, is through the use of pre-paid meters. Pre-paid meters are a type of energy meter that requires users to pay for energy before using it. This is done via a smartcard, token or key that can be ‘topped up’ at a corner shop, via a smartphone application or online. For customers who are high collection risk, the financial risk will be minimized by rolling out this type of meter. With a pre-paid meter, electricity is paid up-front. Once the pre-paid amount is used up, power is cut-off until the customer is able to load the meter with more credits.”

 If the OEB backs off on their muscle flexing and grants Hydro One’s wishes, ratepayers should expect they will have to prepay their anticipated electricity usage or have their power cut off.

Sad times for Ontario as power becomes a luxury, and many more households face the “heat or eat” dilemma!

 

Ontario’s cyclonic wind costs keep heading higher

Compare power output from wind and the cost to consumers between 2010 and 2016 and we learn this: we’re paying more for intermittent wind power, produced out-of-phase with demand

More wind=more cost [Photo: Dorothea Larsen]

In 2010, industrial wind turbines (IWT) in Ontario represented total installed capacity of approximately 1,200 megawatts (MW); they generated 2.95 terawatt hours (TWh*) of transmission (TX) and distributed (DX) connected electricity.  The power from wind cost Ontario’s ratepayers about $413 million for those 2.95 TWh, about 2.1% of total 2010 consumption.  The cost of IWT generation in 2010 was 3.1% of total generation costs (Global Adjustment [GA] + Hourly Ontario Energy Price [HOEP]) and represented 33.5% of “net exports”** of electricity to our neighbours in Michigan, New York, and others.

Wind was over 90% of exported power

Jump to 2016: wind turbines represented installed capacity of almost 4,500 MW, and generated and curtailed*** TX and DX connected electricity totaling 13.15 TWh.  The cost to Ontario’s ratepayers jumped to $1,894.3 million — about 12.2 % of total generation costs.  The 13.15 TWh of generation was 7.9% of Ontario’s total consumption but 94.9% of net exports.

The cost per kilowatt hour of electricity generated by wind in 2010 was 14 cents and in 2016 it had increased to 17.5 cents, despite downward adjustments to the contracted values between 2010 and 2016.   That cost doesn’t include the back-up costs of gas generation when the wind doesn’t blow and we need the power, nor does it include costs associated with spilled hydro or steamed off nuclear, but it does include the cost of curtailed wind, which was 2.33 TWh in 2016 and just shy of total wind generated electricity in 2010.

In the seven years from 2010 to 2016, Ontario’s electricity ratepayers picked up total costs of $7.746 billion for 56.9 TWh of grid-accepted and curtailed (4.9 TWh) wind-generated electricity.   The actual value given to those 56.9 TWh by the HOEP market was just shy of $570 million meaning ratepayers were forced to pick up the difference of $7.166 billion for power that wasn’t needed.  The foregoing is based on the fact we have continually exported our surplus generation since the passing of the Green Energy Act and contracted for IWT generation at above market prices.

During those same seven years, Ontario had “net exports” of 85.95 TWh while curtailing wind, spilling hydro and steaming off nuclear. And, at the same time, we were contracting for gas plant generators that are now only occasionally called on to generate electricity yet are paid considerable dollars for simply idling!

Refinancing wind payments

As noted above the cost of wind generation in 2016 was almost $1.9 billion and represented 15.3% of the Global Adjustment pot. That cost was close to what was inferred in an Energy Ministry press release headlined: “Refinancing the Global Adjustment” but suggesting it was taxpayer owned “infrastructure”:  “To relieve the current burden on ratepayers and share costs more fairly, a portion of the GA is being refinanced. Refinancing the GA would provide significant and immediate rate relief by spreading the cost of electricity investments over the expected lifecycle of the infrastructure that has been built.”

What’s really being refinanced is a portion of the guaranteed payments to the wind and solar developers who were contracted at above market rates! So, what is being touted as a 25% reduction includes the 8% provincial portion of the HST and a portion of annual payments being made to wind and solar developers for their intermittent (and unreliable) power.

Premier Wynne’s shell game continues!

(C) Parker Gallant

May 22, 2017

Note: Special thanks to Scott Luft for his recent chart outlining the data enabling the writer to complete the math associated with this Liberal shell game!

*    One  TWh equals 1 million MWh and the average household in Ontario reputedly consumes 9 MWh annually, meaning 1 TWh could power 111,000 average household for one year.

**   Net exports are total exports less total imports.

*** Ontario commenced paying for “curtailed” wind generation in September 2013.