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Ontario electricity rate freeze and rebate

Background:

In the restructuring of Ontario Hydro in 1999 electricity generation assets were sold to the new Ontario Power Generation (OPG), transmission and distribution assets went to Hydro One (HOI) and administration of the electricity grid was assigned to the Independent Market Operator. Ontario Electricity Financial Corporation (OEFC) is the legal continuation of Ontario Hydro and is responsible for servicing the debt and liabilities of the former Ontario Hydro that were not assigned to the successor companies. OEFC received notes payable from OPG, HOI and IMO for the market value of the transferred assets. All the successor companies of Ontario Hydro are classified to the business sector of the National Accounts with the exception of the Independent Market Operator which is included in the government sector because of its regulatory function.

On May 1, 2002 the Government of Ontario opened the province’s wholesale electricity market to competition. The IMO is the administrator of this electricity market.

Under the open wholesale market the IMO provides an exchange for power generators and local distribution companies (LDC’s) to offer and buy electricity. Every five minutes a “spot price” for electricity is established as the price of the last quantity of electricity purchased and all producers receive that price for their power.

On November 11, 2002 the Government of Ontario announced a plan to freeze the price of electricity at 4.3¢/kWh for households, small businesses and farmers effective December 1, 2002. For these consumers this price was made retroactive to May 1, 2002, the difference to be rebated to them with the first instalment of $75 to be paid before the end of 2002 and the remainder, if any, to be credited to first quarter 2003 invoices. Subsequently the price freeze was extended to the MUSH sector but it was not included in the first instalment of rebates.

To finance the rebates and the price freeze, the IMO, through the OEFC, accessed the Market Power Mitigation Agreement Rebates provision established by OPG at the time of market opening.

For December the average wholesale price for electricity in Ontario was 5.6¢/kWh and the IMO paid $110 million to LDC’s to bring the price for eligible consumers down to the level mandated by the Government of Ontario. The $110 million is expected to come from OPG’s Market Power Mitigation Agreement Rebate provision in the first quarter of 2003.

Eligible small-volume consumers who had entered into fixed-price contracts with retailers also benefited from the price freeze with the retailer receiving compensation from the IMO for the difference with the contract price.

In December of 2002 the IMO paid $335 million to local distribution companies to provide for the $75 rebate to small-volume customers. This rebate was delivered in the form of cash, deductions from December invoices or the elimination of Power Purchase Variance Accounts.

SNA treatment:

The price freeze:

The Independent Market Operator is part of the SNA provincial government sub-sector in Ontario while Local Distribution Companies are classified to the business sector. Payments made by governments to business, especially to reduce consumer prices, are treated as subsidies in the System of National Accounts. Funds financing the subsidy coming from Ontario Power Generation will be considered remitted profits and form part of government income.

The rebate (first instalment of $75):

While the rebate also took the form of a transfer from the Independent Market Operator to Local Distribution Companies to show all this money as a subsidy would imply a retail electricity price of less that the mandated 4.3¢/kWh; to show December prices as less than that would undervalue personal expenditure and current dollar GDP. Accordingly, we show that part of the first-instalment rebate which was paid to households as transfers to persons with the portion going to small business and farmers reflected in subsidies.

This treatment reflects the fact that choices for production and consumption were based on the higher prices from May 1 to December 1 and the valuation of production or consumption should not be changed retroactively. The rebate is a retroactive compensation - an income effect as opposed to a price effect.