Regulated Price Plan - Electricity Prices for Eligible Consumers Announced

Another significant component of Ontario’s electricity market restructuring was announced today by the Ontario Energy Board ("OEB"). The announcement details the terms and prices of the Regulated Price Plan ("RPP"). Following on the Ontario Government’s announcements and legislative amendments which change how electricity prices are to be determined through a hybrid approach of regulated, contract and market inputs, today’s announcement spells out how such overall electricity commodity costs will be applied to a particular class of consumers –"Eligible Consumers".

The Ministry of Energy has determined that eligible consumers who qualify for the RPP will include: residential consumers, municipalities, universities, colleges, schools, hospitals, farms and consumers whose annual electricity usage is 250,000 kWh or less annually ("Eligible Consumers").

All of these Eligible Consumers will be eligible for the RPP until April 2008. After April 2008,only residential consumers and general service customers having less than 50 kW demand will be deemed to be "eligible consumers".

Commencing April 1, 2005, the commodity price to be paid by Eligible Consumers will be 5.0cents/kWh for the first 750 kWh consumed monthly and 5.8 cents/kWh for electricity consumed over this amount.

To reflect seasonal impacts for residential consumers only, the electricity consumption threshold will change on a go-forward basis. As of November 1, 2005, the consumption threshold will be adjusted to reflect a "winter" and "summer" season. For future "winter" periods from November1st to April 30th, the 5.0 cents/kWh price will be applied to the first 1,000 kWh of electricity consumed per month and 5.8 cents/kWh for electricity consumed over this amount. For future "summer" periods from May 1st to October 31st, the 5.0 cents/kWh price will be applied to the first 600 kWh of electricity consumed per month and 5.8 cents/kWh for electricity consumed over this amount.

For those Eligible Consumers who are not residential consumers, there is a single consumption threshold, regardless of the season, of 750 kWh per month to which the 5.0 cents/kWh is applied and the 5.8 cents kWh is applied to electricity consumed over this amount.

The initial RPP pricing is intended to be in place for one year, commencing April 1, 2005.Starting April 1, 2006, and every six months thereafter, the OEB will determine if there is a need to change the RPP prices. Current and future RPP prices will be subject to regular and extraordinary adjustments (as described below).

As outlined in our previous bulletins, Ontario will determine electricity prices under a "hybrid" blend of regulated prices, contract prices and spot market prices, combining to establish an overall market cost of electricity. The purpose of the RPP is to apply this market cost to Eligible Consumers in a way that is predictable and reduces volatility.

Accordingly, the initial RPP prices are the products of a calculation and forecast by the OEB of the following future costs: future electricity spot prices over the next 12 months, Ontario Power Generation Inc.’s ("OPG") "regulated" prices, and existing contract prices from the non-utility generation contracts. In addition, the OEB indicates that the forecasted benefit of the previously announced OPG "revenue limit" has already been incorporated into the RPP prices announced today.

As indicated, the duration of the RPP prices are intended to be fixed for one year. At the end of the first year and every 6 months thereafter, the OEB will update its price forecast, take into account any Ontario Power Authority ("OPA") variance amounts (as described below), and issue a new price(s).

Future RPP prices will take into account any positive or negative differences (or variances)between overall electricity market costs and amounts paid by Eligible Consumers in previous periods. These variances will be tracked by the OPA and then applied by the OEB in determining the RPP price for future periods. Future RPP prices will also reflect the cost of additional generation procured through the Ministry of Energy requests for proposal contracts.

In extraordinary circumstances, where the variance between market costs and revenues from Eligible Consumers exceeds the forecasted variances by $160 million, an automatic price adjustment will be triggered.

Although most Eligible Consumers do not yet have "smart meters" (meters that permit electricity usage to be billed at hourly or more frequent prices), the RPP terms provide for variable RPP prices for those consumers who acquire such smart meters and elect to stay in the RPP.

The OEB indicates that the smart meter pricing component of the RPP is designated to recover the same costs charged to Eligible Consumers with conventional meters under the RPP. The smart meter RPP employs both a seasonal (winter/summer) and time-of-use (on-peak, mid-peak, and off-peak) pricing approach – with prices ranging from 2.9 cents/kWh to 9.3 cents/kWh depending on season and time of use. Ontario’s local electricity distribution companies are not obliged to provide Eligible Consumers with RPP pricing until April 1, 2006. As of early 2006, however, all Eligible Consumers with smart meters will receive RPP pricing.

While the reaction of retailers to the "hybrid" market price determination and its application to Eligible Consumers through the RPP remains to be seen, the RPP terms announced today indicate that those Eligible Consumers who do not wish to participate in the RPP have the option to sign a contract with an electricity retailer.

Furthermore, Eligible Consumers who have interval meters can choose to leave the RPP and pay the spot market price.

In the event an Eligible Consumer leaves the RPP (through switching to a retailer, electing to pay the spot price or leaving Ontario) such persons will be subject to settling a true-up for any differences between the RPP prices paid and actual "hybrid" market costs. This true-up could see such persons receiving a refund of overpayments or paying an additional amount. Early OEB working group reports suggested that consumers who leave the RPP will more often than not be subject to making a true-up payment. Accordingly, it remains to be seen whether the true-up will encourage retail transactions.

In cases where Eligible Consumers already have retail contracts, the OEB and supporting legislation indicates that those consumers who entered into retail contracts before December 9,2002 will be automatically covered by the RPP. For contracts entered into after December 9,2002 but before June 15, 2004, consumers will not be covered by the RPP until such contract expires. A third category of contracts, those entered into or renewed by residential consumers on or after June 15, 2004 but before a date (to be specified by regulation) are to be subject to transition rules and contract reaffirmation.

