Hydro One customers take it on the chin–again

Delivery charges ballooning, according to recent financial report

Hydro One released their first Quarter results on May 9, 2019: reported revenue was up 15.4 % ($183million) compared to the first Quarter of 2018.  The higher revenues were “driven by higher distribution revenues [up 30.5% from the comparable quarter] primarily due to OEB’s decision on the 2018 and 2019 distribution rates.”

With that in mind and, as a Hydro One customer who just received the monthly bill, I checked the relative percentage costs of their “delivery” charge. It was 45% of the bill (before taxes). Another quick calculation by simply dividing the delivery costs by the monthly consumption indicated a cost of 7.31cents/kWh for Hydro One’s delivery charges.   Electricity costs were 52% of the bill (8.5cents/kWh) and “regulatory charges” represented the balance.

Intrigued with these findings, I then calculated Hydro One’s comparative delivery costs for the same quarters in 2018 and 2019 to determine how the two rate increases granted by the OEB for their distribution business affected the same calculation—cost per kilowatt hour! Hydro One’s quarterly report provides the details on both GWh (gigawatt hours) distributed and the cost of “Purchased Power” so the basic calculation is the same as that for my bill.

For the first Quarter of 2018, Hydro One reported their distribution was 7,406 GWh which produced gross revenue of $1,145 million, and the cost of Purchased Power (PP) was $751 million, meaning “Distribution Revenue” net of PP was $394 million. Dividing that $394 million by the 7,406 GWh distributed indicates the average distribution cost was 5.32 cents/kWh.

For the first Quarter of 2019, Hydro One reported their distribution was 7,738 GWh (+4.5%) producing gross revenue of $1,321 million (+15.4%) and the cost of PP was $807 million (+7.5%) producing net Distribution Revenue of $514 million (+30.5%). Dividing that $514 million by the 7,738 GWh distributed indicate the average distribution cost was 6.64 cents/kWh.

So, based on these calculations, what do we get? Average delivery costs for Hydro One customers increased from 5.32 cents/kWh in 2018 to 6.64 cents/kWh in the comparable 2019 quarter which equates to a 24.8% increase year over year. That far outpaces the cost of living increase year over year!

Despite the 15.4% ($183 million) increase in revenue compared to the first Quarter of 2018, Hydro One’s net income fell from $222 million to $171 million as operations, maintenance and administration (OMA)  costs jumped by $146 million.  Interestingly enough, of the $146 million OMA increase, the financial statements attribute $140 million of it to the cost of the failed Avista acquisition.  In an attempt perhaps to appease shareholders, the quarterly financial statements suggest “Adjusted net income attributable to common shareholders” was $311 million.  If they earned that for the ensuing three quarters, net income would be $1.244 billion.  If one measured that income on an equity base of $9,622 million (Hydro One’s year-end equity December 31, 2018) it would represent a 12.9% ROE (return on equity).

The current OEB (Ontario Energy Board) allowed ROE is 8.98% which suggests the OEB either treats Hydro One as “special” or sets the ROE without enforcement. The first point under the OEB’s “Mandate” is “Establishing rates and prices that are reasonable to consumers and that allow utilities to invest in the system.”

Perhaps it’s time for the OEB to follow their mandate, as a 12.9% ROE exceeds the current allowed ROE by a wide margin. All ratepayers should be aware Hydro One has five distribution rate applications outstanding with the OEB according to their latest quarterly report!

Let’s all hope the OEB has a serious look at those applications and actually allows rates to be set that are “reasonable to consumers”!

PARKER GALLANT

Quebec Inc. and Ontario renewables: was due diligence done?

Part 2: a look at Axium Infrastructure, and a review of OEB responsibilities

After reading Part 1 of this short series, you might ask, who or what is Axium Infrastructure?

From all appearances, it seems Axium was created by a group of individuals with the help of Fiera Capital Corporation. Fiera Capital Corp.* is a major Quebec-based investment manager with assets under management (AUM) of C$144.9 billion** as of March 31, 2019.   They once held a 35-percent interest in Axium Infrastructure Inc. but U.S. regulations appear to have forced them to divest their holdings, as noted in a press release of December 21, 2015.   The divesture was apparently due to Fiera’s substantial share ownership by National Bank of Canada and Fédération des caisses Desjardins du Québec and related to U.S. banking regulations. The press release stated their 35 percent ownership in Axium Infrastructure was purchased by Axium and the shares were subsequently cancelled.

Finding specific details about Axium’s capital base, financers or assets is difficult. A press release they issued January 3, 2018 claimed “Axium manages dedicated infrastructure funds having approximately C$2.8 billion in assets under management as of September 30, 2017, as well as more than C$1 billion in co-investments.” One should assume those AUM have grown since Sept. 2017.

A visit to Axium’s website starts with the following: “Created in 2008, Axium Infrastructure is an independent investment firm dedicated to investing in core infrastructure assets. The firm is employee-owned, aligning the interests of the management team with limited partners. It benefits from the capabilities of a group of professionals with extensive infrastructure backgrounds. Its management team comprises infrastructure investment specialists with decades of combined experience acquiring, developing, financing, operating and managing infrastructure assets.”

So, who are those employees and “limited partners” who own Axium Infrastructure Inc.? The “team” is identified on the Axium website for all to see, but not the “limited partners.”

