Wednesday, April 8, 2015

Ontario Energy Board boldly moves to fixed distribution charges

“allocating common costs is like trying to find a black cat in a dark room. [pause] Where there is no cat.”
The Ontario Energy Board (OEB) released, on April 2nd, A New Distribution Rate Design for Residential Electricity Customers (.pdf), along with many documents from the period leading to the publication of the new Board policy.

It's notable beyond Ontario's borders as many jurisdictions are also attempting to cope with changing revenues and similarly looking to change pricing models.

From the OEB:
On April 2, 2015, the Ontario Energy Board (OEB) issued a new rate design policy that will change the way local distributors bill their residential customers. Distribution charges, currently a blend of fixed and variable (per kilowatt-hour) rates will be an entirely fixed monthly service charge by 2019. Fair billing, grid innovation and enabling customer uptake of new technologies are among the OEB’s objectives for this change. 
I agree with the change, although not without concerns  - some of which I noted when writing on the initial discussion document. I'll have more to say on the policy document on my Cold Air blog - because the OEB's documents are poor, which is almost certainly requisite for any document produced in Ontario's ridiculous electricity policy environment.

I'll try to keep my comments, and citations, in this short post relevant to a broader audience.

Utilities in many jurisdictions, including Ontario, are dealing with a need to maintain infrastructure while demand levels are dropping, and the problems are particularly acute where solar panels are being rapidly installed within distribution networks (often net metering jurisdictions).

The quote beginning this post is attributed to Fred Kahn in a comment by Greg Rosston attached to an article by Severin Borenstein, What’s so Great about Fixed Charges?
...much of the utility fixed costs that are being discussed are system wide – such as maintaining the distribution networks in residential neighborhoods. These costs wouldn’t change if one customer were to drop off the system. In other words, running the system as a whole has certain unavoidable costs and someone has to pay them. There isn’t much guidance, based on economics or equity, about who should pay, because there is no “cost causation” as it is termed in the utility world. In particular, the statement I have heard a number of times recently that “the utility should cover fixed costs with fixed charges” has no basis in economics when it comes to system fixed costs. 
... there isn’t a strong fairness or economic efficiency argument for recovering fixed distribution costs – which are not customer-specific — through a fixed monthly charge.
Borenstein's article doesn't give readers a neat answer, nor do the comments attached to it (which are excellent).

While I do applaud the OEB's courage in moving to a pricing scheme that will facilitate a sustainable grid, I will note:
  1. the move from 2-tiered pricing based on monthly consumption levels, to time-of-use pricing has been a 7-8% rate hike for households with consumption all within the lower tier and a typical usage distribution - with an offsetting benefit to those with consumption largely above that level.
  2. the HST added 8% (to all ratepayers)
  3. this change to fixed distribution charges will again shift a cost burden over to those that consume the least, to the benefit of those that consume the most.
The industry does have a way of making customers with the lowest consumption pay, proportionally, the most.


John Spears wrote on the proposal in The Toronto Star in June 2014. I was looking for what he had to write on this and realized I'd not seen his name for some time. He was the main (only?) energy reporter in the province, and the main reason to read the Star.

Case in point: the Star's editorial on the matter, that same month, lacked balance, insight and information.

The Ontario government appears set to sell-off it's distribution asset (Hydro One). It's possible to attach the regulator's move to improve the consistency of distributor revenues to increasing the value of that asset before selling it, but I don't.

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