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Respite for Multi-Res Electricity Consumers Few Institutional Players Stay with Regulated Price Plan
April, 2008
By Barbara Carss
Most multi-residential electricity customers can look forward to continued discounts on spot market prices thanks to the Ontario government's recent move to indefinitely extend the sector's eligibility for the regulated price plan (RPP). In contrast, a 12-month postponement of the deadline for terminating the MUSH (municipalities, universities/colleges, schools, health care facilities) sector's eligibility delivers little real benefit to those customers since the RPP's rate scale translates into prices that are higher than the spot market average for consumption greater than 750 kilowatt-hours (kWh) per month.
O.Reg 58/08, filed on March 20, rescinds the previous deadline that would have compelled multi-residential and MUSH customers to switch to spot market prices or sign a contract with an electricity retailer by May 1, 2008. MUSH customers now have until May 2009 to make those arrangements, but the largest share have already opted out of the program.
"It's kind of a non-issue because we have been buying on the spot market and using forward contracts for the last four years now," reports Rajan Balchandani, Manager of Energy Management for the City of Mississauga, which saved approximately $1.25 million in 2007 compared to RPP prices.
"Most of the hospitals do bulk contracting through different organizations and affiliations. We get better pricing that way than under the RPP so for us the extension of the RPP is moot," concurs Wayne McLellan, President of the Canadian Healthcare Engineering Society and Director of Engineering Services for the Chatham-Kent Healthcare Alliance.
RATE STRUCTURE CREATES WINNERS AND LOSERS
Under the RPP, qualified consumers pay biannually adjusted electricity rates prorated to the volume of usage. At the end of each six-month period, RPP administrators calculate the accumulated variance - that is, the difference between the established price and the actual price paid to electricity generators - and this is reflected in the next period's rates. (The variance is also a factor for customers opting out of the RPP, as they will either receive a pay out or be required to pay an exit fee depending on whether the variance account has a surplus or a deficit.)
Residential and multi-residential customers typically purchase most of their power at the lower rate - which applies to the first 600 kWh of usage per dwelling unit in the summer or the first 1,000 kWh per dwelling unit in the winter - whereas MUSH customers typically use a much greater amount of electricity and thus pay a rate that is 18% higher for most of the electricity they use. (5.9 cents/kWh for the period from November 1, 2007 to April 30, 2008 versus 5 cents/kWh at the lower rate.)
"The RPP is really the spot market smoothed out over time. The only difference is that they set it for six months and accumulate a variance. The whole RPP moves as an entity in sync with the spot market, but that's if you look at the average," explains Mike McGee, President of the energy management consulting firm, Energy Profiles Limited. "If you're a multi-res customer you're below the average and, on the other side, the MUSH sector is paying at the high end. So one group is subsidizing the other."
Still, it's dubious to suggest that the rate structure is somehow unfair when customers aren't compelled to participate in the program. Cost conscious consumers have the freedom, and arguably the responsibility, to explore other options. "Maybe it is time for them to realize that this isn't a bargain," McGee says.
Conversely, the best economic choice for many multi-residential customers has simply been to stay on the RPP for as long as possible. Given what turned out to be a false deadline, many landlords and condominium boards of directors are now relieved that they delayed signing a retail contract.
"Some have made some choices they've regretted in opting out," says Vince Brescia, President and CEO of the Federation of Rental-housing Providers of Ontario (FRPO). "We were in favour of continuing the RPP and, more importantly, in favour of renters continuing to be treated the same way as homeowners."
ENERGY MANAGEMENT EXPERTISE IN DEMAND
Although most of the largest institutions within the municipal government, health care and education sectors no longer participate in the RPP, there is a discernable urban/rural split in the province. Notably, there are 445 municipalities in Ontario, but only 32 with populations exceeding 100,000. Large cities and regions like Toronto, Mississauga, Hamilton, Peel and York have in-house energy management expertise, but the vast majority of municipalities have had to seek outside guidance or have taken the default RPP option.
"Our survey showed that 75% of the municipal electricity supply needs are currently off the RPP, but 75% of municipalities are still on the RPP. So there is a disconnect," reports Nancy Plumridge, President of Local Authority Services Ltd. (LAS), a subsidiary of the Association of Municipalities of Ontario (AMO).
AMO/LAS launched an electricity procurement program in June 2007, following on its successful gas-buying venture, which has been in place since 1992. "Over the last five years we've saved $17 million for our members so it was a logical thing for us to move into the electricity side," Plumridge notes.
