Local Electricity Distribution Companies: Helping to Shape the Future of Ontario''s Electricity System
Ken Quesnelle
Chair, Electricity Distributors Association
Creating a Stable Electricity Market is Fundamental to Ensuring Economic Competitiveness and Future Prosperity
THE ELECTRICITY INDUSTRY is of seminal importance to the economic competitiveness and future prosperity of Ontario.
The structure and operation of the electricity market is undergoing unprecedented change - change that will have direct economic, social and political impacts on a range of interests, including municipalities, residential customers and businesses of all sizes. Recent provincial legislation and the ongoing reform of Ontario''s electricity regulatory regime are playing an instrumental role in shaping the future of the province''s electricity system.
The creation of an electricity market that is both politically and financially stable is paramount to the future sustainability of Ontario''s electricity system. The volatility of the past few years can certainly attest to the need for change.
In the spring of 2004, the Ontario government introduced energy legislation that in effect, alters the roles and responsibilities of those who administer the electricity sector.
The government faces the challenge of providing price stability, while ensuring that Ontario''s supply of electricity keeps pace with the growing needs of the province. New supply and energy conservation initiatives are the cornerstone of the government''s energy strategy in successfully meeting these needs and fuelling the province''s long-term growth and prosperity.
Distributors are Key Players in Ontario''s Electricity Market
This is a critical time for the electricity distribution sector, the publicly and privately owned companies that safely and reliably deliver electricity to over four million Ontario homes, businesses and public institutions.
Local electricity distribution companies (LDCs) take power from high-voltage transmission lines, "step-down" the electricity to a lower voltage level, and provide it to local customers. Reliability of supply and power quality are the two most important responsibilities of the local distribution company. On-going monitoring, maintenance and life cycle replacement of the electricity distribution system is crucial and benefits all electricity consumers.
Distributors are an essential component of any electricity system, and a key player in the economic development of Ontario. As cities and industries expand, distributors expand with them to facilitate their growth.
LDCs provide a number of substantive benefits to their local communities and the provincial economy. The sector provides employment to almost 10,000 Ontarians with a payroll of over half a billion dollars. They also invest well over half a billion dollars in the province''s infrastructure while providing up to $200 million to municipal shareholders throughout Ontario.
As the electricity market continues to evolve, the distribution sector remains a key player in the important discussions and consultations that will ultimately shape the industry. As decisions are made, and legislation is put in motion, we come closer to better defining the role of distributors in Ontario''s electricity market.
The Municipal Dimension of Ontario''s Electricity Distribution Sector
In 1998, Bill 35, the Energy Competition Act, incorporated all municipal electric utilities as companies under the Ontario Business Corporations Act. They became commercial entities, and for the most part, many municipalities assumed ownership of local distribution companies, with the exception of one provincially owned distributor (Hydro One Networks), and a few privately owned companies.
For many municipalities, the decision to retain ownership of the local distribution company represented a regulated and stable business by which a steady flow of revenue could be used to offset rising expenditure pressures in other areas caused by the downloading of responsibilities from the provincial to the municipal level.
The lack of stability in the sector in the past number of years has caused legitimate concern among municipal shareholders. In less than three years, we have seen the opening and the subsequent overhaul of Ontario''s competitive electricity market; an unsustainable price cap imposed for electricity consumers and small businesses instituted by Bill 210; the sector wide downgrading of LDCs'' credit worthiness; and, ongoing financial pressures that have been brought to bear on distributors in making infrastructure and operational changes to support changing government policy. These are but a few examples that demonstrate the volatility of Ontario''s electricity market in recent years.
In order to attract new businesses and support industrial development, municipalities must be able to rely on a stable and sustainable electricity market. Without it, the continued business investments that drive the industrial base of many municipalities could be put in jeopardy.
Additionally, municipalities represent one of the largest consumers of electricity in the province - power that is needed to fuel everything from water and wastewater systems to street lighting. It is in their best interest to have an electricity system that is both stable and reliable.
