Changes to Allocation of Global Adjustment Will Increase Costs for Most Consumers

January 2011

• The Global Adjustment is an obscure but increasingly significant component of electricity costs.
• Changes in how the Global Adjustment is allocated to consumers were implemented January 1, 2011.
• These changes will lower costs for some large users, but increase costs for the majority of electricity consumers.

The bills we pay for electricity in Ontario are comprised of several cost components. Some are visible and easy to understand: most people are aware that the Ontario Clean Energy Benefit will provide a 10% discount on total bills for consumers with annual consumption below 250,000 kWh, starting January 1, 2011. At the other end of the spectrum, charges related to the Global Adjustment are opaque, complex, and not well understood. Most consumers are not aware that changes have been made January 1 to how the cost of the Global Adjustment will be allocated to different consumer groups.

Global Adjustment - What is it?

The Global Adjustment (the "GA", also previously known as the "Provincial Benefit") is an Ontario electricity market mechanism used to transfer certain types of costs among generators, agencies and consumers.

The large majority of GA costs arise from contracts the Ontario Power Authority has with generators. A good portion of these contracts are at fixed prices, or they have revenue guarantees that behave like fixed-price arrangements. When spot prices are low, the generator does not earn enough revenue from power sales to meet its revenue guarantee or fixed price. The OPA pays the generator to make up the difference, and the OPA recovers that cost from consumers through the Global Adjustment. So, in a month when the market price of electricity is low, the unit value of the GA will be higher and when market prices are high, the GA will be lower.

The remainder of the GA costs represents the cost of conservation and demand management programs that are passed on to consumers. These costs are largely unaffected by spot prices.

Changes to how the GA is allocated

To date, all GA costs were allocated to consumers on a "postage-stamp" or energy-consumed basis. Total costs in the month were spread across all energy consumed in the province in the month, resulting in a uniform unit rate per MWh that was applied on all consumption by all consumers.

Starting January 1, 2011 consumers will be grouped into two classes, and each class will be allocated a share of the GA costs. "Class A" consumers - those with average monthly demands over 5 MW - will pay their share of the GA based on their demand or energy consumption during the 5 highest load hours that occur in Ontario each year. This share is called the "Peak Demand Factor". All other consumers fall into "Class B" and will continue to pay for the GA on a postage-stamp basis. The aggregate GA dollar amount paid by Class B consumers will equal the total GA dollars less the aggregate paid by Class A consumers.

The impact

Under this method, Class A consumers will pay a smaller share of GA costs and Class B consumers will pay a higher share.

In the near-term, Class A consumers will see their aggregate share of total GA costs fall from 14.1 % to about 9.2 % -- a relative decrease of 35 %. Class B consumers will see their aggregate share of total GA costs rise from 85.9 % to about 90.8 % -- a relative increase of 6 %.

The total decrease in GA costs for Class A consumers in dollars equals the total GA cost increase in dollars for Class B consumers, but the percentage changes differ, because Class B represents about 6 times as much energy as the Class A group.

Unit cost impacts - 2011

In 2010, total annual GA costs were $ 3.85 billion, and the uniform unit GA cost to consumers was about $ 27.20/MWh (rounded to the nearest 10 cents and based on a total allocation volume of 141.5 TWh).

In 2011, there will be upward pressure on GA expenditures but also possible moderating factors such as a higher spot market price and increased total consumption over which to spread costs. Considering these and other factors, we estimate 2011 total GA costs will be about $ 4.21 billion and assume the allocation volume (that would have been used under the one-class GA scenario) to be 142.9 TWh.

If these costs were allocated under the old, postage-stamp method, consumers would see a unit GA cost of about $ 29.50/MWh. The projected 2011 GA cost for each class under the new allocation method (rounded to three significant digits) would be as follows:

• Class A: $ 19.40/MWh ( a decrease of $ 10.10/MWh)
• Class B: $ 31.10/MWh ( an increase of $1.64/MWh)

Unit cost impacts - 2015

Over the next few years, total GA costs will rise significantly as that is where the majority of pending Ontario electricity cost increases will "show up".

An August 2010 study by Aegent for Canadian Manufacturers and Exporters showed total annual GA costs could rise to over $ 10 billion by 2015. Using that total cost and assuming flat Ontario energy consumption, if there were still only one GA class of consumer in 2015, we'd see a staggering GA unit cost of $ 70.00/MWh. With the change in GA cost allocation, the projected 2015 GA cost for each class (rounded to three significant digits) would be as follows:

• Class A: $ 46.00/MWh ( a decrease of $ 24.00/MWh)
• Class B: $ 73.90/MWh ( an increase of $ 3.91MWh)

In 2015 then, the spread between GA unit costs for the two classes would be $ 27.90/MWh, up significantly from $ 11.70/MWh in 2011.

Summary

The Global Adjustment is one of the most significant cost items on an electricity consumer's bill, yet it is complex and obscure. Changes to the GA are not receiving as much attention as other changes on the bill, yet these changes will have an important and growing impact on the net cost of electricity for each consumer.

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