The three most senior executives of the “team” are all ex SNC Lavalin employees. Axium’s President & CEO is Pierre Anctil whose bio identifies him as the co-founder of Axium and a former General Manager of the Québec Liberal Party, a position he held from 1988 until early 1994 when he was appointed to the Chief of Staff to the Quebec Premier, Robert Bourassa. Anctil’s bio goes on to note he joined SNC in 1997 and in 2001 was promoted to Executive Vice-President and Member of the Office of the President. He left SNC in early 2008 and shortly after co-founded Axium.

What came to light about Mr. Anctil in the Quebec Charbonneau Commission*** investigation into companies illegally giving money to Quebec’s political parties is interesting. This is from a CTV March 2014 report: “Yves Cadotte, a vice-president at SNC-Lavalin, testified at Quebec’s corruption inquiry that company executives and some of their spouses donated over $1 million to the Liberals and Parti Quebecois between 1998 and 2010.” The article goes on to say, “Cadotte testified former SNC Vice-President Pierre Anctil, a former strategist with the provincial Liberals, handed him the cash to give to Union Montreal fundraiser Bernard Trepanier. The fundraiser shared an electoral office with former executive committee chairman Frank Zampino.”

The Montreal Gazette on November 11, 2014 reported: “The new portions of the affidavit released Monday reveal that two former SNC vice-presidents, Normand Morin and his successor Pierre Anctil, each told police that their job included the unofficial responsibility of monitoring and arranging for political financing. The men said that former SNC-Lavalin CEO Jacques Lamarre informed them of this responsibility, and that they were in contact with businessman and Liberal fundraiser Marc Bibeau to arrange for donations to the Liberals. SNC-Lavalin’s employees acted as straw man donors, Morin and Anctil confirmed, and the company reimbursed them. There were also allegedly cash payments.”

Second in command at Axium is Stephane Mailhot, President & Chief Operating Officer. Mr. Mailhot’s biography on the site notes: “In 1999, Stéphane was named vice president of SNC-Lavalin’s Investment division where he was responsible for the evaluation, negotiation and management of investments in infrastructure and public-private partnership projects.” One of the PPP projects undertaken by SNC, referred to as MUHC (McGill University Health Centre-a $1.3 billion contract) resulted in bribery charges against several SNC employees and a February 2, 2019 CBC article noted: “when Quebec police started digging into the process that led to that contract, they uncovered what one detective called “the biggest case of corruption fraud in Canadian history.” The amount involved in the bribery case was said to be $22.5 million. Despite the police action, SNC-Lavalin sued MUHC for $330 million in respect to that contract, and in an article dated January 8, 2018 apparently agreed to a settlement of $108 million. There was no indication in any of the articles carrying the story about the MUHC bribery charges of any involvement by Mr. Mailhot.

The third former SNC Lavalin executive is Jean Eric Laferrière, Senior Vice President, General Counsel, Secretary and Chief Compliance Officer of Axium.   Mr. Laferrière’s position with SNC started as Legal Counsel, Legal Service, from June 2000 to Dec. 2006 and he rose through the ranks to become SVP, Legal Affairs from Aug. 2012 to May 2016 when he left and joined Axium. On April 30 2019 a story broke on the CBC related to illegal political donations to the Federal Liberal Party by SNC Lavalin employees and while Mr. Laferrière’s name is not mentioned, one of the non-executive employees commented; “Lefebvre said he understood that the president of the company at the time, Jacques Lamarre, initiated the scheme and that the legal department at SNC-Lavalin had signed off.” One wonders if Mr. Laferrière was aware of this while in the legal department of SNC-Lavalin?

From all information available, it appears none of the top three Axium Infrastructure executives have been charged by the RCMP or Quebec police for the three unrelated criminal events that seem to have taken place while they held senior positions at SNC Lavalin.

Ontario Energy Board and due diligence

It is disconcerting that Ontario’s regulator, the OEB ignored protocol by issuing the generating licence in respect to the application by Nation Rise. They should have overruled the Ministry of the Environment, Conservation and Parks for the issuance of the REA two days before the election writ was dropped. They could also have overruled the IESO for their issuance of the NTP issued before the newly elected government had even named their cabinet ministers. They could also have queried Nation Rise in respect to claiming financing had not been arranged, but appear not to have done so. The other aspect is their “due diligence” in respect to Axium Infrastructure’s majority acquisition of Nation Rise was non-existent.

One should also wonder why it took the OEB over two months to grant the generating licence to EDPR for the Nation Rise project and then only eight days after granting the licence, Axium suddenly announced the majority acquisition of the project? The obvious question is, was the party responsible within the OEB for granting the licence aware of the upcoming acquisition announcement causing them to issue it, or were they oblivious to the upcoming takeover?

Finally, after the OEB received Axium Infrastructure’s newly created subsidiary’s application why would the OEB simply tell them “the OEB does not intend to issue a notice of review of the proposal”? There was no effort made on the part of the OEB to conduct proper due diligence on this file which should be worrisome to all of Ontario ratepayers.

Ontario’s ratepayers will be sending billions of dollars to “Quebec Inc” for intermittent and unreliable renewable energy in the form of wind and solar generation, and our regulator appears to have simply blessed it. The OEB treats its “Vision” as if it doesn’t exist as their treatment in this case fails to promote “outcomes and innovation that deliver value for all Ontario energy consumer.”

There are no outcomes in this case delivering any value for Ontario’s energy consumers.

PARKER GALLANT

 

 

*Fiera Capital, subsequent to the sale of their interest in Axium Infrastructure, formed a wholly owned subsidiary that has also been buying up Ontario renewable generation as noted in an article from January 2017 announcing the purchase of solar assets from NextEra of Florida.                                                                                                                                                               **Fiera’s AUM at $144.9 billion is slightly less than Ontario’s 2019/2020 planned budget spending (before interest costs) of $150.1 billion.                                                                                                                                                                                    ***The commission was created by Jean Charest and launched in October 2011 and cost $45 million.

