Ontario Energy Board RP Board Proposal Regulated Price Plan for Electricity Consumers. Submission of Aegent Energy Advisors Inc.

Transcription

1 Ontario Energy Board RP Board Proposal Regulated Price Plan for Electricity Consumers Submission of Aegent Energy Advisors Inc. December 21, 2004

2 INTRODUCTION Aegent Energy Advisors Inc. (Aegent) has reviewed the Regulated Price Plan (RPP) for Electricity Consumers proposed by the Ontario Energy Board (the Board). Provided below are Aegent s comments on specific items contained in the proposed RPP. Aegent also would like to submit comments that relate to the contextual framework for the RPP. Aegent is licensed as an electricity retailer. Our licence allows us to act as agent only, and only for largevolume consumers. Specifically, Aegent provides independent energy management and consulting services to large-volume energy end-users in the commercial, institutional, and industrial sectors, acting as agent or advisor. Aegent assists its electricity clients with the development and implementation of an energy supply plan, the selection of energy delivery mechanisms, and/or invoice verification and dispute resolution. Aegent does not sell or buy energy for its own account. Some of the electricity consumers with whom Aegent has worked are classified currently as designated consumers. Aegent has assisted them in examining their options for lowering their electricity costs and managing their price risk. In Aegent s view, the main objective of the Regulated Price Plan should be prices that reflect the true cost of supply on a timely basis so that consumers receive economic signals concerning their options and therefore, may make sound decisions about their electricity supply. COMMENTS ON SECTION ELEMENTS OF THE RPP Section Price Adjustment Methodology Aegent agrees with the Board and the RPP Working Group that a move to quarterly price adjustments to coincide with smart meter penetration is appropriate. Similar to the commodity-related Quarterly Rate Adjustment Mechanism employed by the Ontario natural gas utilities, a quarterly approach for electricity would support an important principle that prices be more reflective of costs on an ongoing basis. A further transition to monthly price adjustments would lead to prices that are even more reflective of costs. Section RPP Consumer Mobility Aegent concurs with the Board that providing neither an incentive nor a disincentive to RPP consumers to choose retail supply contracts is a key guiding principle for the Board. Aegent supports the differentiation that has been made between incremental exit fees and the proposed settlement of the amount in the Ontario Power Authority variance account attributable to a consumer when the consumer exits the RPP. Payment or receipt of the debit or credit attributable to a consumer upon exiting the plan is fair and consistent with the treatment of natural gas consumers who choose to move from system supply to direct purchase. Section Conventional Meter RPP Pricing In Aegent s view, the proposed tiered pricing with a fixed first block will result in cross-subsidization of residential consumers by non-residential consumers with energy meters, where load shapes are unknown. Aegent has provided an example of this cross-subsidization in the attachment to this submission. The example shows that non-residential but still relatively small RPP consumers could pay more than the actual cost to supply them and then still be liable for a debit variance upon exit or in the following pricing year. One way to avoid this situation is for these consumers to install an interval meter in order to be eligible for Smart Meter RPP Pricing, thereby avoiding the conventional meter tiered pricing. However, installation of an Aegent Energy Advisors Inc. 1

3 interval meter for such smaller consumers is often uneconomic. The provision of metering services to loads that are not wholesale market participants does not yet take place in a competitive market. The charges imposed by local distribution companies to install interval meters are very high, and consumers cannot choose an alternative service provider. The impact is particularly felt by school boards and municipalities, which have many relatively small-volume non-residential accounts. To avoid undue cross-subsidization of one consumer class by another, the Board may wish to define the first block size as a proportion of each RPP consumer s average monthly historical consumption. The applicable proportion could range, for example, from 60% to 75% of total usage and could be determined on a 12-month rolling or calendar year basis. The attachment provides an illustration of how this approach could work to eliminate the cross-subsidization that is inherent in the fixed first tier approach. Section Smart Meter RPP Pricing Aegent notes that the 1:2x:3x ratio for off-peak, mid-peak, and on-peak prices referenced by the Working Group is arbitrary and could lead to uneconomic supply decisions. In Aegent s view, the preferred approach would be to project time-of-use prices as well as possible using a mix of historical and expected time-of-day pricing. In addition to energy prices reflecting time of use, the Board may wish to examine the adoption of time-of-use rates for non-energy rates in the interest of ensuring consumers receive economic signals, particularly as smart meters become more widely deployed. COMMENTS ON THE CONTEXTUAL FRAMEWORK FOR THE RPP Aegent notes the Board s request that parties focus their comments on the elements of the proposed RPP and not on the out-of-scope issues and information constraints. Aegent is also mindful, as indicated by the Board, that the Ontario Government s anticipated regulation concerning RPP eligibility may have an impact on elements of the proposed RPP. However, Aegent respectfully suggests that questions concerning eligibility, entry, and exit directly affect how the RPP will work. The impacts of eligibility, entry, and exit require consideration in order to illustrate how the design of the RPP must consider the regulations that ultimately will be made. Eligibility Consumers who opted out of the current legislated pricing structure have not been eligible to return to the legislated price. In Aegent s view, once the legislated pricing regime ends and is replaced with the regulated plan, eligibility in terms of entry and exit by qualified consumers should be without barriers. As a result, qualified consumers, who entered retail arrangements while the legislated pricing was in effect, should have the ability to obtain RPP pricing under the appropriate option (conventional or smart meter) once their retail contracts end, if they so choose. The RPP should be the long-term do-nothing default supply mechanism for qualified consumers. It will work best as the default mechanism if it is unbiased and if there are no undue barriers to consumer mobility. This would parallel the natural gas industry s system supply option. Exiting the RPP For many current non-residential consumers, the most efficient market mechanism for contracting to lower energy costs and reduce cost risk is through a contract for differences. This mechanism allows a consumer Aegent Energy Advisors Inc. 2

