ENERGY MARKETS B U L L E T I N

Transcription

1 ENERGY MARKETS B U L L E T I N November 11, 2002 ONTARIO S ELECTRICITY MARKET: MAY 1, NOVEMBER 11, 2002?? BORDEN LADNER GERVAIS LLP

2 EXECUTIVE SUMMARY Years of electricity sector restructuring review, stakeholder consultations, market development and market implementation now appear in peril with the dramatic announcement by Premier Ernie Eves late this afternoon of his Electricity Action Plan (the Action Plan ). While the details and specifics on the multi-point reform agenda are unclear at this time, the potential implications of the announcement could effectively signal a reconstruction of the wholesale and retail electricity market that was only instituted through open access some 6 months ago. Highlights of the Action Plan and our preliminary identification of the issues raised therein include the following: Retroactive freeze on electricity commodity prices at 4.3 cents per kilowatt hour ( kwh ) effective May 1, 2002 to Rebates to all residential and small business consumers (including those customers on spot prices and those who signed contracts with retailers) for the difference between 4.3 cents per kwh and the spot/contract prices. Large industrial, institutional and commercial users given the opportunity to reconsider existing hedging arrangements with retailers or generators when their fixed priced contracts exceed 4.3 cents per kwh. Imposition of rate caps and rate-redesign for Ontario LDCs. Creation of a Standardized Electricity Bill. New incentives for conservation, clean energy and alternative fuels. Ontario asks Ottawa to eliminate GST charges on electricity. Changes to occur regarding composition of OPG Board of Directors. BORDEN LADNER GERVAIS LLP Page 2

3 Investigation into Pickering nuclear rehabilitation cost overruns. Independent Review of other electricity charges including LDC fixed charges, IMO charges including Intertie Offer Guarantee? While the potential implications of the Action Plan appear to be profound, from the impact on the Hydro One share sale and the recently announced 100 day review of the OEB to the reaction of the financial markets, we caution our readers that no definitive conclusions should be drawn at this time until the proposed implementing legislation has been presented and considered in detail. Borden Ladner Gervais LLP Energy Markets Group will issue further Bulletins as soon as we receive additional information on this important development. BORDEN LADNER GERVAIS LLP Page 3

4 I. PRICE OF POWER FROZEN AT 4.3 CENTS PER KWH Today s announcement by the Government of Ontario raises more questions than answers. The Action Plan calls for the price of power to consumers being lowered to 4.3 cents and then being frozen until Based upon the limited detail provided in the Action Plan it is unclear at this time what and how this will be implemented. In particular, it is completely unclear how freezing the price consumers pay will impact the wholesale market for electricity and the operations of the Independent Electricity Market Operator ( IMO ). It is possible to construct various scenarios which range from the complete dismantling of the IMO as it is currently constituted and a return to the Ontario Interim Market, to a scenario in which the IMO is relatively unaffected, and everything in between. In each scenario much will turn on the answers to the following questions: 1. Does the 4.3 cents represent an average weighted price? 2. Will the Government impose a wholesale cap on the IMO-administered markets? 3. Will the Government impose bidding rules on Ontario Power Generation Inc. ( OPG )? 4. Will the Government mandate changes requiring that generators receive only the offer price that they submitted? At this juncture, without the benefit of the legislation accompanying the proposed changes it is virtually impossible to determine what the ultimate ramifications on the IMO and the wholesale market might be. However, given the complete lack of any reference whatsoever to the IMO (other than the review of charges imposed by the IMO) in the Action Plan one can reasonably assume that the plans being put forward will leave the wholesale market relatively unaffected. Stay tuned. BORDEN LADNER GERVAIS LLP Page 4

5 II. RETAIL IMPLICATIONS The Action Plan appears to dramatically affect electricity retailers who have already entered into fixed price contracts with consumers. As stated above, the price consumers pay for power would be lowered to a constant 4.3 cents effective December 1, Further, consumers on fixed price contracts for more than 4.3 cents are to now only pay 4.3 cents. This proposal effectively eliminates the business of retailing electricity by offering fixed price contracts to consumers (unless of course a retailer can offer a product below 4.3 cents). Issues arising from the Action Plan will become more clear once the legislation is introduced. Questions raised by the proposal include: How does the government propose to treat the status of existing customer contracts: eg. will the contracts be allowed to run out for the remainder of their term or will they be voided? If the contract is to run to the end of its term, what will be the settlement process for separating the 4.3 cents from the contract price and who is to pay the retailer the difference? If the government chooses to void the contract, then how or will the retailer be compensated? If retailers are not to be compensated, is there anything retailers should be doing immediately to exercise compensation rights under the contract? As discussed below, the announcement appears to give large commercial and industrial customer the choice of maintaining their current arrangements or choosing a fixed price of 4.3 cents. The announcement states that consumers will be refunded every penny of the difference between what they have paid for electricity since May and what they would have paid at a frozen price of 4.3 cents. While the announcement does not specifically state that this refund will apply to BORDEN LADNER GERVAIS LLP Page 5