 

“Quebec Inc” scoops up Ontario renewable energy projects

Valuable contracts with above-market rates for wind and solar power are attracting investor attention

Perhaps unbeknownst to many, Ontario’s electricity ratepayers are accumulating debt in the electricity file (Fair Hydro Plan or FHP); that debt will reappear in future years to ensure electricity rate increases exceed inflation by a wide margin.

The cause of the FHP debt can be traced to the Green Energy Act (GEA) and the FIT and MicroFIT contracts handed out by the Ontario Liberal Government under Premiers McGuinty and Wynne.  Those lucrative above-market (confirmed by the Auditor General) contracts were granted to mainly foreign-owned companies. The companies rushed to Ontario to take advantage of the above-market rates offered for renewable energy of the wind and solar variety.

Many of those foreign-owned companies are now leaving Ontario, cashing out on the lucrative contracts by selling them to willing buyers. Our provincial neighbour “Quebec Inc.”, with its cheap electricity prices, is rushing in to scoop up many of those contracts along with others like the Canada Pension Plan Investment Board (CPPIB). The latter purchased NextEra’s portfolio (Head Office Florida) of 396 MW of wind and solar contracts, paying $1.871 million per MW for a total of $741 million CAD and assuming the debt (US $689 million).

“Quebec Inc’s” acquisitions are more “under the radar” and most costs are unknown, but some of the bigger investment players with Quebec headquarters are very active.

The one recent acquisition from “Quebec Inc.” caught the attention of many in Eastern Ontario was the purchase of a controlling interest in the unbuilt 100-MW Nation Rise wind power project in North Stormont, south of Ottawa. When newly elected Premier Ford’s government announced they were cancelling 758 renewable wind and solar energy projects, most Ontarians thought Nation Rise would be one of: it wasn’t. Somehow the bureaucrats in the former Ministry of the Environment and Climate Change managed to issue the REA (renewable energy approval) just a few days before the election writ was dropped despite wind power and this project in particular being a prominent election issue.

To top things off, the IESO (Independent Electricity System Operator) were satisfied that EDPR had met their “key development milestones” and issued the NTP (Notice to Proceed) on June 13, 2019, days after the election and weeks before the Ford government announced the new cabinet.

When the approval became public, community group Concerned Citizens of North Stormont, stepped up their fight to stop the power project.

Project developer EDPR then sold off controlling interest in the Nation Rise project along with other existing operating projects. Before that happened however, EDPR submitted an application dated October 11, 2018 to the Ontario Energy Board (OEB) for a electricity generation licence. Question 13 of the application asks the question; “Has the applicant secured financing?”

EDPR ticked the NO box.

The OEB appears to have overlooked the lack of secured financing (based on the application) and granted the licence December 20, 2018 without comment.

EDPR is a subsidiary of EDP a global energy company with its headquarters in Portugal and with significant renewable energy assets in North and South America. With 2,300 industrial wind turbines in the USA, EDP rank third in installations.

EDP has been a takeover target for several years by Three Gorges, a Chinese state-owned company who are already a significant shareholder. Because of the Chinese state ownership the US government expressed concerns with the possible purchase by Three Gorges. The principal concern is the volatility of US electricity grids and security issues surrounding them. Other EU countries with EDP electricity generation assets are also concerned with grid security issues in the event of a takeover by Three Gorges.

In the midst of takeover buzz, EDPR suddenly sold off controlling interest in some of their North American generation assets to a Quebec-based company, Axium Infrastructure Inc. Eight days after the OEB blessed the EDPR licence application for Nation Rise, Axium issued a press release announcing they had closed an agreement to acquire an 80-percent interest in three wind power projects, totaling 499 MW in the U.S. and Canada from EDPR.

Nation Rise was one of those acquired.

A month and a half earlier, Axium was the lead investor in the purchase from U.S.-based Pattern Energy Group of a 90-MW minority interest in the 270 MW K2* wind generation project. The purchase price was CAD $216 million.

Following OEB’s approval of the EDPR Nation Rise generation licence, Axium Infrastructure submitted an application to the OEB dated January 14, 2019 seeking approval of their majority (80 percent) acquisition. The application form asks no questions about financing, nor does it ask questions about bankruptcy or criminal issues for either the company or individual officers, unlike the “generation licence” application format.

The application to the OEB indicated Axium held investments in seven of Ontario’s wind turbine developments and 19 solar projects. It also included the following: “After completion of the Proposed Transaction and the Project, Axium and its affiliates will have a generation capacity of 1,050 MW** on a gross basis and 563 MW on a net basis within the Province of Ontario.”

On February 28, 2019 Axium issued a further press release reporting they acquired a 50-percent interest in a 101-MW solar portfolio in Ontario from Mitsubishi Corporation.

In short, Axium has been very aggressive in acquiring Ontario’s foreign-owned wind and solar projects and Ontario’s regulator, the OEB, have blessed everything Axium has done.

That’s obvious if one reads the short letter dated February 14, 2019 from the OEB notifying  Axium about their Nation Rise acquisition: “the OEB does not intend to issue a notice of review of the proposal.”  Was this due diligence?

Tomorrow, in Part 2 of my look at the “Quebec Inc” acquisition spree, I will attempt to explore who is behind Axium Infrastructure, the interaction with the Ontario Energy Board and how the latter executes its Vision: “The OEB supports and guides the continuing evolution of the Ontario energy sector by promoting outcomes and innovation that deliver value for all Ontario energy consumers.”

