Global adjustment: a political time bomb in Ontario

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Global adjustment: a political time bomb in Ontario

Peter R. Murphy

Canada November 25 2009

Prior to April, 2009, most Ontario electricity consumers probably paid little attention to the "Provincial Benefit" line item on their electricitybills. They had little reason to. Since its inception in 2005, the Provincial Benefit, known in Ontario's electricity industry as the GlobalAdjustment, was a relatively small adjustment on their electricity bills.

A drastic drop in market prices for electricity and increased governmental payment obligations have made this overlooked price adjustment a powder kegof political resentment and consumer backlash. In April 2009, for the first time ever, the Global Adjustment charged to Ontario electricity consumersexceeded the market price of the electricity they purchased. In every month since then the Global Adjustment has been significantly greater than themarket price for electricity purchased by these consumers


The Global Adjustment is the difference between the rates paid by Ontario governmental authorities to regulated and contracted electricity generatorsand the spot market prices for electricity consumed in Ontario. If the amount paid by Ontario governmental authorities for the generation of theelectricity is higher than the market price for the electricity, a positive Global Adjustment is charged to Ontario electricity consumers. If theamount paid by Ontario governmental authorities for the generation of the electricity is lower than the market price for such electricity, a negativeGlobal Adjustment is credited to Ontario electricity consumers.


The amounts paid by Ontario governmental authorities that are factored into the Global Adjustment fall into three categories: (1) amounts payable fornuclear and baseload hydroelectric generation by Ontario Power Generation Inc. (OPG), (2) amounts paid for non-utility generation administered by theOntario Electricity Financial Corporation (OEFC), and (3) amounts paid under agreements between the Ontario Power Authority (OPA) and electricitygenerators and suppliers of conservation services. Each of these three categories of governmental payment is explained in more detail below.


In the case of OPG's regulated hydroelectric and nuclear generators, a fixed price for electricity is set by the OEB. If the net revenue earned fromthe sale of electricity produced by these regulated baseload generators is less than the regulated price, the difference is charged to electricityconsumers as part of the Global Adjustment. If the net revenue from OPG's sale of this electricity is more than the OEB's fixed price, the excess iscredited to consumers.


Non-utility generators (NUGs) are generators that are not owned by the former Ontario Hydro. These generators provide electricity at set prices underpower purchase agreements with what is now the OEFC. As is the case with the OPG base-load regulated generators, the difference between the OEFC's netrevenue from the sale of this electricity and the amount that it pays to the NUGs under power purchase agreements is charged to electricity consumersas a component of the Global Adjustment.


The final component of the Global Adjustment arises under OPA contracts for generation and demand management projects. Some of these projects were setup through the OPA's former "Request for Proposals" process while other projects resulted in power purchase contracts without recourse to the RFPprocess. The OPA provides guaranteed revenue to electricity suppliers under these agreements. If the project earns net revenue that is less than theguaranteed amount, the difference is made up from a charge to the Ontario consumer through the Global Adjustment.


April 2009 saw an unprecedented change in the Global Adjustment. Until then the Global Adjustment had never exceeded 1.44 cents per kWh, and in thevast majority of months it had been less than 1 cent per kWh. In April, 2009 the Global Adjustment shot up to 3.020 cents per kWh and has remainedabove 3 cents per kWh each month since, except for June 2009 when it dipped to the still relatively high amount of 2.79 cents per kWh.


By covering the gap between the market price for electricity consumed in Ontario and the amount Ontario governmental authorities contract to pay out inthe categories outlined above, the Global Adjustment reduces the volatility of electricity prices and passes the cost of new generation projects on toconsumers. This procedure enables the Ontario government to offer price certainty to new generation and demand management projects, spurring thedevelopment of new electricity supply projects in Ontario.


However, consumer resentment may be growing now that reduced economic activity, particularly in Ontario's flagging manufacturing sector, hascontributed to a steep decline in spot market electricity prices. The Global Adjustment has prevented the benefits of low electricity market pricesfrom being passed on to the Ontario consumers, many of whom badly need it, particularly in light of the rising Canadian dollar.


Hardest hit are consumers who signed retail contracts at locked-in prices before the electricity market price crashed. Retail contracts provide theconsumer a fixed price for electricity, subject to the floating Global Adjustment. Consumers that locked into fixed rates under retail contracts beforethe market prices crashed have experienced a double whammy - locked-in fixed rates that exceed the current market price, plus a drastically increasedGlobal Adjustment.


The guaranteed rates being offered by the OPA under its new Feed-In-Tariff program will put continued upward pressure on the Global Adjustment, byproducing a source of new governmentally-guaranteed pricing for electricity generation.


As a result, it appears Ontario electricity consumers are not going to experience relief from high electricity bills in the foreseeable future.







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RW: The Global Adjustment is extra the producers of power get paid by you when demand is low and the spot price is down. Which is the case with this recession. The producers get paid for lost revenue due to lower demand. They get paid to not produce power.

Let me see if I have this right.

Every weekend you travel half a day with the kids to visit grandma. Before you head out you always fill the tank at the local station. But because you have been laid off, or are suffering increases in other costs, you decide to only go every other weekend.

But that poor gas station owner just lost half the money he normally gets from you. So to compensate him for that loss, the government forces you to pay him double on each visit for the gas to fill your tank, in lieu of the gas you would have used in the weekends you missed.

Get the picture now?

This is how the Provincial Benefit (Global Adjustment) has changed:

Data from: http://www.ieso.ca/imoweb/b100/b100_GA.asp

DO NOT SIGN UP WITH RETAILERS!
You will pay about twice for power if you do as it stands now.