6 consumers under fixed price contracts, it is assumed that these customers will also enjoy the refund. Details have been left to further legislation, but similar issues arise, such as who is to provide the refund, how the refund is to be administered and whether retailers will be faced with being out of pocket (and whether any immediate action needs to be taken). III. LARGE COMMERCIAL AND INDUSTRIAL USERS The Government s plan to cap the Ontario electricity price at 4.3 cents would also extend to large commercial and industrial users ( Large Users ). Unlike residential and small business customers, Large Users will be able to choose between their current electricity arrangements and the fixed price of 4.3 cents. Large Users who have not to date entered into fixed price electricity contracts with an electricity retailer will now receive the benefit of the 4.3 cent cap. Those Large Users that have entered into fixed price contracts will apparently now be able to opt-in to the price cap protection. It is not yet clear how Large Users with fixed price contracts which oblige them to pay more than 4.3 cents to an electricity retailer would be able to receive the benefit of the price cap. Will Large Users simply be able to cease making payments under their fixed price contracts, which would amount to a government sanctioned breach of their contractual obligations, or will Large Users still be compelled to honour their contracts, but then receive a rebate from the Government for the difference between the contract price and the price cap? These issues raise obvious questions about the integrity of electricity price contracts in the Province and the ability of parties to enforce their contractual rights including termination clauses, changes in law and provisions regarding the calculation and payment of liquidated damages which are common in contracts with Large Users. The uncertain status of these retail contracts also raises questions about the status of the wholesale contracts which electricity retailers have entered into with domestic and foreign counterparties to hedge their financial exposure in respect of their retail contracts. BORDEN LADNER GERVAIS LLP Page 6

7 It also appears that Large Users may benefit from the retroactive nature of the price cap. Large Users who have paid the market price since May 1, 2002 might expect to receive a rebate for the difference between the market price paid and 4.3 cents. It appears that Large Users with fixed price contracts might also expect to have the option of receiving some form of rebate for the period since market opening, however it is not yet clear how this rebate might be calculated or paid to the Large User. IV. RATE CAPS & RATE REDESIGN FOR LOCAL DISTRIBUTION COMPANIES? The Premier s Action Plan announcement also focused on Ontario Local Distribution Companies (LDCs) indicating, the price consumers pay for delivery would be capped at current levels. The announcement is unclear as to whether this will mean that all Ontario LDCs are prohibited from implementing the third and final annual increment of the Market Based Rate of Return regime previously approved by the Ontario Energy Board ( OEB ) in connection with first generation Performance-Based Regulation ( PBR ). If so, the result would be to reduce the returns on both equity and debt that municipal shareholders of LDCs had relied upon. The LDC rate freeze may also have implications for acquirers of LDCs which based their investment decisions to purchase electric distribution utilities on the commercial rate of return approach adopted for the LDC sector by the OEB. Today s announcement also notes that local delivery charges would be reduced if municipal councils stopped running their local hydro companies on a for-profit basis. Unless a municipality decides otherwise by council resolution, its local hydro company would become non-profit. It is unclear whether this statement will find its way into any legislative changes that will be forthcoming to implement the announcement. For example, it is unclear whether the statement requires a municipal council to pass a resolution confirming that it seeks a commercial orientation regarding its LDC business, or whether the Province may be considering mandating something other than a commercial approach for LDCs. We will monitor whatever draft legislation comes forward on these issues, although the implications for LDCs and their municipal shareholders could be monumental. BORDEN LADNER GERVAIS LLP Page 7

