Friday, August 17, 2012

The Conversation: The problem in the grid

I spend a lot of time on the costs of the electricity commodity itself, but in Ontario the big price mover over the past 7 years has not been the cost of the commodity, but the other cost associated with consuming it (distribution).
That is also being sold as the case in Australia, where the Prime Minister is seemingly desperate to move the blame for rising prices away for the carbon tax she introduced 

The Conversation: the problem in the grid:
...reducing pressures on electricity price rises is a key objective of the government’s offensive. In emphasizing the “pole and wires” the Prime Minister is pointing the finger at the grid as a key driver of recent price rises. It is the way we distribute electricity, rather than generate it, that dominates retail prices, so the argument goes.
In particular, the Prime Minister and others have begun to highlight policies that have encouraged over-investment in, or gold-plating, the electricity grid. With utilities receiving a guaranteed rate of return, grid investment has been something of a “no-brainer” for them, even if demand hasn’t fully justified it.
Read the entire article at The Conversation:

Ontario  Context:  

Ontario demand peaked in 2005.
The commodity price is common to most consumers, so it's fairly simple to discuss.  While time-of-use and consumption tiered price plans change things slightly, most people will have seem price increases of 35-45% since 2005, which is the year demand peaked in the province.
But there were over a dozen categories of customer in 2005, and there are still 4 (by memory) ... and each local distribution company has different rates.  So there is no shared figure.

My delivery costs have risen 130% over the period the commodity cost rose 35%.

Growth in Capital expenses is adding to equity
The article from "The Discussion" notes "gold plating" the electrical grid.

In 2005 Hydro One reported assets of $11.8 billion (annual report .pdf)
In 2011 Hydro One reported assets of $18.4 billion (Consolidated Financial Statement .pdf)

This as demand/their business dropped over 10%.

Regardless of the value proposition to end customers, utilities will accommodate any government directive cheerfully if it allows them to inflate their stated equity.  This allows them to get higher rates from the regulator who's formula in determining rates is based on return on equity.

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