PARKER GALLANT

 

*K2 was a Samsung project commissioned in September 2015 so has about 17 years left in its contract and if it operated at 30% of capacity would generate approximately $540 million in gross revenue over the remaining term of its contract for the 90 MW of capacity now owned by the Axium consortium.                                                                                                                                 **That amount of renewable generation would represent approximately 14% of all current operating renewable wind and solar in Ontario.

 

 

 

How Ontario’s “little” electricity customers help out the big ones (with billions)

Class B Ontario ratepayers support Class A ratepayers–$6.2 billion and growing

It was almost six months ago when the Ontario Energy Board’s (OEB) Marker Surveillance Panel (MSP) released a review of the Industrial Conservation Initiative (ICI). The review looked at the impact it had on pricing since its launch in September 2011.

The ICI came into being after extensive lobbying for a reduction in electricity pricing by the Association of Major Power Consumers of Ontario (AMPCO) when Brad Duguid held the position of Minister of Energy.

The ICI model simply requires the “A” Class user to pick five “peak demand” hours over a year in order to gain a sizable discount to the price they pay.

An article written by yours truly, appeared shortly after the review’s release and pointed out the cost to Class B ratepayers, namely, residential and small/medium sized businesses. The article noted the failure by the OEB to act on its role which is: “The OEB supports and guides the continuing evolution of the Ontario energy sector by promoting outcomes and innovation that deliver value for all Ontario energy consumers.” The article noted it took the OEB seven (7) years to realize “the ICI as presently structured is a complicated and non-transparent means of recovering costs, with limited efficiency benefits.”

One should wonder if the recognition was a reflection of a change in government or, a realization the “value” didn’t apply to “all” of Ontario’s ratepayers the OEB is supposed to consider in its innocuous decisions!
The support of Class B to Class A ratepayers as of the end of 2017 “has shifted nearly $5 billion in electricity costs from larger consumers to smaller ones. In 2017, the ICI shifted $1.2 billion in electricity costs to households and small businesses—nearly four times greater than the amount in 2011.”

Almost six months have transpired since issuance of the MSP review and nothing has changed. Another year has gone by (the review reflected cost transfers to the end of 2017) and 2018 duplicated the shift of 2017 so add another $1.2 billion and push the total transfer to $6.2 billion since mid-September 2011.

What that represents is an average subsidy to Class A ratepayers of over $1,200 for each of the approximately 5.1 million Class B ratepayers over the 7 ½ years since the ICI came into existence.

The Market Surveillance Panel made several observations on how the ICI could be made more efficient and/or enhanced to make it fairer. The Panel’s first two observations would help to reduce the burden on Class B ratepayers so perhaps its time the OEB and/or the Ministry enable those changes which are:
*Costs that are not related to the fixed capacity costs of needed generation are removed from the Global Adjustment and recovered by other means.
*Only the cost of peaking generation is recovered based on consumption during peak demand hours; the cost of non-peaking generation should be allocated such that all consumers that benefit from that capacity pay for that capacity.”

Almost a year ago, many in Ontario voted for the Ontario Progressive Conservative Party, handing them a majority government. One of the chief reasons the Liberals were defeated was their mishandling of the energy file. Based on the foregoing, most voters anticipated the new Ford-led government would have tackled the file with all the might one would expect with the election promise that “help is on the way” followed by the declaration of Premier Ford in his victory speech stating; “My friends, help is here.”

The opportunities to demonstrate the “help” are there for all to see such as those recommended by the MSP.

The government could also use regulations to enforce noise controls (audible and inaudible) on industrial wind turbines, they should insist the UNIFOR wind turbine in Saugeen Shores be removed, they could cancel the 100 MW Nation Rise project to save future ratepayers hundreds of millions, and they could insist the OEB reflect its “vision” which claims it is responsible for: “promoting outcomes and innovation that deliver value for all Ontario energy consumers.”

Ontario’s Class B ratepayers are waiting for “help” to arrive and see the OEB deliver actual value!

Oh, and a thank you from the Class A ratepayers would be nice too!

PARKER GALLANT

Electricity bills in Ontario: promise made, promise missed?

More work to be done to get Ontario electricity bills down

In the campaign before last year’s election in Ontario, Doug Ford promised to cut hydro bills by 12 per cent if his party won. He said it would be on top of a rate reduction (25% under the Fair Hydro Plan/FHP) from the governing Liberals, whose plan he had repeatedly criticized.

He also said he would cut rates through a variety of measures that would save the average ratepayer $173 a year. When asked about their plans in respect to the FHP he said, “We’re going to be reviewing that. That was, as far as I’m concerned, the wrong thing to do, borrowing down the future and the only people who are going to pay for it is our children, our great-grandchildren.”

He also said he would give ratepayers the dividends from the government’s share of the partially privatized Hydro One.

Since being elected with a majority, the Ontario PC Party has often issued press releases suggesting “promises made, promises kept” but so far, we haven’t heard those words uttered in respect to the electricity file.

IESO reports are now available for the first three months of 2019, so we can compare the quarter with 2018 under the previous government to see if any progress has occurred.

To begin, if you look at the IESO report reflecting the “Variance Account under Ontario’s Fair Hydro Plan” you can discern the dollars being deferred went from $410.5 to $496.6 million, a jump of $86.1 million or 21%. That is money Ontario ratepayers will have to pay back in future years! The second quarter could be just as bad: Scott Luft has estimated April 2019’s combined HOEP (Hourly Ontario Energy Price) and GA (Global Adjustment) will set a new record high.