4 to exchange a price that moves with the Hourly Ontario Energy Price (HOEP) for a fixed price on a stated quantity of energy. Right now, in order for a contract for differences to provide an effective hedge, consumers need to be able to pay a HOEP-based price as a default price. The consumer can then swap the HOEP-based price to a fixed price in a contract for differences with a marketer. This works whether the consumer paid the utility HOEP in each hour times the consumption in that interval, or if the consumer paid a HOEP-based price as determined using the Net System Load Shape as in the former Standard System Supply mechanism. Currently, a designated consumer served by a local utility must have an interval meter if the consumer wishes to opt out of the legislated price and pay a default price based on the Hourly Ontario Energy Price. This requirement to install an interval meter is inconsistent with the treatment of non-designated consumers with energy meters and annual consumption over 250,000 kwh, who pay HOEP via their utility s Net System Load Shape. Among the group of consumers to which the interval meter requirement applies are municipalities and school boards who are characterized by large aggregate power loads that are spread over many (perhaps hundreds) of utility accounts. Most of these accounts are energy-metered. The requirements of the existing regulation make it impractical for these buyers to enter into contracts for differences as a price hedging vehicle, even though such contracts represent the most efficient hedging method for a large-volume buyer. At a cost of approximately $2,000 per meter, it is impractical to consider the widespread installation of interval meters as a pre-condition for pursuing a contract for differences. It would cost a large school board or municipality hundreds of thousands of dollars and could take several months to complete. The inability of the non-residential, small-volume consumers to use a contract for differences means they have no choice but to contract with a retailer and enroll each meter point. Not all electricity sellers are active as retailers, so the restriction means that the consumer has fewer suppliers to choose from. Sellers who are wholesalers only would be unable to sell to these consumers, and so have fewer consumers to sell to. In both respects, the liquidity of the market is impaired and the development of a healthy, competitive bilateral market is stunted. Retail prices are always higher than wholesale prices, and retail offers often bundle together services that large-volume buyers do not need. This unnecessarily increases the costs to the consumer, and imposes inefficiencies. Imposing a retail arrangement on a consumer can add an estimated $0.75/MWh or more to a consumer s energy costs (assuming a hedge of approximately 50%, a $0.50/MWh settlement charge, and a minimum retail premium, as a result of reduced competition, of $1.00/MWh hedged). Retail settlement increases complexity and uncertainty and therefore, brings into question whether or not the settlement is understood and has been executed accurately. The potential outcome is a barrier to opting out of the RPP or entering into a similar arrangement at some future date. Setting the minimum annual consumption threshold for opting out of the RPP at something in the range of 30,000 kwh to 50,000 kwh would serve to address any concerns about the administrative burden arising from the possibility of a large number of residential consumers opting out of the RPP in favour of the Standard System Supply, if there are any such concerns. In Aegent s view, the replacement of the legislated pricing with the RPP should mark the end of the inconsistent treatment of consumers as described above, allowing energy-metered consumers to opt out of Aegent Energy Advisors Inc. 3

5 the RPP without being required to install interval meters or to contract with a retailer and enroll each meter point. Aegent recognizes the valuable role that interval meters will play in facilitating wiser energy use, and we endorse the concept that energy meters should be converted to interval meters over time. However, in our view, a continued requirement that interval meters be in place as a precondition to opting out of the new RPP and then paying a HOEP-based default price is counter-productive. It creates an arbitrary impediment for consumers who could otherwise be availing themselves of opportunities in the electricity market to reduce their electricity costs. SUMMARY The RPP will be the do-nothing default supply mechanism for qualified consumers. As such, it will operate the most effectively if it is unbiased in its treatment of consumers and presents no barriers to entry or exit. It should support the goal that energy prices reflect the true costs of supply so that consumers receive economic signals to make sound decisions. To achieve this outcome, Aegent believes that the following are important elements of the RPP: There should be settlement of the amount in the Ontario Power Authority variance account attributable to the consumer when the consumer exits the RPP. The transition to frequent (at least quarterly and preferably monthly) price changes should occur as soon as possible. Tier thresholds should be set to minimize cross-subsidization between residential and non-residential consumers. Smart Meter RPP prices should reflect expected market conditions. With respect to the contextual framework for the RPP, consumer mobility to enter or exit the default supply option represented by the RPP should not depend on a consumer s prior decisions under the legislated pricing structure. Consumers should have complete choice of pricing alternatives including the Hourly Ontario Energy Price and financial deals. Aegent Energy Advisors Inc. 4

6 ATTACHMENT - Example of Cross-Subsidization with Fixed First Tier for Conventional Meter RPP Residential Non-Residential Total Portion of Total Market 33% 17% 50% EXAMPLE 1: Fixed 1st Block Peak Demand kw 25 Load Factor 50% Monthly Energy kwh 1,000 9,125 1st Energy Block size kwh Energy Prices $ / kwh 1st Block $ * $ $ Remaining $ * $ $ Total Energy Cost $ $ Average Unit Energy Cost $ $ $ Deemed Supply Cost $ * $ * $ * Class Unit Revenue $ $ $ Variance on Exit $ $ $ Actual Paid $ $ $ EXAMPLE 2: Proportional 1st Block (75 %) Peak Demand kw 25 Load Factor 50% Monthly Energy kwh 1,000 9,125 1st Energy Block size kwh 750 6,844 Energy Prices $ / kwh 1st Block $ * $ $ Remaining $ * $ $ Total Energy Cost $ $ Average Unit Energy Cost $ $ $ Deemed Supply Cost $ * $ * $ * Class Unit Revenue $ $ $ Variance on Exit $ $ $ Actual Paid $ $ $ Note (*): Values are estimated and are provided for illustrative purposes.