8 Finally, LDCs are to be prohibited from disconnecting power to customers who are in arrears until March 31, V. STANDARDIZED ELECTRICITY BILLS The Premier promised Ontarians a standardized province-wide electricity bill that is easy to read and understand. Similar to standardized report cards in the education sector, the government will presumably legislate, by statute or regulation, the form and content of bills across the Province. Some questions: 1. Will the form of the new bill be dictated by the government, or will there be a period of consultation with LDCs and consumer groups those who send the bills and those who receive them? 2. Will a legislated standard bill still allow LDCs to include other information on the bill itself, or will the bills have to be completely uniform, forcing LDCs to relegate any unique content to a separate bill insert? Will the design be standardized as well? 3. Will the OEB or some other government entity be conducting another round of readiness reviews to determine which utilities have complied by certain dates? 4. If standardized billing or the proposed review of other charges mean a new way of calculating various costs, how long will utilities be given in order to convert their billing systems once again? 5. If an LDC fails to meet a government-imposed deadline for converting to the new billing system, will it be subject to fines from the OEB again? BORDEN LADNER GERVAIS LLP Page 8

9 6. What format will bills take during the interim, while prices are capped but before the billing system is converted? 7. Does easy to read simply mean more detailed explanations of each line item, or does it mean a partial rebundling of the various charges? Would a rebundling have any effect on the way rates are calculated? 8. Most utilities have not yet finished claiming their initial Transition Costs incurred prior to May 1, Will the government allow utilities to claim the costs of this latest transition away from an open market? If distribution rates are to be frozen, then when will utilities be able to recoup both the original transition costs and these new costs of implementing a new billing format? 9. Will there be separate billing formats for residential and small business customers, versus large commercial and industrial customers? 10. Who will be responsible for identifying the difference between a small business and a large business? VI. INCENTIVES FOR CONSERVATION, CLEAN ENERGY AND ALTERNATIVE FUELS The government indicates that its long-term plan includes introducing measures to promote conservation, encourage alternative fuels and support clean electricity production. These measures are to include tax incentives and tax holidays. It remains to be seen whether the government has specific tax measures in mind or whether it will undertake a consultation process with interested parties similar to the consultations that are currently being undertaken with respect to tax incentive zones for Ontario municipalities. In addition, the Premier indicated that Scarborough East MPP Steve Gilchrist will be appointed as Commissioner of Alternative Energy to undertake the broad mandate of encouraging the introduction of cost-efficient alternative sources of power. Further details regarding the above BORDEN LADNER GERVAIS LLP Page 9

10 are expected on November 13, 2002 when Mr. Gilchrist and the Minister of Energy, John Baird, will announce initiatives to encourage conservation, clean electricity and alternative energy. Note that Mr. Gilchrist drafted the recent report of the Select Committee on Alternative Fuel Sources, which urged the adoption of a renewable portfolio standard. VII. GST The Province has requested that Ottawa remove the GST from electricity bills. This proposed request could prove to be a non-issue, however, as the GST is regulated solely by the Federal Government, which has already declared that it would not remove the GST even from the Debt Retirement Charge component of the bill. A further GST issue is whether GST will be included in customer refunds for the period of May 1 to December 1, VIII. OPG BOARD OF DIRECTORS Today s announcement also contained indications that changes are to come for OPG. While the Premier stated that changes to the Board of OPG will be made and an independent investigation into delays in restoring Pickering Nuclear Generating Station to full operation will be undertaken, specifics as to the timing of the implementation of such measures or the substance of such changes were not given. The Backgrounder which accompanied the Premier s statement indicated that further details would be announced in the next few days. A further area of concern regarding OPG arises with the promise, contained in the Action Plan, to ensure that the publicly owned OPG company supports consumers in all its actions. It is unclear whether this promise might entail something more than the announced changes to the Board at OPG or the onset of an investigation into delays at Pickering Nuclear Generating Station. IX. INDEPENDENT REVIEW OF OTHER ELECTRICITY CHARGES In addition to freezing the cost of power and delivery charges, the Province intends to order an independent review of how other charges on your electricity bill are calculated to ensure they are BORDEN LADNER GERVAIS LLP Page 10