So, let’s look at Hydro One’s dividends to determine how far they would go to achieving the 12% reduction. The December 31, 2018 annual report for Hydro One shows dividends paid of $518 million to shareholders, so the 47% ownership of Hydro One by the province would represent $243 million!  If one than does the math for the promised annual average residential ratepayer saving of $173 the amount needed is about $807 million ($173 X 4,665,055 ratepayers = $807 million) for a shortfall of $564 million. Adding the additional FHP $86.1 million for the 2019 first quarter puts the shortfall at $650.1 million — so far.

For the first quarter of 2019, Ontario total electricity demand including net exports (exports minus imports) increased by 392 GWh (gigawatt hours) with Class A ratepayers increasing consumption by 486 GWh and Class B by 217 GWh while net exports declined by over 300 GWh. The weighted average of the GA and HOEP as reported by IESO on April 30^th of each year climbed from $103.80/MWh in 2018 to $110.67 in 2019 a gain of $6.87/MWh or 6.6%. Multiplying the $6.87/MWh by Class B consumption of 25,628,600 MWh in the first three months of 2019 comes to approximately $44 million. That is about $42 million shy of the $86.1 million increased transfer to the FHP over the 2018 transfer. (We must assume, as frequently happens, IESO made an adjustment to the prior month’s transfer and that is the reason for the difference.)

In specifically examining wind generation and curtailment from Scott Luft’s post it appears year over year grid-accepted wind declined by 40,000 MWh and curtailed wind dropped 66,000 MWh. What that suggests is that the increase in costs is a reflection of the rate increases granted by the OEB to OPG for their nuclear generation at Darlington and Pickering.   This marks the first time over a long period when increased costs cannot be blamed on either wind or solar generation or both!

The foregoing 2019 first quarter results may present a major road block for Premier Ford in achieving his “promise made, promise kept” catchphrase in respect to the energy file.

Last December, former Minister of Energy Glenn Thibeault, was testifying at a committee hearing and responded to a question on the portfolio as follows: “There was lots that was happening on the file, and I was still learning it, right? As I said earlier, I was drinking from a thousand firehoses. Not that I’m trying to minimize the complexity of the file, but there was lots for me to learn and, at the same time, trying to find ways to reduce rates was, I think, the most important thing.”

Perhaps that point should be borne in mind by the current Minister, under Premier Ford. There are ways and means of reducing upward pressure on electricity costs, but so far Greg Rickford, Minister of Energy, Northern Development and Mines seems to have missed them or is still trying to digest the complexities of his portfolio.

My advice: Start with the cancellation of the Nation Rise 100-MW wind power generation project which will eliminate over $400 million from future electricity bills. And for those living with industrial wind turbines in rural Ontario, ensure they are in compliance with audible and inaudible noise regulations! Consultation with the Minister of the Environment, Conservation and Parks to ensure the regulations are followed would go a long way to reducing costs.

Minister Rickford could also consult with some external experts and find out what can be done to reduce costs, beyond getting rid of the “$6 million dollar man” from Hydro One!

PARKER GALLANT

 

 

Just released 2018 electricity data: are things finally looking up in Ontario?

Why ‘down’ is actually ‘up’ in topsy-turvy Ontario

Last month, the Independent Electricity System Operator (IESO) released the grid-connected 2018 Electricity Data. Under the “Price” heading the IESO said this: “The total cost of power for Class B consumers, representing the combined effect of the HOEP [2.43 cents/kWh] and the GA [9.07cents/kWh] was 11.50 cents/kWh”.

In 2017, that combined price was 11.55 cents/kWh, so there has been a slight decline. That slight decline represents an annual savings to the average household consuming 9,000 kWh per annum of—wait for it—$5.00.

If Bob Chiarelli was still Minister of Energy, he would probably suggest you could now purchase two “Timmies” with that much money!

The price drop isn’t very much but, the question is, how or why did the average price drop?

Ontario’s overall consumption in 2018 increased from 2017 by 5.3 TWh (terawatt hours) or 4%.  In 2017 the IESO reported grid-connected consumption was 132.1 TWh and in 2017 it increased to 137.4 TWh.  This is increase is a “good thing.” Here’s why:

• Curtailed (paid for but not used) wind power fell by 1.207 TWh, which saved around $145 million!
• Nuclear maneuvers (steam-off) or shutdowns declined by 791 GWh (gigawatt hours) and saved approximately $60 million.
• Net exports (exports less imports) also fell by 2.318 TWh and, combined with the higher HOEP average for the year, saved ratepayers approximately $320 million.
• Foregone hydro generation was probably lower as the first three quarters reported by OPG show it dropped from 4.5 TWh to 2.4 TWh (down 2.1 TWh). That saved around $90 million.

Taken together, that $615 million ratepayers had to absorb in 2017 comes to much more than Class B residential ratepayers benefited in 2018. There are only 4,665,000 of them so total net savings was only about $25 million.* Other Class B ratepayers presumably received some very minor benefits, too.

The reason these benefits were not more is because additional costs were levied in 2018, absorbing most of the remaining $590 million. The Ontario Energy Board approved large rate increases for OPG for the regulated hydro and nuclear generation segments.  The rates for the latter rose substantially and will also increase further in 2019 and 2020 before falling back in 2021 as the OEB used their power to attempt to “smooth” the nuclear refurbishment costs over several years.

