End of RPP Eligibility Can Be a Good Thing

October 2009

• After two extensions, the RPP is scheduled to end for "designated consumers" as of November 2009.
• For many, the delay in leaving the RPP will have cost them a lot of money over the last four and a half years.
• The end of RPP eligibility is, on balance, a good thing for these consumers. There will be a little more complexity, but there will also be the opportunity for a clearer understanding of the factors that drive electricity costs, and for more informed decision-making about how to reduce and control these costs.

Some municipalities, school boards, universities, hospitals and farmers in Ontario may see changes to their electricity bills in November. Since 2005, consumers in these sectors have been participants in the Regulated Price Plan (RPP) for electricity. Although many consumers in these sectors have opted out of the RPP over the years, consumers of those types that remained in the plan are no longer eligible for the RPP as of November 1, 2009, except at their small-volume sites.

The RPP was introduced in 2005, and was intended to apply to small-volume consumers such as residential consumers. It was extended to "designated consumers" in certain public sectors, regardless of size. Under the RPP, the Ontario Energy Board periodically set a price that would be charged for electricity over the coming months, based on what prices were projected to be and allowing for a collection from or refund to consumers for any difference between the fixed RPP price and the actual cost of power during the preceding price period.

The RPP had the effect of simplifying and stabilizing the cost that consumers saw. It also had some other effects that were less obvious and less desirable.

The RPP set two tiers of prices, under which larger consumers paid more than smaller consumers. The consequence was that large consumers (for example, schools or hospitals) subsidized the cost of power for smaller consumers (such as homeowners). It is for this reason that many large consumers opted out of the RPP early in the program. They could lower their costs by leaving the RPP.

Because the RPP price only changed periodically, many consumers mistakenly viewed it as a kind of hedge against rising power prices. In fact, the RPP only deferred price increases (or delayed the impact of price decreases), since variances between the RPP price and the actual cost of power were collected and rolled into the RPP at the next price change.

The RPP was slated initially to end for the "designated consumers" in the spring of 2008. Based on requests from some of these consumers, their eligibility was extended at that time to the spring of 2009, and then again extended to October 31, 2009. Barring any last minute policy change, these consumers will finally be out of the RPP in November. For many, the delay in leaving the RPP will have cost them a lot of money over the last four and a half years.

Consumers who use less than 250,000 kWh a year of electricity will remain in the plan, regardless of what sector they are in. Some of these consumers would also benefit from exiting the RPP. Certain conditions apply before one can opt out of the plan.

Changes on leaving the RPP

If someone is leaving the RPP in November, what changes will they see? Well, their cost of electricity will be determined based on what market prices for electricity do over the month, and on the timing (time of day, day of the week) of their energy use.

In addition, the consumer will see an item called the Provincial Benefit, on their bill. This item is related in large part to price guarantees given to certain generators in Ontario. It can be a credit or a charge, though for many months now it has been a relatively large charge. This is not a new charge. Customers who are on the RPP pay the Provincial Benefit as its cost is rolled into the RPP price. Consumers outside the RPP see it as an explicit item.

The cost of the Provincial Benefit changes with changes in the average market price of power, and in a way that tends to offset price changes. The Provincial Benefit (also called the Global Adjustment) is a complex mechanism that plays an increasing role in the total cost of power for Ontario consumers. Seeing it on the bill is a good thing for consumers who want to understand the factors affecting their power costs. Consumers need to understand that the price of electricity plus the cost of the Provincial Benefit together determine their cost of power.

Like many things in the electricity sector, the RPP has been a mechanism that many consumers did not fully understand. It has had the effect of making the "do nothing" scenario seem more palatable for some consumers who really ought to have done something, and done it long ago. The end of RPP eligibility is, on balance, a good thing for these consumers. While the new world will bring a little more complexity, it will also bring the opportunity for a clearer understanding of the factors that drive electricity costs, and for more informed decision-making about how to reduce and control these costs.

Larger Electricity Consumers Better Off Outside the Regulated Price Plan Read more »

Global Adjustment: Change in Behaviour Has Implications for Hedging Read more »