Without doubt, municipal shareholders have a vested interest in the changes that are being made to the electricity market. LDCs are working closely with them to improve the legal, regulatory, and policy environment in which utilities operate.
We are charting new waters with the municipal ownership of fully commercialized OBCA companies. The problems seem to arise when shareholder rights are not fully recognized in policy matters due to their public status.
Bill 100 - First Steps to Changing Ontario''s Electricity System
Bill 100, the Electricity Restructuring Act, 2004, deals primarily with supply and conservation, reassigns responsibilities to different entities, and lays out the roles and responsibilities of the new Ontario Power Authority (OPA). This major piece of energy legislation was introduced in June and provides details of the government''s new vision for Ontario''s electricity industry and the creation of a "conservation culture" in the province.
On the supply side, the legislation provides the framework for encouraging new investment in generation. This includes a percentage mix of new renewable energy sources, with the stipulation that coal fired electricity plants will be shut down by 2007.
Bill 100 reflects many of the objectives long held by the distribution industry, including electricity prices that reflect the true cost of power while ensuring stable rates for residential customers.
The legislation also provides avenues for distributors to actively participate and take a leadership role in promoting energy conservation and initiating Demand-Side Management (DSM) programs. This applies to programs for both low and high-volume customers (low volume customers are residential and small business consumers on a 2-tier fixed price model, while high-volume customers include commercial and industrial entities using more that 250,000 kWh of electricity per year).
Demand-Side Management refers to measures that can be taken on the customer''s side of the electric meter to change the amount consumed or the timing of that electricity consumption (water heater control programs offered by many utilities prior to the first generation of regulatory restructuring are a good example of a viable DSM program that shifts electricity load to a time of day when demand is low and prices are low).
The government is re-defining an electricity distributors'' role by permitting LDCs to become involved in DSM related activities. Local distributors have not been allowed to offer such programs since passage of the Electricity Act in 1998 when it was clearly stipulated that distributors were restricted to operating as "wires-only" companies.
Currently, larger users pay the current wholesale price for electricity (the Hourly Ontario Energy Price) through the Independent Electricity Market Operator (IMO), or a price negotiated in a retail fixed-rate contract. These prices better reflect the true cost of electricity, unlike the two-tier pricing regime that protects low-volume consumers. As a result, industrial users, including major manufacturers such as automotive plants, have often put demand response practices in place as a way to manage their electricity costs.
Essentially, interval meters installed at the plant or other facility, track the energy used on an hour-by-hour basis. The local utility then uses this information along with the hourly price information to invoice the customer. Prices rise and fall according to the daily rise and fall of demand. The practice of shifting their electricity use to off-peak periods has become more common. A simple example to illustrate this - a company may decide to re-charge their fleet of electrical forklifts overnight (or in off-peak hours) while electricity prices are lower.
The related, and much publicized government directive for distributors to install smart meters in all Ontario residences by 2010 (4.3 million installations) will fulfill a similar function for low volume customers by giving them the ability to track their power use through low and high peak periods. The government is committed however to stable and predictable prices for low volume consumers so the plan is likely to be based more on pre-established time of day prices as opposed to hourly market driven prices.
The creation of the OPA may signal higher prices for industrial users, but it also signals the importance that the government is placing on a more balanced approach to new supply. Environmental considerations have come into play and more expensive renewable and green power is being integrated into Ontario''s mix of generated supply. This will mean a continued and/or renewed emphasis on load shifting and load management programs. In many instances, distributors will now be able to work more closely with large users to accomplish these cost-saving measures.
The impact of higher costs however, will be tempered by a more environmental approach to the generation of electricity which will in turn, appeal to many of the municipality''s constituents. The revived emphasis on energy conservation is also expected to find resonance among a growing number of Ontarians. Despite this, however, consumers of electricity are most likely to change their consumption patterns with cost incentives more than anything else. It is likely that a new pricing regime for low volume consumers will reward off peak usage and penalize electricity consumed in high demand periods of the day - in much the same way that industry has already adapted.