Despite the fact that increased consumption in 2018 helped to, ever so slightly, reduce costs, the IESO continued their efforts to get us to reduce consumption by spending upwards of $350 million on conservation programs.

Why?

The small price drop for Class B ratepayers turns the economic law of “supply and demand” which is: increased demand will increase prices.  Somehow that law works in reverse in Ontario’s electricity sector!

Enjoy your two extra “Timmies” this year!

PARKER GALLANT

*These savings have nothing to do with the 25% reduction under the Fair Hydro Act which eliminated the 8% provincial portion of the HST and provides a 17% reduction for residential ratepayers. The FHA amortized assets over a longer timeframe than normal in the rest of the electricity generation world.

Ontario Energy Board looked the other way on rising electricity bills

After seven years, the Ontario Energy Board has determined that a move by the McGuinty government to shift the burden of electricity costs to smaller ratepayers was “complicated and non-transparent.” What took them so long to find out that out, when it cost Ontario citizens billions?

Where your money went [Shutterstock photo]

Back in 2011, the Dalton McGuinty government introduced the Industrial Conservation Initiative (ICI) with the idea of changing the way Global Adjustment (GA) costs were allocated to different classes of consumers. “The stated purpose of the ICI is to provide large consumers with an incentive to reduce consumption at critical peak demand times. The resulting reductions in peak demand were expected to reduce the need to invest in new peaking generation and imports of electricity from coal-reliant jurisdictions.”

The government had been lobbied hard by the Association of Major Power Consumers of Ontario (AMPCO) who had been feeling the effects of climbing power rates brought on by the Green Energy Act (GEA) and the resulting FIT (feed-in-tariff) contracts for renewable energy (wind and solar).

Needless to say, the Liberal government caved, the ICI was born and officially started September 2011.

Just over a week ago the Ontario Energy Board released a report titled: The Industrial Conservation Initiative: Evaluating its Impact and Potential Alternative Approaches. What struck me immediately was this sentence in the Executive Summary: “In the Panel’s view, the ICI as presently structured is a complicated and non-transparent means of recovering costs, with limited efficiency benefits.”

It took the OEB seven years to come to this conclusion. And they are supposed to be the regulators for the energy sector. Their vision is: “The OEB supports and guides the continuing evolution of the Ontario energy sector by promoting outcomes and innovation that deliver value for all Ontario energy consumers.”

So, it took seven years to determine the ICI wasn’t delivering value?

The ICI was created via a change in the Regulations* and was posted August 27, 2010 on the Environmental Registry with this statement:  “As a result of the consultation, there was general agreement that the proposed changes would result in a net benefit to electricity consumers, the electricity system and the broader Ontario economy.”

The new OEB report noted the Class B to Class A shift commencing in 2011 “has shifted nearly $5 billion in electricity costs from larger consumers to smaller ones. In 2017, the ICI shifted $1.2 billion in electricity costs to households and small businesses—nearly four times greater than the amount in 2011.”

Wondering what 2018 would bring in respect to the B to A shift and, knowing IESO now posts both consumption and costs of the GA by customer class on their website, it was worth an exercise to determine if the $1.2 billion shift of 2017 would increase or decrease.  Using IESO’s data it appears the subsidy for the first 11 months was about $35.4 million per TWh (terawatt hour).  Based on 36.9 TWh consumed by Class A ratepayers the cost shift is $1.306 billion.  The 4,665,000 residential ratepayers who use 9 MW of electricity annually will absorb approximately 30% of those costs — in other words, it represents an annual subsidy to Class A customers of almost $100 from each ratepayer.

Small and medium sized businesses will pay a lot more absorbing the remaining 70%, or about $900 million!

Now you know why the price of that hamburger and everything else went up!

Electricity price increases have hit all classes of ratepayers in the province and now that we see the shift of costs, it is helpful to look at the cause!

Renewable energy in the form of wind and solar** power generation has played a big part in rising electricity bills, so it is an interesting exercise to do a simple calculation to determine what wind generation and curtailment have cost in the first 11 months of 2018.   My friend, Scott Luft posts actual wind generation and curtailment for grid-connected (TX) and distributor-connected (DX)*** wind.  Calculating the TX, wind generated (9.655 TWh) and curtailed (1.940 TWh) for the 11 months indicates costs were $1.305 billion for grid-accepted generation and $230 million for curtailed (paid for but not used) wind.

That brings total costs of intermittent and unreliable wind to more than $1.5 billion. ****

What this simple exercise really does of course is demonstrate how our costs would be much less without intermittent wind power generation, which is produced out-of-phase with demand in Ontario. Considering first-to-the-grid rights for wind power operators means it also results in spillage or waste of hydro (5.9 TWh in 2017) and nuclear steam-off (1 TWh in 2017) and must be backed up with gas generation — all of which we pay for — wind power simply increases our electricity bills without any significant benefit to the environment or power system.

If solar costs were also included in these calculations, we would be in the $3 to 4 billion range.

Short story: Without all that waste, all classes of Ontario ratepayers would have reasonable and cost-competitive electricity rates.

Conclusion                                                                                                                                       The OEB should have stood up for consumers a lot sooner and called out the government for NOT delivering the “outcomes and innovation that deliver[d] value for all Ontario energy consumers.”  Instead, the OEB simply watched while billions of dollars were removed from ratepayers’ pockets for foreign-owned wind power developments and stood by for seven years while residential, small and medium sized businesses provided increasing subsidies to large industrial companies for a program “with limited efficiency benefits.”