11 reasonable, within 10 days. That review is to include charges imposed by the IMO and the fixed monthly customer charge imposed by LDCs. It is not clear from the Press Release or the Backgrounder whether this review will include transmission charges, which are passed through to those customers who receive their electricity from LDCs, or the fixed charges imposed by Hydro One Networks Inc. on its distribution customers. The Premier states that: Many people have asked, why should I pay a monthly charge just for being a customer? We ve asked the same question. For example, why do fixed monthly charges for residential customers range from $5.00 to $25.00? That s why we'll order a review. The Distribution Rate Handbook requires that distribution rates be composed of both fixed and variable components. In designing their initial unbundled rates in 2000 and through the OEB review and approval process in 2001, LDCs had to adjust their new rates by increasing the variable component and reducing the fixed charge, in order to mitigate rate impacts on the lowvolume consumers in their various rate classes. The Premier's comment suggests that following the review, and notwithstanding the previous mitigation measures already undertaken by LDCs at the OEB s insistence, the Province may consider requiring LDCs to design distribution rates that are fully variable (and that do not include Market Based Rates of Return in the absence of a municipal council resolution declaring their LDCs to be for-profit entities). This could represent a significant risk to LDCs, as the fixed charge provided them with some assurance that at least a portion of their revenue requirements (not so much for their Market Based Rates of Return as for their operating expenses) would be met. A fully variable charge, based on consumption alone, exposes an LDC to uncertainty as to whether customer consumption will be at a level that will allow the LDC to recover its costs. X. REVIEW OF IMO FEES As noted above, the Province has announced that it will within 10 days order an independent review of how other charges on electricity bills are calculated with the goal being to ensure that these charges are reasonable. Not only will this review include the fixed monthly charge by LDCs but it will also include a review of the amounts charged by the IMO. Initial information supplied is silent on the time frame for completion of the IMO fee review. Only the review is BORDEN LADNER GERVAIS LLP Page 11

12 specifically mentioned and so it is unclear whether any type of refund for IMO amounts paid might be contemplated if the fees are determined to be unreasonable. This review comes at an interesting time for the IMO which on October 28, 2002 filed its Fee Submission with the OEB, seeking approval of, among other things, a usage fee of $1.06/MWh to be paid commencing January 1, The announcement also raises many questions about the price importers will be paid for power sold into the Ontario market. No doubt one of the fees that will be assessed in the independent review will be the reasonableness of uplift costs. One component of the uplift cost which received wide attention from market participants this summer was the amount paid pursuant to the Intertie Offer Guarantee. The Intertie Offer Guarantee was devised in order to encourage imports of electricity into Ontario by limiting the price risk to importers. The independent review may choose to focus on whether the Intertie Offer Guarantee is reasonable and whether it should remain as a component part of uplift. For further information with respect to Ontario's electricity sector issues, please contact Linda Bertoldi at (416) , or Mark Rodger at (416) This publication has been prepared as a service to clients and friends of Borden Ladner Gervais LLP and other persons involved in energy markets. It is not intended to be an exhaustive statement of law or an opinion on any subject. If you have specific areas of concern or require further details we would be pleased to elaborate on any of the matters set out above. Please contact: Linda L. Bertoldi Tel: (416) lbertoldi@blgcanada.com Co-Chair, Energy Markets Law Group Rick F. Coburn Tel: (416) rcoburn@blgcanada.com J. Mark Rodger Tel: (416) mrodger@blgcanada.com Co-Chair, Energy Markets Law Group Stephen J. Fyfe Tel: (416) sfyfe@blgcanada.com BORDEN LADNER GERVAIS LLP Page 12

13 Bruce Fowler Tel: (416) W. Paul McCarten Tel: (416) Michael Shadbolt Tel: (416) Christine E. Long Tel: (416) Kevin F. Fritz Tel: (416) Danielle Lavallée Tel: (416) Vinay Mehta Tel: (416) Shane Freitag Tel: (416) James C. Sidlofsky Tel: (416) Richard J. Morelli Tel: (416) William R. McLean Tel: (416) Elizabeth A. Jordan Tel: (416) Michael Richmond Tel: (416) Meaghan Bethune Tel: (416) Tyler Moore Tel: (416) FOR MORE INFORMATION ON THE FIRM'S CANADIAN ENERGY MARKETS ISSUES AND OTHER LEGAL SERVICES, CONTACT ONE OF OUR OFFICES BELOW: Vancouver Office: 1200 Waterfront Centre 200 Burrard Street P.O. Box Vancouver, British Columbia V7X 112 Tel: (604) Fax: (604) Toronto Office: Scotia Plaza 40 King Street West Street Toronto, Ontario M5H 3Y4 Tel: (416) Fax: (416) Ottawa Office: World Exchange Plaza 100 Queen Street, Suite 1100 Ottawa, Ontario K1P 1J9 Tel.: (613) Fax: (613) Montreal Office: 1000 de La Gauchetiere Street West Suite 900 Montreal, Quebec H3B 5H4 Tel: (514) Fax: (514) Calgary Office: 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta T2P 4H2 Tel: (403) Fax: (403) BORDEN LADNER GERVAIS LLP Page 13