The Need for Regulatory Certainty in Moving Forward
The fact that the majority of Local Distribution Companies (LDCs) are publicly owned has allowed the sector to be used more easily as delivery instruments of public, and sometimes, purely social policy. The notion of having the natural monopoly of electricity distribution regulated by the Ontario Energy Board (OEB) is good public policy. Continuous intervention in the sector has often resulted in a poor investment environment and inevitably, a higher cost of service.
A lot of debate and planning has gone into the creation of what is hoped to be a better investment climate for the generation sector. This is critical to ensure an adequate supply and there is no doubt that this is the government''s top priority. It is also very important to remember that ample supply does not guarantee delivery. The distribution sector must also have an attractive investment climate; otherwise reliability and quality of supply will diminish. The revenue requirements of the distributors cannot continue to be the buffer between the total cost of electricity and the political appetite to have consumers pay the real price.
In part, the distribution sector was commercialized and made subject to regulation to bring an investor owned discipline to bear on the electrical utility business and ensure the appropriateness of investments. The prudence evaluation of investment decisions can only be determined if we have a long-term view of the distributor''s role and expectations of the sector.
The dynamics of municipal ownership of regulated incorporated entities was not understood when the current regulatory regime was put in place in 1998. Municipal ownership must be recognized for what it is and better understood if we are to regulate the sector to maximize societal benefits.
In a speech to members of the Electricity Distributors Association (EDA) in June 2004, then Chair Ann Mulvale of the Association of Municipalities of Ontario (AMO) and Mayor of Oakville, spoke about the natural rights of municipalities as shareholders:
"We believe that communities must be provided with choices regarding their LDC''s future, and any heavy-handed regulatory approach will be unwelcome. After all, we do not need another Bill 210. It would not be in keeping with the new relationship being established between the Province and municipalities. Incentives, as opposed to punitive or mandatory measures, are an appropriate mechanism to encourage more efficiency in the sector."
For both municipally and privately owned distributors there exists a need for regulatory certainty and objective based regulation.
Objective, performance based regulation is going to accomplish two things. First, it will encourage benchmarking between distributors and create a level-playing field. This will help us to manage efficiency gains and signal when and where there are cost saving advantages to be had.
Secondly, it will have the effect of increasing the flexibility and efficiency of the Ontario Energy Board. Important, new responsibilities of the OEB include the development of pricing mechanisms for low volume consumers, development of a framework for DSM programs and the implementation of smart metering technology in an effective and cost-efficient manner. Ultimately it will be the OEB who provides details of how to implement the government''s broader agenda. The OEB''s mandate can be greatly enhanced with the successful implementation of a Performance Based Regulation model.
The reform of Ontario''s electricity system will not happen overnight. Continuing consultations between the provincial government, Ontario Energy Board and key industry stakeholders is helping to ensure that we are moving in a positive direction. More importantly, we are getting there in a cooperative and collaborative way.
After tackling issues of supply and conservation, the provincial government is expected to turn its attention to the future structure and reform of Ontario''s electricity distribution and transmission sectors. New legislation may then be introduced in 2005 that will move us closer to the desired end-state of a stable and sustainable electricity system to benefit all Ontarians.
We are on the cusp of major changes to the distribution sector. As the industry prepares to meet these many challenges, Ontario''s distributors will continue to play a key role in helping to shape the future of the province''s electricity industry.
ABOUT THE AUTHOR
Ken Quesnelle is the Vice-President of Woodstock Hydro Services Inc. and Chair of the Electricity Distributors Association. Mr. Quesnelle has been an active participant in the remodelling of the electricity sector in Ontario over the past several years, having taken a leadership role on numerous industry task forces and advisory groups. He has over 25 years of experience in the utility business with a focus on electricity distribution.
The Electricity Distributors Association (EDA) is the voice of Ontario''s local electricity distributors, the publicly and privately owned companies that safely and reliably deliver electricity to over four million Ontario homes, businesses and public institutions. The EDA provides members with advocacy and representation in the legislative and regulatory environment and the electricity market in Ontario. For more information about the Electricity Distributors Association, go to www.eda-on.ca.