PARKER GALLANT

* Class A was limited to very large consumers with an average monthly peak demand of more than 5 MW (primarily large industrial consumers). Since then, the government has expanded eligibility such that Class A now includes all consumers with an average monthly peak demand of more than 1 MW, as well as consumers in certain manufacturing, industrial and agricultural sectors with an average monthly peak demand of more than 0.5 MW.

**IESO do not disclose solar generation until early the following year                                                                                                                                                      ***Estimated for grid connected but generally very close to actual generation.

****Generated wind at $135/MWH and curtailed at $120/MWh.

Hydro One shareholders happy with Avista purchase denial

Avista shareholders, not so much

The Hydro One press release immediately following the decision by the State of Washington’s regulator denying them the right to acquire Avista Corporation was short but expressed “extreme disappointment.”

“TORONTO and SPOKANE, WA, Dec. 5, 2018 /CNW/ – Hydro One Limited (“Hydro One”) (TSX: H) and Avista Corporation (“Avista”) today received a regulatory decision from the Washington Utilities and Transportation Commission (UTC), denying the proposed merger of the two companies. The companies are extremely disappointed in the UTC’s decision, are reviewing the order in detail and will determine the appropriate next steps.”

How did investors view the denial? Avista shareholders were definitely in the “extremely disappointed” crowd as their shares tumbled, but Hydro One investors were probably “extremely happy” as their shares had one of their very best days ever!

Remember, Hydro One offered to purchase Avista shares well over book value and at a high multiple to earnings ratio.  While the prior Board of Directors of Hydro One and then CEO Mayo Schmidt, along with Glenn Thibeault, former Minister of Energy, were excited about the offer to purchase Avista, it certainly appears that shareholders weren’t!

Some media blame “political interference” by Premier Ford as the principal reason for the denial! One such individual was quoted in CBC article stating: “Ontario Liberal finance critic Mitzie Hunter said Ford’s “reckless conduct” at Hydro One continues to damage the province’s interests.” Apparently Hydro One’s investors are not buying Mitzie’s claim!

There will, however, be a cost to Hydro One. When the purchase was negotiated, they agreed to a “termination fee” of US$ 103 million (CAD$ 139 million) and will have to pay that to Avista for distribution to their shareholders.  Hydro One will also have to unwind foreign exchange forward contracts and accumulated acquisition costs which will be expensed.  They also have to deal with the large convertible debenture issue ($1,540 million) which has a 10-year maturity and interest payments above market rates prior to conversion.

I assume we ratepayers will have to sit on the sidelines until Hydro One’s year-end report in early 2019 is issued before we get an estimate on the costs of the denial by the State of Washington’s regulator.

We can then hope our regulator, the Ontario Energy Board (OEB), doesn’t grant a rate increase to Hydro One to cover the costs of their ill-considered attempt to acquire a company 3,200 kilometres away at an inflated price.

Only time will tell.

PARKER GALLANT

Former Ontario Liberal energy ministers: your turn to eat crow

More enlightening facts from the Lennox gas plant, and how billions have been wasted

There have been a few problems with wind power, former Energy Minister Glenn Thibeault told a business audience almost two years ago. We had no idea how bad.

My earlier article briefly described my recent tour of the Lennox natural gas power facility in Bath, Ontario, and also provided the costs of wind power generation—including what was “curtailed” (wasted; paid for but not used).

The period covered was nine years (2009 to 2017) during which grid-delivered wind power generation was 53.1 TWh* (terawatt hours) and its costs (including 6.9 TWh curtailed) were approximately $8 billion.

What I didn’t note earlier was, as we were paying for power generated by wind turbines and curtailed power, we were also paying for spilled hydro and steamed-off nuclear which added additional costs to the GA (Global Adjustment) pot, driving up electricity costs. We started paying for “spilled hydro” in 2011 when the OEB (Ontario Energy Board) allowed OPG to establish a “variance” account.  Since that time 18.7 TWh have been spilled by OPG and the cost of $875 million (4.7 cents/kWh) was placed in the GA and paid for by Ontario ratepayers.

Likewise, the cost of 2 TWh of steamed-off nuclear was (about) $140 million (7 cents/kWh) and also became part of the GA. Adding that to the $8 billion costs of wind power in those nine years brings the total to slightly more than $9 billion, as the hydro spilled and nuclear steam-off were due to “surplus baseload generation” (SBG)!

In 95 percent plus of the surplus events, SBG conditions were caused by wind power generation because it is granted “first to the grid” rights.

So, you might ask on reading this, is, how does/could Lennox fit into this situation?

Well, the fact is Lennox is treated as “the leper” in generation sources within the province and is called on only when something untoward or unusual happens, despite its ability to generate power at relatively low cost. Examples of Lennox doing more than idling include this past summer’s Lake Ontario algae problem which caused the shutdown of a Pickering nuclear unit (the water intake was clogged) and the winter of 2014 when we experienced the “polar vortex” causing gas prices to spike.  As it happens, wind wasn’t there for either event and Lennox was called on to provide the power necessary to keep our electricity system functioning.  (Wind turbines cannot be turned on when demand suddenly increases when the wind isn’t blowing.)

Ontario without wind

If the then Liberal Ontario government had decided not to proceed with the GEA (Green Energy Act) which focused on wind and solar sources, one could justififably wonder how the cost of electricity might have been affected.   If we had instead focused on reliability and reasonable costs, Lennox coupled with our other sources, could have easily replaced the intermittent and unreliable generation from wind turbines.