Another significant component of Ontario’s electricity market restructuring was announced today by the Ontario Energy Board ("OEB"). The announcement details the terms and prices of the Regulated Price Plan ("RPP"). Following on the Ontario Government’s announcements and legislative amendments which change how electricity prices are to be determined through a hybrid approach of regulated, contract and market inputs, today’s announcement spells out how such overall electricity commodity costs will be applied to a particular class of consumers –"Eligible Consumers".

The Ministry of Energy has determined that eligible consumers who qualify for the RPP will include: residential consumers, municipalities, universities, colleges, schools, hospitals, farms and consumers whose annual electricity usage is 250,000 kWh or less annually ("Eligible Consumers").

All of these Eligible Consumers will be eligible for the RPP until April 2008. After April 2008,only residential consumers and general service customers having less than 50 kW demand will be deemed to be "eligible consumers".

Commencing April 1, 2005, the commodity price to be paid by Eligible Consumers will be 5.0cents/kWh for the first 750 kWh consumed monthly and 5.8 cents/kWh for electricity consumed over this amount.

To reflect seasonal impacts for residential consumers only, the electricity consumption threshold will change on a go-forward basis. As of November 1, 2005, the consumption threshold will be adjusted to reflect a "winter" and "summer" season. For future "winter" periods from November1st to April 30th, the 5.0 cents/kWh price will be applied to the first 1,000 kWh of electricity consumed per month and 5.8 cents/kWh for electricity consumed over this amount. For future "summer" periods from May 1st to October 31st, the 5.0 cents/kWh price will be applied to the first 600 kWh of electricity consumed per month and 5.8 cents/kWh for electricity consumed over this amount.

For those Eligible Consumers who are not residential consumers, there is a single consumption threshold, regardless of the season, of 750 kWh per month to which the 5.0 cents/kWh is applied and the 5.8 cents kWh is applied to electricity consumed over this amount.

The initial RPP pricing is intended to be in place for one year, commencing April 1, 2005.Starting April 1, 2006, and every six months thereafter, the OEB will determine if there is a need to change the RPP prices. Current and future RPP prices will be subject to regular and extraordinary adjustments (as described below).

As outlined in our previous bulletins, Ontario will determine electricity prices under a "hybrid" blend of regulated prices, contract prices and spot market prices, combining to establish an overall market cost of electricity. The purpose of the RPP is to apply this market cost to Eligible Consumers in a way that is predictable and reduces volatility.

Accordingly, the initial RPP prices are the products of a calculation and forecast by the OEB of the following future costs: future electricity spot prices over the next 12 months, Ontario Power Generation Inc.’s ("OPG") "regulated" prices, and existing contract prices from the non-utility generation contracts. In addition, the OEB indicates that the forecasted benefit of the previously announced OPG "revenue limit" has already been incorporated into the RPP prices announced today.

As indicated, the duration of the RPP prices are intended to be fixed for one year. At the end of the first year and every 6 months thereafter, the OEB will update its price forecast, take into account any Ontario Power Authority ("OPA") variance amounts (as described below), and issue a new price(s).

Future RPP prices will take into account any positive or negative differences (or variances)between overall electricity market costs and amounts paid by Eligible Consumers in previous periods. These variances will be tracked by the OPA and then applied by the OEB in determining the RPP price for future periods. Future RPP prices will also reflect the cost of additional generation procured through the Ministry of Energy requests for proposal contracts.

In extraordinary circumstances, where the variance between market costs and revenues from Eligible Consumers exceeds the forecasted variances by $160 million, an automatic price adjustment will be triggered.

Although most Eligible Consumers do not yet have "smart meters" (meters that permit electricity usage to be billed at hourly or more frequent prices), the RPP terms provide for variable RPP prices for those consumers who acquire such smart meters and elect to stay in the RPP.

The OEB indicates that the smart meter pricing component of the RPP is designated to recover the same costs charged to Eligible Consumers with conventional meters under the RPP. The smart meter RPP employs both a seasonal (winter/summer) and time-of-use (on-peak, mid-peak, and off-peak) pricing approach – with prices ranging from 2.9 cents/kWh to 9.3 cents/kWh depending on season and time of use. Ontario’s local electricity distribution companies are not obliged to provide Eligible Consumers with RPP pricing until April 1, 2006. As of early 2006, however, all Eligible Consumers with smart meters will receive RPP pricing.

While the reaction of retailers to the "hybrid" market price determination and its application to Eligible Consumers through the RPP remains to be seen, the RPP terms announced today indicate that those Eligible Consumers who do not wish to participate in the RPP have the option to sign a contract with an electricity retailer.

Furthermore, Eligible Consumers who have interval meters can choose to leave the RPP and pay the spot market price.

In the event an Eligible Consumer leaves the RPP (through switching to a retailer, electing to pay the spot price or leaving Ontario) such persons will be subject to settling a true-up for any differences between the RPP prices paid and actual "hybrid" market costs. This true-up could see such persons receiving a refund of overpayments or paying an additional amount. Early OEB working group reports suggested that consumers who leave the RPP will more often than not be subject to making a true-up payment. Accordingly, it remains to be seen whether the true-up will encourage retail transactions.

In cases where Eligible Consumers already have retail contracts, the OEB and supporting legislation indicates that those consumers who entered into retail contracts before December 9,2002 will be automatically covered by the RPP. For contracts entered into after December 9,2002 but before June 15, 2004, consumers will not be covered by the RPP until such contract expires. A third category of contracts, those entered into or renewed by residential consumers on or after June 15, 2004 but before a date (to be specified by regulation) are to be subject to transition rules and contract reaffirmation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.