Currently, 25 municipalities are covered in one contract, while another 17 that joined up later are taking advantage of the recent favourable spot market prices until the timing and pricing is right to enter a contract. AMO/LAS also coordinates power purchases on the spot market for 40 municipalities' streetlighting since that represents the best pricing for the off-peak hours when streetlights are on.
Many of the more than 300 municipalities still participating in the RPP are expected to join the buying group in the coming months, and also sign up for on-line access to energy management software that AMO/LAS is providing to help municipalities comply with Ontario's Energy Conservation Responsibility Act.
Other municipalities have formed coalitions and buying groups among themselves. Mississauga, for example, is part of a 16-member group that also includes Burlington, Markham, Richmond Hill, Cambridge, London, Windsor and Durham and Halton Regions. "Some municipalities will always choose to go it alone, but I can count them on two hands," Plumridge adds.
Similarly, 49 of 72 school boards in the province now participate in an electricity buying consortium. "Among the 49 school boards, we represent more than 85% of the [elementary and secondary] students in Ontario," says Norm Vezina, the coordinator of the buying consortium and Manager, Building Systems, with the York Catholic District School Board. "All of the big ones are part of this group. For the rest of the school boards, the Ministry of Education has sent out a memo telling them they should probably be looking at their options."
BALANCING SPOT MARKET AND HEDGING OPTIONS
New members are welcome in the organization, which was initiated by the six GTA-based boards that make up the Catholic School Board Service Association. Those core members actually launched the project when Ontario's electricity market first opened in 2002, but shelved the idea after the government of the day capped prices at 4.3 cents per kWh.
"In 2004 when the price was revised, it made sense to go to the market again," Vezina recalls. "We put the word out and the group went from six to 20."
Collectively, those 20 school boards saved $2 million over the RPP rate for electricity purchased during the life of the first deal negotiated in 2004. Additionally, with 20 boards sharing the cost of a consultant and jointly sponsoring the request for proposals (RFP) for suppliers and other required background work, group members saved an estimated $900,000 in administrative costs.
Although the buying group works together to secure the most competitive retail rate, each school board signs a separate contract tailored to its own needs. That way, the consortium avoids having to set up an administrative arm for tasks that each board's purchasing department already has the expertise to perform.
Thus far in 2008, the consortium has simply been watching and waiting. "Our contract with our supplier ended December 31, 2007 and, because of the prices on the market right now, we are better off to stay on the open market," Vezina says. "If we see prices moving, the steering committee will meet and decide if we should act. Then we'll put a webinar together so that all school boards can participate without anyone driving anywhere."
Ontario health care providers have formed several buying groups among themselves, which typically contract for 60 to 80% of their electricity supply and leave the remainder on the spot market. McLellan sees budgeting certainty as one of the major advantages of retail contracts.
"The problem with health care, unlike industry, is that it's very difficult for us to do any load shedding. During the summer, I can't shut down the air conditioning in the O.R. (operating room) because I would be effectively shutting down the O.R.," he observes. "This is a demand-driven service. We have no choice. For us, by going with contracts, it helps to control those time-of-use prices."
OTHER DEADLINES PENDING
Next year's scheduled termination of the Ontario Power Generation (OPG) rebate (also known as the ONPA rebate) could bring greater upheaval for customers paying market prices. The rebate covers the difference between the provincially set price that OPG is paid for 85% of the power produced at its coal-fired and small hydroelectric plants (i.e. excluding the Beck generating facility) and the actual market price.
Customers receive a quarterly rebate of expenditures above the benchmarked price. This has been increasing incrementally by 0.1 cents annually and now stands at 4.8 cents/kWh for the final rebate period from May 1, 2008 to April 30, 2009. Since this price structure was introduced in 2005, the rebate pay out has varied from a high of 0.65 cents/kWh for the period from April 1 to December 31, 2005 to a low of 0.05 cents/kWh for the period of May 1 to July 31, 2007.
"The RPP extension for another year is not a big deal for us because we've taken most of our larger loads off the RPP rate. The bigger question is what is going to happen in the longer term with Ontario's hybrid electricity market and the ONPA rebate," reflects Geoff Lupton, Manager of Energy Initiatives with the City of Hamilton. "We hope to get some direction from the government so we can determine what are the next steps we need to take to manage our portfolio and electricity price risk."
Yet, analysts are not convinced the OPG rebate will be eliminated next year. There is some speculation that it will remain in place until the coal-fired generating plants close - a target date now set for 2014.
Notably, the rebate was previously scheduled for cancellation on two other occasions prior to 2005. "Each time at the 11th hour we got a continued rebate," McGee says.
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