The math: Taking the wind power generation of 53.1 TWh over the nine years out of the picture would have meant those 18.7 TWh of spilled hydro and the 2 TWh of steamed-off nuclear could have reduced the net contribution of wind to 32.4 TWh. That would have saved ratepayers $1.8 billion i.e., (cost of 20.7 TWh of IWT generation @ $135 million/TWh = $2.8 billion, less the cost of 18.7 TWh of spilled hydro @ $46 million/TWh [$875 million] and less the cost of 2 TWh steamed off nuclear @ $70 million/TWh [$140 million])

The remaining 32.4 TWh of wind power generation could have been provided by generation from the OPG Lennox plant (capacity of 2,100 MW). It would have eliminated the $800 million cost of the 6.9 TWh of curtailed wind as it would have produced power only when needed.  Now if it ran at only 20 percent of its capacity (gas or oil,) it could have easily generated the remaining 32.4 TWh generated by IWY and accepted into the grid.

Note: No doubt much of that 32.4 TWh wind power generation was presented at times IESO were forced to export it at a substantial loss. For the sake of this calculation we will assume Ontario demand would have required it.

More math: As noted in the earlier article “idling” ** costs for Lennox are fixed at $4.200 per MW per month, making the annual idling costs about $106 million or $8.8 million per month. Running at 20 percent of capacity would result in idling costs per MWh of generation of about $30/MWh.

Adding fuel costs*** of about $40/MWh would result in total costs (on average) of approximately $70/MWh or 7 cents/kWh.  Generation at 300,000 MWh per month on average would have generated 32.4 TWh over those nine years (2009–2017).  The cost of that generation would be approximately $2.3 billion whereas the 32.4 TWh generated by IWT in those same nine years cost ratepayers about $4.4 billion.

So, without any wind power generation at a cost of $8 billion over the nine years, Ontario ratepayers would have saved almost $4.9 billion:

• $1.8 billion using spilled hydro
• $200 million using steamed-off nuclear
• $800 million paying for curtailed IWT generation and
• $2.1 billion by utilizing Lennox

Beyond the dollar savings, the lack of subsidized wind power would also have other effects like:

• zero (0) noise complaints, instead of the thousands reported,
• elimination of the slaughter of thousands of birds, bats and butterflies
• prevented the possible disturbance/contamination of well water

Again, that cost-benefit study might have proved useful!

PARKER GALLANT                                                                

*1 TWh is about the amount of energy 110,000 average households in Ontario consume annually.

**Idling costs of the TransCanada gas plant next door to Lennox is $15,200 per month per MW or 3.7 times more costly than Lennox.

***Lennox has the ability to generate electricity using either natural gas or oil meaning if a fuel priced spikes, as natural gas did during the “polar vortex” in 2014, Lennox can shift to the cheaper fuel.

Hydro One’s curious third-quarter results (and why you should worry)

Hydro One’s third quarter earnings fall     

                                                                            

Ontario ratepayers should be worried about bad planning and whether the Ontario Energy Board will protect us from more rate increases

Why is the title above practically the opposite of Hydro One’s November 8, 2018 press release headline which claimed “Hydro One Reports Strong Third Quarter Results”?

While gross revenues for both the distribution and transmission businesses were up—quarter over quarter, by 6.1% ($63 million) and 4.7% ($22 million) respectively—Net Income for the quarter was actually down 11.4% or $25 million compared to the same quarter in 2017.

The revenue gains were a reflection of prior rate application approvals by the OEB (Ontario Energy Board) coupled with increased demand and the revenue was provided by the ratepayers of the province.

So, if revenue was up, what caused net income to fall?

Here is a partial explanation from Hydro One’s quarterly financial statement:

“The increase of $35 million or 30.7% in financing charges for the quarter ended September 30, 2018 was primarily due to the following: • an unrealized loss recorded in the third quarter of 2018 due to revaluation of the deal-contingent foreign exchange forward contract related to the Avista Corporation merger”. [emphasis added]

It appears previous management believed finalizing the Avista purchase would occur sooner and that the Canadian dollar would remain where it was when the purchase offer was originally accepted by Avista’s shareholders. That would suggest poor planning!

As ratepayers in Ontario, we should be concerned about Hydro One’s financial results and how their spending impacts us via rate increases.

The Ontario Energy Board (OEB) on an annual basis sets the acceptable RoE (Return on Equity) for all distribution and transmission companies. The current RoE is 9% and Hydro One expects it will remain at that level. Right now, Hydro One has two pending transmission and one distribution rate application(s) before the OEB, and will file one transmission and five distribution rate application(s) later this year and into early 2019.

Here’s the question we ratepayers should ask: will the OEB protect us by ensuring we will not be picking up any of the costs associated with the Avista purchase such as the “foreign exchange forward contract” loss or the “financing charges” referenced above? Ratepayers should not be penalized for bad planning!

Hydro One’s quarterly statement under the heading ‘Risk Management” notes:

“Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk.”

The “increased financing charges” and the “foreign exchange forward contract” costs related to the Avista merger were clear “risks” management should have foreseen!

On the surface, they could suggest part of the fall in net income is attributable to Canada’s inability to sell its oil at market prices which had a detrimental effect on the Canadian dollar’s exchange rate. But that claim would ignore the fact it was Hydro One’s management decision (blessed by former Ontario Energy Minister Glenn Thibeault) that led to the “foreign exchange forward contract” loss and the increased “financing charges.”

The blame should be shouldered by past management decisions.

Many said, at the time the planned acquisition of Avista was announced, that it made no sense. With that in mind, one would expect the OEB will indeed make the right decision and not allow rate increases that fail the test of bringing value to Ontario ratepayers.

We can only hope.

PARKER GALLANT